On December 12th, 2013, Ottoman Bay released its first report on Mindray Medical (NYSE:MR). In our original report, we detailed our findings in a 103-page slide deck, which supports our view that Mindray Medical has systematically deceived investors and regulators, including the SEC.
On December 13, 2013, Mindray Medical's management team released a response to our beliefs. Not only do we believe Mindray's responses were intentionally misleading, but management deliberately evaded some of the more serious concerns from our original report.
In our report, we present the country level financials, from local registries, for each of Mindray's operating subsidiaries. The financials confirm our beliefs that Mindray reports inaccurate sales, has roughly 30% gross margins and has reported an operating loss in all of European business.
Summary of New Findings:
- Mindray Medical's business is a fraction of the business MR purports. Ottoman Bay has obtained the "in country" filings, from local registries, of MR's operating subsidiaries which confirm MR has been reporting substantially inaccurate sales, gross margins and has been hiding operating losses in subsidiaries from US investors for years.
- We believe Mindray's earnings are materially overstated, by at least 30% and real gross margins are 30% vs. the 60% the company claims. For example, in the Netherlands & UK, MR's gross margins were just 6% and 30%, respectively.
- So much like past Chinese frauds, "in country" filings confirm that the company has a mere fraction of the cash it reports to the SEC.
- Mindray's UK business has had 3 separate auditors in the last 3 years, of which 2 abruptly resigned. Investors should question what the auditors know that we don't.
- MR's business has deteriorated so significantly in the last year that the core business is now growing at sub 10% vs. the 17% full year guidance management gave in 2Q12 (-7% in 8 mos.). MR has propped up the ailing business solely by making dubious acquisitions which the company refuses to disclose the contribution of.
- Mindray's SEC financial statements are materially misrepresented, rendering them, in our view, unreliable and inaccurate.
- Mindray's shares are worth no more than $10.00/share, and will approach $0.00 as the event risks unfold.
The Smoking Gun
We present smoking gun evidence, which confirms our initial belief that Mindray Medical's business is a fraction of the business MR purports. Specifically, we requested and compiled all of the "in-country" reported filings from local registries of each of Mindray Medical's operating subsidiaries dating back to 2010. The documents present a company that does not even remotely resemble the company that Mindray portrays to US investors in its SEC filings. Furthermore, contrary to consensus perception, MR's international business realizes gross margins of roughly 30% and has been hiding significant operating and net profit losses in its subsidiaries for years.
More alarmingly, the "in country" filings confirm that the company has a mere fraction of the cash the company reports to the SEC, so much like past Chinese frauds. Specifically, Mindray's UK filings confirm that its business overseas is largely insolvent. We believe Mindray's problems run deeper than unusual accounting. The MR story also comes with misrepresented financials, multiple auditor resignations, hidden losses in subsidiaries and governance abuses.
Given the gravity of these issues, we have notified the IRS and the SEC of the material abuses at Mindray Medical. We believe Mindray Medical will restate several years of filings as a result of the issues covered. Ottoman Bay contacted Mindray Medical on several occasions and did not hear back from the Company, further confirming our suspicion. Below we address these concerns in detail.
Mindray's International Revenues & Earnings Are a Fraction of the Amount MR Claims
Ottoman Bay first became skeptical of the reported sales and earnings of Mindray's International business when we discovered an interview dated 12/6/2012 between Lun Tao (David) Yin, head of Mindray Europe and Oost NV, a regional business development and investment agency in the Netherlands.
Link to video interview with David Yin: http://www.oostnv.com/testimonial-extra/mindray
We noted numerous statements made by Managing Director of Europe Mr. Yin, which we could not reconcile with the company's reported SEC filings.
In the interview, Mr. Yin, in fact, accurately disclosed the following:
- Mindray apparently runs its entire +$100m European business through its location in the Netherlands (Europe headquarters), which services 30 countries out of what is a 3,080 square meter office and a leased 1,380 square meter warehouse. See photo below:
Investors can confirm via Google maps:
Mindray Medical Europe Headquarters
Address: Doctorandus W. van Royenstraat 8 3871 AN Hoevelaken, Nederland
- More notably, Mr. Yin also said ― "We keep investing in Europe, and we will see in the future if our business over here can be over 100 million or even 500 million US Dollars. That's our target we'd like to achieve in the next 5 or 10 years."
Initially, we found this comment particularly strange because in 2012 Mindray reported sales in Europe of $101m, up from $91m in 2011. Therefore, Mr. Yin was a mere $10m away from his 5 year target in December 2012 when the interview was taken and just a few days before MR closed its 2012 books to end its fiscal year. This disclosure implied that the scale and profitability of MR's European business, as reported to the SEC, could be far lower than the company claims.
To reconcile Mr. Yin's comments, we compiled all of the filings of MR's European operating subsidiaries dating back to 2010. Specifically, we analyzed the 2011 public filings, as the Netherlands 2012 filing has yet to be filed. Evidence shows that Mindray Medical has been reporting inaccurate sales, gross margins and operating earnings to US investors for years. After consolidating the results, MR generated 2011 revenues of just $67 million, an operating loss of -4m a net loss of -14m and the losses continued in 2012 filings. Furthermore, the $67m represents revenue for ALL of the UK, Spain, France, Italy, the Netherlands & Sweden - incorporating many of the largest countries in Europe. MR's European sales are a significant 31% lower than the $100m+ the company reports to the SEC and in line with Mr. Yin's comments. Investors should note that in MR's most recent press release, the company dubiously claimed that "Western Europe" was the key growth driver despite filings which suggests that it is a money losing business and has been so for years.
In 2011, MR claimed to generate $91m in sales. However, as can be seen below, country level financials show substantially lower sales of $67m and net losses of -$14m. See chart below.
Investors should note that we were unable to obtain the filings for Germany but through earnings transcripts have gathered that it is a small portion of sales. Furthermore, Mindray's CIS region is included in "other" in the company's reported filings. This segment reported $147m in sales in 2012.
Hidden Losses In Subsidiaries
The most concerning revelation are the significant losses the company has been hiding from US investors in its subsidiaries. In 2011, MR's largest businesses in Europe realized a negative operating margin of -6% and a net margin of -21%. Notably, not a single country reported operating margins higher than 12%. The UK, the Netherlands and France reported significant operating losses and Spain and Italy reported op. margins of just 4% vs. the consolidated 21% operating margins MR reports to the SEC. We find this implausible and investors should question just how significant the losses MR is experiencing for subsidiaries we could not obtain.
Note that in 2011, MR reported Europe revenues of $91m, which is an overstatement of 31% from the $67m MR discloses in its "in country" filings. Even after taking into consideration consolidation issues a $22m discrepancy (the equivalent of 4 of MR's UK businesses) is still significant given we accounted for all of the major countries in Europe and MR has a segment titled Other, which purportedly did $279m in sak2011. Ultimately, we believe that Mindray reports accurate financial figures to their own government whereas they report fabricated financial figures to the U.S government and U.S. investors.
If MR cannot turn an operating profit in larger, mature European markets, that spend a higher % per capita of GDP on healthcare, what does that imply for operating profit for the rest of the business? Better yet, how many countries is MR reporting significant operating losses that US investors do not know about?
We have included the filings for each of Mindray's operating subsidiaries below; investors can also confirm that Mindray's financials are misleading for themselves:
- Mindray Medical UK 2010
- Mindray Medical UK 2011
- Mindray Medical UK 2012
- Mindray Medical Netherlands 2010
- Mindray Medical Netherlands 2011
- Mindray Medical France 2012
- Mindray Medical Italy 2012
- Mindray Medical Espana 2011
- Mindray Medical Espana 2012
- Mindray Medical Sweden 2010
- Mindray Medical Sweden 2011
- Mindray Medical Sweden 2012
Contrary to consensus belief, Mindray's UK segment is an inconsequential 6 million euro business, which reports 30% gross margins, operating losses and carries a mere 643 thousand euros in cash.
What Has All of Mindray's Auditors Spooked?
MR's claims to be "transparent" are implausible. Its offshore structure, which utilizes multiple British Virgin Island entities, is an unjustifiable black hole.
Another significant corporate governance abuse we identified is that Mindray uses different audit firms for each of its subsidiaries, making checks and balances nearly impossible. To compound matters, Mindray UK has had 3 separate auditors in the last 3 years, of which 2, abruptly resigned. In 2010, Mindray's UK auditor was Silver Levene Audit, the auditor abruptly resigned during the year and was replaced by UHY Hacker Young. Similarly, in 2011, UHY Hacker Young also abruptly resigned during the period and was replaced by PricewaterhouseCoopers.
Mindray UK 2011 Filing
Mindray UK 2012 Filings
Looking Past the Smoke and Mirrors
On Monday January 13th, Mindray Medical pre-announced 2013 full year earnings. The company noted that revenues grew 14.3% YoY and Non-GAAP earnings grew 11.5%. Specifically, the press release noted that "In 2013, we exceeded our revised financial guidance with both our sales and non-GAAP net income". While analysts were quick to superficially cheer the report, a deeper look into the numbers presents a more troubling picture.
The Ugly Truth: Mindray's Core Business Has Deteriorated Significantly in 8 Months.
Mindray Medical's purported business has deteriorated so significantly in the last year that the core business is now growing at sub 10% vs. the 17% full year guidance management gave in 2Q12. This implies that the core business has deteriorated by -7% in the last year, propped up solely by dubious, dilutive acquisitions the company made.
For starters, management has changed guidance 4 times in 2013, which should render management's visibility valueless to investors.
In Q3, management completed the acquisition of Zonare Medical and Ulco Medical. Management refuses to break out the contribution from acquisitions; therefore investors have little visibility into the earnings power of Zonare Medical or Ulco Medical. However, in fact, investors can back into the core businesses growth using Zonare's press releases which released sales numbers. The financials imply that sales have been amplified by acquisitions and the company faces declining demand for its products. We believe in 2013, MR experienced negative organic growth. See below.