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Mindray Medical (MR) - Initiated BUY

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healthcare2 March 15, 2010 (Chinavestor) We recommend a BUY rating for Mindray Medical International Limited (NYSE:MR), as it continues to outperform the medical industry and its competitors in summary performance measures. Mindray Medical  (NYSE:MR) is set to continue its strong performance with growth in the domestic market, as well as international expansion.

- Company overview

Mindray Medical (NYSE:MR) was founded in 1991 and headquartered in Shenzhen, China. Its US operations is headquartered in New Jersey. Mindray Medical is a leader in China in the development, marketing and manufacture of medical equipment. It aims to introduce 6-8 new products each year to broaden its market share in target market segments. Mindray Medical (NYSE:MR) exceeded this target in 2009 with 10 new products. Mindray Medical (NYSE:MR) invests 10% of revenues in Research & Development (R&D) each year. Mindray Medical's advantage is its low internal cost structure. R&D sites are located in Shenzhen, Nanjing, Beijing, Mahwah, Seattle and Stockholm. R&D staff comprises of over 1500 engineers, based mainly in China and in the US. They aim not only to better meet customer needs, but to lower cost to its existing product portfolio.

Mindray Medical (NYSE:MR) offers 70 products across three business segments - patient monitoring and life support products; in-vitro diagnostic instruments and medical imagining systems. In 2009, it introduced ten new products. In 2010, it plans to introduce 7-10 new products, with a focus on the high-end customer segment segments.
MR_09Q4_sum_table

 

Selected Financial Data

Mindray Medical International Limited

Key Income Statement Data

Q4 09

Q3 09

Q2 09

Q1 09

Q4 08

In Millions of USD

Net Revenues

189

151

160

134

168

Revenues generated in China

88

67

76

62

73

Revenues generated outside China

101

84

84

72

95

Gross Profit

102

86

92

75

95

Non-GAAP Gross Profit

104

87

93

35

93

EBITDA

52

60

47

N/A

40

Net Income

37

43

33

25

32

Non-GAAP Net Income

42

37

38

31

36

Key Balance Sheet Data

2nd half 09

1st half 09

2nd half 08

1st half 08

2nd half 07

In Millions of USD

Cash & Equivalents

204

119

96

75

189

Restricted cash

102

100

156

70

--

Total Receivables, Net

113

101

90

73

29

Total Inventory

65

66

57

61

25

Value added tax receivables

9

8

14

--

--

Other current assets

18

19

14

93

63

Total Current Assets

512

413

427

372

306

Property/Plant/Equipment - Net

154

142

126

108

48

Land use rights - Net

26

26

3

3

2

Other non-current assets

274

208

229

216

53

Total Assets

966

858

786

700

447

Total Current Liabilities

255

237

280

171

69

Total Long Term Liabilities

142

75

16

97

3

Total Liabilities

397

312

296

268

72

Total Equity

641

546

498

432

374

Total Liabilities and Equity

966

858

786

700

447

Market Comparisons

Mindray Medical

Industry

Sector

S&P500

Current Ratio (MRQ)

1.98

2.05

3.13

0.99

Total Debt / Equity (MRQ)

29.70

226.19

33.17

197.55

Asset Turnover (TTM)

0.74

0.14

0.14

0.50

ROA (TTM)

16.18

1.31

2.11

5.11

ROI (TTM)

22.34

1.69

2.74

6.69

ROE (TTM)

25.02

2.39

3.60

14.84

Gross Margin (TTM)

55.93

11.61

12.47

30.43

Operating Margin (TTM)

21.90

1.96

-0.32

--

Pre-tax Margin (TTM)

25.18

1.80

-0.71

12.98

Net Profit Margin (TTM)

21.75

1.00

-1.50

10.43

In China, Mindray Medical (NYSE:MR) supplies to distributors, hospitals, clinics, and healthcare facilities. Worldwide, it supplies to 190 countries.

Mindray Medical (NYSE:MR) acquired Datascope's patient monitoring division in May 2008. This allows Mindray Medical (NYSE:MR) to access more direct sales channels in the US, UK and France. This division is located in Mahwah, New Jersey. Mindray Medical plans to market products that will extend its value chain, to get closer to end users. It has 29 branch companies in China, and 12 overseas branches.

- Revenue and earnings outlook

Revenue and earnings have grown dramatically since 2007. In 2007, revenues rose 57.5% and net income increased 74.9%. In 2008, revenues rose 79% and net income increased by 34%. In 2009, revenues were up 15.8% and net income up 28.1%.

In 2000, Mindray Medical (NYSE:MR) began to export. By 2007, export revenues exceeded domestic Chinese revenue for the first time.

For 2009, Mindray Medical (NYSE:MR) exceeded its fully diluted non-GAAP guidance of $1.29 earnings-per-share to $1.30. This is up 11.4% year-on-year. Revenues for 2009 increased by 15.8% from 2008 figures, which was US$547 million. In dollar terms, revenues exceeded guidance expectations of US$624-633 million to US$634.2 million.

Part of Mindray Medical's growth in revenue and earnings is due to the Chinese government's focus on healthcare. The Chinese government's RMB850 billion healthcare reform over three years will assist in the sustained growth of the Chinese healthcare industry, and high growth in Mindray Medical (NYSE:MR) in the Chinese domestic market.

The Chinese market is the largest revenue market for Mindray Medical, comprising 42.8% of its total revenue in 2008. China, Europe, and North America comprise 77.5% of total revenue.

The main threat to revenue and earnings performance reside mainly in hospital expenditure. In the economic crisis of 2008, critical factors to Mindray's success were shown to be hospitals' spending, reimbursement and financing. These factors are directly affected by credit availability, which leads directly to the volume of hospital procedures and hospital revenue. The resource allocation decision of hospitals revolve around cost and routine patient needs, which are the foci of Mindray Medical's R&D. Mindray Medical's products are generally considered to be hospital essentials, with patient monitoring and life support products comprising 44.5% of total revenue.

MR_09Q4_revenue

Increase in profit margins is due primarily to a decrease in employee share-based compensation expenses.

The effects of the economic downturn may adversely affect the net profit margins.

MR_09Q4_profit_margin

 

-Cash flow and cash equivalents outlook

Operating cash generation has been strong over the past two years. In 2007, Mindray Medical held RMB1379M in cash and cash equivalents. In 2006, it had RMB1710M in cash and cash equivalents.

Mindray Medical (NYSE:MR) has high working capital, with RMB1730M in 2007 and RMB 1613 in 2006. The company does not rely heavily on debt for its operations. In the fourth quarter 2009, net operating cash was US$86.3 million.

MR_09Q4_cash

 

-Competitor and industry analysis

Mindray Medical's main competitors in the Medical Instruments and Supplies industry are Abbott Laboratories, Bayer Healthcare AG and GE Healthcare.

Abbott Laboratories has a larger market cap than Mindray Medical (NYSE:MR). Mindray Medical's market cap stands at US $4.09B. Abbott Laboratories' market cap stands at US $85.83B.

In 2008, the Medical Instruments and Supplies Industry suffered in the economic crisis. The effect of the crisis was exacerbated, at the time, by uncertainty in healthcare reform by the Chinese government, proposed reimbursement reductions and low operating margins.

For-profit hospitals rely heavily on leverage for its operations. The crisis in 2008 and subsequent lack of spending on hospital supplies provides a solid backdrop for a pick-up in equipment and supplies expenditure.

At present, hospitals are severely low in supplies due to drastic cuts in spending, and dated equipment is due for an upgrade.

Another catalyst for improved industry conditions is the overall rebound in macro-economic conditions. Improved economic conditions leads directly to the number of uninsured individuals to drop. This leads to a higher number of insured patients, and higher overall hospital spend.

MR_09Q4_copetitor_table

Note: GE figures shown are for the consolidated entity. GE's consolidated figures include GE Capital, which suffered heavy losses in 2008-09 along with the overall financial sector.


- Competitor Ratio Analysis

MR_09Q4_copetitor_charts

Note: GE figures shown are for the consolidated entity. GE's consolidated figures include GE Capital, which suffered heavy losses in 2008-09 along with the overall financial sector.


- Mindray Medical Internal Growth Analysis

MR_09Q4_internal_growth_table

As shown by the internal growth analysis, Mindray Medical is set to continue to grow. Mindray Medical outperforms the industry in key growth areas. These include sales, earnings-per-share, operating margin and return-on-investment. Mindray Medical operates both efficiently and effectively within a growing Chinese domestic market and international market.

Compared to its main competitor, Abbott Laboratories, Mindray Medical (NYSE:MR) has some scope to lever up its operations to generate a greater rate of return. At present, it has a relatively low leverage ratio.

MR_09Q4_internal_growth_charts

 

Annual Income Statement

Annual Income Statement

Mindray Medical International Limited

In Millions of USD

2009

2008

2007

2006

2005

Net Revenues

634

548

294

190

132

Cost of revenues (1)

(280)

(251)

(133)

(86)

(60)

Gross profit

354

297

162

104

71

Operating expenses

Selling expenses

(106)

(80)

(41)

(27)

(18)

General and admin expenses

(48)

(41)

(12)

(10)

(14)

R&D expenses

(58)

(52)

(28)

(19)

(13)

Expense of in-progress R&D

--

(7)

--

(4)

--

Other general expenses

--

(35)

--

--

--

Realignment costs

1.2

0.9

--

--

--

Profit from Operating Activities

141

118

80

45

27

Other Income

26

5

2

0.8

1

Interest income

7

8

10

4

0.5

Interest expense

(5)

(5)

(0.01)

(0.06)

(0.25)

Income before income tax, minority interest

168

126

92

49

28

Provision for income taxes

(29)

(17)

(14)

(3)

(2)

Minority interests

--

--

--

(0.8)

(1)

Net income

139

109

78

45

25

Deemed dividend (convertible pref. shares)

--

--

--

--

(2)

Net Income to ordinary shareholders

139

109

78

45

23

Basic net income (loss) per share

1.28

1.01

0.73

0.52

0.28

Diluted net income (loss) per share

1.23

0.96

0.69

0.47

0.28

 

Annual Balance Sheet

Annual Balance Sheet

Mindray Medical International Limited

In Millions of USD

2009

2008

2007

2006

2005

Cash and cash equivalents

204

96

189

244

64

Restricted cash

102

120

--

--

--

Short-term investments

--

37

56

2

--

Accounts receivable

113

90

29

15

10

Inventories

65

57

25

17

15

Value added tax receivables

9

14

0.03

--

--

Other receivables

9

7

5

2

4

Prepayments and deposits

7

5

2

3

3

Deferred tax assets

2

2

0.6

--

--

Total Current Assets

512

427

306

283

96

Long-term investments

66

--

34

15

1

Other assets

2

2

3

--

--

Advances for buying plant and equipment

28

46

18

--

--

Property, plant and equipment, net

154

126

48

25

22

Land use rights, net

26

3

2

--

0.3

Intangible assets, net

64

67

18

24

0.4

Goodwill

115

114

17

17

--

Total Assets

966

786

447

365

120

Short-term bank loans

103

157

--

--

--

Notes payable

6

7

9

7

2

Accounts payable

36

29

18

11

9

Advances from customers

10

8

72

3

3

Salaries payable

20

17

8

--

--

Other payables

57

47

17

29

15

Income taxes payable

16

11

8

--

--

Other taxes payable

6

4

2

--

--

Deferred tax liabilities

1

--

--

--

--

Total Current Liabilities

255

280

69

50

29

Other long-term liabilities

1

7

--

--

--

Bank loans

66

--

--

--

1

Deferred tax liabilities

4

0.7

3

3

--

Minority interests

--

--

2

--

5

Shareholders' equity

14

14

13

--

--

Total Liabilities

325

288

73

53

35

Additional paid-up capital

298

275

260

273

7

Retained earnings

301

184

94

38

32

Accumulate other comprehensive income

41

39

19

--

--

Redeemable preferred stock

--

--

--

--

46

Total Shareholders' Equity

641

498

374

311

85

Total Liabilities& Shareholders’ Equity

966

786

447

365

120

 

Annual Cash Flow Statement

Annual Cash Flow Statement

Mindray Medical International Limited

In Millions of USD

2008

2007

2006

2005

2004

Cash flows from operating activities

109

78

45

29

26

Amortization of land use rights

0.07

0.02

0.02

--

--

Depreciation of property, plant and equipment

14

7

5

4

2

Amortization of debt issuance costs

0.5

--

--

--

--

Amortization of intangible assets

8

3

--

--

--

Provisions for inventories obsolescence

5

--

--

--

--

Allowance for doubtful accounts

3

0.3

0.4

11

0.3

Expense of in-progress R&D

7

--

4

--

--

Write off of intangible assets

--

--

0.3

--

--

(Gain) loss on disposal of PPE

0.5

0.02

(0.03)

--

--

Share-based compensation expense

9

8

3

--

--

Deferred income taxes

(1)

0.03

(1)

0.2

(0.2)

Income attributable to the minority interests

--

--

0.8

--

--

Changes in current asset and liabilities

-61

-2

11

7.5

(4.7)

Net Cash from Operations

93

93

68

52

24

Acquisition cost, net of cash received of $397

(211)

--

--

--

--

Purchase of property, plant and equipment

(44)

(31)

(9)

--

--

Purchase of land use rights

(0.3)

--

--

--

--

Advances for purchase of plant and equipment

(26)

(17)

--

(10)

(4)

Proceeds from disposal of property, plant and equipment

6

0.2

0.1

1

1

Decrease (increase) in restricted cash

(118)

--

1

--

--

Proceeds from sale of investments

59

4

--

--

--

Increase in investments

--

(75)

(15)

--

--

Repayments from employee loans, net

0.1

0.06

0.5

--

--

Net cash used in Investing

(335)

(119)

(22)

(9)

(3)

Proceeds from bank loans

155

--

--

(5)

(1)

Dividends paid

(19)

(15)

(40)

0

(12)

Proceeds from issuance of ordinary shares

--

--

155

--

--

Proceeds from exercise of options

6

9

--

--

--

Proceeds collected for (repaid to) shareholders

--

(5)

4

--

--

Net Cash used in Financing

142

(12)

120

(5)

(13)

Net Change in Cash and Cash equivalents

(100)

(37)

165

N/A

N/A

Net Cash - Begin Balance

189

219

55

N/A

N/A

Effect of foreign exchange rate changes, net

7

7

(2)

--

--

Net Cash and Cash equivalents - End Balance

96

189

219

38

7

 

Disclaimer

Analyst Certification

I, Scott Lin, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

Other Important Disclosures

The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Chinavestor.com.

Copyright, user agreement and other general information related to this report:

Copyright 2010 Chinavestor.com. All rights reserved. This research report is prepared for the use of Chinavestor.com clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Chinavestor.com. This research report provides general information only. It is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice. Past performance is not necessarily a guide to future performance.

Fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current.



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