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Executives

Cathy Gao – Deputy Manager of Investor Relations

May Li – Deputy Chief Financial Officer

Jie Liu – Chief Financial Officer and Chief Operating Officer

David Gibson – President, North America Operations

Analysts

Ingrid Yin – Oppenheimer

Bin Li – Morgan Stanley

Shaojing Tong – Bank of America

Jack Hu – Deutsche Bank

Johnny – Maxim Group

Richard Yeh – Citigroup

Jinsong Du – Credit Suisse

Wei Du – Goldman Sachs

Anthony Petrone – Jeffries

Katherine Lu – Cowen & Company

Junaid Husain – Ticonderoga Securities

Gideon Lo – Nomura

Erica So – UBS

Mindray Medical International Limited (MR) Q2 2011 Earnings Conference Call August 9, 2011 8:00 AM ET

Operator

Good morning everyone. Thank you for standing by and welcome to Mindray’s Second Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen-only. 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.

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

Cathy Gao – Deputy Manager of Investor Relations

Hi, everyone, and welcome to Mindray’s 2011 second quarter conference call. Our financial results were released last night and are available on the company’s website, as well as on newswire services. In addition, an archived webcast of this conference call will be available on the Investor Relations section of our website at www.mindray.com.

Joining today’s call are Mr. Xu Hang, our Chairman and Co-CEO; Mr. Li Xiting, our President and Co-CEO; Mr. Jie Liu, our Chief Financial Officer and Chief Operating Officer; Mr. David Gibson, our President of North America Operations; Mr. Alex Lung and Ms. May Li, our Deputy Chief Financial Officers.

Our management team will review second quarter highlights, as well as speak to the current financial and the market environments of each of our major sales markets, after which, management will be available to answer your questions.

Before we continue, please note 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 views expressed here today that are not historical facts or forward-looking statements. You should be cautioned that 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 made and views expressed here today due to a variety of factors. A number of such risks, uncertainties, and factors are outlined in our public filings with the SEC. In particular, please refer to risk factors beginning on page four of our Annual Report on Form 20-F. Any projections made here today are based only on limited information currently available to us, which is subject to change. Mindray does not undertake any obligations to update any forward-looking statements except as required under applicable laws.

I will now turn the call over to Mindray’s Deputy CFO, Ms. May Li.

May Li – Deputy Chief Financial Officer

Thank you, Cathy. Good morning and good evening ladies and gentlemen. Thank you for joining us today for our 2011 second quarter earnings results conference call.

First, I will provide an overview of the company’s overall financial results of the quarter. Mr. Jie Liu will then discuss our performance in all geographical regions outside of North America. Mr. David Gibson will then discuss our North America operations. Before opening the call to questions, Jie will discuss a couple of company updates as well as our 2011 outlook.

Continuing the sales momentum, we had another good quarter. In the second quarter, we achieved a 21.2% year-over-year increase on the top line for total of US$217.3 million. China revenues lead growth and grew 25.3% year-over-year. This was driven by our regular sales or non-tender sales, which represented almost all of China sales this quarter. The trend towards recovery continued resulting from the successful implementation of our sales re-enforcement program carried out during the last few quarters, as well as favorable government spending trend on country level hospitals.

International revenues were strong at US$126.6 million with 18.5% year-over-year growth. This represents 58.2% of worldwide sales. Our good performance continues to reflect the success of our increased investments in the international delivery channel. In this quarter, emerging markets remained our key drivers of growth was more than 20% year-over-year growth despite the Middle East and African crisis. Developed markets also contributed nicely with double-digit sales growth.

Our gross margin remains healthy. Non-GAAP gross margin was 57.6% as compared to 59% in the second quarter of 2010 and 55.9% in the first quarter of this year. This improvement from last quarter is a result of cost reduction and optimized product mix. Same as last quarter, gross margin lowered than last year due to this new city construction tax, the education surcharge and R&D appreciation. R&D continued to be our focus for the past quarter.

We introduced one major new product this quarter, the BC 68,000, a high level auto hematology analyzer as well as several exclusive reagents. This is one of the most advanced IVD products Mindray offers and we are optimistic about its market potential as well as wage and sales we’ll potentially bring. Wage and sales continue to accelerate this quarter to 28.4% of our IVD sales. We expect wage and sales to become larger product of the IVD sales in the coming quarters.

Non-GAAP selling expenses ratio remained at 17.7% since last quarter, though continuing to grow substantially year-over-year. Compensation as well as sales and marketing activity surrounding our 20th Anniversary celebration contributed to the year-over-year increase. The celebration related expenses were one-time in nature.

Our non-GAAP operating margin was 24.2% and our non-GAAP net margin was 22.9% for the quarter. EBITDA was US$56.9 million during the quarter, representing a 5% increase over the same quarter last year. Our net cash from operations was US$33.8 million, which grew significantly by 70.4% over last year. Thanks to our operational efficiency improvement and overall working capital management.

Our DSO in the second quarter was 64 days as compared to 72 days in the first quarter of 2011. The inventory days were the same as last quarter at 94 days and we had 57 accounts payable days in comparison to 58 days for the previous quarter. Our cash conversion cycle was 101 days as compared to 108 days last quarter. Based on growing direct sales proportion both in China and the key western countries as well as our continued expansion in overseas markets, we anticipate some receivable increases as well as possible fluctuation of DSO due to seasonal sales changes. We continue to exercise cautious credit policy and reinforce insurance protection in our key markets worldwide and remain committed to maintaining a healthy working capital position.

I will now turn the call over to Jie, who will discuss our strategic initiatives and sales trends by region.

Jie Liu – Chief Financial Officer and Chief Operating Officer

Thanks, May. I would like to first discuss our China sales. In the second quarter, China sales grow strongly with 25.3% year-over-year growth. We have achieved positive results through our initiative in China and have also benefited from increased government spending on country level hospitals.

We will first discuss our internal strategic efforts. We are pleased and we have largely accomplished the enhancement to our domestic sales team structure. The newly added key account team has been focusing on driving big orders from the top customers, as well as those from private sector with largest sales potential and has already yielded positive results.

Our advanced customer relationship management program, which aims to facilitate more effective auto assessment and the customer retention was also successfully installed. Furthermore, through increased investment in sales, marketing, and service activities as well as distribution network (indiscernible). We are aggressively ceasing opportunity across different market segment. These efforts have already demonstrated positive impact as evidenced by the continued recovery of our China sales as well as market share gains in (indiscernible) including patient monitor and IVD. Going forward, we expect all this strategies to further strengths our long-term competitive position in China.

In regards to government spending, as we anticipated earlier this year, we have seen a more favorable trend with increased county level hospitals spending and the patient traffic compared to last year based on various initiative to upgrade county in the rural healthcare standards particularly related to county level hospitals infrastructure and equipment prices in the next few years.

We are optimistic about operating environment in China for us. County level hospital is a tier in which Mindray has substantial presence most of this spending is in the form of drug funding as opposed to group’s centralized tender process by central or provisional government and has thus contributed to our regular sales. We anticipate that this spending focus of the government, we are continued to be beneficial to our company moving forward.

Now, I would like to discuss our international sales, especially emerging markets. In the second quarter of 2011, we recorded strong growth in our international markets. Emerging market performance was again a key growth driver, growing by more than 20%. In particular, we delivered over 40% year-over-year growth in East Europe and the CIS region as well as over 30% growth in Asia-Pacific region.

In the Middle East strong tender activity in Turkey this quarter have our offset the weakness regarding from unrest in the region. However, our growth in Africa was negatively impacted. We are closely monitoring the situation in this region and remain cautious to the potential impact to us.

Overall, we are pleased with our progress towards the enhancement of international sales channels. We continue to develop country’s specific marketing sales strategies increase the number of local staff, increase the investment in sales and marketing initiative such as organizing and participating in regional and local industrial forums and to bid a solid and reliable service platform. Going forward, we are confident in strong market demand as well as our competitive position in emerging markets will remain a pillar of company’s overall growth.

Moving on to developed markets, developed markets combined contributed more than 12% year-over-year growth. North America operation grew nearly 13%, David Gibson will provide more information on North America operation. In West Europe, the growth was in the low teens.

In term of R&D development, as May mentioned, we introduced the BC-6800 hematology analyzer this quarter. We are also on track to reach our goal of launching between seven to ten new products in 2011. In addition, two organic product developments in order to leverage our strong cash position and further implement our growth strategy worldwide. We continue to actively seek external opportunities that will bring complementary technologies and/or products to our company. 2011 is the third year of successful integration of Mahwah operations in the U.S. Meanwhile, we are also well on track with the integration of our recently acquired Shenke high sense businesses. Our integration experience will better equip us in potential future acquisition opportunity worldwide.

Next, I would like to invite David to elaborate on our North American operations.

David Gibson – President, North America Operations

Thanks Jie. The North American group had a good quarter with overall sales growth of around 13% compared to the second quarter of last year. We have achieved several quarters now in a row of double-digit growth in North American markets. The combination of great products positioning growth segments and investment in the sales channel has resulted in robust growth and market share gain in several product areas. We also had order growth, outpatient sales growth during the quarter and expect our sales in the second half to be well on track.

The Ultrasound segment continues to be the growth driver for our business in North America. The continued expansion of the direct sales channels delivered great results and we will continue the expansion program for the next several quarters. The positioning of our direct sales efforts into the emerging Ultrasound market segments has produced productive sales synergies with our pre-existing Mindray sales team. Additionally, the M7 and DC7 are great products for these segments, allowing us to compete on performance with the other major players. Along with our direct sales, we have continued to strengthen our business and distribution channels for outpatient care. The distribution team delivered stronger at this quarter and has positioned us for a solid performance moving forward.

In the Monitoring Product segment the robust order transfers the V Series platform continues. Recently the V Series gold recognition in the prestigious 2011 Medical Device Excellent Award competition, a premier awards program for medical device technology community. We are excited about the recognition and confident that V Series platform continues to provide highly differentiated product for us to expand in critical care market. Currently we have little penetration into Critical Care segment and the V Series, although early in its launch, has showed some initial success in opening up this market opportunity. We are also investing in the Monitoring channel in North America to support this expansion of our covered markets. The launch of the V Series Monitor is a major milestone in our effort to upgrade and renew our Monitoring products over the last three years. We have almost completed this now with the majority of our sales now coming from the products introduced since the merger.

In the Anesthesia segment, the A5, the first of our new A Series portfolio completed its first full quarter in the market. The A5 offers customers a big step forward in human factors engineering and ventilation performance and mid range anesthesia machine. We will be installing the A5 and the large university hospital during Q3 which will provide us a reference like open up the large hospital market. The A5 has been moreover seen its initial launch I mean foresee the A5 becoming the contributor in the second half. In additional launch of A series allows us to – or multi modality sales strategy more effectively with procedural ultrasound and overall monitoring.

Our profitability has continued to improve with our first half profits increasing substantially versus the same period last year. We expect to further benefit from economies scales as our overall sales level increases.

In addition to proving out competitive position in the market purchase of the N-7, the V series and A5 are significantly contributes to improve gross margins. Going forward, we’re going to plan to continue investing in market initiatives that build a stronger global panel among our hospital customers and build direct sales channels. The North American team will also have a lead role in product development strategies for the developed market.

I will now transfer the call back to Jie who will comment on a couple of company updates as well as the guidance for 2011.

Jie Liu – Chief Financial Officer and Chief Operating Officer

Thanks David. As we have discussed upon the press release, we have recently entered into a binding LIs with certain Datascope entities. These we are settle the dispute arising out of our acquisition of (indiscernible) business. Under this agreement we will pay a one-time payment of US$7 million to Datascope to acquire all right and the interest in certain marks.

Service marks and the names, Mindray will also grant Datascope and exclusive 20 year license to you certain of acquired the marks in certain circumstances. Separately we are also pleased to announce the appointment of Ms. Alex [indiscernible] as our new Chief Financial Officer, which will become effective on August 10 Alex will replace my CFO role and I will continue to serve as Mindray COO and we are acting as in an advisory capacity to Alex to ensure an orderly transition.

Alex has extensive experience in his previous role as Corporate Controller, auditor and accounting and he has served as a deputy CFO since March 2011 as well as our Group Finance Director since June 2009. Our deputy CFO May Li as well as the whole finance team will continue to support Alex. We are confident that Alex is highly qualified for this role and we certainly help lead our company's continued growth.

We will now discuss our 2011 guidance, while maintaining our 2011 guidance at this time and continue to project more than 16% year-over-year sales growth in 2011. We now anticipate regular sales in China to lead growth this year based on our strategic initiative as well as favorable Chinese profit and government healthcare spending, especially in county level hospital.

We also expect our key emerging markets to demonstrate a strong growth. However, we continue to be cautious based on the political unrest in the Middle East and Africa, which has had some negative impact on us during the quarter. In developed markets, we expect Mindray to demonstrate good growth in the U.S. and the West Europe, although we need to closely monitor in the evolving macroeconomic situation in both region.

We continue to forecast non-GAAP net income to grow more than 10% year-over-year. This figure excludes the tax benefits related to the key software enterprise status and assume our corporate income tax rate of 15% applicable to the Shenzhen subsidiary. Lastly our capital expenditure expense projection remains to be in the range of $70 million to $80 million for 2011.

May Li – Deputy Chief Financial Officer

Thanks, Jie. Operator, can you open the Q&A Session. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ingrid Yin with Oppenheimer. Please proceed.

Ingrid Yin – Oppenheimer

Good evening everyone. Congratulations on a good quarter. My first will be about China sales, it has grown very impressively this quarter. Can you comment government spending in the grass root healthcare infrastructure, especially for the second half and also comment on the competition you have seen in this area, because we have noticed that multinational corporations and also a lot of domestic players are targeting that market?

Jie Liu

Hi, Ingrid, this is Jie. For the government spending, we always very confident on the government spending shift from the country side to the county level hospitals this year. We did see the good result and also there we realized that other multinational company, all the competitors want to grab the pie in this segment. That’s a county level hospital. But as we discussed last quarter in this tier is basically is Tier II hospitals Mindray has a most advantage position in these environment because in the past we’ve already been up to very good sales channel and a very sophisticated service platform and very good relationship with this group of customers and long-term perspective we believe in this segment, we are not afraid of any competition and we believe we can do a better job in this segment.

Operator

Your next question comes from the line of Bin Li with Morgan Stanley. Please proceed.

Bin Li – Morgan Stanley

Hi thanks for taking my question. Obviously, you had a pretty strong quarter on the top line, but you are still maintaining your sales guidance for more than 16% year-on-year for the full year, now that implies a much slower growth rate of both China and international market for the second half which seems to be conservative to me even that end uncertainties going around globally. So, I would like to understand number one, what is the gross assumption you have build in your guidance for the second half both for domestic and international market. And number two, can you tell us what is the organic growth rate excluding the foreign exchange benefit for China and different markets or the other way to ask this question is was the currency benefit on China sales and ex-China sales? And the last question is can you explain what is this minority interest item that shows up this quarter with the $47 million in the quarter, and how should we forecast that line item going forward? Thank you.

Jie Liu

I will answer the first part of the question – second part of the question may be May Li probably give you the answer. For the – basically the, for the China situation, we are very optimistic about the Chinese situation that we are confident on the China investment on the healthcare industry. We believe with a long-term perspective we’ll get a good benefit from this kind of move and since the second half of last year we conducted the sales transformation project that will help us to build solid platform on the sales and the service that really help to grow the business in long-term perspective, but for the internationally because of the Middle East and Africa political instability and also the European natural data crisis and the U.S. now current situation made us more cautious. We are very prudent to project the next half numbers. That’s the reason we maintained the guidance other numbers may work till then.

May Li

Hi, Ben, this is May. Well, basically, the exposure that we have on our top line to RMB and euro, and in total this quarter, we saw around just four percentage basis points of top line growth rates, that’s attributable to RMB and euro year-over-year appreciation against U.S. dollar. On the bottom line, the RMB and euro exposure in COGS as well as on our operating expense lines gave us actually a negative impact. And this quarter, we saw about one to two percentage points of growth rate that has been negatively impacted by the currency movement. So, on the top line, it’s three to four percentage point, on the bottom line, it was one to two percentage points on the growth rate.

Alex Lung

Hi Ben, this is Alex. Hi, with regards to your last question concerning the non-controlling interest number, actually in the last quarter, we completed acquisition of Shenke. And from this quarter onwards, we started consolidating this 51% owned investment, because it’s 51% owned under the consolidation that 47,000 represent the share of profits for the minority shareholder of Shenke.

Operator

Your next question comes from the line of Shaojing Tong with Bank of America. Please proceed.

Shaojing Tong – Bank of America

Hi, thank you very much for taking my questions. I just want to focus again on the domestic market growth in terms of going up the ladder to enter high-end hospitals, can you give us an update how that goes? It will be nice if you can specify certain series or certain products that you are doing well. And on the competition side, we note that many multinational companies are becoming more aggressive entering low-end markets. DO you see any pressure from these companies in your territory now? And lastly, overall, the second quarter 25% without the exchange impact maybe around 20% growth in China, this quality growth level normal level we can achieve in the next foreseeable futures? Thank you very much.

Jie Liu

Hi, Shaojing. For the China market – for the companies geographically, we cannot disclose the information, but what can I say is that in most regions we are doing well. And specifically, the different segments, the patient monitor and the life support products and the image line and IVD sector. The three lines almost are equally. Patient monitor probably doing a little better than the two lines domestically. And this kind of the customer segmentation from our sales restructuring programs as I say that we really build up the platform for futures growth. And this year the procedure we began the restructure, the purpose, and the intention is really to build up the platform to get on with a better relationship and build up the direct contacts with customer to make sure the company really understand the customer better and to develop the better products in the future. So, that’s for the one thing.

Another thing for the – as I say it in the first question to Ingrid is for the low end, from a low to mid end products, that’s probably fits to the mid segment and even lower segment markets, specifically maybe country level hospitals. Of course, there is much more competition from both multi-nationally and domestic players, but as I said earlier, in the segment, we played and is the mid-tier segment, we strongly believe we can do better than any other competitors. It’s not only because we did probably in the past, but also we have some other good products in the pipeline also. So, we believe we can compete with any competitors in the market. Competition always there and in the near future, we see probably become a little bit more fierce, but that’s the nature of this. We have expressed it and we are confident we can overcome the competition.

Operator

Your next question comes from the line of Jack Hu with Deutsche Bank. Please proceed.

Jack Hu – Deutsche Bank

Thank you for answering my question. I have – first the question is on the competition, so specifically on your risk mitigation strategy. So, first of all is on pricing, can you give us some comment on pricing side and secondarily what you have been doing eventually to send off competition? And then second question is can you talk about earlier new product launch for the second half? And the third question can you sort of quantify the one-time cost that occurred in second quarter? And finally actually just that Jie has mentioned in prepared remarks that you are gaining market share in PMD and IVD, so what about imaging our stock right now?

Jie Liu

Too many questions. How will you remember how many new products will be introduced right. There are many new models of the patient monitor products that will be gradually replaced our existing segment monitor products that will be there. From our perspective, we have a good weapon to really crack the competition in the near future. For the other nearly launch the products that will be the DC-8, the color system, but that will be there at the end of this year, that’s probably will contribute the next year growth for the DC-7 and for the (indiscernible) we got the FDA approval for the BC-6800 that’s be open another door to growth further because this kind of machine has reticulocyte and also has in RBC. In the high end lab, where this kind of machine will open the door to growth for the future. So that’s the MPI product. Any other questions?

Jack Hu – Deutsche Bank

Maybe you guys catch some question to answer.

May Li

Hi Jack. Can you just repeat the question? That was a very long list.

Operator

Your next question comes from the line of Yale Jen with Maxim Group. Please proceed.

Johnny – Maxim Group

Hi, this is Johnny for Yale from Maxim Group. It seems my questions have been answered previously. So, could you please give us some color on the MRI, that your R&D effort on your MRI product so far?

Li Xiting

Specifically the R&D development, we have invested a lot on the R&D, but specifically for the MRI system we put our R&D investment on the magnetic MRI systems as the permanent magnetic MRI system, but for the next-generation of the super conductivity MRI system we have still in the evaluation process fee was need to be done.

Johnny – Maxim Group

Okay, thanks.

Operator

Your next question comes from the line of Richard Yeh with Citigroup. Please proceed.

Richard Yeh – Citigroup

Hi thanks this is actually Richard here. Couple of question to ask, so first question is, can you discuss actually the volume growth for pressure monitor and Ultrasound for the China growth and I think it will be if it’s possible to breakdown actual growth rate for patient monitoring and ultrasound?

And the second question is on the diagnostic product? It looks like this quarter, the particular drive for the China growth is actually coming from in-vitro diagnostic products. So, I like to get some color on where actually the growth driver for the diagnostic test and also in the press release it was mentioned that the product segment actually contributed to about 25.9% with total revenue and how was that last year, was that mostly because of the in-vitro reagents and how would that actually impact the gross margin. And also, I would like to get some sense on the domestic competition, especially (indiscernible) also Eden has done IPO, and how would that strategy impact the China growth especially in the low end market going forward. Thank you.

Li Xiting

For the volume growth of the patient monitoring (indiscernible) for us is a pretty mixed for last time in the past probably we see a lot of volume of black-white system. Now we will see a lot of the color system. The growth coming from the outside actually the color system growing a lot more than black-white, actually in China for black-white is negative growth.

For the patient monitoring, is the low to mid segment monitors. The volume growth actually much faster than the revenue growth that means probably the average price of this kind of machine decreased that because our competition as I said earlier.

And for the diagnostic IVD products there is a major drivers coming from reagent growth that’s you would see the percentage wise of the reagent percentage now is this quarter is 28.4% that accelerated growth our IVD. Second that would be nice for the future growth because that’s the recurring revenue for the future as long as there are (indiscernible) in the Eden competition for the IPO whatever the same competition as in the past.

In the past, we used this kind of products and that they use this kind of price and this kind of the sales team that’s what it is. We didn't use any raised money to do something differently and we believe that this kind of competition will continue and we are confident to overcome not only the (indiscernible) Eden for the local domestic players, but also the multinational moving down to their mid segment market.

Operator

(Operator Instructions) Your next question comes from the line of Jinsong Du with Credit Suisse. Please proceed.

Jinsong Du – Credit Suisse

Hi everybody. For the prepared remarks on working capital you mentioned that because of some changes in sales in the international markets there is some changes in terms of creditors. Could you elaborate and also have that being affecting a few quarters or is just dying now and relate to that your cash collection this quarter as a percentage of operating income was 70% that’s lower than last quarter’s 90%. Is that a (indiscernible) reason purely or there are some other reasons.

Regarding the international sales, it looks like the margin over that sequential improvement, but do you see that continue to improve sequentially in the next few year quarters because of the cost savings you mentioned in your prepared remarks as well?

May Li

Hi Jinsong, this is May. So, your first question credit policy, right?

Jinsong Du – Credit Suisse

Yes.

May Li

Okay, basically we continue to exercise very cautious credit policy throughout the region including China, emerging markets as well as developed markets. I think from the past few years, we have seen some ramp up in receivables both in balance trends and in DSO trends. If you compare year-over-year numbers, some of the reasons behind it are that when we started to expand into key markets globally. We had to basically match some of the credit terms. Our competitors provide to our business harness IVD distributors and prior to 2008, we pretty much had credit granted to our distributors outside of China and that was one of the major hurdles for us to expand meaningfully into international market. So, we started to grant some credits around 2008 to international distributors. We will meet differently I guess from the some of our international competitors that’s we actually get China export insurance company to insure our most substantial majority of our open credit basically. Hence, the finance actually formed by our distributor, that is how we have structured our credit and insurance policy outside of China.

In developed markets, I would say because the proportion of direct sales has increased over the years as a result of our growth progress in Western Europe as well as in North America as a result of the acquisition. So, the DSO got extended naturally as a result. So, that has, I would say, these pretty much are the main reasons behind the receivables and DSO increase over the years.

And to your second question is on the cash collection and you are saying it’s, well basically, I think you know on the net operating cash level, this quarter we are pretty happy to see 70% plus year-over-year increase, which continue to demonstrate our capability to generate operating cash, which has always been a main important pillar of the Mindray story.

Alex Lung

Hi, just on this, Alex. I just want to add maybe one more factor, we have question on the cash collection side. I believe that maybe this quarter, we have mode of non-cash spending like the stock option expense. The share-based compensation cost has actually increased in this quarter, so actually attributable to the low ratio of that demand cost.

Operator

Your next question comes from the line of Wei Du with Goldman Sachs. Please proceed.

Wei Du – Goldman Sachs

Hi, good evening. I just have a question about the operating cost, actually, I want to know most of the hirings are pretty much done in the first half. I guess, you can answer that question, if I am wrong. And I guess are we expecting to see any improvement in the second half, especially at the SG&A level?

Jie Liu

Hi, Du, this is Jie.

Wei Du – Goldman Sachs

Hi, Jie.

Jie Liu

In the first quarter actually we explained the model that we adding the more people since the second half of last year, actually the last quarter of the last year and gradually first quarter and the second quarter, but for the Q3 and Q4 this quarter we are gradually, the incremental probably will not so much as the first half. That means the growth rate compared to last year will be lower than the first half. So, the percentage wise, maybe will get improved.

Wei Du – Goldman Sachs

Okay, thank you.

Operator

Your next question is a follow-up from the line of Jack Hu with Deutsche Bank. Please proceed.

Jack Hu – Deutsche Bank

Yeah. My previous question, can you comment on pricing landscape right now, because in the beginning of the year you commented about that you are expecting larger than you expected in the previous year price erosion, so?

May Li

Hi Jack. Yeah, thanks for asking the question again. Well, what we said in the previous quarter was price reduction this year we are seeing probably a bit more on the higher end of the range than last year. We are seeing more significant price reduction this year, primarily in China, and this has already been factored in when we did our full year guidance. The cost reduction initiatives that we took on throughout the first half of this year turned out to be very efficient and it’s actually helped us to offset the impact from the price reduction. The product mix both in China and also outside of China have also optimized to help us further, where these cost of goods sold. So, that has again helped to offset the price reduction as well. That’s why in the first half both in Q1 and Q2 outside of the construction tax, the education surcharge beyond the appreciation. We are seeing very, very minimal negative impact to our gross margin in terms of yield to give comparison.

Jack Hu – Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Anthony Petrone with Jeffries. Please proceed.

Anthony Petrone – Jeffries

Thank you very much. Just have two questions here, one is on the EPS guidance, the 10% that you’ve reiterated here just want to get my head around it seems that through the first half according to my math you had mid single-digit growth, which would suggest that you could have low teens growth into the back half just wondering where that’s coming from on the expense line?

And then secondly just a question on the short-term investments on the balance sheet, it seems there is a 24% increase there and cash equivalents had also declined from the full year period in December 2010. So, I am just wondering what percentage of the increase in short-term investments is actual receivables or loans made out of the Bank of China in order to facilitate capital equipment purchases in China? Thanks very much.

May Li

Okay. Hi Anthony, this is May. On the guidance side, I just want to clarify our guidance is based on non-GAAP net income rather than non-GAAP EPS. This is one. Your other question on the short-term investments, all the short-term investments or substantial majority of the short-term investments that we have right now on our balance sheet is in the form of interest in the loan guaranteed by Bank of China, and now to my knowledge is to distributors, all business partners of Mindray.

Operator

Your next question comes from the line of Katherine Lu with Cowen & Company. Please proceed.

Katherine Lu – Cowen & Company

Hi, good evening. Thank you for taking my questions. Actually, I’d like to get a better sense of the business dynamics in Western Europe. In your prepared remarks, you mentioned Western Europe increased at the low teens this quarter and we also know that euro had a big swing this quarter. So, I am just wondering if you can breakdown the growth, if you can talk about the growth by pricing volumes and mix and also your expectation for the rest of the year in Western Europe?

Jie Liu

Hi Katherine, this is Jie. For the Western Europe, it’s really tough to say, but it’s we are – how good or how bad we are really depending on the budget government holds such as the UK. The situation is government is still holding the budget for the (indiscernible) hospitals, for some other countries Italy, Spain has the similar situation. The Germany and France maybe a little bit better situation, but all these kind of combined together in the West Europe, it’s really hard to predict what kind of situation could be, but for us, we take very prudent perspective to project the West Europe situation. But long-term perspective, we always believe in the Western Europe, our market share is relatively small. We have growth potential in this area, that’s the reason we think we are doing a better job now of our peers than the competitors in the Western Europe long-term perspective, but also because of the bad economy of different government probably has a crisis or have the need to use alternative for the value products.

If we have these kind of needs, we did see some signals from some public hospitals. In the past, we had too much money. We may not consider Mindray as our alternative, but gradually we see some signals maybe we have opened the door to Mindray for the future growth in the Western Europe and maybe other developed markets.

Operator

Your next question comes from the line of Junaid Husain with Ticonderoga Securities. Please proceed.

Junaid Husain – Ticonderoga Securities

Good evening, everyone. Jie just so that I can understand your sales guidance for the year, when I look at my model, you’ve done about 22% growth in the first half of the year, but in order to take your 16% full year growth for the year would almost seem to suggest a slowing in the second half of the year in call that the 12% to 13% range. Are you just being conservative or do you actually think it’ll be around this range in the second half of the year? Thanks.

Jie Liu

As we said we are taking very prudent perspective to really prepare the best situation. That’s mean with our best to do a better job. But at this moment in terms of the environment as I said in the Middle East, the Africa, the West Europe and North America, all this area they have different issues, political or the credit rating or debt crisis, that give us conservative prospective to predict, but I said we always try to do a better job than our industry peers in the different markets.

Operator

Your next question comes from the line of Gideon Lo with Nomura. Please proceed.

Gideon Lo – Nomura

Hi, thank you for taking my question. I have two questions, because I joined late, maybe I lost your way this is asked about this. The first question that regarding your China and international market. Can you give me guidance how about the growth, where it’s come from? How much percentages come from the new product and how many percentage is come from existing product? And also regarding the second half we know your full year forecast on sales, revenue and also profit. May I have your guidance if you compare with the first half what would be the profit margin change in second half, you expect better or lower or remain the same? Thank you so much.

Jie Liu

For the sales of the China sales and internationally we got a lot of sales, always Mindray as a company for the new product doing the sales. So, that’s the reason we heavily invested on our R&D activities to launch seven to 10 new products every year and we drive the growth of the future sales.

For China and internationally, our major driver actually coming from our new product from (indiscernible) color ultrasound system, our new just launched black-white system that’s internationally driven ultrasound imagine. But for the IVDs, a little bit different. IVD is the installation based, where you install more high relatively mid-to-high end product you get a lot of more revenues confirmed sense that we will get more revenue in the future, so that’s the reason when we see our percentage of revenue coming from region, we foresee the future will be even better for the IVD sector because of the higher percentage of the reagents.

As to the profit margin for the second half as I stated we are for the expense growth, in the growth side we are not higher in the first half. So, as a percentage wise we are getting improved so the profit margin for the second half would be better than the first half.

Operator

Your next question comes from the line of Erica So with UBS. Please proceed.

Erica So – UBS

Hi, I’m Erica So on behalf of Ding Ding from UBS. I have a follow-up question on the high end market and products and I think you just now answered the question and saying that Mindray facing the first year of using this market and expectation for this year is basically selling up the platform for future growth. So, would you like let us know when do you expect to see the effect to see this platform to actually mature and bring in revenue and what do you think the potential revenue would be from this segment, from high-end market.

And then my second question is on the MNC competition, you’ve commented on the competition in terms of sales, but I want to understand as like big companies such as GE moving there more and more of their operations to China. I would expect not only on the sales side, but on the resource side Mindray to keep key talents, your key researchers it would have some impact on how much you’ll have to in terms of like the cost of keeping those resources may actually be driven up by seeing all these MNCs moving operations to China. Can you comment on that? Thank you.

Li Xiting

Hi Erica, I need to clarify one thing that I do say that this is the first year high end market. This year is the first year allow our sales transformation program is began it’s actually the sales restructuring program for the relatively Tier I hospital that’s probably the high end market and in the past we already done the business with them and we are continue to do the business with them. For this kind of transformation, we have separate our sales team, separate one team to dedicated to selected 248 Tier I hospitals and a separate team target to the private sector and there is other team based on the project probably target the county level hospital. This kind of the segments, the customers and put dedicated sales force and then probably expect the better return on this kind of the restructure program. That’s the first year.

By the way this platform will be benefiting and the Mindray for their future growth probably you know that any reform neither two or three years really a much. At this stage we initially already have got very positive results and we believe in the future we can see a better results, better server our customers.

As long as the multinational competition not only on the sales, but also on the result of these especially probably talent people and that’s the China because of the economies to grow very fast different industry including IT and the internet company. We try to recruit many people. So, this kind of talent competition always in China and we are used to this kind of competition.

Of course for the multinational we have much more resources in China and we have to face this kind of talent competition more seriously. That’s also the reason, why we buildup other research center city in the [Shian] [Tendo] and Shanghai. Those research centers are close to the many good universities that will help us to better recruit the future talent for the research perspective. That’s a current situation. I think we are prepared for this kind of competition for the talent recruiting.

Operator

Final question today comes from the line of Richard Yeh with Citigroup. Please proceed.

Richard Yeh – Citigroup

Hi, actually this is Richard Yeh again. Thanks for taking my follow-up questions. Just a very fast for the last question, I just want to guess some sense on given that the U.S. probably the hospital budget cycle in the CapEx spending pattern. What would be the potential growth rate for the reminder of the year and if we have to look forward into 2012, given that what’s going on the financial market. How would that impact U.S. the CapEx spending from the U.S. hospitals in next year? Thanks.

Jie Liu

Hi, Richard, we invite Dave to answer questions.

David Gibson

Okay.

Jie Liu

Thanks.

David Gibson

Obviously, very dynamic situation, if you assume Friday to Monday changes dramatically. The growth rate we have and what we are baking in our assumptions for this year are really based on the market expansion of the— our served markets, not based on growth rate and CapEx. Obviously, we don’t look forward to the potential of a headwind if things continue to deteriorate or destabilize with us, it will get proportionally tougher, but we are not basing our growth strategy on an expanded capital spending market. Right now, we see that, that’s probably going to hover in the 0% to 5% range, but with a high degree of uncertainty on it. And we’ve got to base our going forward on gaining share in markets like the emerging inherent care ultrasound markets, where we have both the M7 products and picking up traction there as well as our expansion into critical care.

In both of those segments, we have low market share and plenty of room to grow if there is a reasonable market contraction. Obviously, if we talk about the major setback, that’s – of unexpected proportions, it will change our strategy and our growth rates. Based on what we say now we are still, still pretty secure, a bit cautious. And I think like probably many people that are sitting on the phone call were keeping our ear to the ground and hoping that some sense of stability returns to the world of public finance.

Richard Yeh – Citigroup

Thank you.

Operator

Ladies and gentlemen, that does conclude our Q&A portion of the call. I would now like to turn it back over to Cathy Gao for closing remarks.

Cathy Gao – Deputy Manager of Investor Relations

Thank you everyone for participating to this call. As always, we appreciate your support of Mindray. The replay of today’s webcast will be available later today. Our CFO and COO, Deputy Sales CFOs, my IR team and I will be available for questions today. Thank you all for joining us and we look forward to speaking with you soon.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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