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Company Note Medical Equipment & Svs│China│January 16, 2020

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INITIATION

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Mindray Leading medical device giant, initiate with ADD ■ Mindray is the largest medical device manufacturer in China in terms of revenue. ■ The Company has a highly recognized brand name and high earnings growth

visibility, and is well positioned for China’s fast-growing medical device industry. ■ Unlike chemical generic drug manufacturers, Mindray is exposed to relatively low

government centralized procurement risk in China. ■ We expect Mindray to deliver a 22.3% EPS CAGR in 2019–2021F. We set our Target

Price at Rmb211, based on 2x 2020F PEG, a premium to its domestic peers’ average of ~1.5x (Figure 2-1), but below its international peers’ average of ~2.8x (Figure 2-2). Our TP is equivalent to 55.4x/44.6x/37x 2019/20/21F P/E. Initiate with ADD.

Well positioned for China’s fast-growing medical device market China’s medical device market reported a CAGR of 23.89% in 2006–2016, according to the China Association for Medical Devices Industry. We expect continuing high-teen growth in the next two to three years mainly because of China's aging population, vast demand from low-tier hospitals for medical equipment purchases and upgrades, technology advances and government policy support. With its broad product spectrum, extensive sales channels, competitive product prices, comparable quality to imported devices, solid R&D capability and highly recognized brand name over its domestic peers, it is well positioned for China’s fast-developing medical device market.

Broad product portfolio and recognized brand name; should benefit from import substitution and China’s vast low-tier hospital market Mindray is a global supplier (44% revenue from overseas in 2018A) of a broad range of products across three primary business segments: patient monitoring and life support products, in-vitro diagnostic products (IVD), and medical imaging systems. Mindray was ranked third, fifth, third and sixth in the global patient monitoring, defibrillator, anesthesia machines and ultrasound markets, respectively, in 2016. Its brand name is well recognized globally and domestically. This will facilitate its penetration into lower-tier hospitals, and Mindray will benefit from import substitution in the domestic market. We expect China to continue being the fastest growing market for Mindray with >20% revenue CAGR in the next few years, following by other emerging markets with ~20% topline CAGR, while revenue from North America to post a single-digit CAGR.

Relatively low GPO risk for medical consumables in China Currently, in China only a few provinces have centralized procurement for the IVD reagents. Even if this is expanded nationwide in the future, we estimate that only <20% of Mindray’s revenue (IVD reagents sold in China) faces a potential price cut risk from the centralized procurement of medical consumables.

Mindray deserves a valuation premium over its domestic peers We value Mindray at 2x 2020F PEG, which is a premium to its domestic peers’ average of ~1.5x (Figure 2-1). We think a premium is justified because of: 1) Mindray’s globally and domestically highly recognized brand name, which has tremendous intangible value; 2) its strong bargaining power with its distributors and downstream customers; 3) its solid R&D capability and platform; 4) its high earnings growth visibility, with a diversified product portfolio; and 5) its quality balance sheet and cash flow management. Mindray’s 2x 2020F PEG is below its international peers’ (Figure 2-2), and its 2019A–2021F EPS CAGR of 22.3% far exceeds that of its international peers. We expect major catalysts for 2020F to be 1) rapid growth of high-end products, such as its N-series patient monitors, its chemiluminescence and its ultrasound RE-series etc.; and 2) relief from the Sino-U.S. trade dispute.

SOURCES: CGIS RESEARCH, COMPANY DATA, BLOOMBERG

China

ADD Consensus ratings*: Buy 19 Hold 2 Sell 0

Current price: Rmb188.4

Target price: Rmb210.9

Previous target: Rmb

Up/downside: 11.9%

CGI / Consensus: 0.0%

Reuters: 300760.SZ

Bloomberg: 300760 CH

Market cap: US$33,261m

Rmb229,085m

Average daily turnover: US$133.1m

Rmb935.1m

Current shares o/s: 1,216m

Free float: 25.5% *Source: Bloomberg

Source: Bloomberg

Price performance 1M 3M 12M Absolute (%) 1.7 4.8 79.5

Relative (%) -2.4 1.5 59.3

Major shareholders % held Li, Xiting 26.9 Xu, Hang 24.4

Insert

Analysts

Harry He

T (852) 3698 6320 E [email protected]

Wong Chi Man T (852) 3698 6317 E [email protected]

Financial Summary Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F

Revenue (Rmbm) 11,174 13,753 16,630 19,966 23,779

Operating EBITDA (Rmbm) 3,254 4,097 5,486 6,751 8,090

Net Profit (Rmbm) 2,589 3,719 4,628 5,742 6,925

Normalised EPS (Rmb) 2.37 3.34 3.81 4.72 5.70

Normalised EPS Growth 47.2% 40.9% 14.0% 24.1% 20.6%

FD Normalised P/E (x) 75.93 55.89 47.42 39.90 33.08

DPS (Rmb) 0.82 1.09 1.14 1.42 1.71

Dividend Yield 0.44% 0.58% 0.61% 0.75% 0.91%

EV/EBITDA (x) 62.21 48.40 39.20 31.29 25.58

P/FCFE (x) 144.4 140.8 59.3 43.4 38.3

Net Gearing (52.1%) (76.1%) (75.5%) (78.1%) (78.8%)

P/BV (x) 31.10 13.84 12.34 10.00 8.15

ROE 46.5% 34.2% 27.4% 27.7% 27.2%

% Change In Normalised EPS Estimates

Normalised EPS/consensus EPS (x) 1.00 1.01 0.99

84

126

167

94.0

144.0

194.0

Price Close Relative to SHCOMP (RHS)

10

20

30

Jan-19 Apr-19 Jul-19 Oct-19

Vo

l m

2

Medical Equipment & Svs│China

Mindray│January 16, 2020

Valuation Figure 1: Mindray's historical rolling forward P/E band since listing

Source: Company, Capital IQ, CGIS Research estimate

Figure 2-1: Peer comparison table (data as at January 15, 2020)

Source: Capital IQ, CGIS Research

* Represents estimated by CGIS Research

Mindray's medical device industry peers are trading at an average of 1.5x 2020F PEG, or ~27-30x 2020F P/E. Currently, Mindray is trading at ~1.8x 2020F PEG or ~40x 2020 P/E, higher than industry average. We think Mindray deserves a more prominent valuation premium to its peers because of: 1) its globally and domestically highly recognized brand name, which has tremendous intangible value; 2) its strong bargaining power with its distributors and downstream customers; 3) its solid R&D capability and platform; 4) its high earnings growth visibility for its diversified product portfolio; 5) its good quality balance sheet and cash flow management; and 6) its 1.8x PEG, which is still below its international peers’ average of ~2.8x.

Therefore, we have a PEG target of 2x 2020F. Our Target Price is therefore Rmb211, equivalent to 55.4x/44.6x/37x 2019/20/21F P/E.

Title:

Source:

50

100

150

200

250

10/2018 12/2018 2/2019 4/2019 6/2019 8/2019 10/2019 12/2019

Rmb

36.6x

54.9x

48.8x

42.7x

30.5x

Company Name Close

(Rmb)

Market

Cap

(Rmbm)

2020F 2021F EPS

CAGR

(2019-

2021F)

PEG

(2020F)

2018A

R&D to

revenue

%

2020F 2021F 2020F 2021F 2020F 2021F

Shenzhen Mindray Bio-Medical Electronics Co., Ltd. (SZSE:300760)* 188.4 229,085 39.9x 33.1x 22.3% 1.8x 9.2% 10.0x 8.2x 31.3x 25.6x 27.7 27.2

Shanghai Fosun Pharmaceutical (Group) Co., Ltd. (SHSE:600196) 26.7 65,275 18.2x 15.4x 14.2% 1.3x 5.9% 2.0x 1.9x 18.3x 15.1x 11.2 12.2

Autobio Diagnostics Co., Ltd. (SHSE:603658) 108.0 45,360 48.6x 37.9x 28.5% 1.7x 11.0% 15.2x 11.4x 33.0x 25.7x 33.0 31.9

BGI Genomics Co., Ltd. (SZSE:300676) 69.8 27,911 60.1x 53.7x 11.8% 5.1x 9.3% 5.8x 5.4x 42.5x 36.3x 9.6 10.0

Guangzhou Kingmed Diagnostics Group Co., Ltd. (SHSE:603882) 58.0 26,571 48.9x 38.3x 30.7% 1.6x 6.4% 9.7x 8.0x 33.1x 26.8x 19.4 20.5

Guangzhou Wondfo Biotech Co.,Ltd (SZSE:300482) 54.8 18,786 34.6x 26.3x 32.0% 1.1x 8.3% 7.1x 5.9x 25.1x 19.2x 20.7 22.6

Maccura Biotechnology Co.Ltd (SZSE:300463) 29.6 16,508 24.3x 19.3x 26.7% 0.9x 4.1% 4.2x 3.6x 14.8x 13.0x 18.3 19.1

Dian Diagnostics Group Co.,Ltd. (SZSE:300244) 23.9 14,854 23.9x 19.5x 25.3% 0.9x 2.3% 2.9x 2.6x 13.7x - 12.4 13.3

Berry Genomics Co.,Ltd (SZSE:000710) 41.3 14,656 30.8x 23.8x 30.6% 1.0x 6.3% 5.4x 4.4x 24.2x 19.0x 17.4 18.4

Amoy Diagnostics Co., Ltd. (SZSE:300685) 69.0 10,157 49.7x 36.7x 36.8% 1.4x 17.8% 9.5x 7.7x 40.5x 30.4x 19.1 21.0

Da An Gene Co., Ltd. of Sun Yat-Sen University (SZSE:002030) 11.4 9,122 - - - - 7.9% - - - - - -

Sinocare Inc. (SZSE:300298) 15.8 8,880 23.6x 20.8x - - 5.7% 2.7x 2.4x 17.5x 14.8x 12.1 12.4

Beijing Strong Biotechnologies, Inc. (SZSE:300406) 16.6 8,350 - - - - 8.3% - - - - - -

Shanghai Kehua Bio-Engineering Co.,Ltd (SZSE:002022) 12.5 6,411 - - 0.0% - 0.7% - - - - - -

Getein Biotech, Inc (SHSE:603387) 24.2 6,309 10.4x 8.1x - - 11.7% - - - - - -

Shanghai Runda Medical Technology Co., Ltd. (SHSE:603108) 10.7 6,207 12.5x 9.7x 26.0% 0.5x 2.1% 1.9x 1.7x 6.3x 5.3x 14.4 15.9

Guangdong Hybribio Biotech Co.,Ltd. (SZSE:300639) 27.0 5,867 30.3x 22.9x 31.7% 1.0x 7.9% 4.7x 4.1x - - 15.0 18.0

Dirui Industrial Co.,Ltd. (SZSE:300396) 19.4 5,329 - - - - 3.5% - - - - - -

Medicalsystem Biotechnology Co.,Ltd (SZSE:300439) 13.6 4,703 - - - - 10.9% - - - - - -

Tellgen Corporation (SZSE:300642) 45.3 4,116 21.0x 16.7x 25.2% 0.8x 11.0% 3.1x 2.6x 15.0x 11.9x 14.9 15.8

Beijing Leadman Biochemistry Co.,Ltd. (SZSE:300289) 6.0 2,490 - - - - 6.1% - - - - - -

Wuhan Easy Diagnosis Biomedicine Co.,Ltd. (SZSE:002932) 37.3 2,482 - - - - 15.4% - - - - - -

Average 31.8x 25.5x 24.4% 1.5x 7.8% 6.0x 5.0x 24.3x 20.3x 17.5 18.5

Median 30.3x 22.9x 26.3% 1.1x 7.9% 5.0x 4.2x 24.2x 19.1x 16.2 18.2

P/E P/B EV/EBITDA ROE(%)

3



Figure 2-2: International peer comparison table (data as of January 15, 2020)

Source: Capital IQ, CGIS Research

* Represents estimated by CGIS Research

Company Name Close

(US$)

Market

Cap

(US$m)

2020F 2021F EPS CAGR

(2019-2021F)

PEG

(2020F)

2018A

R&D to

revenue

%

2020F 2021F 2020F 2021F 2020F 2021F

Roche Holding AG (SWX:ROG) 332.4 283,842 15.6x 14.9x 2.6% 6.0x 18.8% 6.6x 5.6x 11.1x 10.6x 44.2 39.8

Medtronic plc (NYSE:MDT) 117.3 157,267 21.0x 19.4x 7.7% 2.7x 7.6% 3.0x 2.9x 17.1x 16.3x 13.8 15.3

Abbott Laboratories (NYSE:ABT) 87.4 154,528 24.3x 21.7x 11.5% 2.1x 7.5% 3.5x 3.3x 18.7x 16.9x 15.8 18.5

Danaher Corporation (NYSE:DHR) 160.8 115,792 29.9x 26.3x 18.1% 1.6x 6.2% 4.1x 3.6x 21.8x 19.6x 12.3 17.4

Stryker Corporation (NYSE:SYK) 206.8 77,407 22.9x 20.9x 9.6% 2.4x 6.3% 5.1x 4.4x 18.5x 17.2x 23.2 22.1

Becton, Dickinson and Company (NYSE:BDX) 277.3 75,152 19.9x 18.1x 5.3% 3.7x 6.0% 3.2x 3.0x 15.2x 13.7x 17.1 17.5

Boston Scientific Corporation (NYSE:BSX) 42.6 59,335 23.8x 20.9x 14.0% 1.7x 11.3% 5.9x 4.5x 19.3x 17.4x 26.3 27.0

Edwards Lifesciences Corporation (NYSE:EW) 236.8 49,387 38.4x 34.1x 11.4% 3.4x 16.7% 10.1x 7.5x 30.6x 27.6x 28.0 25.8

Siemens Healthineers AG (XTRA:SHL) 47.7 47,571 23.4x 21.3x 8.5% 2.8x 9.1% 4.0x 3.8x 14.7x 13.4x 17.1 17.8

Baxter International Inc. (NYSE:BAX) 89.6 45,725 23.9x 21.5x 11.0% 2.2x 5.6% 3.9x 3.6x 16.1x 14.7x 20.1 19.8

Zimmer Biomet Holdings, Inc. (NYSE:ZBH) 148.2 30,472 17.9x 16.6x 6.7% 2.7x 4.9% 2.0x 1.9x 14.2x 13.5x 11.8 11.7

Average 23.7x 21.4x 9.7% 2.8x 9.1% 4.7x 4.0x 17.9x 16.5x 20.9 21.1

Median 23.4x 20.9x 9.6% 2.7x 7.5% 4.0x 3.6x 17.1x 16.3x 17.1 18.5

P/E P/B EV/EBITDA ROE(%)

4



Company overview

Mindray is the largest medical equipment manufacturer in China in terms of revenue. Its products can be categorized into three primary segments: patient monitoring & life support products, IVD, and medical imaging systems (Figure 3-1 & Figure 3-2). We think the key investment themes for Mindray are 1) its broad product spectrum, which is well positioned to embrace the fast development of China’s medical device market; 2) its extensive sales network, with products sold in over 190 countries and regions; 3) its competitive product prices, with comparable quality to imported ones; 4) its solid R&D capability; 5) the relatively low central procurement policy risk in China; 6) its highly recognized brand name both globally and domestically; and 7) its strong balance sheet and net cash position.

Mindray’s products have been sold in over 190 countries and regions. Emerging markets are its fastest growing geographic area. In 2018, China, North America, Europe, Latin America and others reported 29.3%, 2%, 22.3%, 26.7% and 19% yoy sales growth, respectively.

Figure 3-1: 2019F revenue breakdown

Source: Company, CGIS Research estimate

Figure 3-2: 2019F detailed revenue breakdown

Source: Company, CGIS Research estimate

Patient monitoring and life support

37%

IVD35%

Medical imaging26%

Others2%

Patient monitor14%

Defibrillators revenue4%

Anesthesia machines revenue

4%

Surgical lights4%

Other life support products

11%

IVD Reagents revenue22%

IVD Analyzers12%

Other IVD1%

Untrasound revenue20%

Other imaging products 6%

Others2%

5



Investment thesis

1. Mindray's highly recognized brand name will facilitate its penetration into China's lower-tier hospitals

We believe that Mindray's highly recognized brand name, combined with its competitive pricing strategy in the mid- to low-end markets put it in a good position to penetrate into lower-tier hospitals in China, which we expect to make vast new medical equipment purchases and upgrades as a result of hierarchy

diagnostics (分级诊疗) in the future. Currently, ~30% of Mindray’s revenue in

China comes from Grade III public hospitals, ~30% from Grade II public hospitals, ~20% from the private sector medical institutions. Low tier public hospitals only accounted for ~20% of Mindray’s total domestic sales. Looking ahead, given currently China’s Grade III hospitals are over-burdened, while lower-tier hospitals lack sufficient medical equipment to improve their treatment level, hierarchy diagnostics will stimulate demand from lower-tier hospitals for medical devices, and we believe Mindray will greatly benefit from this.

2. As the domestic leader, Mindray should fully benefit from import substitution in China

We expect Mindray's strong brand name and comparable product quality to imported brands (in 1995, Mindray became the first Chinese medical equipment company to receive TÜ V Ps 9001/13485 accreditation; from 2000 to 2003, Mindray received the CE Mark for devices in the fields of patient monitoring & life support, IVD and medical imaging; and in 2004, Mindray received FDA 510(k) clearance for devices in the fields of monitoring & life support, IVD and medical imaging), but its competitive prices compared to imported ones will help Mindray fully benefit from import substitution. We think Mindray is one of the best available choices for China’s public hospitals apart from imported devices. The key drivers behind the import substitution trend for medical devices are 1) the R&D efforts of domestic companies, which have improved the quality of domestic products; 2) the competitive prices of domestic products; and 3) policy support (e.g. domestic products may enjoy a higher reimbursement rate than imported ones).

Currently, according to CGIS Research’s check on industry data, the import substitution rate for patient monitors is 50–60%, and for IVD biochemical reagents (relatively low-end IVD products compared with molecular diagnostic reagents, etc.) it is ~70%. For products such as ultrasound and Chemiluminescence analysis (CLIA), with a relatively high entry barrier, the rates are still low (<30% for ultrasound and ~10% for CLIA), implying vast substitution room.

3. Relatively low GPO risks

Unlike drug prices, medical device prices are more market driven because it is hard to conduct central procurement due to the difficulty of comparing different devices, since a lot of parameters and features are involved. Also, Mindray has relatively strong bargaining power with its distributors and downstream clients. In markets where Mindray sell through distributors, it sets its prices after considering returns to distributors, the prices of competing products and Mindray’s gross margins. In markets where it sell products direct to clients, it bases its prices primarily on market conditions. We expect only <20% of its revenue (IVD reagents sold in China in the consumables category) to face future government central procurement risks.

4. Strong R&D capability to fuel medium- to long-term growth

Mindray invests ~10% of its net revenue in R&D. The Company has over 2,200 R&D engineers and eight centers, located in Shenzhen, Beijing, Nanjing, Xi’an and Chengdu in China, and in Silicon Valley, New Jersey and Seattle in the U.S. Its R&D facility in Shenzhen coordinates its global R&D efforts and leverages the core competencies of each of the centers. Mindray's strong R&D capability ensures that it consistently upgrades and refines its existing products and

6



launches new products, allowing it to maintain its core competency and growth potential.

5. Extensive sales network

Mindray’s products have been sold in over 190 countries and regions. Emerging markets are the fastest growing geographic area for Mindray. In 2018, China, North America, Europe, Latin America and others reported 29.3%, 2%, 22.3%, 26.7% and 19% yoy sales growth, respectively. In the domestic market, its products cover ~110,000 medical institutions and over 99% of Grade III hospitals. Internationally, Mindray has a long-term partnership with globally respected medical centers, clinics and hospitals, such as the Johns Hopkins Hospital. As at end-2018, Mindray had 2,994 salespeople.

Figure 4: 2018A revenue breakdown by area

Source: Company

6. Strong, clean balance sheet, premium cash management

The Company is expected to be in a strong net cash position in the next few years. Mindray had Rmb13.1bn of cash on hand (53.7% of its total assets) and no debt as at the end of 3Q19. We expect the Company to be in a strong net cash position for the next few years, given its strong operating cash flow and good cash management ability. Its net cash position is projected to be 75.5%/78.1%/78.8% of its equity at the end of 2019/20/21F, respectively.

Its strong cash position makes it easy for Mindray to pay dividends, expand manufacturing capacity, engage in M&A (such as historically, in July 2013, Mindray acquired ZONARE, an American ultrasound technology company to step into the high-end radiology market), conduct R&D, and extend its sales

network into lower-tier hospitals in China.

Goodwill accounted for only ~6% of its total assets as at the end of 2018, implying that Mindray has a steady business development strategy and relies on organic business to drive growth.

Despite its extensive sales network, Mindray’s days receivable are as short as ~40 days, much shorter than its domestic peers', indicating good cash flow management and relatively strong bargaining power with its distributors (prior to shipment, the Company’s exclusive distributors in China typically pay at least 50% of the purchase price).

China56%

North America11%

Europe9%

Latin America6%

Others 18%

7



Mindray’s business segments

1.1 Patient monitoring devices

Mindray was ranked third in global market share and first domestically in the patient monitoring market in 2016, according to the China Association for Medical Devices Industry. Mindray’s patient monitor segment accounted for 14.2% of total revenue in 2019F.

The Company’s patient-monitoring devices track the physiological parameters of patients, such as heart rate, blood pressure, respiration and temperature. It offers patient monitoring devices that are suitable for adult, pediatric and neonatal patients, which are used principally in hospital intensive care units, operating rooms and emergency rooms. Also, the product line offers customers a broad range of functions, such as single- and multiple-parameter monitors, mobile and portable multifunction monitors, central stations that can collect and display multiple patient data on a single screen, and an electro-cardiogram monitoring device. The multi-parameter monitoring devices can be networked, allowing hospitals to remotely gather patient data from patient rooms and centralize the data in a single location. The patient-monitoring devices also have built-in recorders and have batteries for portability in most models, as well as power backup in the event of power failure in mobile models.

In the patient-monitoring market, Mindray’s major competitors are Philips and GE. Globally, Mindray, Philips and GE had a ~10%, 38% and 26% market share, respectively, in 2016, according to the China Association for Medical Devices Industry. At present, most patient-monitoring product companies in China (besides Mindray, other major domestic patient-monitoring product companies include Jinkewei, Biolight and Shenzhen EDAN) are still very small and have weak R&D capabilities, so the market is dominated by Mindray, Philips, and GE. Mindray, Philips and GE had a ~65%, 18% and 4% share, respectively, of China's patient-monitoring product market in 2016, according to the China Association for Medical Devices Industry. Philips and GE enjoy superiority in medium- and high-end monitors, while Mindray focuses on low- to mid-high-end markets. The other domestic companies are mainly in the low-end market.

The global patient monitor market had a sales CAGR of 2% in 2015–2017, according to EvalueMedtech. The China patient-monitoring product market delivered a CAGR of 6.2% in 2015–2017. We estimate that Mindray delivered above-average industry growth of a 15.8% revenue CAGR for its patient-monitoring product segment in 2015–2018.

Figure 5: Global (excluding Japan) market size for patient monitoring devices

Source: EvalueMedtech

Title:

Source:

2.68 2.68

2.79

2.4

2.6

2.8

3

2015 2016 2017

Patient monitor

US$ bn

8



Figure 6: China's market size for patient monitoring devices


Title:

Source:

1.79

1.75

2.02

1.6

1.8

2

2.2

2015 2016 2017

Patient monitor

Rmb bn

9



Figure 7: Mindray's patient monitoring products

Source: Company

Category Category brie fing Deta i led products

High Acuity

The BeneVision N-Series and Passport patient

monitors equip hospitals with sophisticated tools to

assess, diagnose and treat most critically ill

patients across the hospital enterprise.

BeneVision N19/N22 Patient Monitors,

BeneVision N12/N15/N17 Patient

Monitors, BeneVision N1 Monitor/Module,

BeneVision N-Series Parameter Modules,

Passport 17m Patient Monitor, Passport

12m Patient Monitor, T1 Monitor/Module

(BeneVision N19/N22)

Mid/Low Acuity

The Company offers patient monitoring solutions

for virtually any environment. The Accutorr 7 can

be used as a monitor in the general ward and step-

down areas, while the Passport 8 and Passport 12

leverage a modular structure to provide flexibility

for virtually any clinical environment.

Passport 12 Patient Monitor, Passport 8

Patient Monitor, Passport 8/12 Parameter

Modules, Accutorr 7 Vital Signs Monitor

(Passport 12)

Transport

Monitors

The Company's transport solutions provide

continuity of monitoring – and continuity of

information for patients during transition, from ED

to CCU, OR to PACU, ICU to special procedures.

With integrated wireless and long battery life,

patients are connected.

BeneVision N1 Monitor/Module, T1

Monitor / Module, Passport 8 Patient

Monitor

(T1)

Telemetry

BeneVision Telemetry, together with the

BeneVision Distributed Monitoring System (DMS),

enable monitoring of ambulatory patients across

the healthcare enterprise. Using advanced

technology, BeneVision TM80 and TD60 display

telemetry transmitters aid in early detection of an

ambulatory patient’s changing condition. With on-

board touch displays, BeneVision TM80 and TD60

enable clinicians immediate access to critical

information right at the patient. Comprehensive

data sent continuously through to BeneVision DMS

and the EMR provide a seamless patient record

accessible where and when it’s needed.

BeneVision TM80 Display Telemetry

Transmitter, BeneVision TD60 Display

Telemetry Transmitter, BeneVision DMS

(BeneVision DMS)

Vital Signs

Accutorr vital signs monitors have been

workhorses in hospitals, clinics, and doctor’s offices

for over 30 years. The Accutorr 7 and Accutorr 3

were first released in 2015.

Accutorr 7 Vital Signs Monitor, Accutorr 3

Spot Check Monitor

(Accutorr 7 Vital Signs

Monitor)

Centralized

Monitoring

The BeneVision Distributed Monitoring System

(DMS) is an innovative and scalable solution that

redefines the meaning of flexibility in patient

monitoring. BeneVision DMS is built to provide

clinically-focused solutions that support high-

quality, patient-centric care. It extends beyond the

traditional centralized monitoring model; choosing

any combination of point of care and remote

BeneVision DMS WorkStations, in combination

with BeneVision CMS Viewer and the BeneVision

CMS Mobile app, hospitals can now determine

how and where they view and manage patient data

for optimized clinical workflow. Through scalability,

seamless data and accessibility, BeneVision DMS

helps clinicians overcome daily challenges and

achieve the critical goal of delivering quality care

everywhere.

BeneVision DMS, BeneVision CMS Mobile

App, BeneVision CMS Viewer

(BeneVision CMS

Viewer)

Interoperability

& Cybersecurity

The Company provides efficient and cost-effective

interoperability solutions to facilitate bi-directional

communications among devices at the bedside

and systems within the hospital. The Company

also embedded partnerships with hospitals to

assist in driving the adoption and implementation

of strategies and tactics that will mitigate

cybersecurity risk.

eGateway Integration Solution, BeneLink

Connectivity Module, Cybersecurity

Representative product p ictures

10



1.2 Life support

Mindray is actively expanding its range of life-support products to provide operating room and intensive care unit solutions for the end users. The Company currently offers anesthesia machines, defibrillators, surgical equipment (including surgical beds and surgical light ceiling pendants), syringes, infusion pumps, and ventilators.

Defibrillators The defibrillator segment is expected to contribute 4% of the Company’s 2019F total revenue. Mindray was ranked fifth in terms of market share globally and second domestically in the defibrillator market in 2016, according to the China Association for Medical Devices Industry. Globally, Mindray competes mainly with Zoll Medical, Philips and Switzerland's Schiller. On a global basis, Zoll, Philips, Schiller and Mindray had a ~29%, 22%, 6% and 5% market share, respectively, in 2016, according to the China Association for Medical Devices Industry. Domestically, other than the three major players, the top defibrillator players include Medtronic, St. Jude Medical, Boston Scientific, Biotronik, Sorin Group, Cardiac Science, HeartSine Technologies and Nihon Kohden. In China, Phillips, Mindray and Zoll had a ~26%, 18% and 16% market share, respectively, in 2016, based on data from the China Association for Medical Devices Industry.

Mindray’s D-series defibrillators integrate monitoring, manual defibrillation, AED and pacers. They are professional defibrillators and are suitable for hospitals. The Company’s AED series are more suitable for public places, such as office buildings, shopping malls and airports.

Figure 8: Global (excluding Japan) market size for defibrillators


Figure 9: China's market size for defibrillators


Anesthesia machines Mindray is ranked third both globally and domestically in the anesthesia machine market, according to the China Association for Medical Devices Industry. Mindray’s major competitors are Germany's Drager and GE. In China, anesthesia devices are highly concentrated; the top three players have a ~90%

Title:

Source:

0.68

0.71

0.74

0.6

0.65

0.7

0.75

0.8

2015 2016 2017

Defibrillators

US$ bn

Title:

Source:

0.53

0.65

0.75

0

0.2

0.4

0.6

0.8

2015 2016 2017

Defibrillators

Rmb bn

11



market share. Draeger, GE and Mindray had a ~46%, 32% and 11% market share, respectively, in China's anesthesia devices market in 2016, according to data from the China Association for Medical Devices Industry. The major driver in the anesthesia devices market is the need for the use of anesthesia in most surgical procedures.

Figure 10: Global (excluding Japan) market size for anesthesia machines


Figure 11: China's market size for anesthesia machines


2. IVD segment

The IVD segment is expected to account for 35% of the Company’s total revenue in 2019F. IVD reagents and analyzers are estimated to account for ~22% and 12%, respectively, of the Company’s total 2019F revenue.

Mindray’s IVD segment mainly provides data and analysis of blood, urine and other body fluid samples for clinical diagnosis and treatment. The Company offers a wide range of semi-automated and fully automated IVD products for laboratories, clinics and hospitals to perform analysis to detect and quantify various substances in patient samples. Mindray’s IVD product portfolio consists of hematology analysis, biochemistry analysis, chemiluminescence immunoassay analysis, flow cytometric analysis, coagulation analysis, urine sediment analysis and microbiology analysis.

IVD market competition landscape In the global market, the IVD industry is relatively centralized. Nearly 60% of the entire market share is controlled by Roche, Siemens, Abbott, J&J, Backman, and BD.

The Chinese market is less centralized than the global market. The top eight players are Roche, Sysmex, Siemens, Abbott, Beckman, Mindray, Kehua and Daan Gene, with a ~9.4%, 8.2%, 7.1%, 5.8%, 5.3%, 3.3%, 2.7%, and 1.9% market share, respectively, in 2018, according to the China National Pharmaceutical Industry Information Centre.

Mindray was ranked third in China’s biochemistry market and second in China’s hematology market in 2016, according to the China Association for Medical

Title:

Source:

0.90.91

0.93

0.8

1

2015 2016 2017

Anesthesia machines

US$ bn

Title:

Source:

0.91

0.93

0.97

0.88

0.89

0.9

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

2015 2016 2017

Anesthesia machines

Rmb bn

12



Devices Industry. In the hematology field, Mindray’s primary competitors are Sysmex and Beckman. In the biochemistry category, the Company’s primary competitors are Beckman and Roche Diagnostics.

IVD market classifications Based on the methods and applications, IVD can be categorized into a number of fields, including immune diagnosis, biochemical diagnosis, molecular diagnosis, blood detection, and microbial detection.

Figure 12: China's 2018 IVD market breakdown, estimated by CGIS Research

Source: CGIS Research estimated based on different data sources, referred sources include Kalorama

Information ”IVD in China” , McEvoy & Farmer and EvalueMedtech etc.

Global and Chinese IVD market size According to EvalueMedtech, the global IVD market was US$49.4bn in 2016. EvalueMedtech estimates that the global IVD market will be ~US$69.6bn in 2022F, representing a CAGR of 5.9%.

We believe ~Rmb68bn may be an appropriate estimate for China’s 2018 IVD market size, accounting for ~13% of China 2018 medical device market of ~Rmb525bn.

IVD market drivers Integration of devices and reagents.

Import substitution: Domestic companies have made great progress in both technology and service. Recently, in the low-end market, imported products have gradually been replaced by domestic products. In the future, with policy preferences and capital injection in China, the trend of product replacement from low-end market to high-end market will continue.

Technology upgrading: The entire market is going through a transformation from biochemical diagnosis to immunological and molecular diagnosis. For example, chemical luminescence diagnosis will eventually take over ELISA as the mainstream technology because it offers high sensitivity and strong specificity.

Mindray’s IVD analyzers Hematology analyzers. Hematology analyzers test blood samples to detect

abnormalities or foreign substances. For example, hematology analyzers can be used to detect blood diseases, such as anemia, and to screen and differentiate between illnesses caused by viruses and those caused by bacteria.

Biochemistry analyzers. Biochemistry analyzers measure the concentration or activity of substances such as enzymes, proteins and substrates. These analyzers may be used as therapeutic drug monitors or to check for drug abuse.

immune diagnosis38%

biochemical diagnosis19%

molecular diagnosis15%

Others 28%

13



Immunoassay analyzers. Immunoassay analyzers measure the concentration of proteins, such as hormones, tumor markers and virus proteins. These hormone measurements can monitor the functioning of glands such as the thyroid gland. Tumor marker measurements can be used for cancer diagnosis and cancer treatment monitoring. Virus protein measurements can be used for infection disease diagnosis and monitoring antiviral therapy, such as for hepatitis B.

Flow Cytometers. Mindray’s flow cytometers use a laser-based flow system to simultaneously measure physical and chemical characteristics of thousands of cells per second. They can assist in the diagnosis of a wide range of health disorders, especially leukemia, lymphoma and immunodeficiency diseases. In addition to clinical purposes, there are many other applications for the flow cytometers in basic research and in the pharmaceutical industry.

Coagulation analyzers. The Company’s coagulation analyzers are used to measure activated partial thromboplastin time (APPT), prothrombin time (PT), thrombin time (TT), fibrinogen (FIB), D-Dimer and clotting factors. They are used mainly for examination before operations, and cardiovascular and blood coagulation disease detection.

Urine sediment analyzers and consumables. Urine sediment analysis can detect kidney and urinary tract diseases by analyzing blood cells, bacteria, urinary casts, etc., in urine samples. Urinalysis includes urine sediment and dry chemistry analysis.

Microbiology analyzers. Microbiology analyzers are used in clinical laboratories by using the microbial identification and antibiotic susceptibility testing (ID/AST) system to identify microbes and perform antibiotic susceptibility testing. They use the blood culture system to recover pathological organisms.

Figure 13: Mindray’s IVD analyzer demonstration (BA-800M as an example)

Source: Company

The BA-800M chemistry analyzer is a versatile workhorse – a high volume chemistry platform with a built-in sample delivery management (SDM) module. Its advanced automated analyzing system is equipped with conventional software and an intuitive user interface. The BA-800M is suitable for today’s fast-paced laboratory environment.

The board selection test menu includes general chemistries and electrolytes serving the needs of most clinical laboratories and hospitals.

Mindray’s IVD reagents Mindray also offers reagents for use with its IVD diagnostic products. A reagent is a substance used in chemical reaction analysis. Mindray offers reagents that can be used in diagnostic laboratory instruments produced by other international and China-based manufacturers (other manufactures’ reagents may also be used with Mindray’s analyzers). The ongoing consumption and resulting need to order additional reagents basically creates a recurring revenue stream.

3. Ultrasound and medical imaging products

The imaging segment is expected to contribute 26% of the Company’s 2019F total revenue. Ultrasound products account for >70% of segment revenue.

14



Mindray’s ultrasound systems use computer-managed sound waves to produce real-time images of anatomical movement and blood flow. Ultrasound systems are commonly employed in medical fields such as urology, gynecology, obstetrics and cardiology.

In July 2013, Mindray acquired ZONARE, an American ultrasound technology company in the high-end radiology market. The ZONARE acquisition strengthened the Company’s high-end ultrasound R&D and U.S. sales potential. Because of the Sino-U.S. trade dispute, Mindray may withhold or slow down its M&A pace in the U.S. in the future.

Ultrasound competition landscape Mindray ranked sixth globally and third domestically in the ultrasound market in 2016, according to the China Association for Medical Devices Industry.

Domestically, Mindray’s primary competitors are GE Healthcare, Philips Healthcare, etc. GE, MIndray, Philips, Hitachi Sonoscape and Siemens had a ~20%, 19%, 18%, 6%, 4% and 4% share of China's ultrasound device market, respectively, in 2018, according to MOC Med..

Internationally, the Company’s primary competitors are GE Healthcare, Philips Healthcare, Toshiba, Hitachi, etc. GE, Philiphs, Toshiba, Hitachi, Siemens and Mindray had a ~29%, 19%, 12%, 9%, 7% and 6% share of the global ultrasound market, respectively, in 2018, according to data from IHS Markit.

Figure 14: Global (excluding Japan) market size for ultrasound devices


Figure 15: China's market size for ultrasound devices


Title:

Source:

6.09

6.18

6.42

5.9

6

6.1

6.2

6.3

6.4

6.5

2015 2016 2017

US$ bn

Title:

Source:

7

7.85

9.28

0

1

2

3

4

5

6

7

8

9

10

2015 2016 2017

Ultrasound devices

Rmb bn

15



Pricing

Mindray has relatively strong bargaining power with its distributors and downstream clients. In markets where Mindray sells through distributors, it sets its prices after considering distributor returns, prices of competing products, and Mindray’s gross margins. In markets where it sell products direct to clients, it bases its prices primarily on market conditions. In the low- to mid-end markets, Mindray deploys a more competitive pricing structure to better capture market share.

Mindray’s sales model

Mindray’s products have been sold in over 190 countries and regions. Mindray sells products through different distribution channels in different regions. In China and emerging markets, it sells its products primarily through third-party distributors. In the United States, the United Kingdom, France, Germany and the Netherlands, the Company sells its products primarily through the direct-sales model.

In 2018, 84% of revenue came from sales through distributors. Prior to shipment, the Company’s exclusive distributors in China typically pay at least 50% of the purchase price (this is probably one of the reasons Mindray’s days receivable are ~40 days).

Figure 16: 2018 revenue by sales model

Source: Company

Distributors 84%

Direct sales 16%

16



Regulations in China for medical devices

The majority of Mindray’s products manufactured in China are classified as Class II or Class III devices. In China, medical devices are classified into three different categories: Class I, Class II and Class III. Class I devices require product certification. They present a low risk to the human body and are subject to “general controls.” They are regulated by the municipal level National Medical Products Administration (NMPA) where the manufacturer is located. Class II devices present a medium risk to the human body and are subject to “strict controls.” Class II devices require product certification, usually through a quality system assessment, and are regulated by the provincial level NMPA where the manufacturer is located. Class III devices, such as life-sustaining, life-supporting or implantable devices, present a high risk to the human body. Class III devices also require product certification and are strictly regulated by the NMPA.

A manufacturer must obtain a manufacturing license from the provincial level NMPA before commencing the manufacture of Class II and Class III medical devices or IVD reagents. Mindray’s manufacturing license covers the manufacture of its patient monitoring and life support products, IVD products (including IVD reagents), and medical imaging systems. A manufacturing license, once obtained, is valid for five years and is renewable upon expiration. To renew a manufacturing license, a manufacturer needs to submit to the original level NMPA that issued the license an application to renew the license, along with required information six months before the expiration of the license. According to the Drug Regulatory Statistics

Yearbook 2018 (2018年度药品监管统计年报) issued by the NMPA, as at the

end of November 2018, there were ~17,000 medical equipment manufacturers in China, of which 7,513 had a manufacturing license for Class I medical devices, 9,189 had a manufacturing license for Class II medical devices, and only 1,997 had a manufacturing license for Class III medical devices.

17



Earnings projections

Overall, we expect the Mindray’s revenue to deliver steady growth in the next few years (we project 20.9%, 20.1% and 19.1% yoy growth in 2019F, 2020F and 20/21F, respectively), given 1) continued industry-wide import substitution, especially in the areas of ultrasound, CLIA, etc.; 2) Mindray’s continuing penetration into lower-tier hospitals with its competitive prices; and 3) rapid volume growth in its high-end products, such as patient monitors N-series, chemiluminescence and ultrasound RE-series.

For the gross margin of most segments (except for IVD reagents), we are modeling an ascending trend, considering relatively stable product prices, economies of scale, increased automation, and fast growth of high-margin, high-end products. We modeled a downward gross margin trend for IVD reagents to reflect the potential centralized procurement risk.

Our projected net profit to shareholders shows 24.4%, 24.1% and 20.6% yoy growth in 2019F, 2020F and /20/21F, respectively, higher than the top-line pace, thanks to rising operating leverage. EPS is forecast to post yoy growth of 14.0%, 24.1% and 20.6% in 2019–20/21F, respectively (2019F EPS growth diluted by IPO in 2018).

Figure 17: Overview of CGIS Research projections

Source: Company, CGIS Research estimates

2017A 2018A 2019F 2020F 2021F

Patient monitoring and life support 4,236 5,224 6,212 7,327 8,579

yoy 18.9% 23.3% 18.9% 18.0% 17.1%

Gross margin 65.5% 65.7% 67.2% 67.6% 68.0%

IVD 3,741 4,626 5,751 7,113 8,768

yoy 29.3% 23.7% 24.3% 23.7% 23.3%

Gross margin 66.1% 64.1% 68.0% 68.3% 67.6%

Imaging 2,935 3,597 4,331 5,155 6,024

yoy 24.7% 22.5% 20.4% 19.0% 16.8%

Gross margin 70.5% 71.0% 73.3% 74.2% 74.7%

Others 262 307 337 371 408

Total revenue 11,174 13,753 16,630 19,966 23,779

Gross margin 67.0% 66.6% 69.1% 69.6% 69.5%

Selling expenses ratio 24.4% 23.3% 22.7% 22.2% 21.8%

Admin ratio 5.8% 5.2% 5.0% 4.9% 4.8%

Operating profit 2,950 3,779 5,118 6,341 7,639

Operating margin 26.4% 27.5% 30.8% 31.8% 32.1%

Net profit 2,589 3,719 4,628 5,742 6,925

Net margin 23.2% 27.0% 27.8% 28.8% 29.1%

18



1. Patient monitoring segment

Given the Company’s full product spectrum, extensive sales network and continued expansion into lower-tier hospitals, we expect the Company’s patient monitoring segment to continue deliver above-average industry growth over the next few years. We model 17%, 15% and 14% revenue growth in 2019–20/21F.

Figure 18: Historical and CGIS Research projected revenue for Mindray's patient monitoring segment


Note: Company didn’t disclose 2018 patient monitor revenue. CGIS Research estimated to be Rmb2.04bn based

on 2018 sales volume and 1Q2018 ASP.

We project the segment gross margin to increase gradually in the next few years mainly because of 1) economies of scale; 2) an increasing percentage of automation (some patient monitoring manufacturing procedures are not yet automated in the Shenzhen Guangming Manufacturing Base); and 3) expected continuing price softening of some raw material, such as some electronic components.

The Company produced/sold 176,695/171,869 patient monitors in 2018A. Current patient monitor capacity is already full (at end-1Q18 annual capacity was 160,000). The Company plans to add capacity of 85,000 units in 35 months by expanding the Shenzhen Guangming Base using IPO funds. In the next 1–2 years, we expect a gradually increase of capacity each year by adding manufacturing labor to support patient monitor volume growth. We think the risks remain here if Mindray fails to expand its capacity to cope with the growth of patient monitor sales.

Figure 19: Historical sales volume and ASP for Mindray's patient-monitoring segment

Source: Company

Note: ASP in 2018 refers to price data for 1Q2018.

Title:

Source:

1,310 1,465

1,620

2,036

2,382

2,739

3,122

11.8% 10.6%

25.6%

17.0%15.0% 14.0%

68.7%70.8%

72.6% 73.1% 73.3% 74.0% 74.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2016 2017 2018* 2019F 2020F 2021F

Patient monitor revenue yoy Gross margin

Rmbm

Title:

Source:

109,195

124,644

136,386

171,869 11,994

11,751 11,879 11,844

10,000

11,000

12,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2015 2016 2017 2018

Sales volume ASP (RHS)

RmbNumber of units

19



2. Defibrillators

The Company’s defibrillator business delivered a 38.2% revenue CAGR in 2015–2018A (The Company didn’t disclose its 2018 revenue. This is a CGIS Research estimate based on

2018 sales volume and 1Q18 ASP). We expect the defibrillator segment to continue its fast growth, given the increasing awareness of emergency treatment, especially in China. We model 40%, 37% and 33% revenue growth in 2019–20/21F, with a stable gross margin of ~68.5%, given the relatively mild softening of both ASP and raw material prices each year.

Regarding capacity, as at the end of 1Q18, Mindray had annual defibrillator capacity of 20,000 while FY18 production volume was 28,901 units (volume sold: 29,466 units). Mindray plans to add additional capacity of 9,700 units by expanding its Shenzhen Guangming Base within 35 months using IPO funds. In the next 1–2 years, we expect a gradual increase in capacity each year by adding manufacturing labor (pushing the utilization rate past 100%) to support growth in sales of defibrillators. We think risk remains here if Mindray fails to expand its manufacturing capacity to match sales growth.

Figure 20: Historical and CGIS Research projected revenue for Mindray defibrillators


Note: The Company didn’t disclose 2018 revenue. CGIS Research estimated based on 2018 sales volume and 1Q2018 ASP.

Figure 21: Historical sales volume and ASP of Mindray's defibrillator segment (declining ASP is mainly due to sales of more AED, with a lower ASP than the D-series)

Source: Company


Title:

Source:

188 222

333

497

696

953

1,268 67.4% 67.8% 66.2%

68.2% 68.5% 68.5% 68.5%

17.9%

50.0% 49.2%

40%

37%33%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

200

400

600

800

1,000

1,200

1,400

2015 2016 2017 2018* 2019F 2020F 2021F

Defibrillators revenue Gross margin yoy

Rmbm

Title:

Source:

9,509

12,588

20,426

29,466 19,808

17,643

16,309 16,869

0

5,000

10,000

15,000

20,000

25,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2015 2016 2017 2018


Number of units Rmb

20



3. Anesthesia machines

We expect Mindray to deliver above-average industry growth because of its continued penetration into medium- to high-end markets, given its cost-effectiveness and import substitution. This segment delivered a ~20.5% revenue CAGR in 2015–2018A (The Company didn’t disclose 2018 revenue. This is a CGIS Research estimate,

based on 2018 sales volume and 1Q18 ASP). We model 16%, 15% and 14% revenue growth in 2019–20/21F, respectively, with a gradual rise in gross margin each year, as a result of fast growth of the high-end A-series.

Regarding capacity, as at the end of 1Q18, Mindray had annual anesthesia machine capacity of 7,000, while FY18 production volume was 7,893 units (volume sold: 7,688 units). Mindray plans to add additional capacity of 4,000 units by expanding its Shenzhen Guangming Base within 35 months using IPO funds. In the next 1–2 years, we expect a gradual increase in capacity each year by adding manufacturing labor to support sales growth of anesthesia machines. We think the risk remains here if Mindray fails to expand its capacity to match growth in sales of anesthesia machines.

Figure 22: Historical and CGIS Research projected revenue for Mindray's anesthesia machines



Figure 23: Machines sales volume and ASP for Mindray's anesthesia products

Source: Company

Note: ASP in 2018 refers to price data for 1Q2018

Title:

Source:

368 420

542

644

747

859

979

58.4%

64.2%66.2%

63.5% 65.0% 66.0% 67.0%

14.2%

28.9%

18.8%16% 15% 14%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

200

400

600

800

1,000

1,200

2015 2016 2017 2018* 2019F 2020F 2021F

Anesthesia machines revenue Gross margin yoy

Rmbm

Title:

Source:

4,251 4,462

5,949

7,688

86,588

94,212

91,090

83,742

78,000

80,000

82,000

84,000

86,000

88,000

90,000

92,000

94,000

96,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2015 2016 2017 2018


Number of units Rmb

21



4. IVD reagents

Mindray is expanding its channel of reagents available for sale in China and globally and continuing to upgrade its analyzers to run more tests per hour, so we are expecting IVD reagents to maintain strong volume momentum, especially with the gradual execution of centralized procurement for medical consumables. We expect reagents volume to deliver >40% yoy growth with a ~10% ASP cut each year. Netting off, we model 35%, 32% and 30% yoy growth in 2019–20/21F.

Given the expected centralized procurement of medical consumables, we are projecting a declining gross margin trend for IVD reagents.

Figure 24: Historical and CGIS Research projected revenue for Mindray's IVD reagents



Figure 25: Sales volume and ASP for Mindray IVD reagents

Source: Company

Note: ASP in 2018 refers to price data for 1Q2018

5. Ultrasound products

We believe this segment will be driven by Mindray’s ability to further penetrate the China market, since the current ultrasound import substitution rate is still below 30% in China and additional emerging country markets, and to develop and market products offering more advanced ultrasound and other imaging modalities.

Regarding capacity, as at the end of 1Q18, Mindray had annual ultrasound capacity of 18,000 units, but FY18 production volume was 21,982 units (volume sold was 21,029 units). Mindray plans to increase capacity by an additional 20,000 units by expanding the Shenzhen Guangming Base within 35 months

Title:

Source:

1,157 1,508

1,951

2,650

3,577

4,722

6,138 74.5% 75.7%

78.2% 77.2% 77.0%75.0%

73.0%

30.4% 29.3%

35.8% 35%32%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2015 2016 2017 2018* 2019F 2020F 2021F

IVD Reagents revenue Gross margin yoy

Rmbm

Title:

Source:

4,168,752

5,203,806

6,457,215

7,925,161

278 290

302

361

0

50

100

150

200

250

300

350

400

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2015 2016 2017 2018


Number of units Rmb

22



using IPO funds. We think the risk will remain if Mindray fails to expand its capacity to match sales of ultrasound products.

Figure 26: Historical and CGIS Research projected revenue for Mindray's ultrasound products


Note:The Company didn’t disclose 2018 revenue. CGIS Research estimated based on 2018 sales volume and 1Q2018 ASP.

Figure 27: Sales volume and ASP for Mindray's ultrasound products

Source: Company


6. Balance sheet items

Gearing: Mindray has Rmb13.1bn in cash on hand (53.7% of total assets) with no debt as at the end of 3Q19. We expect the Company to be in a strong net cash position in the next few years, given its strong operating cash flow and good cash management ability. Its net cash position is projected to be 75.5%, 78.1% and 78.8% of its equity as at the end of 2019–20/21F, respectively.

Capex: We model the Company’s capex at ~Rmb0.9bn, 0.95bn and 1.0bn in 2019–20/21F, respectively, based on expanding the capacity of the Shenzhen Guangming Manufacturing Base and the Nanjing Manufacturing Base. We do not expect any major M&A to consume a significant portion of

cash in the near future.

Dividend policy: Given Mindray’s strong cash position, we expect a steady payout of ~30% over the next few years.

Title:

Source:

1,450 1,650

2,123

2,661

3,273

3,961

4,674

69.8%72.9%

75.5% 75.9% 76.0% 77.0% 77.5%

13.8%

28.7%25.4%

23%21%

18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2015 2016 2017 2018* 2019F 2020F 2021F

Untrasound revenue Gross margin yoy

Rmbm

Title:

Source:

12,012

13,645

17,494

21,029

120,672 120,921

121,346

126,550

117,000

118,000

119,000

120,000

121,000

122,000

123,000

124,000

125,000

126,000

127,000

0

5,000

10,000

15,000

20,000

25,000

2015 2016 2017 2018


Number of units Rmb

23



Days receivable: We expect Mindray’s days receivable to remain stable at ~40 days in the future because of its relatively strong bargaining power with its distributors and good cash management.

24



Risks

Rmb appreciation. Mindray’s current selling prices are denominated mainly in US$ and Rmb, while a significant portion of its costs are denominated in Rmb.

Escalation of the Sino-U.S. trade dispute. About ~11% of revenue came from the U.S. in 2018. Mindray’s patient monitors, ultrasound devices, anesthesia machines, etc. sold in the U.S. have been affected by tariff hikes. Mindray will either transfer the cost of the tariffs to its customers (which will reduce the competitiveness of its products) or pay for the tariffs itself. We think that either way, Mindray’s revenue growth in the U.S. will be impaired, and we expect only low single-digit growth, under the current Sino-U.S. dispute (In 2018, revenue from U.S. was up only 2% yoy).

Potential off-loading from the major shareholders when the lock-up period expires. Controlling shareholders Li Xiting and Xu Hang have a lock-up period of three years (expires on Oct 16, 2021). Other pre-IPO investors/senior management had a lock-up period of one year (expired on Oct 16, 2019). Any off-loading of shares will put pressure on the share price.

Higher-than expected ASP decline of major products.

Slower-than-expected production capacity expansion, as some of Mindray’s current production lines are close to full capacity (patient monitors, anesthesia machines, etc.)

25



Appendixes

1. Company background

Mindray was founded in 1991 and is headquartered in Shenzhen, China. It is the largest medical device manufacturer in China in terms of revenue.

Mindray is a global supplier of a broad range of products across three primary business segments: patient monitoring and life support products, in-vitro diagnostic products (IVD), and medical imaging systems.

Mindray was delisted from the New York Exchange in 2016 and was listed on the Shenzhen Exchange (A-share) on Oct 16, 2018.

2. Management background

Li Xiting, 68, is one of the founders. Li has served as executive chairman of the board of directors since March 2015, and co-chief executive officer, director and president since 1991. Li is one of the core managers of Mindray’s business and is responsible for business operations and management. Li received a bachelor’s degree from University of Science and Technology of China.

Xu Hang, 57, is one the founders. Xu has served as chairman of the board of directors since 1991. He received a bachelor’s degree from Tsinghua University's Department of Computer Science and Technology, a master’s degree in biomedical engineering from Tsinghua University's Department of Electrical Engineering, and an EMBA degree from China-Europe International Business School.

Cheng Minghe, 58, has served as co-chief executive officer since June 2013 and as chief strategic officer since September 2010. From 2007 to September 2010, he served as executive vice president of strategic development, from 2004 to 2007, he was executive vice president of sales and marketing, and from 2000 to 2003, he was vice president of sales and marketing. From 1998 to 2000, he served as a vice president of Rayto Life and Analytical Sciences Limited. From 1991 to 1998, he served as vice president of Mindray’s sales department. Cheng received a bachelor’s degree and a master’s degree in biomedical engineering from Shanghai Jiaotong University.

3. Shareholder structure (as at end-3Q19)

Li, Xiting (Chairman) holds 26.9%.

Xu Hang (Director & Chairman) holds 24.4%.

Cheng Minghe (Director) holds 5.29%.

Strategic investors hold ~17.8%.

Remaining free float is ~25.5%.

26



BY THE NUMBERS


25%

29%

33%

38%

42%

46%

50%

7

8

9

10

11

12

13

Jan-15A Jan-16A Jan-17A Jan-18A Jan-19F Jan-20F

P/BV vs ROE

Rolling P/BV (x) (lhs) ROE (rhs)

16%19%21%24%26%29%31%34%36%39%41%

2325272931333537394143

Jan-15A Jan-16A Jan-17A Jan-18A Jan-19F Jan-20F

12-mth Fwd FD Normalised P/E vs FD Normalised EPS Growth

12-mth Fwd Rolling FD Normalised P/E (x) (lhs)

Diluted Normalised EPS Growth (rhs)

Profit & Loss

(Rmbm) Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F

Total Net Revenues 11,174 13,753 16,630 19,966 23,779

Gross Profit 7,490 9,156 11,487 13,888 16,532

Operating EBITDA 3,254 4,097 5,486 6,751 8,090

Depreciation And Amortisation (304) (318) (368) (410) (451)

Operating EBIT 2,950 3,779 5,118 6,341 7,639

Financial Income/(Expense) (267) 156 210 269 333

Pretax Income/(Loss) from Assoc. 0 0 0 0 0

Non-Operating Income/(Expense) 249 303 0 0 0

Profit Before Tax (pre-EI) 2,931 4,238 5,328 6,610 7,972

Exceptional Items

Pre-tax Profit 2,931 4,238 5,328 6,610 7,972

Taxation (330) (513) (693) (859) (1,036)

Exceptional Income - post-tax

Profit After Tax 2,601 3,726 4,636 5,750 6,935

Minority Interests (12) (7) (7) (9) (10)

Preferred Dividends

FX Gain/(Loss) - post tax

Other Adjustments - post-tax

Preference Dividends (Australia)

Net Profit 2,589 3,719 4,628 5,742 6,925

Normalised Net Profit 2,601 3,726 4,636 5,750 6,935

Fully Diluted Normalised Profit 2,589 3,719 4,628 5,742 6,925

Cash Flow


EBITDA 3,254 4,097 5,486 6,751 8,090

Cash Flow from Invt. & Assoc.

Change In Working Capital (908) (336) (397) 81 (398)

(Incr)/Decr in Total Provisions

Other Non-Cash (Income)/Expense

Other Operating Cashflow 1,284 786 203 260 323

Net Interest (Paid)/Received (267) 0 0 0 0

Tax Paid (330) (513) (693) (859) (1,036)

Cashflow From Operations 3,033 4,035 4,600 6,232 6,979

Capex (467) (678) (900) (950) (1,000)

Disposals Of FAs/subsidiaries

Acq. Of Subsidiaries/investments 0 0 0 0 0

Other Investing Cashflow 480 (14) 0 0 0

Cash Flow From Investing 13 (693) (900) (950) (1,000)

Debt Raised/(repaid) (1,684) (1,866) 0 0 0

Proceeds From Issue Of Shares 0 5,796 0 0 0

Shares Repurchased

Dividends Paid (611) (900) (1,216) (1,388) (1,723)

Preferred Dividends

Other Financing Cashflow (157) (138) 0 0 0

Cash Flow From Financing (2,453) 2,892 (1,216) (1,388) (1,723)

Total Cash Generated 594 6,234 2,484 3,894 4,256

Free Cashflow To Equity 1,362 1,476 3,700 5,282 5,979

Free Cashflow To Firm 3,313 3,342 3,700 5,282 5,979

27



BY THE NUMBERS… cont’d


Balance Sheet


Total Cash And Equivalents 5,270 11,544 14,028 17,922 22,178

Total Debtors 1,423 1,627 2,018 2,358 2,853

Inventories 1,567 1,699 1,965 2,365 2,797

Total Other Current Assets 330 322 322 322 322

Total Current Assets 8,591 15,192 18,333 22,968 28,151

Fixed Assets 3,105 3,409 3,897 4,349 4,768

Total Investments 0 0 0 0 0

Intangible Assets 2,169 2,277 2,320 2,408 2,539

Total Other Non-Current Assets 573 749 749 749 749

Total Non-current Assets 5,848 6,435 6,967 7,507 8,056

Short-term Debt 1,801 0 0 0 0

Current Portion of Long-Term Debt

Total Creditors 2,469 2,843 3,103 3,925 4,453

Other Current Liabilities 1,966 1,749 1,749 1,749 1,749

Total Current Liabilities 6,236 4,592 4,851 5,673 6,202

Total Long-term Debt

Hybrid Debt - Debt Component

Total Other Non-Current Liabilities 1,548 1,857 1,857 1,857 1,857

Total Non-current Liabilities 1,548 1,857 1,857 1,857 1,857

Total Provisions 0 0 0 0 0

Total Liabilities 7,784 6,449 6,708 7,530 8,059

Shareholders' Equity 6,620 15,158 18,563 22,908 28,101

Minority Interests 34 20 27 36 46

Total Equity 6,654 15,178 18,591 22,944 28,147

Key Ratios

Dec-17A Dec-18A Dec-19F Dec-20F Dec-21F

Revenue Growth 23.7% 23.1% 20.9% 20.1% 19.1%

Operating EBITDA Growth 90.1% 25.9% 33.9% 23.0% 19.8%

Operating EBITDA Margin 29.1% 29.8% 33.0% 33.8% 34.0%

Net Cash Per Share (Rmb) 3.18 10.37 11.54 14.74 18.24

BVPS (Rmb) 6.06 13.61 15.27 18.84 23.12

Gross Interest Cover 11.03 N/A N/A N/A N/A

Effective Tax Rate 11.3% 12.1% 13.0% 13.0% 13.0%

Net Dividend Payout Ratio 34.8% 32.7% 30.0% 30.0% 30.0%

Accounts Receivables Days 40.42 40.48 40.00 40.11 40.00

Inventory Days 128.7 129.7 130.0 130.4 130.0

Accounts Payables Days 83.22 76.98 77.00 77.21 77.00

ROIC (%) 69% 80% 93% 99% 111%

ROCE (%) 35.5% 33.3% 31.6% 31.8% 31.2%

Return On Average Assets 20.9% 19.8% 18.9% 19.7% 19.8%

28



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