Fat Pitch Value: Medical net, Japan compounder
Medical net, 3645, is a Japanese company, a small cap reporting in Japanese only.
It is a very fast growing medical tech company trading at a normalised PE under 10 (2022). Due to heavy investments (increase in personnel expenses for the strengthening of recruitment for business expansion), the PE is dropping to 15 for the year ending may 2023. What is unusual is that it has a tech and a non tech business.
Sales 7 years CAGR: 16.86%
Profit 7 years CAGR: 35.41% (note that 2023 profits are expected to decrease).
Some tables are google translated so the format is not well polished. Let’s go!
Business
(1) Media platform business
It develops and operates websites that provide information specializing in “body,” “health,” and “beauty.” (B2C)
The company operates a total of 58 sites in the fields of dentistry, beauty and esthetics from various perspectives. Its dependent on the google and yahoo algorithm, and on direct traffic.
(2) Medical institution management support business
This segment is a mixmatch of different things.
SEO (search engine optimisation) service, Listed ads.
Website creation and maintenance.
Management of dental clinics in Thailand
Sales of dental equipment and pharmaceuticals.
Dental clinic administrative agency, opening support and management.
(3) Medical BtoB business
BtoB type comprehensive dental information site "Dentwave.com" that connects dental professionals and dental-related companies. As of the end of November 2010, there are 45,188 registered dental care professionals on this site, one of the largest in Japan.
Operates the Japanese version of "DENTAL TRIBUNE"
Strategy & Management
The strategy is very ambitious but unclear for the non Japanese speaker that cannot view the video presentations done by the management.
“we are building a medical network economic zone in the dental industry and establishing a platform that will play a central role in the digitalization of the dental industry. In addition, we worked on building a new service called a healthy life expectancy promotion platform business starting around the oral cavity and expanded the business.” This is related to “Dentistry value chain Preventive medicine area, pre-symptomatic area”.
The company expects a significant increase in sales by expanding new businesses, such as starting a pharmaceutical sales business.
The company also wants to grow the Thailand business, using the know how developed in Japan, maybe also adding websites and IT services like in Japan.
Revenue plans for 2025 implies doubling from 2023, but it’s not clear to me what is the new business exactly about. For comparison, the current market cap is 3650 million yen.
President Hirakawa commented that the growth strategy aiming for sales of 10 billion yen is "slightly behind", and he would like to promote the acquisition of human resources and lead to growth from the next term onwards.”
An active M&A strategy:
https://www.facebook.com/serise.thland/
Management:
Joined the company in April 2005.
April 2006 Director of the Company [in charge of Solution Sales Division]
August 2012 Representative Director and President of the Company
August 2016 Chairman and CEO of the Company (current position)
Here is his CEO message:
Since our founding in 2001, we have continued to innovate and take on challenges with the aim of “creating new value and contributing to society” in the fields of “medical care” and “IT/Internet.”
Especially in the field of dentistry, we aim to realize a better dental care environment, not only providing services using the Internet, but also solving problems in response to all the demands surrounding dental care.
In addition, in order to create new value, we are promoting the provision of useful information for consumers beyond the framework of dental care, from medical care, beauty, lifestyle to support for mothers raising children.
We will continue to provide innovative services to consumers and businesses with an eye to the “future” 5 to 10 years from now. Our vision is to become a leading company.
We will continue to innovate and take on challenges by having each employee think and act proactively without forgetting our gratitude to everyone. We appreciate your continued understanding and support.Representative Director, Chairman and CEO
Dai Hirakawa
Two of the three founders are still working in the company, as COO and director of content. It’s an interesting setup, maybe they are so passionate by operations and content, that they let another person being CEO in order to focus on their core areas.
Market
Here you got the three businesses, with the support business in blue, the Media platform in Orange and the B2B in Green, with the relative Total addressable market in number of clients (so for b2b, their clients are 100/400 potentially).
Figures and Valuation:
Most of the profits are in the Media Platform business which is a very high quality business in terms of operating profit. It is the cash cow of the group but also provided good growth in the past years. The market cap (3.65B Yen, is to be compared with the 461k Yen segment profits, under 10 times).
The support business is in investment mode at the moment so has maybe depressed profits.
They stated that they recruited 27 professionals and 8 graduates, Personnel expenses are planned to increase by 41.8% in 2023. This is for a microcap. The investment plan for recruitment is only 38% complete in fiscal 2023, that ended in March, so we can expect further cost increase in the following year.
Despite these investments, adjusted net income is 180 million yen for the first 9 months of 2023. Annualised, its an adjusted P/E ratio of 15.
We are at 10 times operating profits.
The company has no net debt, and net current assets, but no significant cash pile corresponding to market cap.
Conclusion
Medical-net has a really good business, ambitious expansion plans, and a low valuation.
I don’t understand the expansion plans into new business of prevention very well. The company is led by long time oriented management, with founders still present, and has a great track record. For this reason, we must give them the benefit of the doubt.
Can one invest in such a premise? For me yes, especially in a diversified manner.
Note: this is not financial advice, but my opinion on the company. Anyone should do their own due diligence to confirm a company thesis presented and form their independent opinion.
Further reading:
https://www.bridge-salon.jp/report_bridge/archives/2022/11/221124_3645.html
I will cover more Japanese tech businesses over the coming months in the form of lists of interesting value tech ideas.
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Thanks for the informative analysis. I've started looking into the company, and from what I can tell the prevention business they're trying to grow was started because in 2017 the Japanese Cabinet for the first time included dental exams as apart of disease prevention. As a result, they expect the dental industry in Japan to grow and shift to a more holistic-style dentistry, which views oral health in terms of total body health. This would seem to explain why as apart of their growth plans they are expanding into the DNA testing industry, and their partnerships with Okayama University and iRidge Co.