IPO-bound Dazhong Dental all smiles in market ripe for consolidation

The company has filed to list in Hong Kong, seeking overseas capital to consolidate its position in China’s fragmented dental services market

Key Takeaways:

• Wuhan Dazhong Dental has filed for a Hong Kong IPO, reporting its revenue fell 4% in the first half of this year, while its profit dropped 18.7%
• The company uses a business model inviting qualified medical professionals to become minority shareholders in its centers to share in its profits

By Ken Lo

China’s dental market is a fragmented place, with chains taking only 3% of the market. That’s making the sector ripe for consolidation, something that Wuhan Dazhong Dental Medical Co. Ltd. may be considering with its plan to raise funds through a Hong Kong IPO.

The company is a relative old-timer in a market where advanced dental services are still quite new, boosted over the last decade by a growing Chinese middle class that can afford to think about things like braces, root canals and even teeth whitening. The company set up its first dental institute in 2007 and currently operates as a direct-sales chain. It uses a partnership model to attract talent, essentially operating a network for dental entrepreneurs.

Its financials have been mostly cause for smiles in recent years, though lately the business has started to slow as Chinese consumers curb their spending with the nation’s slowing economy. Dental operators could be especially prone to such cutbacks, since their services are often seen as more discretionary and nonessential.

Dazhong Dental’s revenue and profits were rising steadily over the last three years, growing from 381 million yuan ($52.3 million) in 2021 to 442 million yuan last year, according to its listing document filed with the Hong Kong Stock Exchange late last month.

But things went into reverse this year, with the figure dropping 4% year-on-year to 205 million yuan in the first half of 2024. The company attributed the drop to factors such as a slower-than-expected post-pandemic recovery, its participation in China’s collective government procurement program, as well as intense competition in the sector that weighed on prices it charges for its services.

By business categories, general dentistry services accounted for more than half of the company’s revenue, some 54.2%, in the first half of this year. Implantology and orthodontics services were the other two big money-spinners, accounting for 29.3% and 16.5% of the revenue pie, respectively. The breakdown between those three business types has stayed relatively constant over the last three years.

Profit decline

During the good times when revenue was growing, Dazhong Dental’s profit also rose steadily from 17.1 million yuan in 2021 to 50.1 million yuan last year, while its net profit margin also rose from 3.9% to 15.2% over that period. But that also reversed in the first half of this year, as its net profit fell 18.7% year-on-year to 20.4 million yuan and its net profit margin eased to 14.3%.

According to third-party market data in the listing document, Dazhong Dental was the biggest private dentistry service provider in Central China last year in terms of revenue. It was the third-largest in all China based on its net profit for that year. And it was fifth largest among all private dentistry service providers in China in terms of the number of dentistry centers it operated by the end of last year.

Despite its relatively modest annual revenue of just over 400 million yuan, Dazhong Dental is still at the forefront of its sector, reflecting the market’s fragmented nature at this early stage of its development. That raises the potential for the company to emerge as a future leader if and when the sector consolidates around a few top operators.

The company currently uses a community-centered operating model, aimed at providing accessible and reasonably priced dentistry services. At the end of June this year, it had 81 dental centers spread across eight cities in Central China’s Hubei and Hunan provinces. The figure included four dentistry hospitals, 70 dentistry outpatient centers and seven dentistry clinics.

The company has conducted two financing rounds, raising close to 115 million yuan in total. Investors in its B-series round in 2021 included Citic Securities, Zhongyuan Jiupai and Zhidao Capital, which provided a total of about 85.5 million yuan, valuing the company at around 559 million yuan at that time.

Profit-sharing partners

Dazhong Dental is currently dominated by two investors, Yao Xue and Shen Hongming. Yao directly holds 1.24% of the company, while Shen holds 1.17%. The biggest stakeholder is Zhongshan Medical Investment, which holds 81.3% of Dazhong Dental’s shares, and is 44.1% owned by Yao and 32.4% by Shen.

The company operates using a partnership program, seeking participation by mid-level dentists or above, physicians with qualification certificates for over five years and highly skilled professionals with strengths in particular specialties or with strong marketing and management experience. Such individuals are typically between 35 to 55 and can become minority shareholders of newly established dentistry centers, which are set up using profit-sharing arrangements. 

All that said, what can potential investors expect from Dazhong Dental in terms of valuation? Based on its 20.4 million yuan profit in the first half of the year, we can extrapolate a net profit of 40.8 million yuan for the year. Using the 7 times expected price-to-earnings (P/E) ratio for listed rival Modern Dental Group (3600.HK) as a benchmark, we can project a relatively modest IPO valuation of 286 million yuan.

That would be well below the 559 million yuan Dazhong Dental achieved after its latest funding in 2021. But then again, times are no longer as smiley for this type of discretionary services provider as China’s economy enters a new phase of slower growth and greater uncertainty.

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