January 22, 2015 Mindray Medical International Limited Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 06/26/2014 Current Price (01/21/15) $26.73 Target Price $28.00 SUMMARY (MR-NYSE) Mindray Medical posted mixed third-quarter 2014 results wherein revenues grew 9.6% year over year but earnings fell 4.4%. However, earnings were in line with our expectations. Though revenues largely benefited from double-digit sales growth in China and Western Europe, sales at certain key emerging markets continue to be affected by unfavorable foreign exchange and political issues. In the face of increasing uncertainties in currency and other macro developments, Mindray expects 2014 net revenue year-over-year growth below 10%, lower than the earlier growth guidance of at least 10%. However, Mindray maintains a decent product pipeline and brings out several products each year which should drive sustainable growth. Therefore, we maintain our Neutral recommendation on Mindray and set a target price of $28.00. SUMMARY DATA 52-Week High $38.53 52-Week Low $26.17 One-Year Return (%) -27.28 Beta 1.14 Average Daily Volume (sh) 528,907 Shares Outstanding (mil) 117 Market Capitalization ($mil) $3,135 Short Interest Ratio (days) 27.65 Institutional Ownership (%) 78 Insider Ownership (%) N/A Annual Cash Dividend $0.46 Dividend Yield (%) 1.72 5-Yr. Historical Growth Rates Sales (%) 17.9 Earnings Per Share (%) 13.1 Dividend (%) 29.4 using TTM EPS 13.0 using 2015 Estimate 13.5 using 2016 Estimate 12.0 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold Risk Level * Type of Stock Below Avg., Mid-Blend Industry Med Instruments Zacks Industry Rank * 80 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 242 A 307 A 296 A 368 A 1,214 A 2014 242 A 334 A 325 A 434 E 1,335 E 2015 281 E 388 E 377 E 455 E 1,501 E 2016 1,617 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.50 A $0.53 A $0.45 A $0.59 A $2.08 A 2014 $0.50 A $0.53 A $0.43 A $0.39 E $1.85 E 2015 $0.47 E $0.66 E $0.51 E $0.34 E $1.98 E 2016 $2.22 E Projected EPS Growth - Next 5 Years % 16 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Mindray Medical International Limited (MR), headquartered in Shenzhen, China, commenced operations in 1991. The company conducts much of its business through its consolidated operating subsidiary, Shenzhen Mindray, which was established in 1999. Mindray owns about 99.9% of the equity of Shenzhen Mindray. It maintains its global operational headquarters (HQ) in Shenzhen while the U.S. HQ is in Mahwah, New Jersey. Mindray is a developer, manufacturer and seller of medical devices globally. It has three segments, namely Patient Monitoring and Life Support products, In-Vitro Diagnostic products and Medical Imaging Systems. Mindray s largest segment, Patient Monitoring and Life Support includes products such as patient monitoring devices (PMD), anesthesia devices, defibrillators, surgical lights, and beds. Generally, PMDs measure real-time, concurrent, or dynamic physiological parameters such as heart rate, blood pressure, respiration, and temperature. In China, the company is the leading player in the patient monitoring market. The In-Vitro Diagnostics segment or IVD includes products in 5 instrument categories used for diagnostic testing: hematology analysis products, biochemistry analysis products, urine sediment analysis products, microbiology analysis products and coagulation analysis products. In addition, the company manufactures and sells over 150 separate reagents for both hematology and biochemistry analyzers. Reagents are a major source of recurring revenue. The Medical Imaging Systems segment includes the following product lines: black and white ultrasound, color ultrasound, and digital radiography. Historically, this product segment has consisted primarily of portable and mobile ultrasound systems. The Others segment derives revenues from provision of after-sales services along with research and development services performed for original design manufacturers (ODM). This segment also includes revenues from acquired business, such as orthopedic products, endoscope devices and healthcare IT solutions products that are outside the other three business segments. Mindray sells products through different distribution channels in various parts of the world. In the U.S., U.K., France, Germany and the Netherlands, the company sells its products through a direct sales model. In China, it sells its goods mainly to third-party distributors. The company reported total revenues of $1.2 billion in 2013, reflecting year-over-year growth of around 14.5%. Revenues from China accounted for 45.4% of the company s total revenues while the same from international operations comprised 54.6% of total revenues. Equity Research MR Page 2
REASONS TO BUY Despite its current sluggish pace, long-term fundamentals of the Chinese healthcare market are solid. Sales in China are bolstered by three factors, namely, higher healthcare spending by the government in county hospitals where Mindray has a strong presence; the company s efforts in restructuring its sales outfit; and enhanced growth in in-vitro diagnostics reagents and medical imaging product sales. Additionally, private hospital demands are poised to grow rapidly based on government initiatives and private investments. Also, the government has recently released new initiatives to encourage hospitals to prioritize the purchase of products from domestic brands. We feel that Mindray will benefit from this policy and remain optimistic about the long-term growth potential of the Chinese market. Mindray represents one of the best quality names in the Chinese healthcare sector. The company has one of the largest sales, distribution and service networks of medical device companies in China. Its distribution network widens its client reach and enhances its ability to penetrate the Chinese market. The company s superior sales infrastructure has provided significantly better access to China s small- and medium-sized hospitals (county hospitals) than its competitors. In this segment, the company sells its products at a moderate premium over domestic competitors, while it beats global majors, such as General Electric, Philips and Siemens, on the basis of price. Brand recognition, in the end, enables Mindray to beat Chinese competitors at Tier II and Tier III hospitals. In the developed countries too, Mindray has successfully garnered market share by targeting midmarket, potentially more price-sensitive, customers who may be looking for medical devices offered at lower prices than global brands. Mindray is making consistent efforts to strengthen its sales, marketing, distribution and product development capabilities, which should drive sustainable growth. The company is focused on expanding its core capabilities through innovative product launches. Over the past year, Mindray unveiled nine products and plans to introduce seven to ten more in the current year. We believe that the company s focus on promoting new products and improving internal operating efficiency will lend it a competitive edge. REASONS TO SELL A sluggish Chinese healthcare sector continues to impact domestic revenues of the company. Also, healthcare related reform measures in the U.S. have negatively impacted Mindray s business by creating uncertainties, reducing demand for its products. The stiff capital spending environment in North America is hampering the company s top line growth. Mindray also continues to face persistent weakness in certain emerging markets due to unfavorable currency fluctuations and political tensions. In the face of increasing uncertainties in currency and other macro developments that could impact its performance in certain key markets, Mindray slashed its 2014 financial guidance. We feel that the lowered guidance fails to indicate any near-term catalyst that may improve the scenario anytime soon. The medical device industry is characterized by quick product development, rapid technological advances, intense competition and a strong emphasis on proprietary products. Mindray faces direct competition both locally in China and in overseas markets. Mindray has traditionally generated a part of its domestic revenues from government tender sales. Tenders in China are a discretionary decision of the government and can vary from year to year. The company forecasts that uncertainty and low tender volumes will continue in the future. Equity Research MR Page 3
RECENT NEWS Third Quarter Highlights Mindray Medical posted adjusted earnings of $0.43 per share in third-quarter 2014, in line with the Zacks Consensus Estimate. Earnings, however, fell 4.4% on a year-over-year basis. Quarter Details Third-quarter net revenue came in at $324.6 million, up 9.6% year over year. Meanwhile, China revenues grew 18% year over year to $155.7 million, representing 48% of the company's total revenue while international revenues inched up 2.8% to $168.9 million. Revenues were driven by double-digit sales growth in China and Western Europe during the quarter. However, the company experienced persistent softness in certain key emerging markets as a result of unfavorable foreign exchange and political issues. Revenues at IVD went up 11.5% to $92.5 million, driven by robust reagents sales which accounted for 44.2% of the segment s net revenue. In addition to reagents, high-end hematology and high-speed biochemistry analyzers also performed well in China, reflecting healthy recurring revenues in the IVD segment. Revenues from both Patient Monitoring & Life Support Products and Medical Imaging Systems improved 7% year over year to $118 million and $82.5 million, respectively. Revenues from Others (including sales from the orthopedics business, service revenues from extended warranties, sales of accessories and repair service revenues for post-warranty period) spiked 22% to $31.6 million in the quarter under review. Adjusted gross profit rose 10.5% year over year to $184.6 million while adjusted operating earnings declined 9.2% year over year to $49.5 million. As of Sep 30, 2014, Mindray Medical had $972.9 million in cash, cash equivalents and short-term investments, compared with $915.6 million as of Jun 30, 2014. Cash flow from operating activities improved marginally to $85.5 million from $84.6 million at the end of the previous quarter. In the first nine months of 2014, cash flow from operations totaled $189.8 million as compared with $185.7 million in the year-ago period. 2014 Guidance Mindray Medical slashed its 2014 financial guidance in the face of increasing currency-related uncertainties and unfavorable macro developments that could impact its performance in certain key markets. The company expects year-over-year net revenue growth below 10% for 2014, lower than the earlier guidance of at least 10%. The company apprehends 2014 adjusted net income to decrease by mid-single digits from the 2013 figure. Capital expenditure is now expected at around $110 million for 2014, as against the prior expectation of $130 million. Equity Research MR Page 4
VALUATION Mindray shares are trading at 13x TTM earnings, a discount to the peer group average of 44.3x and S&P 500 average of 18.6x. The TTM multiple is below the mid-point of the historical range of 12.9x to 31.5x TTM earnings, indicating upside potential. The stock is trading at 13.5x our forward earnings estimates for 2015, approximately 88% discount to the peer group average of 115.5x, which is lower than the 73.6% average discount for the historical period, indicating further upside. However, five year estimated EPS growth rate of 16% is lower than the peer group average of 17.8%. Given the mixed signals, we maintain our Neutral recommendation and set a price target of $28.00 (14.1x 2015 earnings). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Mindray Medical International Limited (MR) 13.5 12.0 16.0 12.9 13.0 31.5 12.9 Industry Average 115.5 31.9 17.8 30.5 44.3 211.0 33.4 S&P 500 16.1 15.1 10.7 15.9 18.6 19.4 12.0 IDEXX Laboratories, Inc. (IDXX) 36.2 30.4 13.8 34.3 41.5 38.7 25.1 Elekta AB (EKTAY) 19.5 17.3 9.0 16.9 27.0 31.5 25.1 Sirona Dental Systems Inc. (SIRO) 22.5 20.5 11.1 18.4 24.7 24.0 11.6 Masimo Corporation (MASI) 19.0 17.5 14.6 19.2 21.5 32.5 17.2 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow Mindray Medical International Limited (MR) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA 2.0 6.6 2.0 15.7 0.1 1.7 9.5 Industry Average 5.2 5.2 5.2-736.2 0.1 0.1-3.6 S&P 500 5.1 9.8 3.2 24.8 N/A 2.0 N/A Equity Research MR Page 5
Earnings Surprise and Estimate Revision History Equity Research MR Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MR. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1114 companies covered: Outperform - 15.6%, Neutral - 78.1%, Underperform 5.7%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research MR Page 7