China's Huge Dental Files For Hong Kong IPO

The dental products and materials maker derives 70% of its revenue from China, but plans to use IPO proceeds for a new production base in Indonesia

Key Takeaways:

• Huge Dental has applied for a Hong Kong IPO, reporting a net profit of 77.7 million yuan on 300 million yuan in revenue in the first three quarters of 2024
• The dental products supplier plans to use proceeds from the listing to build a factory in Indonesia as a base for global expansion

If they frown on you in one market, then maybe they'll smile in another.

That seems to be the attitude of dental products maker Huge Dental Ltd., which has given up on plans to list on China's domestic A-share markets in Shanghai and Shenzhen after efforts over the past decade went nowhere. Now, the company is hoping for a warmer greeting in Hong Kong with its new application to list on the city's the stock exchange filed late last month.

Huge Dental wasn't completely out of luck when it came to Chinese Mainland listings. The company once listed on the Beijing-based over-the-country style National Equities Exchange and Quotations (NEEQ) board as early as April 2015. But it delisted two years later amid thin trading.

It aimed to graduate to the majors with its July 2017 application to list on Shenzhen's Nasdaq-style ChiNext board for growth companies but terminated that application two years later. Not one to give up so easily, it tried again in 2019, this time on Shanghai's then-newly launched STAR market, also for growth companies, but failed once more.

Those repeated setbacks never wiped the smile from Huge Dental's face, as it hopes its third try at the big leagues will be the charm. It could very well have better luck this outing, as Hong Kong has typically been far friendlier to this type of consumer-style listing, unlike the ChiNext and STAR markets that prefer sexier growth sectors like tech and new energy.

Huge Dental's listing document shows it was founded in 2006 by Song Xin, now 52. Its main business is divided into three categories: dental clinical products, like impression-taking materials and resin adhesive materials; dental laboratory products, which mainly refers to denture restoration materials; and dental digital products. The vast majority of its revenue, around 97%, comes from the first two categories.

Improving margins

Huge Dental is China's largest manufacturer of elastomeric impression materials and synthetic resin teeth, based on revenue in 2023, according to third-party market data in the company's listing document. The broader dental industry has been feasting for the last decade on a new Chinese middle class that can now afford such small luxuries as dentures and other forms of synthetic teeth.

As the sector expanded, Huge Dental's revenue grew 28% from 280 million yuan ($38.6 million) in 2022 to 358 million yuan in 2023. Its revenue continued growing last year, though at a slower pace, rising 14% year-on-year to 304 million yuan in the first nine months of 2024. Its net profit similarly rose 38% from 64 million yuan in 2022 to 88.4 million yuan in 2023. The growth continued at a slower rate last year, up 6.6% in the first nine months of 2024 to 77.7 million yuan. Perhaps most importantly, the company's gross margin has also climbed steadily from 54.9% in 2022 to 59.2% in the first nine months of last year.

Huge Dental sells its products in more than 60 countries and regions, though nearly 70% of its revenue comes from its home China market. Its other major markets are Europe, accounting for about 12% of revenue, and North America, at about 10%. It plans to use IPO proceeds to buy land in Indonesia, where it wants to construct a new factory that will serve as a strategic base to further its global expansion.

National policy dividend

Huge Dental is lucky to be selling into the right environment, especially as many consumer sectors suffer in China's economic slowdown. On a global scale, a worldwide aging population and growing awareness of dental health have caused demand for dental medical supplies to rise sharply, valued at $37.8 billion in 2019 and expected to reach $83.7 billion in 2030, according to the listing document. China's market is especially buoyant, rising from 43.4 billion yuan in 2019 to 60.7 billion yuan in 2023, and expected to grow 15.5% annually from then to reach 166.7 billion yuan in 2030.

Government policy support has helped to boost the industry in China, with oral health recognized as a priority in the country's "Healthy China 2030" initiative. The government has encouraged development of domestically made, self-developed dental materials to nurture local brands and ween the country off imported products commonly used in the past. Huge Dental is a big beneficiary of such policies.

As Chinese brands begin to rise, they have lured away customers who traditionally bought imported products by offering prices that are generally 30% to 50% lower than those for the imports. At the same time, the domestic names are also rapidly closing the divide with foreign products in terms of quality.

A case in point is the recent unseating of U.S.-based Invisalign (ALGN.US), king of the invisible braces market, by homegrown Angelalign (6699.HK) in the Chinese market. In 2021, Angelalign's 41.1% share of China's invisible braces market made it king of the hill ahead of Invisalign, which has been in second place ever since.

Fierce competition

China is currently Huge Dental's mainstay, but that doesn't mean the domestic competition isn't fierce, both from emerging local and well-known global brands. Given skepticism about domestic technologies in general, Huge Dental may need to give more clinical data about its product performance and disclose more information about its patents to win over foreign investors.

To stand out from the crowd, the company must show it is constantly working to improve its products to stay ahead of rivals. In that regard, its digital dental products business might have a greater role to play in executing such a strategy. While that part of its business currently accounts for only 0.8% of its revenue, Huge Dental is planning to step up its development of intraoral scanners, 3D printers, 3D printing materials and AI-driven diagnostic tools to provide dentists with better diagnostic and treatment solutions.

Of the two major dental stocks currently listed in Hong Kong, Angelalign's price-to-earnings (P/E) ratio of 184 times is inflated by its small profit, making it an inappropriate reference. A more suitable comparison is Modern Dental (3600.HK), whose P/E stands at just 9 times. Huge Dental may be more conservative in the valuation it seeks since it's smaller than Modern Dental and could otherwise face difficulties attracting investors.

While an attractive valuation could win over investors to its IPO, the company will need a more compelling story to keep such investors over the longer run. Such a story could show the potential for "high-quality domestic substitution + digitalized products," as two major growth drivers headed into the future.