Net profit increased by about 80% year-on-year, with MODERN DENTAL (03600) supported by the "false tooth business" from Europe and the United States.

With the arrival of the aging stage at home and abroad, the denture market has become a high-speed developing segment of the dental market. As a leader in domestic denture processing, MODERN DENTAL has continuously made profits through its globalized "denture business". On March 11, MODERN DENTAL disclosed its performance for 2023, expecting to achieve revenues of 3.125-3.225 billion Hong Kong dollars, an increase of 10.4%-14% year-on-year; and net profits of 390-410 million Hong Kong dollars, a significant increase of 76.5%-85.5% year-on-year. In the profit announcement, the company stated that the record net profit for the period was mainly due to the improvement of operational efficiency and the increasing proportion of digital solutions driven by the digitalization trend in the dental industry. From the secondary market perspective, investors have shown positive feedback towards MODERN DENTAL's core denture processing business. Since hitting a low point of 2.19 Hong Kong dollars per share on May 16 last year, MODERN DENTAL's stock price has been steadily rising. As of March 13 this year, the company's stock price reached 4.02 Hong Kong dollars, representing a cumulative increase of 83.56%. It is understood that over 60% of dentures worldwide are produced in China, with the number of domestic denture processing companies exceeding 4000. For MODERN DENTAL, the key to development lies in expanding market share, consistently reducing costs, and breaking through the increasingly fierce competition. The age of "denture technicians" has arrived In fact, it is not surprising that the market shows no surprise at MODERN DENTAL achieving nearly 80% net profit growth in the whole year 2023. Since last year's interim report was released, MODERN DENTAL has demonstrated a strong level of profit growth. Data shows that in the first half of last year, MODERN DENTAL's revenue increased by 12.1% year-on-year to 1.6 billion Hong Kong dollars, and net profit rose by 109.3% year-on-year to 210 million Hong Kong dollars. The reason why it was able to achieve a significant growth in net profit is also attributed to the "digital transformation" of the denture business mentioned in the announcement. It is understood that dentures, also known as false teeth, refer to replacement devices used to replace missing natural teeth after the removal or loss of single jaw, upper and lower jaw, or full teeth rows. From the perspective of the industry chain, the upstream raw materials for dentures include resin, metal, ceramics, titanium alloy, zirconia, etc., with raw material costs accounting for about 80% of the production costs. In addition, customized fixed denture products require high-quality manufacturing processes. For example, in the process of denture design and manufacturing, key material zirconia has the characteristics of strong hardness and high cost, requiring a high level of personalization and digitization. The manufacturing process involves more than ten steps including oral scanning, data transmission, modeling, 3D printing, casting, glazing, trimming, polishing, etc. For production companies, improving production efficiency through technology to reduce costs is not just an option, but a necessity. MODERN DENTAL Group started using CAD/CAM technology in 2007 and currently has four digital production centers, forming a central digitalized process, equipment, and network. Currently, MODERN DENTAL ranks first in the domestic application of internal oral scanning. Digitalization has increased production efficiency, reduced production costs for MODERN DENTAL Group, enhanced competitiveness, and led to more rapid profit growth. However, at a stage where digital production is not yet mature, denture processing still heavily relies on the professional technical skills of dentists and technicians. The digital transformation faces the challenge of shifting from the demand for single technicians to cross-border talents. Therefore, the development of the denture processing industry is still limited by the severe shortage of talents, reflected mainly in the growth of expenses. Therefore, the key financial data disclosed by MODERN DENTAL also indicate that in the first half of 2023, the company's gross profit margin level significantly increased year-on-year driven by revenue, but the profit margin level was only able to surpass 10% in 2023 due to the growth of sales and administrative expenses. But this also indirectly shows that as a leading denture processing company, MODERN DENTAL is able to prioritize market share expansion, revenue growth, and profitability improvement, thereby widening the gap with other companies in the industry. Rejecting the internal cycle, choosing to go overseas? As mentioned earlier, currently over 60% of denture processing globally comes from China, with over 4000 related companies. Breaking free from the heated domestic competition has become the key to development for companies in this sector. The reason why MODERN DENTAL has been able to achieve double-digit growth in performance and profits is due to its choice to expand overseas. From a market perspective, the global denture market exceeds 30 billion US dollars, and China is a major exporter of dentures. In recent years, the domestic market has also shown rapid growth, and the rigid demand for dentures under the trend of aging can continuously increase the treatment penetration rate. Data shows that the market size of China's denture industry grew from 5.41 billion yuan in 2015 to 10.99 billion yuan in 2021, with a compound annual growth rate of 10.96%. By 2022, the market size of China's denture industry reached 10.842 billion yuan. However, MODERN DENTAL is still primarily focused on overseas markets, with nearly 80% of its revenue coming from abroad. The company continues to achieve internationalization through mergers and acquisitions in Europe, North America, Australia, and other regions. The reason for choosing to expand overseas is not only due to China being a major exporter of dentures but also because of the penetration rate of the denture market. From a market perspective, the European and American markets have always been relatively stable in terms of total volume, with a moderate increase due to technological advancements. For example, the denture market in the United States grew from 44 billion US dollars in 2012 to 83.36 billion US dollars in 2019, with a compound annual growth rate of 9.56%. By 2023, the market size is estimated to reach around 115 billion US dollars; while in Europe, the overall market size increased from 167.53 billion US dollars in 2011 to 221.76 billion US dollars in 2019, with a compound annual growth rate of only around4.15%Although the overall market growth is slow, high penetration rate is a major feature of the European and American markets. Looking at the global scale, in terms of the proportion of dental implants to the population, European developed countries have a high penetration rate, with about 100 implants per 10,000 people. Therefore, currently, North America and Europe are the main sales areas for domestic denture processing companies. Currently, benefiting from the stable and growing overseas denture restoration market, the combined revenue of fixed denture materials and removable denture materials accounts for over 90% of MODERN DENTAL's total revenue, and is its core source of income. Although MODERN DENTAL has seen rapid development in its main denture processing business, it has not been smooth sailing in the new track. In fact, around 2020, MODERN DENTAL also entered the invisible orthodontic industry by launching its self-developed transparent orthodontic brand TrioClear. It is understood that the global invisible orthodontic market has grown from $4 billion in 2015 to $12.2 billion in 2020, with a CAGR of 25.3%. Domestic invisible orthodontics became the second largest market in the world in 2019, with its share in the entire orthodontic market increasing from 6.9% in 2020 to 19.0%. It is estimated that by 2030, the domestic invisible orthodontic market size will reach $11.9 billion, accounting for 40.3%. However, the domestic invisible orthodontic track has long been dominated by a few players. But in terms of market competition landscape, according to the number of cases achieved in the Chinese mainland invisible orthodontic market in 2021, Invisalign and ANGELALIGN occupy over 80% market share. Therefore, for new entrants, the key to quickly seeking a breakthrough is to find differentiation. Although MODERN DENTAL's layout in this track also involves Europe and the Greater China region, from a financial perspective, its growth in invisible orthodontics is still struggling to support the company's second growth curve.