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Mindray Medical International Limited (NYSE:MR)

Q4 2013 Earnings Conference Call

March 4, 2014 8:00 AM ET


Cathy Gao – Manager, IR

May Li – CIO

Alex Lung – CEO

Jie Liu – COO


Jack Hu – Deutsche Bank

Richard Yeh -Citi Group

Wei Du – Goldman Sachs

Bo Pang – Oppenheimer

Sean Wu – JPMorgan

Iris Wang – Credit Suisse


Good morning, everyone. Thank you for standing by and welcome to Mindray’s Fourth Quarter and Full Year 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, we will conduct a question-and-answer session.

Today’s conference is being recorded for replay purposes. If you have any objections, you may disconnect at this time.

Now, I’d like to turn the call over to your host for today’s conference, Ms. Cathy Gao, Mindray’s Manager of Investor Relations. Please proceed, Ms. Gao.

Cathy Gao

Thank you. Hi, everyone. Welcome to Mindray’s 2013, Fourth Quarter Earnings Conference Call. We released our financial results last night and they are now available on the Company’s website and Newswire Services. There will also be an archived webcast of this conference call on our Investor Relations website.

Joining today’s call are, Mr. Li Xiting, our President and the Co-CEO; Mr. Minghe Cheng, our Co-CEO and CSO; Mr. Wang Jianxin, our CAO; Mr. Jie Liu, our COO; Mr. Alex Lung, our CFO; and Ms. May Li, our CIO.

In a moment, Ms. May Li will provide an update of the Company’s operational performance and Mr. Alex Lung will review the detailed financial results, as well as the Company’s outlook for 2013. After that the management team will be happy to take your questions.

Before we continue, please know that this call will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Statements made and the views expressed here which are not historical facts are forward-looking statements. You should be cautioned that these forward-looking statements are only predictions and may involve inherent risks and uncertainties. As such, our actual results may be materially different from the statements and the views expressed here today due to a variety of factors.

A number of such risks and uncertainties and the factors are outlined in our public filings with the SEC. In particular, please refer to risk factors beginning on Page 5 of our Annual Report on Form 20-F. Any projections made here today are based only on limited information currently available to us, and are subject to change. Mindray does not undertake any obligations to update any forward-looking statements except as required under the applicable law.

I will now turn the call over to our CIO, Ms. May Li.

May Li

Thank you, Cathy. Good morning and good evening, ladies and gentlemen. Thank you for joining us today.

2013 was another fruitful year of great accomplishments for Mindray, in spite of the challenges in various markets; we continue to deliver double-digit year-over-year growth in both our top-line and non-GAAP net income.

Our sales reached US$1.2 billion this past year representing a year-over-year growth rate of 14.5%. Excluding the tax benefits, our non-GAAP net income grew 11.8% over 2012.

In terms of geographies, Western Europe and certain key emerging markets performed well. Western Europe recorded more than 20% growth. And the several key emerging countries registered double-digit sales increases. Despite a slowdown in the second half of 2013, our full year China net revenues still increased 16.5% to US$551.2 million.

In 2013, through our internal R&D and external M&A efforts, we are proud that Mindray continued to create new growth opportunities for our business. We exceeded our product development target and launched 11 new products; in particular we further moved up the value chain and launched our first generation immunoassay product in the IVD segment, the CL-2000i.

Our other high-end IVD products also continued to generate strong sales momentum. As a result, we further ramped up our region sales which has higher margin and contributed 41.4% of our overall IVD sales in the fourth quarter of 2013, up from 36.9% in the same period of 2012.

In terms of M&A, we significantly stepped up our high-end ultrasound capability through our acquisition of Zonare, a U.S.-based company. We completed another overseas transaction by acquiring our former distributor Ulco Medical in Australia.

Just recently, we also bought the domestic company that develops coagulation analysis reagents. Since 2011, we have made 11 acquisitions including both domestic and foreign companies. We expect these deals to strengthen our product offerings and channel distributions. Going forward M&As and collaboration opportunities will remain as our focus.

Our cash in the short-term investment position remain very strong at US$1.2 billion. And in order to return capital to our shareholders, we have maintained a continued dividend payout of $0.50 per share and have increased the size of existing US$200 million share repurchase program by US$100 million.

In addition, we extended the execution period of this program to the end of March 2015. This November last year, we have purchased around US$90 million of shares. We are also pleased to announce that our Shenzhen subsidiary was again awarded the nationwide key software enterprise status for the calendar years of 2013 and 2014.

As such, our corporate income tax rate for this subsidiary will be reduced to 10% from 15%. We also recognized a tax benefit of US$7.4 million in the fourth quarter of 2013 in relation to such status for the calendar year 2013.

Overall, we are pleased with our achievements in 2013 and we want to thank our employees for the hard work in making them happen.

Now, let’s look at our detailed first quarter performance by geography and the segment respectively. Starting with China and the emerging markets, then on to the others markets. Our fourth quarter domestic sales increased 8.3% year-over-year and tender sales only accounted for less than 2% of the total domestic sales.

As mentioned, the slowdown in healthcare sectors since the second half of the year has interrupted purchasing as well as marketing activities. Hospitals had been cautious and selective in placing their orders. This phenomenon has negatively impacted many industry participants including us. Longer term, however, we are optimistic that industry fundamentals remain solid and the underlying demand has not waned.

As the domestic leader, we will also support a more regulated and complaint environment, which we think will be beneficial for the entire industry. We are hopeful that the market sentiment will gradually improve over time and we are well-positioned to compete when demand resumes.

Overall, our IVD reagent sales continue to climb, thanks to our high-end product such as BC-6800 and BS-800. We are speeding the development of two new plants in Shenzhen and Nanjing mainly dedicated to IVD product manufacturing to meet future expansion.

We remain optimistic about the long-term growth prospect of this segment based on growing recognition of our brand and attractive product performance as well as the changing market trend where service revenues will become a more important source of income for hospitals.

Longer term, the government focus has not changed and it intends to expand and upgrade county level hospitals, increased patient traffic to such hospitals and support domestic brands.

Mindray is one of the largest domestic medical technology players would definitely benefit from this trend. Moreover in light of the government’s recent policies in supporting private hospitals, we are also working hard to broaden our reach to private hospitals in order to seize these emerging opportunities.

Currently private hospitals only provide around 9% of all national healthcare services in China. By 2015, this number is expected to reach 20%. This trend will definitely benefit companies such as Mindray whose value proposition is to offer competitive products and services.

We will also continue to improve our sales program and expand our direct servicing platform in China. This allows our extensive product offerings continue to put us in a very strong position in the domestic marketplace.

Our international sales performed well and recorded 23.8% year-over-year growth in the fourth quarter. Overall emerging markets achieved more than 20% growth year-over-year. We are pleased to see the sales rebound in emerging markets compared to the past several quarters. Eastern Europe and Asia Pacific represented the highest growth regions delivering over 35% year-over-year sales growth.

In Eastern Europe, Poland recorded the strongest sales growth in the fourth quarter. In Asia Pacific, we did particularly well in Indonesia, Thailand and Korea largely due to our improved brand awareness attractive products and good services.

We did well in several key – Latin American countries such as Brazil, Colombia and Argentina, where we achieved over 30% growth offsetting this was continued weaker sales in countries such as Venezuela where challenging FX and import policies as well as political issues purred our performance. However, the long-term underlying demands in these countries are still strong. We remain hopeful that the macro environment there should gradually improve. And the CIS region, as discussed before, the tough sales comparison in Russia affected the year-over-year growth performance.

Looking ahead, we remain optimistic about the overall growth potential in emerging markets though we are subject to FX and geopolitical risks. We will also continue to expand our key account coverage in top emerging countries and enhance our capabilities in public and private sector participation. Sales in the developed markets grow close to 30% year-over-year in the fourth quarter. We are happy to again report strong results in Western Europe where we posted over 20% year-over-year sales increases.

Excluding the sales contribution from Zonare, we continue to achieve great growth in key countries including Germany, Italy, France and Spain. Increasing brand awareness coupled with our high performance products and services continue to help us earn great references and the more leading hospitals are becoming Mindray’s customers. Our investments over the past few years in Western Europe continue to pay-off and we have gained valuable experience by competing with top international players in this region.

Looking ahead, we are confident that our value proposition is appealing and our expansion strategies are working well. Quarter-to-quarter sales growth could fluctuate but our long-term prospects in Western Europe look promising.

In North America, sales in this quarter increased over 30% largely due to the contribution from Zonare. Our organic business also improved. Going forward, we expect our U.S. business to stabilize, and we will continue to focus on accelerating our product development and improving operational efficiency to enhance our long-term competitive position.

Now let me give you a breakdown of the performance of our different business segments in the fourth quarter. Net revenues from the Patient Monitoring and Life Support segment grew 5.7% year-over-year. This slower growth was largely due to the slowdown in China, which impacted our PMLS line, the most.

Patient Monitoring and Life Support is the most matured segment of our three business lines. Over the last two decades, we have gradually transformed from a product provider to a total solution provider. We are now able to provide integrated solutions for clinicians from critical care to sub-acute settings across the emergency room, OR, ICU, and the CCU departments. Based on our comprehensive product portfolio, we are confident that we can maintain our leading position in the marketplace.

In our IVD segment, sales increased 15.7% year-over-year. The reagents and the five part hematology analyzers were the main contributors to growth in this quarter. As mentioned we introduced our first immunoassay product, the CL-2000i, along with the several reagents in the third quarter. This promoted us to be the first and the only Chinese company to offer products that can compete with those often by leading international players in the segment.

The launch of this product also makes another milestone for Mindray to penetrate further into the fast growing immunoassay segment. As the installation base for product such as the BS-800, BC-6800 and the BS-2000 continue to ramp up together with the recent additions of new product through immunoassay, coagulation and microbiology. We are excited to be able to provide increasingly competitive and a comprehensive lab solutions for our customers.

For the medical imaging segment, the year-over-year net revenues growth for this quarter was 28.7%, which included Zonare’s revenue contribution. Apart from that, color ultrasound did well and drove our sales growth in this quarter.

As we continue to integrate Zonare’s business, we were focused on managing the stability of our business leveraging the combined entities to accelerate the launch of next generation high-end ultrasound products further grow the business and improve our profits.

Our other net revenues grew 43.3% year-over-year in the fourth quarter. This was mainly because of the increasing revenues from our after-sales services as well as sales contribution from the orthopedics business.

I will now turn the call over to Alex for financial details as well as our outlook for 2014.

Alex Lung

Thanks, May. In the fourth quarter, our top line recorded a 16.5% year-over-year increase to $368.4 million. China net revenues were $160.4 million, a 8.3% year-over-year increase. International net revenues were $208 million, a 23.8% year-over-year growth this represents 56.5% of our total net revenues.

Non-GAAP gross margin was 56.5% compared to 58.5% in the fourth quarter of 2012 and 56.4% in the third quarter of 2013. The year-over-year decrease was mainly due to product mix and the inflation of Zonare. Our non-GAAP selling expenses were 16.1% of total net revenues similar to last year’s level of 16.2%.

Non-GAAP general and administrative expenses were 9.1% lower than 11.4% in the same period of last year. Recorded in the fourth quarter of 2012, we recorded higher legal and compliance cost as well as one-time compensation expenses related to the realignment of the Mindray operation in the U.S, this explained the decrease in our year-over-year comparison.

We have continued to invest in R&D over the past quarter. Our non-GAAP R&D expenses were 10.7% of total net revenues compared to 10.1% in the same period of last year. Non-GAAP operating income grew 15.1% year-over-year to $75.8 million. GAAP operating income decreased 9.6% compared to the same period of last year mainly due to a dispute charge of $14.8 million resulting from the settlement with Beckman Coulter in November 2013.

Non-GAAP net income increased 19.8% over the same period of last year to $73.9 million. GAAP net income rose 34.7% year-over-year. In addition to the fourth quarter tax benefit impact emulation to a nationwide key software enterprise status as May mentioned earlier. This increase was mainly due to the reversal of reporting tax that we recorded in the third quarter. Recall that, we declare an intra-group dividend to initiate a one-time fund transfer of China which triggered a text obligation of $20.8 million.

In the fourth quarter we opt to unwind an intra-group dividend as a result of changing market expectation on third party foreign interest rates and our continuation to explore other tax efficient wins including cross border R&D in the company alone in the fourth quarter of 2013.

In terms of margins, our non-GAAP operating margin was 20.6% close to last year’s level of 20.8%. Our non-GAAP net margin was 20% for the fourth quarter compared to 19.5% in the same period last year. Our cash conversion cycle continue to improve this quarter. It was 75 days in the fourth quarter down from 89 days a year ago and 91 days in the period higher quarter.

Even excluding seasonality patterns our working capital also improved because of better receivable collections and inventory management. Our accounts receivable days were 50 days versus 53 days in the same period last year and 56 days in third quarter. Our assets to improve inventory management have also shown positive results.

The inventory turnover days were 79 days compared to 83 days in the fourth quarter of 2012 and 94 days in the prior quarter. We were pleased with our DSO and inventory level and going forward we will continue to adapt cautious credit policies and enforce insurance protections in our key markets worldwide.

Now on to the full year highlights, our net revenue grew 14.5% year-over-year to 1.21 billion excluding the tax benefits, our non-GAAP net income grew 11.8% year-over-year to $226.6 million despite rising costs, the impact of Zonare in the second half our non-GAAP gross margin remained stable at 57.2% same as the level in the prior year.

Our non-GAAP operating margin was 20.8% in 2013 similar to 21.1% in 2012. Our full year non-GAAP net margin was 21.8% compared to 20% in a year before. We generated net operating cash of $307.9 million in 2013 and our full year capital expenditure was around $109.1 million.

To show our commitment to shareholders, the Board of Directors has declared a cash dividend on its ordinary share of $0.50 per share based on our net income for the full year 2013. This is the eighth consecutive year that we have declared dividends for our IPO in 2006. In the next few years, the Board of Directors intends to put aside another 20% to 25% of our annual net income for dividend distribution upon annual review. As discussed earlier, we have also increased the size of our share buyback program this $300 million reflecting our commitment to leveraging our strong cash positions and returning capital to shareholders.

Let’s move on to discuss our financial outlook for 2014. We are maintaining our guidance of more than 15% year-over-year sales growth in terms of geographies, we anticipate that the market dynamics in China to gradually improve based on the reasons or the trends we are seeing more tender activities than in the previous quarters. Overall, we continue to believe that long-term prospect in the domestic market remain favorable for us based on our strong competitive position as well as continued favorable private and government spending trend in the healthcare industry. We expect Western Europe and certainly emerging markets to deliver strong performance. Thanks to our increasing brand awareness, emerging private and public opportunities as well as our better sales and service offering.

However, in some emerging markets, we remain cautious in regions that we have geopolitical issues or currency risks. In the U.S., the macro uncertainties remained as potential headwind for us, but we otherwise anticipate our North American business to stabilize.

Over the past two decades, we have successfully increased our brand recognitions and global market penetrations, thanks to our consistent investment in sales, marketing and distributions as well as product innovations. We continue to evolve to become a bigger and more diverse global company we see an increasing need for more comprehensive sales and service platforms as well as more innovative products to support and sustain our long-term growth. As such we will speed up our investment in 2014 and I will now discuss some of these initiatives in details.

In China, our home market, we intent to accelerate our spending on sales, marketing and service in various segments. To strengthen our market positions in the mid to low end markets, we plan to increase our sales and marketing efforts and top a more flexible pricing strategy. For the high-end markets, our color ultrasounds, anesthesia, and IVD product have made significant inroad in these couple of years and we will continue to ramp up our investment to support the growth rate.

Furthermore, we will also allocate more resources to the emerging and fast growing private hospital market by increasing head counts and expanding channel coverage. As mentioned earlier, we think that this market segment has promising global opportunities and with Mindray strong platform, we are confident that we can capture many new opportunities there.

Outside of China, in key emerging market countries, we will further enhance our platform to promote our brands as well as to better serve our local customers. For example, we plan to set up sales officers in key countries such as Philippines, South Korea and so on to capture new growth opportunities in these countries. We will also work on expanding our local coverage in other important markets by increasing direct sales efforts and optimizing related support infrastructures such as logistics, IT, finance and other services. We are confident that these plans will help us to develop strong competitive position in the key regions. Our growth profile in Europe – in Western Europe reflects the success of our investment strategy and we will continue to enhance our capabilities there.

In terms of R&D, we plan to increase our spending on developing high-end products launching more upgrade products as well as optimizing product functions. Our high-end biochemistry and immunoassay products will require us to invest more capital in developing new models and reagents. We have achieved such momentum in our high-end IVD products that it will wise for us to accelerate new developments and gain market share.

In Patient Monitor segment, we will further improve product connectivity which are increasingly important in domestic and high-end hospitals. It will also allow us to compete better in developed countries. In addition, we will work on helping our acquired companies to accelerate the launch of their new products such as high-end color ultrasounds, coagulations. This will help us to tap into a new growth areas as well as enhance our existing businesses. Based on this various initiatives, we project that this year’s non-GAAP net income will remain at a similar level to last year. And this figure excludes any tax benefits and assumes a corporate income tax rate of 15% for our Shenzhen subsidiary.

Lastly, we expect our capital expenditure to be around $160 million this year. This guidance excludes potential emerging acquisition expenditures. We will continue to actively seek external emerging acquisition opportunities that could bring complementary technology or product to our company as we continue to grow and expand geographically. More investments are necessary to help us build and strengthen our position in the global marketplace. Our biggest share repurchase plan continues to highlight management’s confidence in our business prospects. We will continue to strike a balance between making investment to pursue top-line growth and profitability.

That’s all for now from me and I would like to turn the call over to Cathy.

Cathy Gao

Thanks Alex. We will now open the line for questions. Operator, please go ahead.

Question-and-Answer Session


Certainly ma’am. Ladies and gentlemen, we will now begin the question-and answer-session. [Operator Instructions] Your first question comes from the line of Jack Hu from Deutsche Bank. Please ask your question.

Jack Hu – Deutsche Bank

Good evening. Can you hear me?

Alex Lung

Yes, Jack. Please go ahead.

Jack Hu – Deutsche Bank

Thank you, for taking my question. Actually I have two questions here, the first one is when do you expect the ROI out of this investment. Also, can you remind us how long it took for you ROI in the last run round of spending, I recall you did a similar actually investment or spending back in 2010, I think 2011ish.

My second question actually is regarding the emerging market actually asset fluctuation, so what are your risk mitigation strategy beyond hedging at this point. So first of all, actually for your FX hedging how much of your revenue you have hedged and then also more specifically do you expect a price cut down the road?

And again, historically back in 2008 and 2009, what did you do back there actually when USD appreciated in major emerging market currency and maybe VBJ [ph.] continue to remind us what you did over there? Thanks again.

Cathy Gao

Please allow me a few minutes to translate Jack.

[Foreign Language]

Cathy Gao

This question is taken by Mr. Li, our Co-CEO and the President. So recently the top management as well as the Board of Directors have set new goals for Mindray’s mid to long-term growth targets. And basically we view that the past performance was not although quite good in comparison to – in the context of tough market environment. We think we can do better. So with the aim of achieving these newly set mid to long-term strategic goals and the maintaining the group’s competitive advantage. We have decided to increase investment in sales and marketing as well as R&D. This is part of three year growth strategy to strike a balance between short-term and our long-term growth targets.

The priorities for this around the new investments will be towards mainly sales and marketing and we think sales and marketing investment should yield relatively shorter term returns. And, some of the investments increased investments will also go to R&D. And for such investments, we think the return will come at later stage.

Overall, the company expects this investment cycle to last two to three years, that is we do not expect bottom-line growth to be close to top-line growth within the next two, three years’ time. And the second question will be for Jie Liu our COO.

Jie Liu

Jack, this is Jie. We have intended [ph] a lot of the currency facing and probably maybe Alex adding some points going back to the – in the situation of their international countries specifically for the emerging countries. I think a lot of similarities between 2009 and the current situation. But the Mindray situation could be different. If you look at the way you recall 2009, Mindray was not so strong in many countries.

Now, we have more than 15 countries in our own subsidiaries wholesale service marketing team that actually was the result of 2009 and we specifically invested a lot on the local countries to make sure we are closer to the customers and then when the situation changed we captured opportunity and then we can act faster than our competitors. That’s what we give last time as stronger current situation I think we are – we’ll continue to be investing on the infrastructure service center in the marketing and the sales that’s why we were waiting on the investor side.

But as long as they say how we can do more maybe either get more market share in the current situation that’s May and Alex already explained we are – we’re using the more flexible pricing strategy to really be at their competitiveness and transform the value to the end users to make sure were more competitive in the emerging market. I think we’re doing faster and in a more efficient ways.

Alex Lung

Hi, Jack, this is Alex. Hi. With regard to the FX hedging questions, currently foreign international sales it comes – most of the revenue is still derived on the U.S. dollar. So in a way RMB to U.S. dollar will continue to be our key hedging focus. As Jie mentioned also we have 15 countries that we have already got a local operations and some of this local operations may give rise to local currency exposure as well. For these factors together with RMB and U.S. dollar we will continue to exercise cautious hedging strategies in order to mitigate our FX receivable, FX exposure.


Thank you for your question. The next question comes from the line of Richard Yeh from Citi Group. Please ask your question.

Richard Yeh -Citi Group

Thanks for taking my question management team. I have two questions. The first question I would like to get some sense how management things you had in the course for Mindray in the mid-tier markets in 2014 and especially the opportunities and the challenges. The reason I’m asking is that for some of the research you are doing, we find that in the mid-tier especially county level hospitals, it’s a bit saturated, the construction and purchasing cycle start to potentially slowdown in the next couple of quarters.

So I wanted to get some sense how management is thinking about that for the growth potential for 2014 and beyond? And second question, I want ask, it’s related to the selling expenses, I want to get some sense the rationale for increasing selling expenses in 2014, and whether it’s going to be used for channel expansion or sales of staff increase in the domestic or international markets, what will be the thinking there?

And also for the 15% guidance for 2014, I want to get some sense on the growth assumptions in China and in emerging markets and also the developed markets. Thanks a lot for taking the questions.

Cathy Gao

The first part of the question will be taken by Mr. Wang, our CAO. And let me do a bit of a translation.

[Foreign Language]

So I’m afraid thinking now we view this market segment outlook quite differently from you. And some recent policy movement by the central government thinking further strengthened the message that the government is very dedicated to increasing investment towards county level hospital. In 2014, the target for healthcare reform coverage or the pilot program coverage towards county level hospitals has increased from previously 300 to 1000, this is a major advancement. And also during our recent field trips in two provinces for county counts whereby Co-CEO Mr. Li and the CAO Mr. Wang visited head of hospitals, have lengthy conversations with them and every single hospital we visited have a major construction projects going on.

And the views expressed by those administrators were very positive towards increased investment towards in the future years. So given our market position, a leading position in the Tier 2 county level hospitals in China, we think this is going to be a – continue to be a major growth driver for our domestic market in the future years.


Thank you for your question. [Operator Instructions] Your next question comes from the line of Wei Du from Goldman Sachs. Please ask your question.

Wei Du – Goldman Sachs

Hi, thanks for letting me ask questions. I think my question is just housekeeping. I guess I do have too many questions, I hope you can answer both. One is, if I look at cash flow on a quarterly basis, obviously 3Q and 4Q I see a strong cash flow from financing, I think maybe you can give us a little bit color on that. And the second question is, I’m not sure whether you can give us the contribution from Zonare that obviously it’s a major reason why we were seeing a stronger growth in the U.S. So let’s say if you trip out the Zonare contribution what’s the U.S. growth rate? Thank you.

Alex Lung

Hi, Wei. Thank you for the questions. It is Alex. With regards to the financial activity for the cash flow in Q4, as we mentioned earlier that we actually initiated share buyback program and actually in Q4 we have reduced about $42 million in our share repurchase. And in connection with the share repurchase arrangement, we actually throw [ph] down a bank loan of $160 million in Q4 to facilitate the process. With regards to your second question –

Wei Du – Goldman Sachs

The Zonare contribution.

Alex Lung

Yes. Jie is going to answer.

Jie Liu

Hi, Wei. Even excluding the Zonare contribution in Q4 for the U.S. you will get a single-digit growth, so that means Q3 and Q4 continue to get growth organically that’s including all the [indiscernible]. But anyway we’re adding all the Zonare [indiscernible] much higher numbers.

Wei Du – Goldman Sachs

Okay. Thank you, Jie.

Jie Liu

You’re welcome.


Thank you for your question. Your next question comes from the line of Ben Li from Morgan Stanley. Please ask your question.

Unidentified Analyst

Hi, this is [indiscernible] asking questions on behalf of Ben. I have a question on the guidance, as the bottom line growth only flat versus 15 for top line, maybe can you help us quantify the difference here, how much will be with the sales and marketing capacities, and how much R&D side. And also maybe the grade down for international and China business also the guidance include the impact of lower tax rate? Thank you.

Alex Lung

Hi, thank you for the questions. Well, with regard to the increasing investment as a result of the 2014 important guidance actually the spending – the increasing spending to be split in the sales and marketing and also on R&D is roughly in the equal size.

In terms of the region of spending the sales and marketing basically China and the international market will be spending in a more or less the fair share as well and also depending on the opportunities develop as time goes by. For the international market we will be investing into sales and marketing including brands, direct sales personnel any in China, we will be focusing on improving the end-to-end market shipment and also we have a hospital coverage as well. In terms of the tax side, we expect the effective tax rate for the group for 2014 will be in the region of 14%.

Unidentified Analyst

Okay. Thank you that’s very helpful.


Thank you for your question. Your next question comes from the line of Bo Pang for Oppenheimer. Please ask your question.

Bo Pang – Oppenheimer

Hi, everyone thank you for taking my question. This is Bo asking question on behalf of Ingrid Yin. I just want a follow up with the gross margin trend so the gross margin continues to decline this quarter. So just want to know a bit about the mix between the Zonare dilution and the new product add up in 2014 and beyond. Thank you.

Alex Lung

Hi, Bo. Thank you for the question, this is Alex. We react to the gross margin in the fourth quarter as you pointed out Zonare does have a dilution effect on the overall gross margin as we have previously communicated the reason is because Zonare basically our source their manufacturing to a third-party manufacturer. So as a result, the Zonare business gross margin is lower than our group average. We believe that the gross margin trend will improve as time goes by as we introduce new product for Zonare and then increase the proportion of manufacturing areas in-house to China.

Bo Pang – Oppenheimer

So you mean that both Zonare and then the new product will pump up the gross margin going forward right, is that correct?

Alex Lung

In terms of the new products, I think it depending on which segment is, it goes into as well. But for the overall for 2014, I think the combined effect is that we will be exercising a more flexible pricing strategy and also try to gain shares in the mid and low end segment as well. So this may overall affect our [indiscernible] lower overall gross margin for our existing business.

Bo Pang – Oppenheimer

Got you. Thank you.


Thank you for your question. Your next question comes from the line of Sean Wu form JPMorgan. Please ask your question.

Sean Wu – JPMorgan

Yes. I just have a very quick question of your China business, very dramatic slowdown in the third quarter because of the anti-bribery activities. And for your fourth quarter growth [indiscernible]. So actually like many people wondering whether you have any kind of pent-up demand that can be [indiscernible] hospitals help to upgrade [indiscernible] any kind of like I guess kind of pent-up demand [indiscernible] any kind of or the ant-bribery [indiscernible]?

Cathy Gao

Okay. This question will again be taken by Mr. Wang. Just allow a minute for translation.

[Foreign Language]

Cathy Gao

Okay. So in answering your question, first our view is that the anticorruption activities by the government in China will likely to continue just throughout 2014 across most of the industries and the healthcare included. In January and February, we have seen some early signs of recovery in government tender activities and hospital purchasing and these signs encouraging but again it’s very early.

So our guidance assumption for China this year is based on our views that there is going to be some come back of demand, but on a very top level anticorruption impact is there to stay. We have obviously, under this new three year investment scheme worked out detailed strategies and also a lot of new policies for domestic market including increasing coverage towards the private sector including regaining market shares in the low end segments, including adding head counts for anesthesia segment high-end products et cetera and hopefully with all these strategies and measures in the domestic China market, we should be able to achieve our growth target this year.

Sean Wu – JPMorgan

Thank you, ma’am. Ask a very quick follow-up question. You mentioned about, you are seeing some more in the [indiscernible] activity. You also will be focusing more on a level, you need to see on hospitals, are we going to see some kind of margin increase [indiscernible] like on both segments?

May Li

Yes. This is going to be a very brief answer. I think Alex already mentioned, we should expect slight erosion in gross margin this year as a result of mid to low-end market penetration in selective countries for selective product lines. And China will be one of the markets that’s going to be impacted.


Thank you for your question. Your last question comes from the line of Iris Wang from Credit Suisse. Please ask your question.

Iris Wang – Credit Suisse

Thank you for taking my question. I just have one follow-up question about your guidance on the bottom line, as Alex mentioned you will have the similar marketing and sales project in 2014. And you have still 15% top line growth, why your guidance is having a non-GAAP net income 2014; they are at the similar level of revenue of 2013.

Alex Lung

H, Iris. Thank you for the questions. Let me just recap the earlier response from our CEO Mr. Li. I think the full point is that the Company is working out its three years overall strategy, and we are trying to do a more balance in terms of long-term growth and a short-term profitability balance. So in the sense for the sales and marketing part, we decided that in order to [indiscernible] strategy, it is necessary to step-up our investment in this aspect. As also mentioned by Mr. Li earlier, some of this investment may have a quick return compared to others.

For instance the sales and marketing on the international and the China market will be depending upon the success of hiring the right people and also whether this people will be trained up the speed and generating a sufficient return to the business.

So there are some growth factors that we have taken into account, so as such we believe that those investments is slightly to – gradually recognize in over the next three years, some of it may get sooner, some of that may have a later impact. That’s the reason why we guided our bottom-line to be at a similar level at 2013.

Iris Wang – Credit Suisse

Thank you for the clarification.


Thank you for your question. I would now like to hand the conference back to Ms. Cathy Gao. Please continue.

Cathy Gao

Thank you, Operator. And thank you everyone for participating in today’s call. As always, we appreciate your support of the Company. The replay of today’s webcast will be available later today. And our management team and the IR team will be available for questions.

Thank you, again, for joining us. And we look forward to speaking with you soon.


Ladies and gentlemen, that does conclude our conference for today. Thank you for participation. You may all disconnect.

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