Always in style
septembre 22, 2022
Since the outbreak of Covid-19 in 2020, we have discussed the impact the pandemic has had on our lives, businesses and markets worldwide in several commentaries. The dental industry, like the whole healthcare sector, was no exception, with massive disruptions taking place, especially in the early months when patients were kept from attending routine check-ups.
Fortunately, the importance of the dental practice was well understood, and dentists have been allowed to resume operations with a set of strict protocols. However, delays caused by the pandemic left many people behind in their dental care. The stress and anxiety experienced during endless lockdowns had people grinding their teeth, further aggravating oral health issues. A friendly reminder that a good rule of thumb is to see a dentist twice a year.
During economic downturns, when consumer sentiment weakens, patients might decide to delay elective procedures. However, demand for essential health treatment remains relatively stable. We find that some healthcare companies present attractive investment opportunities, regardless of the macro environment. As the saying goes, teeth are always in style. A good example of such an opportunity is Dentium, a Korean dental implant manufacturer, and one of the top holdings of our Emerging Markets strategy.
In early-summer of 2000, Jung Sung-Min, a practicing dentist running a clinic in South Korea, established Dentium, a small manufacturer of dental implants and related instruments. Little did he expect that over the next two decades, the company would scale up successfully and capture a significant market share to end up ranking as the second largest in South Korea, and the sixth largest worldwide. Although no longer involved in day-to-day operations after stepping down as CEO and Chairman, the founder remains the largest shareholder of the company.
Dentium’s growth strategy to become a global total dental solutions provider is based on ongoing product innovations and expansion overseas. Clinical data accumulated over the years validates the high quality and solid performance of its products. The company has developed a comprehensive product lineup, expanding to digital dental equipment, including CBCT (cone-beam computed tomography), 3D printers, and CAD/CAM (computer-aided-design and computer-aided-manufacturing) systems. Dentium aims to foster package sales of its solutions, spanning from diagnosis to prosthesis procedures.
Although Dentium faces fierce competition from domestic peers, the company has steadily expanded its market share in South Korea, focusing on penetrating primarily newly opened clinics. Once its equipment is installed, recurring orders of dental implants ensure revenue stickiness, growth visibility and margin expansion. With manufacturing facilities located in South Korea, China, Vietnam, and the United States (U.S.), Dentium has established a global footprint. However, China is not only the largest market for the company, accounting for more than half of revenue, but it is also expected to remain the main growth driver in the medium-to-long term. At the same time, we believe that Dentium’s business in India, the Middle East and Southeast Asia will continue growing faster than the industry average.
The dental implant market globally is expected to exceed US $8 billion by 2028, from US $4.8 billion in 2021, implying a compounded annual growth rate of 7.6%. China, with the number of implants placed per 10,000 people equivalent to only one-tenth of the global average, will likely grow at least twice as fast. South Korea has one of the highest penetration rates of dental implants, is expected to grow at a low-to-mid-single digit annually. The global dental implant market is drifting towards an oligopolistic structure, with the seven largest companies (spearheaded by Straumann and Danaher) accounting for over 80% of sales.
In most regions, Dentium caters primarily to the value segment of the market, while providing products of equivalent quality to global industry leaders, but at more attractive price points. Combined with its rich expertise, strong reputation, consistent execution, and adequate capacity, Dentium’s success in developing countries makes total sense. However, the management team shows no signs of complacency and has set in motion an ambitious plan to become a top 3 operator globally in the next 8 to 10 years, ensuring a growth rate of around 15-20% per annum over this period. Operating leverage and growing efficiencies provide a decent uplift to margins. Thus, the operating margin of 30-35% is not only sustainable, but has some upside and compares very favourably to the 17-20% range recorded in the past.
Like many other businesses with a substantial footprint in China, Dentium faces risks primarily of a regulatory nature. The recent announcement made by the National Healthcare Security Administration of China removes lots of uncertainty and solidifies our investment thesis. Aiming to cut elevated prices at public hospitals (which apparently are higher than the average level of private sector) and educate patients, the Chinese government agency defined a set of rules and procedures to ensure central procurement and price controls at public dental clinics. Although this regulation will inevitably impact the general price level of dental implants in the private sector, Dentium caters primarily to private clinics and is expected to benefit at the expense of its U.S. and European peers, as its pricing is more attractive and highly competitive.
Despite having a highly attractive investment case, the company has huge room for improvement in terms of handling their investor relations. At the same time, it is not widely known among foreign investors, partially because it is not covered by any of the big brokerage firms. However, Dentium’s stock performance has been an outlier this year, outperforming its peers year to date.
Despite its outperformance, Dentium still trades at an attractive valuation relative to its historical levels…
…as well as relative to its peers.