Family control takes bite out of Modern Dental Group

The dental prosthetics company’s revenue jumped 18.3% in first quarter, but its domination by a single family may be limiting its appeal to investors

Key Takeaways:

• Modern Dental Group’s revenue rose to HK$788.2 million in the first three months of the year, led by strong growth in Europe and China
• Revenue for the global provider of high-tech dental products and services rose 30% in Europe and 24% in Greater China

By Edith Terry

Modern Dental Group’s (3600.HK) first-quarter update last week got a smiling reception from investors, as it reported a 17.7% rise in case volume and 2.5% growth in product prices per case. The Hong Kong-based company sells “digital solutions” that allow the dentists, hospitals and dental labs that are its main customers to perform traditional cosmetic work using 3D, computer-assisted design and manufacturing (CAD/CAM) dental engineering.

The upbeat report sparked a nearly 14% rally for the stock in the days after it published its first-quarter update a week ago. The company didn’t provide any profit figures in the voluntary announcement, leaving investors to wait until August when it will release its official interim results.

Not surprisingly, shares of Modern Dental, whose market cap stands at a modest HK$2.7 billion ($344 million), are valued quite low compared to industry giants. Its trailing price to earnings (P/E) ratio of 12 is less than half the 31 for Abbott Laboratories (ABT.US), the 29 for Medtronic (MDT.US) and 36 for domestic peer Shenzhen Mindray (300760.SZ).

Such underappreciation may be reason for investors to take a second look at the company, especially if it can tackle issues related to its domination by a single family.

Modern Dental occupies a comfortable niche in a global market for dental prosthetics that was projected to reach $30.6 billion by 2020 and grow 12.4% annually between 2021 and 2030. That gives it a fighting chance of emerging as a leader in what it calls “dental ecosystems,” building on its strength making fixed dental devices like crowns and bridges, and using relatively new digital technologies that make custom-manufactured products possible at scale and lower prices.

The number of “digital solution” cases produced by its China-based production facilities increased by an impressive 82.5% to 549,736 last year, and the latest quarterly data seem to show that trend continuing. Feeding the growth are factors like improving technology, aging societies and growing global middle classes that aspire to project status through good-looking teeth.

Modern Dental’s “secret sauce” could be its single-minded focus on digitalization and the post-Covid popularity of the intra-oral scanners it also sells. Chairman Dr. Ronald Yik Long Chan said his company is growing into a “full dental ecosystem to support our customers,” building a potent mix of its own products, products and services offered through joint ventures and distribution arrangements to extend its reach.

Traditional dentistry uses manual methods, extending traditions that date back thousands of years when, for example China used bamboo pegs as early as 2,000 BC to make oral adjustments. The high-tech intra-oral scanners that are a key component of Modern Dental’s business first appeared in the early 1980s. But they are getting a strong boost in the post-Covid era by allowing dentists and technicians to avoid intimate contact with the gums and teeth that can spread disease, instead using lasers to develop precision models of patients’ jaws.

Modern Dental has tried to use its digital edge as its main selling point, together with its large production capacity. The company has operated its own centralized production facilities since 2013, initially in China, and now expanding to Vietnam. It also has four digital production centers in its major markets in Europe, Greater China, North America and Australia.

Global expansion

The company listed in Hong Kong in 2015, when it raised HK$1.05 billion. It has put the money to good use since then, buying a portfolio of global brands and boosting its production team to a current 4,000 technicians. It has grown largely through acquisitions and joint ventures rather than organically, which has added to its debt. But that load still seems manageable, with the company reporting a relatively low gearing ratio of 22% on net debt of HK$639.9 million.

Modern Dental started from its Hong Kong base as a Chinese business story, producing its products and selling them mainly to customers in Greater China. It began testing the European market through distributors as early as the late 1990s, and in 2013 began expanding internationally through acquisitions of third-party distributors in Europe, followed by the U.S. and Australia.

While such deals pressured its margins, they also brought Modern Dental hundreds of new customers. One of its earliest acquisitions was Labocast Group, its distributor in France since 1996, which it acquired in 2011. Since then it has made similar purchases of manufacturers and distributors in North America, Europe, Australia and Malaysia, giving it the wide-ranging global footprint it has today.

Nonetheless, Modern Dental’s latest annual report showed disappointing results for 2022. Revenues fell 4.2% for the year to HK$2.83 billion, and the company’s net profit dropped by an even larger 38.8%, to HK$220.5 million. Its 2022 revenues were affected in no small part by Covid, which shut down Chinese dental clinics and hospitals for months at a time and left many people avoiding such facilities over concerns about infection.

The company also took a hit from Chinese government regulations introduced in January 2022 to bring down the cost of dental implants by including them in China’s national procurement system. That move affected Modern Dental’s lucrative business selling to China’s thousands of public hospitals, which account for more than 50% of the nation’s dental implant sales.

The company’s geographic diversity helps to protect it to some extent from such major changes in individual markets. Greater China accounted for about 22% of its revenue in the first quarter, while Europe and North America were both larger at 44% and 25%, respectively. Europe and China reported the strongest growth in the first quarter, with revenue up 30% and 24%, respectively, in those two regions.

Despite its ambitions, Modern Dental’s stock has been a relative laggard over the years. Its Tuesday close of HK$2.72 is nearly 40% below its IPO price of HK$4.29.

The disappointing performance may owe partly to its limited float that prevents larger institutions that like to buy big stakes from investing. The controlling Chan family owned 46% of Modern Dental’s shares at the time of the IPO, and the company’s current float of about 319 million shares – about a third of total shares outstanding – is worth just worth just over $100 million at current prices.

There’s no question that Chairman Ronald Yik Long Chan’s family runs the show at this company, inheriting a business set up by patriarch Chan Kwun Pan, a dental technician who founded the business in 1986 in Hong Kong together with his brother. The family’s firm grip on the company may also lead some investors to worry about corporate governance at the company.

Perhaps the family might consider selling down its stake, or bringing in more outside managers and independent directors, as a way to lure in investors and breathe new life into their stock.

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