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Ottoman Bay Research focuses on due diligence-based, special situation investing, particularly in the emerging markets. As of the publication date of our articles, Ottoman Bay may have long or short equity positions in the companies covered.
  • Mindray Medical Is Fool's Gold - Strong Sell - Target Price: $15 3 comments
    Dec 13, 2013 10:50 AM | about stocks: MR

    Mindray Medical is Fool's Gold - Strong Sell - Target Price: $15


    We have detailed our findings in a 103-page slide deck, which supports our view that Mindray Medical has systematically deceived investors and regulators, including the SEC. We lay out a comprehensive case, which strongly supports our claims in this preview.

    We encourage investors to download our full report using the following link:

    We believe Mindray Medical (NYSE: MR) is a Strong Sell and its shares are worth no more than $15. As detailed in this report, Mindray Medical has a record of fairly egregious fraud in the past and evidence suggests this behavior has continued. The Company trades at a rich 20x FY14 PE (vs. peers at ~14x currently and 12-13x historically) despite its highly capital-intensive business model that competes in commoditized, replacement markets with significant price competition. Furthermore, so much like a typical China fraud, MR is a serial capital raiser and relies on debt or equity financing as its primary source of cash generation. Current financials show significant red flags and could be fraudulent. We believe Mindray Medical will eventually be added to the long and growing list of Chinese frauds.

    1. Earnings Are Overstated - We believe Mindray is inflating revenues by 30% and real gross margins are in line with peer levels of 45%-50% vs. the ~60% MR claims. To compound matters, recent SEC correspondences reveal MR has lost money in its ex China businesses (55% of sales) since 2008, when it acquired Datascope's money losing PMD business. MR appears to manage earnings through a myriad of accounting shenanigans, including moving cash through its complex maze of offshore subsidiaries to inflate sales, margins and cover expanding losses, significantly overstating the earnings power latent in the business.

    2. Phantom Cash - We do not believe Mindray has the cash it claims. Despite what appears to be a rich balance sheet ($1bn as of 9/30/13), MR is a serial capital raiser and borrows from capital markets any time the company needs to pay out cash, much like a typical Chinese fraud. A company reporting over $1bn dollars in cash should not have to rely on debt or equity financing to fund its recurring annual dividend or a $101m acquisition. Evidence further suggests that in 2010, MR would have likely defaulted on its debt if the company had not misled investors regarding its 2010 equity offering.

    3. Short Term Investment Returns Are Implausible - We question the nature of Mindray's speculative, off balance sheet, level 2 ST investments. MR's ex-cash net income has grown at a 5yr CAGR of just 11% vs. a 102% CAGR for short-term investments over the same period. Furthermore, MR generates well-above-average returns on its ST investments and investors cannot audit these returns due to MR's overtly opaque disclosures. More alarmingly, we find little evidence as to how MR accounts for the income from its "investments", which can be used to inflate earnings. We question the sanctity of the reported cash & short-term investment balances.

    4. A Series of Questionable Acquisitions - We believe Mindray's largest acquisition - Datascope - was significantly overstated. Evidence suggests Datacscope was worth far less than the $208.6m in shareholder cash MR paid. To cover up the fraudulent acquisition, MR significantly stepped up the accounting value of the assets. The following year MR wrote off the entire value of the acquisition to ZERO, rendering it worthless. Along with another $408m of China long-lived assets which simply vanished from the company's financials - note MR has yet to take an impairment charge for this write-off. Furthermore, striking similarities exist with the recent purchase of Zonare Medical (acquired 7/2013), which was recently accused of "intentional fraud" by HDX, a significant manufacturer and distributor (filed 11/1/2013)

    5. Dubious Accounting Reporting - We find large discrepancies and outright deception in MR's filings from year to year that are nearly impossible to reconcile. We believe Mindray Medical will restate several years of filings as a result of the issues covered.

    6. Multiple Regulatory Overhangs: MR is facing multiple regulatory issues, including, but not limited to: (1) SEC has had 6 correspondences with MR since Fy12 (2) Masimo (MR supplier) is suing MR for patent infringement (3) FDA product investigations which has led to forced and voluntary product recalls in the U.S. (2nd largest geography) (4) HDX Corp.(Zonare distributor) is suing Zonare Medical for "intentional fraud" (filed 11/1/2013) (5) PRC government has recently begun investigating pricing practices in the medical devices industry (they had previously focused on pharmaceuticals which led to significant fines) (6) the SEC is suing 5 of the largest accounting firms with securities violations, including PWC, MR's auditor.

    7. Corporate Governance Issues: MR has had 4 CFOs in the past 4 years, and CEO Xu Hang resigned abruptly in Q4 '12, President of NA, who was a legacy employee of Datascope (acquired in 2008), abruptly resigned in 1q13, along with the majority of his senior team, 3 insiders control greater than 60% of voting shares (note: MR has a poison pill and staggered board (3-year terms)), MR fired auditor Deloitte in late 2008 (coinciding with questionable Datascope acquisition) and brought in PWC. A month earlier, MR added recently-retired and long-time PWC partner to its Board, including a position on the auditing committee. This is highly suspicious.

    8. Mindray Has Lost Significant Market Share: Contrary to consensus perception and Managements guidance, our field research suggests Mindray has lost significant market share in key products, patient monitoring, ultrasound and in-vitro diagnostics in China. Our view is confirmed by Mindray's OWN investor presentations.

    9. Evidence of Channel Stuffing /Questionable Distribution Practices: Substantially all of MR's China sales growth since 2009 has come from an increase in distributor sales, with direct sales showing a negative CAGR over that same period of time. On a worldwide basis, distributors accounted for ~78% of MR sales in 2011 with the remainder from direct sales, roughly two-thirds of which are international. In China (largest market) greater than 80% of sales are to distributors (~1,800 Chinese distributors as of Y/E'11 vs. ~2,400 at Y/E'10). We have seen this business practice in numerous Chinese frauds in the past.

    10. Insiders Are Abandoning Ship: After raising guidance in 2q13, insiders sold more shares in 5 months than in 1h13, 2012, 2011, 2010, and 2008 COMBINED before substantially cutting 3q13 revenue guidance (from 18% to 13%)

    SEC Action - We have submitted our documents to the SEC for further review. We believe Mindray Medical's Board has the fiduciary responsibility to form a special "independent" committee to examine the discrepancies covered in this report

    Disclosure: I am short MR.

    Stocks: MR
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Comments (3)
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  • qrc3288
    , contributor
    Comments (491) | Send Message
    thanks for the article - the link to dropbox appears to be slow or timing out, is it possible to post the report somewhere else (Scribd perhaps)?
    13 Dec 2013, 09:51 PM Reply Like
    , contributor
    Comments (3) | Send Message
    I am a market researcher that is exclusive for China and exclusive for IVD and continue to have confidence in Mindray. Much more than i have confidence in short sellers or in auditors, including PWC. Pls view’s-ivd-market‎.
    If Mindray ever recognizes that their future is in IVD, they will skyrocket. Gross margins for IVD reagents are 80-85% and selling and after sales costs are minimal once the instruments are placed.
    Still waiting for their Chemilluminescence analyzer to really reach the market, but pleased that they keep delaying until they get it right. Others who have developed and introduced in China might be the ones to watch for short selling. They are struggling to keep up with the service issues, now that they have placed thousands of instruments.
    17 Dec 2013, 08:18 PM Reply Like
  • Pricing Flex
    , contributor
    Comments (11) | Send Message
    Great job on the previous probe and the current one. Curious to see how management responds. Seems that from the transcript of the latest call with equity research analysts in response to the last report, analysts have turned against management. In for a short, but realize that it's not a completely safe position, with 16+ days of short interest outstanding on this security already.
    20 Dec 2013, 02:18 PM Reply Like
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