Mindray Medical International Limited (MR) - Strong Report
Mindray Medical International Limited (MR) reported earnings earlier this month and the news was encouraging. After a tumultuous decline late in the first quarter, the stock had begun to rebound, and then moved decidedly higher on the announcement. Revenue came in at $89.3 million which was good for a 48.2% increase. More importantly, the company’s international revenue (outside its home country of China) was $45.6 million or 49.4% higher. Since management has continued to reaffirm its commitment to growing outside its primary China market, it was encouraging to see international sales make up more than half of total revenue. The company continues to enjoy a healthy 57% gross margin and net income came in at $28.4 million or 25 cents per share. Management noted its pride in the fact that the bottom line is actually growing more quickly than the revenue numbers, indicating strong operating leverage.
The company operates in three business divisions, each of which made up roughly 1/3 of the total revenue for the quarter. However, the growth in each division varies. Patient monitoring and life support showed growth of 30.2% over last year. However, In-Vitro diagnostic products saw 56.1% growth and the Medical Imaging division was up over 61%. The company received FDA approval for an additional 3 products during the quarter which expands their offering suite to the US. As of the end of the quarter, Mindray now has developed and manufactures over 40 products which are available in more than 140 countries.
One of the most exciting events in the first quarter was an agreement to buy Datascope Corporation’s patient monitoring business. Mindray picked up the line for $202 million and expects to leverage the products over its current infrastructure. Management has stated that they expect $30 million in synergies by 2011 and has noted that there has been no Datascope staff turnover in the sales department or the R&D portion of the business. An Oppenheimer analyst noted that the acquisition should increase the company’s worldwide market share to 9%, add an additional 20 FDA approved products, and enable cross selling between the two company’s US and China customers. While the growth rate of the new division is much lower than that of its new parent company, it appears that Mindray has the talent in place to jump start the business to perform more in line with the rest of the company.
China’s tax rate is undergoing transition and moving towards a flat 25% rate for most firms. There is an exception for “new and hi-tech enterprises” which would lower the tax rate to 15%. At this point, Mindray has failed to secure the designation and so the accounting takes into account a transition over the next 5 years to the new 25% rate. It may turn out that the company will be able to fall under the preferential treatment and if this happens, the additional tax paid will likely be deducted from future liabilities. However, this is not a guarantee and the higher tax rate would definitely be an incremental detriment to profits.
Finally, the company struggles with currency issues as it conducts business around the globe. Management recently made the decision to transition to reporting in US dollars. This is expected to take full effect in the second quarter release. A stronger dollar would have the effect of decreasing profits to some degree as those profits are obviously recorded in a stronger currency. This is an important area for any international investor to be aware of because of the significant effect not only on reported profits but also in the price of the stock.
Despite the fact that the stock is relatively expensive, Mindray’s growth level makes it an attractive candidate for a long-term investment. Despite signs of a decline in the global economic growth, medical equipment has historically been somewhat resistant to economic changes. Given the fact that Mindray has new and innovative products both currently for sale as well as in the development pipeline, it appears that demand for its products will continue to grow.
FD: Author does not have a position in MR
Additional Reading:
ZachStocks with a December article on MR
