Expecting Revenue Growth Of Around 20% yoy For 2Q23 And 2023
Mindray expects to achieve a steady revenue growth of around 20% yoy in 2Q23 and 2023, supported by new hospital construction programmes in China and continuous market expansion efforts in overseas markets. We believe its emerging products will continue rapid business expansion and become significant revenue contributors in the next two years. It also expects the VBP and DRG/DIP programmes to continue to offer market expansion opportunities. Maintain BUY. Target price: Rmb400.00.
WHAT’S NEW
• Here are the key takeaways from our virtual meeting with Shenzhen Mindray Bio-Medical Electronics (Mindray) on 5 Jul 23.
STOCK IMPACT
• Expect 2Q23 revenue growth of around 20% yoy; maintain revenue growth guidance of 20% yoy for 2023. Mindray indicated that its business operations have met its growth target of 20% yoy in 2Q23, supported by the continuous recovery in number of patient visits in 2Q23. Its in vitro diagnosis (IVD) and medical image segments, which were significantly impacted by the COVID-19 pandemic previously, saw a strong rebound in 2Q23. The company maintains its revenue and net earnings growth guidance of 20% yoy unchanged for 2023. It expects revenue growth of over 20% yoy and 10-20% yoy for its business in developing countries and developed countries respectively. The company targets to achieve revenue of over Rmb50b in 2025 and over Rmb60b in 2026-27. It ranked 36th, 31st and 27th among global medtech companies in 2020/21/22, respectively. We expect Mindray to deliver steady revenue and earnings CAGR of 20% for the next two years, and believe it will likely become one of the top 20 global medtech giants in 2024.
• Continues to benefit from China’s new hospital construction programme and market expansion efforts in overseas markets. The new hospital construction programmes in China had brought Mindray business opportunities worth Rmb20b by end-Mar 23. Management indicates that it has obtained approximately Rmb14b of product orders from the new hospital construction programmes to be delivered in 2023-24. The company also saw accelerated revenue growth of its overseas business in 2Q23, as its domestic and overseas capacity allocation had returned to normal. It continues to expand its overseas headcount and become increasingly localised. Mindray expects to experience stronger growth momentum in emerging markets in the next few years.
• Emerging product lines to become significant growth drivers. Mindray has nurtured various new product lines, ie vet products, minimally invasive products, orthopaedic products, and automated external defibrillator (AED) in recent years. According to management, these emerging segments contributed about Rmb2b in revenue in 2022, with vet products and minimally invasive products segments contributing revenue of Rmb810mand Rmb540m, respectively. These emerging segments are targeted to deliver robust expansion of over 50% yoy in 2023. We believe these emerging products will continue their rapid business expansion and become significant revenue contributors in the next two years.
• VBP and DRG/DIP programmes to provide market expansion opportunities with limited margin pressure. Mindray indicated that both volume-based procurement (VBP) and DRG (Diagnosis Related Groups)/DIP (Big Data Diagnosis-Intervention Packet) programmes will help hospitals lower costs and to constrain the market space for distributors instead of manufacturers. It expects the VBP programme on IVD reagents led by Anhui Province to possibly take place in 3Q23, and will likely target chemiluminescence immunoassay (CLIA) reagents. However, management believes the VBP programmes on IVD reagents and other products will not impacted the company’s profit margin but significantly increased sales volume. The programmes will also offer Mindray tremendous market expansion opportunities and continue to accelerate its pace in entering class III hospitals in China.
• Accelerating M&A activities. Mindray plans to enter into more new business fields to maintain its sustainable growth in the long term, and expects to accelerate its M&A activities in domestic and overseas markets in the next few years. It expects to see progress in M&As in the IVD field, and may consider targets in certain new business fields. However, it indicates flexible endoscopes have low synergy with its existing businesses, and may not consider enter into this area in the short term.
EARNING REVISION/RISK
• We keep our revenue/earnings forecasts unchanged.
• Risks: a) Further weakening of the business environment in the overseas markets, b) foreign exchange risks, and c) geopolitical risks.
VALUATION/RECOMMENDATION
• Maintain BUY and target price of Rmb400.00 based on 42x 2023F PE, or 2x PEG. The company is trading at 31.0x 2023F PE, 1SD below mean, which is attractive in our view.
STOCK PRICE CATALYSTS
• New hospital construction programme continues to support Mindray’s strong revenue growth in China.
• VBP and DRG/DIP programmes allow the company to gain market share in China.
