CMED & MR - Chinese Medical Device Companies With Legs

Anyone who observes the basic conditions in China's rapidly growing economy understands they face a number of significant government challenges. Healthcare is amongst the greatest of challenges and will be at the highest of the priorities. It is my opinion that Mindray (MR) and China Medical (CMED) stand to benefit from what will be a 10+ year investment into healthcare services and hospital infrastructure throughout China.

Recently, China's Minister of Health, Chen Zhu, spoke about how the government will need to 'significantly' increase their investment in terms of providing basic medical services to all of their people. Read this article and you will probably agree there is a likely chance that revenue will continue to accelerate for both these companies in the coming years.

My instinct tells me that 2008 might be the year when people discover basic healthcare as the next wave of China growth (beyond energy and consumers) as the global spotlight from the Olympics will bring a focus on domestic issues precisely like this. Currently, China's spend on healthcare is abysmally low (6% of GDP) and most of it is on medicine and not treatments or preventions. This dynamic will change, and we are talking in billions and billions of dollars.

Major healthcare investment in China means big things for CMED and MR. The types of diagnostics and devices these companies produce are precisely where the government will invest whether it be the form of tax incentives to these companies or via huge subsidies to the patients. It's safe to say it will be both. It's also safe to say that these companies will benefit from their partnership with the government as Chinese companies, something their global competitors (GE) will struggle to beat in terms of profit margins and contract wins.

If these were companies that were just doing business in China it would be one thing, but their low cost manufacturing and highly regarded quality also mean explosive growth overseas in Europe and North America. MR is growing rapidly in the US market (80%) and CMED has recently filed with the FDA to obtain HIFU approval (a potentially explosive technology that has not gained any visibility in the US). HIFU just obtained FDA approval in Korea and was given a go ahead from the FDA in the US to proceed with human trials. I think we are just getting started here. For information and an overview of HIFU go here

MR is the best domestic Chinese medical device maker and CMED is an undervalued gem ('08 P/E = 22) with 50% margins while proving very capable of integrating acquisitions. The acquisition of FISH for CMED could not have gone any better and they are very clear on how to differentiate from their domestic competitors. Both companies have excellent management and having listened to all of their conf calls since their IPOs can validate their management seen as credible and capable. These are two companies who I believe chose to be listed in the US markets to demonstrate the standard they are looking to be held to from an accounting and governance perspective, and their performance since their respective IPO's demonstrate the legitimacy and the sustainability of their business models.

For anyone who thinks China stocks may cool off, MR & CMED are well positioned to avoid major selloffs given the strong fundamentals behind each of them. MR is trading at a loftier valuation (40x '08 earnings), but they are also competing for a much larger market and have more maturity as a proven company.

I believe these are two companies that are just beginning in the new era of global markets. CMED seems more undervalued and undiscovered (PEG = .96), so I would recommend a ratio of 60% CMED and 40% MR to start.

Interestingly enough, despite significant differences in their product line and business events, their performance over the past year has trended very similarly:




All the best,
RSB