Chinese medical equipment maker prices US IPO above range

More than 500 investors want a piece of Mainland industry leader Mindray, allowing it to raise $270 million via Goldman Sachs and UBS.
Chinese medial equipment manufacturer Mindray Medical International raised $270 million ahead of last nightÆs trading debut on the New York Stock Exchange after pricing its initial public offering above the indicated range.

Investors piled into the offering which was the largest US IPO by a Chinese company this year and the largest ever Chinese healthcare listing in any market, leaving the order book well over 30 times covered at the end of a 10-day roadshow even though individual orders were capped at 10% of the total. More than 500 investors signed up to get shares in the company, which is the market leader within medical equipment in China û an industry which is benefiting from the strong economy and a growing desire among a wealthier public for better health care.

About half the order amount came from the US, while Asia contributed about 30% and Europe about 20%.

ôHealthcare is hot with investors at the moment and it is a sector that they are underexposed to globally and even more so in China,ö one observer notes.

The company offered 20 million American Depositary Shares, or 19.3% of the company, of which 53% were new and issued by the company to raise money for the construction of its new headquarters as well as for the expansion of its manufacturing, assembly and warehouse facilities.

The remainder were existing shares that were sold by two directors who will resign from the board after divesting their entire stakes. A small portion (0.21% of the company) was also sold by controlling shareholder Cheng Minghe. If the greenshoe of 3 million shares is exercised in full the companyÆs two co-CEOs will be selling 500,000 existing shares each, while the remaining 2 million shares will be new. If used, the greenshoe will boost the total proceeds to $310.5 million.

Goldman Sachs, which acted as joint bookrunner for the offering together with UBS, held 9.64% of the company before the IPO through its GS Funds arm. The fund will sell none of its shares, but saw its holdings diluted to 3.1% at the time of listing.

The shares were offered at $10 to $12, but ended up being priced at $13.50 to reflect the overwhelming demand. At the final price, Mindray was sold at premium to many of its peers, but sources close to the offering said investors were willing to overlook this because of the Chinese companyÆs superior growth prospects, its strong position both in its home market and internationally û more than 40% of its revenues are sourced from abroad û and a shortage of alternatives if you want a play on the Chinese healthcare industry.

The China market for medical devises had an estimated value of $7.5 billion in 2004, which accounted for about 5% of the global market, according to data by Frost & Sullivan citied in the listing document. However, the Mainland market is growing at a much faster pace and is expected to reach $10.1 billion this year.

According to a source familiar with the company, Mindray has a market share of about 30% in its home market and about 3%-5% in the international market.

Smaller firm, China Medical Technologies, which is also listed in the US after an IPO in August last year, is a competitor within ultrasound equipment, but because this is its only product line, compared with MindrayÆs three (ultrasound systems, patient monitoring devises and diagnostic laboratory instruments), it is not seen as a direct comparable.

China Medical trades at an estimated 2007 PE of 15.1 times or at an EV/Ebitda of 10.8 times, while the final price valued Mindray at 24.3 times its projected 2007 earnings and at an EV/Ebitda multiple of 18.3 times. The listing candidate was also priced at a premium to US medical equipment makers such as Datascope, which trades at a 2007 PE of 18.6 times and Sonosite Inc, which fetches 21.2 times its forward earnings.

The lack of concern about the relative valuation was also evident as the stock started trading last night and soared as much as 23.4% to an intraday high of $16.66. Profit taking did play a role in knocking the stock off those highs and it did fall as low as $15.20 before buying resumed and the stock was able to return to its day highs.

Part of MindrayÆs strength, according to sources, has to do with its extensive sales and marketing network which includes over 1,950 distributors and 500 direct sales channels in China, focused primarily on small- and medium-sized hospitals. It also has more than 660 distributors and 75 sales staff in the international market.

In addition, the company has one of the largest research and development teams of any medical devise maker in China and in 2005, 9.8% of its net revenues were spent on R&D - which is higher than its domestic peers and in line with international firms. This is giving it a real advantage, however, as you get more for your research dollars in China than in the international market, sources note.

Last year the company reported net profits of $23.9 million on sales of $134.9 million, and in the first half of 2006 the net profit already totaled $20.6 million while sales stood at 84.6 million. The company is already growing faster than its peers in each of its three product lines and analysts are projecting that the bottom line will improve by about 30% per year over the next three years as it continues to expand and grab market share in the international market.

¬ Haymarket Media Limited. All rights reserved.
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