“We also understand that Delun is a 51%-owned subsidiary of Whole Shine Medical Technology. Whole Shine acquired its 51% stake in Delun for RMB246 million (around $45.7 million) in 2021,” writes Tay in his Oct 24 report.
Presently, Q&M also owns an associate stake of 32.8% in Aoxin Q&M , which has dental operations across the northern part of China in Liaoning.
Whole Shine noted in its FY2023 annual report that its dental services segment reported a consolidated revenue of RMB678.9 million with operating expenses of RMB322.8 million.
The company also reported a contribution from minority interest of RMB36.1 million for FY2023, translating to a profit of around RMB73.7 million for Delun, based on a minority stake of 49%.
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“The acquisition of a 25% stake in Delun by Q&M could translate to an associate contribution of RMB18.4 million per annum (p.a.), we estimate. Furthermore, we think the earnings risk of the acquisition is likely to be mitigated as there could be terms for profit guarantee, similar to past transactions by Q&M,” writes Tay.
Overall, the analyst sees that the acquisition could see Delun become a significant contributor to Q&M’s profitability.
He continues: “However, we keep our estimates unchanged for now as the non-binding MOU suggests that discussions are likely in the nascent stages.”
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Tay’s target multiple is also 0.5 standard deviation (s.d.) below its historical average as he believes investors are monitoring Q&M’s profitability profile.
Rerating catalysts noted by him including finalisation of Delun acquisition and better contribution from Aoxin.
Conversely, downside risks include potential impairment of Acumen, its medical laboratory business, arising from the expiry of its laboratory licence and unfavourable deal terms or cancellation of acquisition of Delun.
As at 5.20 pm, shares in Q&M are trading 0.5 cents lower or 1.64% down at 30 cents.
