China medical device maker risks getting too pricey

SHANGHAI: One of the biggest companies listed on southern China’s tech-heavy stock exchange is a fast-growing Chinese medical device maker that is grabbing market share from the likes of General Electric Co and Siemens AG.

Shenzhen Mindray Bio-Medical Electronics, which was added to the MSCI index at the end of May, has soared 51% this year to become a top performing stock listed on the ChiNext board. With a total market value of US$29bil, Mindray is vying with Wens Foodstuffs Group to be the largest ChiNext counter.

Backed by government policy to support indigenous medical appliance manufacturers and with growing health care spending amid a rapidly-aging population, Mindray’s earnings outlook seems bright. The firm is expected to grow its revenue by about 20% and net income by about 21% annually between this year and 2021, according to Bloomberg consensus forecasts.

The optimism is reflected in the stock’s valuation. Mindray is trading at a forward price/earnings ratio of 39 times, nearly double the average for the entire ChiNext market that is designed for small, growth enterprises. The analyst consensus one-year price target for the company is 158.90 yuan, indicating a potential downside of 3.8% from the current price, Bloomberg-compiled data shows.

Mindray is “looking expensive,” but is not pricey when compared with some “white-horse stocks”, said Xiong Qi, Beijing-based deputy head of research for Windsor Capital Management Co Ltd, referring to certain high-flying companies such as Chinese soy sauce maker Foshan Haitian Flavouring & Food Co.

The company, which was previously listed in the United States before a US$1.9bil deal to take it private in 2016, found favour among institutional investors after listing itself in Shenzhen last year. Founded in 1991, Mindray makes in-vitro diagnostics (IVD) equipment, life monitoring systems and medical imaging gears such as colour ultrasound devices.

Mindray and other Chinese medical equipment makers such as Lepu Medical Technology (Beijing) Co Ltd and Jiangsu Yuyue Medical Equipment & Supply Co have been chipping away at global manufacturers’ market share as they benefit from supportive local policies, Bloomberg Intelligence said in a report last month. The firms have been ramping up research and development spending to narrow their technology gap.

Mindray’s spending on R&D rose 25.5% year on year to 1.42 billion yuan in 2018, accounting for 10% of its revenue, according to its annual report. The company has started to look beyond its home market for growth as its overseas sales are already accounting for nearly half of its total annual revenue, Bloomberg-compiled data shows.

Institutional investors have piled into the stock, but others are wary. Fidelity Management, China Asset Management and Bosera Asset Management are among investors that bought into Mindray in recent months, according to data compiled by Bloomberg. As of July 8, foreign investors held 13.13 million Mindray shares, up 80% since the announcement of its MSCI inclusion.

Dai Ming, portfolio manager of Hengsheng Asset Management Co, is in no rush to buy Mindray, though he reckons it is a great company. “Mindray’s valuation is too high. We will wait for a pull back to get in at a more reasonable price.” — Bloomberg

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