September 26, 2006, 4:29 pm

MR - Mindray pre-ipo analysis of today's ipo MR. Note that analysis was available to subscribers of the site 2 days prior to ipo pricing/open.

MR - Mindray Medical International

MR, Mindray Medical International plans on offering 20 million ADS at a range of $10-$12. Of the 20 million offering, 9.4 million will be coming from insiders. Goldman Sachs and UBS are lead managing the deal, 4 houses co-managing. 1 ADS equals one share and post-offering MR will have 103.7 million shares outstanding. On a pricing of $11, MR would have a $1.14 billion market cap. Approximately 75% of IPO proceeds will be used for construction of a new headquarters building and expansion of our manufacturing, assembly and warehouse facilities, including the potential relocation into a new facility in Shenzhen, China. The other 25% will be used for general corporate purposes.

Executives and directors will own approximately 75% of MR post-offering.

From the prospectus:

“We are a leading developer, manufacturer and marketer of medical devices in China. We also have a significant and growing presence outside of China, primarily in other regions of Asia and in Europe.”

The driver for this IPO is that MR is able to utilize low cost manufacturing in their homeland, China, and sell their products abroad cheaper than the competition. MR manufactures and sells more then 40 medical devises in three business segments: patient monitoring devices, diagnostic laboratory instruments and ultrasound imaging systems.

In terms of units sold, MR believes they've the leading market position in China for ALL three of their business segments. MR also believes their nationwide distribution, sales and service network is the largest of any medical device company in China. MR utilizes 1,950 distributors and 500 direct sales personnel in China and 600 distributors internationally. MR has sold their products to approximately 25,000 hospitals, clinics and other healthcare facilities in China and sold over 170,000 devices worldwide.

So we've a leading medical device manufacturer in China, now leveraging their low cost Chinese manufacturing capability to sell internationally. MR estimates they're able to undercut the competition on price internationally by up to 30%. MR's products are currently sold in more than 120 countries, and international sales grew from 24.7% of revenues in 2003 to 43.7% of revenues during the six months ended June 30, 2006.

Products: MR's leading product is a portable patient monitoring device which accounted for 13% of revenues first 6 months of '06. MR offers 15 different patient monitoring devices including 4 that have received United States FDA clearance. In their diagnostic segment MR offers ten hematology and biochemistry analyzers that perform analysis on blood, urine and other bodily fluids. In the ultrasound imaging systems business segment, MR offers more than ten ultrasound imaging systems

Patient monitoring products account for 40% of revenues, diagnostic instruments 30% and ultrasound 30%.

MR spends heavily on R&D and that investment has resulted in a steady stream of new products MR. These include MR's first color Doppler ultrasound monitor, MR's first 5-part hematology analyzer and MR's first anesthesia monitor.

It should be noted that MR expects that 2 recent Chinese government regulations will mute '06 revenues a bit. China instituted tighter regulations on medical distributors accepting kickbacks from hospitals. MR believes this new regulation will lengthen the sales cycle as hospitals take extra precautions to comply with this new regulation. The Chinese government has also added a new medical equipment safety standard before approving new devices. This extra layer of regulation has pushed back by 1-2 quarters MR's new product launches. Both regulations would appear to have only lengthened the sales cycle a bit for MR, and shouldn't impact gross sales over a longer period of time.


$1.25 per share in cash post offering, no debt.

Dividends- MR does plan on paying a dividend of 20% of annual net income annually. Based on 2006 earnings projections, MR's dividend would equal approximately a 1% annual yield.

MR has seen their revenues grow swiftly the past few years. Top-line growth was 50% in 2004, and then leaped 57% in 2005 to $135 million. Gross margins have been consistent in the 54- 55% range. Operating expenses have been in the 30% ballpark past few years. Operating income in 2005 was 21% historically however; in the first 6 months of '06 operating margins were closer to 25% than 21%. Stock-based compensation costs were wholly responsible for the operating margin dip in 2005.

Net margins in 2005 were 18%, helped in part to the 7% overall tax rate. Earnings per share in 2005 were $0.25. At a pricing of $11, MR would be trading at 44 X's trailing earnings.

MR has had a sub 10% tax rate since commencing operations. It appears they will lose some tax protections beginning in 2007 and I'm going to be conservative and factor in a 15% overall tax rate for 2007 and beyond. Tax rate should be closer to 10% in '06 after being 7- 8% historically.

MR looks poised for another 50%+ revenue gain in 2006. MR's growth has been impressive as 2006 looks to be the 5th consecutive year of 50%+ revenue growth. That is an achievement and would seem to indicate that MR's Chinese manufactured products are competing quite well internationally. The driver here of course is price, as MR is able to utilize their cheap domestic manufacturing base to undercut prices internationally. It is a good model and the revenue growth appears to indicate it is working nicely.

2006 revenues should approach $200 million. Gross margins again are in the 54%- 55% range. MR looks to book less stock comp charges in 2005, so operating margins should blip back up to the 25% level. Some of that margin increase will be given back by slightly higher tax rate, although overall tax rate for 2006 should still come in a bit below 10%.

I'd estimate net margins for 2006 to be in the 23%- 24% range. Earnings per share should be in the $0.45 ballpark. At a pricing of $11 then, MR would be trading 24 X's 2006 earnings.

Conclusion- China has been leading the world in GDP growth this decade and MR should continue to grow based just on their leading position in China. MR is doing a fantastic job taking their market leading medical device operation global. Due to their cheap manufacturing base in China, they've been able to grow foreign sales strongly by undercutting the competition on price. The result of all this has been 5 straight years of 50%+ revenue growth along with strong gross and operating margins. Due to the large number of outstanding shares available, MR is not coming at a dirt cheap valuation. Insiders are selling 1/2 of the shares in this offering; absolutely expect a secondary in 6 months time. However if they continue the trends of the past 5 years, MR should be a money making machine for years to come. This is one of the stronger Chinese IPOs to come along this decade in my opinion.

Leading Chinese medical device manufacturer utilizing low cost manufacturing base to increase international revenues. Very strong growth trends should continue for MR domestically and abroad. Recommend strongly in range and reasonably above range. MR has a chance to be a nice long term winner. .