Legend Finds Smiles In Dental Firm Investment
Legend Holdings is trying to show it’s more than just a technology company in the run-up to an IPO as early as this year, with word that it’s investing in one of China’s largest dental clinic operators. The move looks like a smart one for several reasons, and should certainly help convince investors that Legend is different from its biggest individual holding, PC giant Lenovo (HKEx: 992). That kind of differentiation will be critical to the success of an IPO, which could offer a chance for investors to buy into one of China’s oldest entrepreneurial firms.
We’re likely to see more deals like this in the months ahead as Legend tries to give investors an idea of a development strategy that looks a bit unfocused at the moment. Right now 2 of the company’s biggest assets are clearly in the tech space, consisting of Lenovo and also Hony Capital, one of China’s best known domestic private equity technology investors.
This newest investment looks quite different from those assets, and will see Legend pay about 1 billion yuan ($163 million) for an undisclosed stake in dental clinic operator iByer Dental Group. (Chinese article) Established in 1993, iByer is one of China’s largest and oldest dental clinic operators. Concurrent with the Legend announcement, the company announced it will change its English name to Bybo Dental Group.
Legend said it could add to its investment as iByer requires new money to expand its chain. The company currently operates about 100 branches nationwide, but is embarking on a major expansion that will double that figure to 200 branches in 50 cities by the end of 2017.
From a strategic perspective, this particular investment looks like a good one as China overhauls its medical system to provide healthcare for many people who currently lack insurance. I doubt that dental insurance will be a high priority in the overhaul, though perhaps Beijing will give some limited coverage for oral care. A more important driver will be growing awareness of the importance of oral healthcare among average Chinese, which is leading more people to seek dental care.
The choice of dental care also looks smart because it’s one of the less regulated areas in China’s healthcare system. Nearly all doctors in China currently must work out of hospitals or large state-owned clinics, and the smaller private clinics commonly seen in most developed countries are nearly non-existent in China. But dentists don’t face the same tough limitations, and are freer to open their own practices or work in small privately owned clinics like iByer’s.
Legend has also invested in a range of other non-tech industries. Chairman Liu Chuanzhi has previously expressed interest in a wide range of investments, from agricultural products to bottled water and even hotels. (previous post) Many of these areas do indeed look full of growth potential, though I’ve previously commented that Liu’s wide choice of target areas seem to lack a common theme.
Legend was in the headlines last week when it released its latest annual report, which contained signals that an IPO was drawing near. (previous post) Liu had previously indicated he wanted to take his company public on one of China’s domestic exchanges. But an IPO freeze over the last year and a half has left a long queue of companies waiting to list in China, leading to speculation that the company may go to Hong Kong instead where Lenovo is now traded.
If I were advising Legend, I would say it should pursue a few more big investments to raise awareness of its name in the run-up to the IPO. But I would also advise it to try and create a more coherent brand by showing how the many different assets in its portfolio fit together to form an attractive investment company with 2 or 3 common themes. Failure to do that could lead to investor confusion about what Legend really represents, undermining the prospects for its public offering.
Bottom line: Legend Holdings’ new dental clinic investment looks like a smart individual purchase, but the company needs to explain its broader vision to investors in the run-up to its IPO.
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