Its revenue falling, Dazhong Dental looks to M&A to brighten its outlook

The company has filed to list in Hong Kong, aiming to jumpstart its falling revenue and profits by buying up rivals in China’s fragmented dental services market

Key Takeaways:

• Dazhong Dental has filed to list in Hong Kong, aiming to attract investors with its status as China’s fifth-largest dental services provider by revenue and third-largest by profit
• The company’s lackluster performance last year was mainly due to falling customer visits, but it could benefit from M&A opportunities as the industry consolidates

By Bai Xinrui

China’s economic slowdown is wiping the smile from the face of Wuhan Dazhong Dental Medical Co. Ltd., as increasingly cautious consumers rein in their spending on services like tooth whitening and other oral procedures considered relatively discretionary. But that hasn’t stopped the company from seizing on a recent wave of IPO fever in Hong Kong, as it tries to sell itself as a future consolidator in China’s highly fragmented dental services sector.    

Dazhong is a relative old-timer on China’s dental scene, established by Zhongshan Medical Investment in 2007 before being restructured into a joint stock company seven years later, according to its listing application filed late last month. It was planning to list on China’s thinly traded National Equities Exchange and Quotations (NEEQ) board in 2018 but changed its mind due to limited trading volumes, and has now shifted its sights to Hong Kong.

China’s dental services market is massive, worth 141.8 billion yuan ($19.7 billion) in 2019. But growth has largely stalled since then, partly due to the pandemic and a slow post-pandemic recovery. Since 2019, the market has only grown 1.9% to reach 144.6 billion yuan last year. Recent government policy measures to boost consumption have been providing some indirect relief to the market, which is expected to resume growing at an average rate of 6% from 2023 to reach 193.2 billion yuan in 2028.

The Chinese dental services market includes a mix of both public and private service providers. Public facilities are cheaper but lack flexibility and often require long waits. That has allowed private clinics, which typically charge more, to build a clientele by targeting people who want shorter waits and more customized services. In 2023, private dental service providers already accounted for 92% of the Chinese market.

Dazhong Dental had 701 dental chairs in 2023, making it China’s fifth-largest private dental services provider, according to third-party market data cited in the listing document. The company ranked third in the industry based on the size of its profit.

Dazhong breaks down its business into three major segments: general dentistry, implantology and orthodontics services, accounting for 53.4%, 28.4% and 18.2% of its revenue in 2024, respectively. Revenue for all three segments fell last year as China’s post-pandemic rebound ran out of steam, resulting in a 7.9% annual revenue decline to 407 million yuan, and an even larger 16.3% drop in net profit to 41.92 million yuan from 2023.

Services charges under pressure

The company blamed its weak performance last year on the government’s growing shift to centralized procurement policies in the medical sector, and to tighter price regulation over the dental services market. Overall procurement costs for the company’s implantology business dropped 15% last year from 2023. But policy-driven price reductions, compounded by cutthroat competition, drove down Dazhong’s implantology service charges between 25% and 40%, more than offsetting the drop in costs.

At the same time, the company’s total customer visits also declined 2.6% to 749,000 last year from 769,000 in 2023, contributing to its lackluster performance. The company blamed the decline on renovations for three of its clinics in Wuhan and the expiry of leases for some of its medical centers, including eight that moved out of its home city of Wuhan. By May 20, the company had 62 medical institutions, down by three from 2024.

Dazhong isn’t the only private dental company feeling such pains, and believes it is well-positioned to benefit from better dental resource allocation and improved brand recognition that will help it return to customer growth. In addition to boasting better economies of scale than many of its rivals due to its relatively large size, the company said it is also confident of its ability to navigate the policy changes that are squeezing its profits.

Strong M&A prospects

Despite the many short-term headwinds they now face, China’s dental services providers may face better prospects over the longer haul. In addition to growing demand from an aging population and growing emphasis on dental health, the current fragmented state of the market also makes it ripe for consolidation. Only 3% of China’s dental service providers currently operate chains, and the combined share of the top five companies is less than 10% of the market, highlighting the potential for M&A.

What’s more, Dazhong’s focus is on the relatively underserved Central China region, with its presence concentrated in Hubei, Hunan, Henan and Jiangxi provinces. While Central China accounts for around 19% of China’s total population, it has just 184 dentists per million people, far less than the national average of 269. As a regional leader in dental services, Dazhong Dental stands to directly benefit from the growing demand for dentistry services as the Central China region plays catchup with the rest of the country.

Most medical service providers aren’t too affected by seasonal factors, but the same isn’t true for dental services. The summer school holidays in July and August are a strong period as parents have more time to bring in their children and teenagers for treatment of dental problems and teeth cleaning, making the third quarter of each year relatively strong. By contrast, customer flows taper off during the Lunar New Year holiday as customers relax and put off treatment, translating to lower revenue in the first quarter.

Only a few dental services companies are currently listed in Hong Kong, Shanghai and Shenzhen, including Shanghai-listed Topchoice Medical (600763.SH) and Hong Kong-listed Arrail Group (6639.HK). The two are relatively highly valued, with the former trading at a forward price-to-earnings (P/E) ratio of 33.5 times while the latter trades at 50.5 times.

If it makes it to market, Dazhong’s stock could be lifted by a number of factors in its favor, most notably some of the strongest sentiment in years towards new listings in Hong Kong. Investors may also like the company’s story of being a potential market consolidator. But there are also downside risks, most notably the company’s falling business metrics and ongoing pressure from central government procurement programs and price-setting policies. If the company can convince investors it can navigate those factors, it could end up all smiles when it finally makes its trading debut.

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