Based on my understanding, there are two main reasons for this.
Firstly, some 20 years ago when SDI decided to target growth outside of its traditional developed markets of Australia, the UK and the USA, the dental market in China was quite undeveloped.
Sure, a big population over there in China, but per capita dental spend was very low (I guess the sugary, processed food western diet had not quite made it to the vast expanses inhabited by the poor, pre-urbanised Chinese).
So SDI went to South America, specifically Brazil which, at the time, was industrialising and was a fast-growing developing economy with rising national incomes and a relatively modern dental industry.
Fast-forward to today and SDI is still trying to crack the code in Brazil, and that's where the company's resources have been focused in recent years.
So I think that before the company can think about committing further resources to trying to break into yet another emerging market, it first needs to bed down the Brazilian venture, something that has taken the better part of half a decade longer than they probably expected.
For the first time in many years, the recent signs are looking reasonable for Brazil (refer below), with SDI's business there generating operating profits (shown in bold) over the 12-months to December 2016 following many years of losses ($10m in cumulative losses over the decade to Dec 2015):
(I like to think that part of the reason that SDI's Brazilian business - currently around 8% of Revenue - has taken a long time to reach critical mass is because SDI has resisted playing the "brown paper bag game" over there.)
So, Brazil represents a complex market and operational situation. And, while things might recently have been looking better than they have done for a long time (the company received permission to package product in Brazil last year, which goes some way to explaining the recent profitability), I remain wary about a few swallows heralding the arrival of summer.
I'd prefer to see a few successive years of sustained profitability - and returns in excess of the company's cost of capital (which would require Operating Profits of at least $1.0mpa) - before I could feel confident enough to declare that the Brazil nut has been well and truly cracked open.
And until they have got Brazil where it needs to be, I don't think they should even think about setting up a business in somewhere like China, because they are already juggling with a fair number of balls in the air.
The second reason that SDI has not ventured into China relates to the first reason, and that is that it has historically been somewhat capacity constrained at its Bayswater factory.
While that has changed following some capital upgrades and capacity expansions over the past few years, it still has to be remembered that SDI's supply chain into its customer base is very long, resulting in significant working capital investment required to grow sales. (Working Capital-to-Sales typically runs at somewhere close to 40%.)
And, for most of the 2000's the company has been run with a significant quantum of debt which limited the ability to fund the sorts of losses that would be required over the time that it would take to reach scale in China or anywhere else in Asia.
As can be seen below, Net Debt has been high historically, with Net Debt-to-EBITDA averaging around 1.8x from 2000 to 2013 (1.8x might be acceptable for a large behemoth like and Amcor or a CSL, or WES, but not for a microcap company whose earnings are somewhat volatile), and the company is only now essentially debt free for the first time in over two decades:
So that is my take on why the company has not entered the Chinese market:
1. It has for a long time had its hands full with its Brazilian foray (and still does today), and
2. It has never been in a strong enough financial position to fund the start-up losses that would inevitably be required in a place like China.
Put another way, I would not be at all happy if the company tomorrow announced that they were entering the Chinese market. I don't think the company is ready for it right now.
One shouldn't forget that this is a tiny company in the scheme of things... just a few tens of millions of dollars in market capitalisation; and not even one hundred million dollars in annual sales, from which it generates some $6m or so in profits.
It doesn't exactly have a lot of financial clout with which to take on the world.
As it is, I think SDI might be servicing too many clients in too many geographies, with the attendant laws of diminishing returns.
My preference would be for them to consolidate their customer base, where possible, and cut out some of the smaller ones whom I doubt would be profitable at all.
(20min delay)
