Mindray (MR): Leeb targets medical frim

by Stephen Leeb, The Complete Investor

The Manning & Napier World Opportunities fund—rated five stars by Morningstar and ranked in the top one percentile for the past 10-year stretch—is a large-cap foreign blend fund that invests mainly in developed countries, particularly in Western Europe.

Thus its increasingly hefty stake in the relatively small Chinese technology company Mindray Medical International (NYSE: MR), one of just two Chinese stocks it owns, is striking.

The fund began accumulating Mindray shares in 2009’s second quarter; as of November it owned 2.5 million shares, representing a 1.6 percent weighting.

Mindray is the leading provider of high-tech medical equipment in China and sells its products globally as well. (The company has a market cap about $4 billion.)

Advertisement

Its products include patient monitoring devices such as anesthesia machines and defibrillators; diagnostic laboratory instruments that analyze blood, urine, etc.; and ultrasound machines. It sells directly to hospitals, clinics, and labs as well as through its extensive dealership network.

Revenues in 2008 grew by nearly 90 percent year over year to $550 million. And despite the difficult environment, growth remained at double-digit levels in 2009, with revenues for the first three quarters up 17 percent year over year. (Fourth-quarter results, not yet reported, typically are Mindray’s strongest.)

As relatively small-ticket items, Mindray’s products are less vulnerable to spending cuts than larger hospital equipment is. Still, tighter hospital budgets in the U.S. and Europe have affected sales in developed economies.

Demand from developing markets, however, continues to grow nicely. In the Chinese domestic market, sales grew more than 9 percent on an annual basis in 2009’s third quarter. And overall companywide gross and net margins held steady.

Mindray has built up a solid brand name in China, allowing it to sell its products there at a 20 percent premium to competing domestic brands while still charging 30 percent or so less than foreign rivals.

This brand awareness—along with the company’s impressive sales and distribution network in China and its sizable and low-cost R&D operations—gives Mindray competitive advantages in its home country that rivals are hard-pressed to match.

Chinese sales accounted for around 42 percent of 2008’s revenues and should be an even bigger proportion of 2009’s results. And while the company continues to push for growth overseas, the domestic market will likely be the key growth driver.

According to World Health Statistics, health care spending was less than 5 percent of China’s GDP in 2008 (compared to 15 percent in the U.S.), leaving ample room for expansion. Mindray will benefit from China’s burgeoning middle class, longer life expectancies, and increased government funding for social welfare and health care.

Shares now trade with a forward P/E in the mid-20s, but with growth prospects resulting in a PEG just slightly above 1, the stock isn’t too expensive.

Revenues from China are expected to grow by at least 25 percent or more this year, while growth from overseas could be in the mid-teens if developed economies continue to stabilize. Mindray joins FundFinds this issue.

Learn more about this financial newsletter at Stephen Leeb's The Complete Investor.