Q&M extracts value from partial sale of Aidite stake, to drill into growth of core dental business

The sale will see Q&M pare down its stake in the profit-making associate company to a mere 12.25%.

In the latest quarter, 2QFY2019 ended June, Q&M saw a 7% rise in its share of profit from equity-accounted associates to $1.9 million. The increase was spearheaded by higher contribution from Aidite.

But the way Ng explains it, the sale of Aidite is imperative for the dental group’s core business.

While Q&M will walk away with a gain of some $19 million from the transaction, Ng says the sale was not just a strategic move to improve the group’s balance sheet, but was also necessary to get Aidite listed on the Shenzhen Stock Exchange.

In search of higher valuations

Aidite, the China-based manufacturer of zirconium oxide blocks used for dental prosthesis, was previously listed on China’s National Equities Exchange and Quotations (NEEQ) — the so-called New Third Board for trading in shares of smaller companies that are not listed on either the main Shenzhen or Shanghai stock exchanges.

In September 2018, however, Aidite announced plans to delist from the NEEQ to “explore certain strategic business development opportunities”. At an extraordinary general meeting close to a month later, Aidite’s shareholders voted in approval of the delisting proposal.

Ng explains that the delisting was brought about by a lack of over-the-counter trading and illiquidity of the stock. Even then, there were hints that Aidite was eyeing a bigger listing. In a bourse filing on Oct 9 last year, Q&M said Aidite intended to “strengthen its foundation and seek more opportunities in the established capital markets in the future”.

“Aidite is planning for an IPO on the Shenzhen Stock Exchange in about five years’ time,” Ng tells The Edge Singapore. He adds that the founding shareholders of Aidite are required to have a controlling stake in the company before it is allowed to engage in an IPO.

This is in line with China’s revised listing rules, following the 2015 Chinese stock market crash, which wiped out trillions of dollars from the equity markets. Since then, Chinese regulators have tightened the leash on the Shanghai and Shenzhen bourses.

Ng notes that, following the sale of Q&M’s partial stake, co-founders Li Hong Wen and Li Bin will hold stakes of 32% and 18% respectively — making them the controlling shareholders of the group.

“The four buyers of our partial stake will each own less than 20% of the company, making them non-controlling shareholders,” Ng adds. The four buyers of Q&M’s partial 36% stake in Aidite are Suzhou Junlian Xinkang Venture Capital Partnership, Health Advance, Schroder Adveq Asia Hong Kong I, and ASP Hero SPV.

Six-fold gain, more acquisitions in the pipeline

Q&M had acquired a 51% stake in Aidite in 2014 for RMB85 million. In a bourse filing earlier on Oct 10, Q&M noted that Aidite was valued at RMB1 billion ($193 million), up from RMB170 million in 2014.

This implies that Q&M’s 51% stake in Aidite is now worth $98.2 million — an increase of more than six-fold from its acquisition price. This means the 36% stake that Q&M divested is worth $69.3 million.

Ng says it was a tough decision to divest Q&M’s stake in Aidite. He grappled, on the one hand, with the possibility that the stake could increase in value in the future, and the need to develop other areas of Q&M’s business, on the other.

When negotiations began in September last year, Ng says, Q&M received more than a few offers from established buyers. But when an offer rolled in from the four buyers — two of which are linked to tech giant Lenovo Group — it was an offer Q&M could not resist.

“The companies were reputable funds that have good names in the industry. Lenovo specialises in computers, and Schroders in asset management. This year, we decided that we were agreeable to their strategies, as they boded well for the group,” says Ng.

With more money now in the bank, Ng is determined to find the best — and not the easiest — way to utilise the money. He is also quick to assure investors that this is by no means a signal that the group is backing out of the tough manufacturing landscape.

“We still have a considerable stake in Aidite, just not as a major shareholder. We are always on the lookout for good entities on the market that can add value to the group in one way or another — financially or operationally,” he says.

While Ng agrees that the company’s debt of close to $50 million could be erased completely with the proceeds from the sale, he says it would be in Q&M’s best interests to focus on growth instead.

So far, Ng notes, the group has seen the most growth in Malaysia, where it owns 25 clinics versus just five in 2016. He adds that more acquisitions are in the pipeline on the back of strong revenue growth in Malaysia.

In addition, Q&M said in its 2QFY2019 results announcement in June that it had secured locations — six in Singapore and eight in Malaysia — to open dental clinics, which are slated to commence operations in 2HFY2019. The group noted, however, that the openings will depend on opportunities and market conditions.

Ng also points out that the group’s capex figures are relatively small compared with annual revenue figures. On average, the group has added 10 new clinics a year at a cost of $200,000 each clinic, amounting to an average cost of $2 million a year.

“Every year, our core earnings range from $14 million to $15 million, so this [growth through acquisitions] is very simple to achieve,” says Ng.

New projects to boost financial figures

Ng rues that Q&M has recently been experiencing a period of “hibernation” in terms of several financial metrics. And he is wholly unsatisfied with the rate at which the company has been growing.

For 2QFY2019, the group reported earnings of $2.86 million, up 2% y-o-y, and revenue of $30.5 million, up 3% y-o-y.

While Aidite contributed a higher share of profits, the group’s other associate, Aoxin Q&M, suffered losses in the quarter. This was due to start-up losses from new hospitals and clinics, as well as higher expenses for training dentists and staff to cater for its expansion.

Now, with the funds obtained from the sale of its stake in Aidite, Ng is putting into action plans to help improve the group’s financial figures.

In May, Q&M announced that it was integrating artificial intelligence into its dental services, which marks the dental group’s maiden foray into the tech industry. To this end, Q&M has been recruiting AI scientists and linking up with professors from the International Medical University in Kuala Lumpur. Ng says this move began early this year and the group is looking to roll out the completed AI procedure as soon as possible.

“It’s a move to scale up our business and move ahead of our competitors. A growth of 3% is incredibly low for a listed company, so this is a step towards improving the company’s financials,” says Ng.

On Oct 17, Q&M also announced the opening of a private dentistry college offering graduate diploma studies in clinical dentistry. According to Ng, the college sees potential in offering the programme in Malaysia, Indonesia, Vietnam, Cambodia and China.

“The sale of Aidite has brought back a lot of money with it in terms of proceeds for us,” says Ng. “This will let us have the fundamentals straight, which will in turn help improve the company’s balance sheet.”