Mindray Medical: Chinese Firm Expands Internationally

When I last spoke about Mindray Medical (MR), the company had just released its second quarter earnings and the growth prospects of the company looked very impressive. Yesterday the stock was 35% higher and yet expectations continue to be ratcheted up.

Numbers for the third quarter were released in early November as the overall market was getting pounded by another wave of credit fear. Chinese stocks took more than their share of punishment as these names typically have higher volatility and most managers were attempting to cut as much risk out of their books as possible. However, the company specific numbers were actually very impressive and the weakness in the stock was quickly overcome. The stock nearly touched its October high Tuesday before the fed announcement sent most stocks lower in the afternoon.

Breaking out the third quarter numbers, revenue came in at $76.5m which was up nearly 50% over the same quarter last year. International revenue growth actually exceeded domestic growth as management noted particular strength in Europe and South America. Mindray now has 10 offices open internationally including offices in Canada, Brazil, Mexico and the Netherlands which are new this quarter. A Moscow location should be complete in the fourth quarter and could make an impact on overall sales next year as the addressable market is likely to offer significant growth.

All three of the segments (Patient Monitoring, Diagnostic Lab Instruments, and Ultrasound Image Products) reported strong gains. With each of these segments carrying a fairly equal portion of sales, the company is well diversified within the medical equipment sector which creates more stability. The company is launching six new products in the Imaging division in the fourth quarter and expects these products to carry a large portion of revenue growth for 2008.

Looking at the profitability, one might initially be concerned with lower margins this quarter. Most of the additional expense came in the form of selling expenses and these are related to the new office openings. As these sales forces become well trained and begin to gain traction in their respective markets, the investment should pay off and margins should improve. Another point of interest is that the company operated with an effective tax rate of 6.6% in the third quarter of 2006, but had that rate more than double in the last quarter to 14%. This is a testament to the strength of the company to be able to post 67% earnings growth with such financial challenges.

Speaking of taxes, China recently passed a regulation that would tax nearly all businesses at a new 25% flat rate compared to the old standard of 15%. There are only a few exceptions and one is for technology development companies. Mindray believes that it will fall under the 15% rate due to its extensive Research and Development. While I have little reason to doubt management on this issue, it should be an issue any investor keeps in mind as an added tax burden could hamper the earnings growth to some degree.

I continue to like Mindray as a long-term investment and believe the stock is at an attractive purchase point given its strong fundamentals. The stock is a bit volatile and requires close attention, but should be a name that adds significant growth to any portfolio.

Disclosure: Author has a long position in MR