Bucking the Trend in China

06/26/2008 12:00 am EST

Focus: GLOBAL

John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, talks about a Chinese company that should be able to withstand the shocks to that market.

After a blistering 63% gain last year, Chinese stocks have been tanking in 2008. MSCI's China index is off 24% since January 1st, ranking among the world's worst-performing markets.

But some Chinese firms have been quietly bucking the trend. Mindray Medical International (NYSE: MR), based in Shenzhen, is China's largest medical equipment manufacturer. The company operates in three business segments: patient monitoring; biochemistry and hematology analysis equipment, and ultrasound imaging systems. Revenues were fairly balanced among the three segments.

Mindray certainly isn't a household name. And, with a market capitalization of $4 billion, it's a little on the small side. Its full-year 2007 revenue rose 47% to $306 million.

But this is no fly-by-night operation. Founded in 1991, Mindray has the number-one market share in China for several of its products and it routinely holds its own against much bigger global competitors like General Electric (NYSE: GE), Siemens, and several Japanese firms.

And Mindray has ambitions far beyond China. Indeed, its home country accounts for only half of its revenue. Europe accounts for 18.4% of sales, Asia comes in at 13.5%, and 6.8% of sales are in the US. Mindray has been exporting its medical equipment since the start of the decade, but as recently as a few years ago the Chinese market accounted for three-quarters of the company's revenue.

By making its equipment in China, Mindray enjoys an obvious cost advantage. But it's not merely a cheap manufacturing play. The company is committed to innovation, targeting R&D spending at 10% of revenue. Mindray has nearly 1,000 engineers in China and Seattle, and the company typically rolls out about eight new products each year.

The strategy is paying off. Net income rose 64% last year, a net margin of 26.4%. Return on equity was a robust 21.5%. By selling most of its equipment through exclusive distributors, Mindray keeps sales and marketing expenses low. The bottom line also gets a little extra boost thanks to the Chinese tax code. As a "high tech" enterprise, Mindray qualifies for a 15% tax rate rather than the 25% rate that is the norm for Chinese companies in other sectors.

Demand for Mindray's equipment is expected to remain strong in China. The government is eager to help hospitals invest in new equipment, particularly in rural areas that are less advanced than the big cities. Sales outside China should also continue to be robust. Earlier this month, Mindray received [the Food and Drug Administration's] approval to sell its DC-3 color ultrasound imaging system in the US, the latest of 16 products with FDA clearance.

Mindray's guidance calls for 50% sales growth in the US in 2008. At a recent $39, Mindray sells for 26x earnings estimates for 2009. That's not cheap, but the company has the growth and profitability to back it up. And as emerging market stocks go, medical equipment makers are as close to "defensive" as they come.

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