Key points of investment
In this report, we mainly explain the investment value underestimated by the market behind the company's high ROE by comparing it with the TOP20 medical device companies at home and abroad. Considering the promotion of favorable domestic policies such as “strengthening capacity building for intensive medicine services” and “trade-in of large-scale medical equipment” since 2024, as well as the acquisition of Huitai Healthcare to expand the high quality circuit and the continuous acceleration of overseas expansion, we believe that the company is expected to enter the fifth stage of development, that is, the stage of high and continuous improvement in performance, profit and valuation, and Davis double click.
Undervaluation: For the first time, it was lower than the leading overseas valuation center at the end of 2023. The cost performance ratio highlights that the valuation of the top 20 overseas companies has shown a certain upward trend since 2011. The valuation (PE) center has remained at 26.5X, and the valuation reached 32.3X in 2023. The valuation trend of the top 20 domestic companies is the exact opposite of that of overseas companies. After nearly ten years of valuation digestion, the valuation had fallen back to 23.8X by 2023 (35.7X since 2011), which is significantly lower than the average valuation level of leading overseas companies. Among them, Mindray Healthcare's valuation as of June 7, 2024, PE has fallen back to 29.9X, which is at an all-time low (the valuation center since listing was 46.7X), and lower than the leading overseas valuation center at the end of 2023 for the first time, making the cost performance ratio outstanding.
High ROE: Far exceeding the level of leading centers at home and abroad. Judging from the return on net assets in the past 5 years, the ROE of overseas TOP20 companies has basically maintained a central level of 11.4% since 2011. The ROE center of domestic TOP20 companies is 15.5%, which is slightly higher than overseas. In contrast, Mindray Healthcare's ROE center level reached 31.9%, and is on a continuous upward trend. In 2023, it reached a record high of 35.6%, far exceeding the level of leading centers at home and abroad. Separation determines the main core indicator of ROE. We found that unlike overseas TOP20, which usually has high financial leverage, Mindray Healthcare mainly enhances the company's ROE level through higher operational efficiency and higher profitability. This is reflected in the fact that the gross margin of the company's three major business segments has been rising to varying degrees, and the cost ratio has continued to improve over the past 10 years. Considering that the company's expansion in high-end customers and high-end markets, especially overseas markets, the superimposed company relies on the Sanrui systems of “Ruizhi Connect”, “Mindray Intelligent Inspection” and “Ruiying Cloud ++” to give full play to the advantages of the company's digital transformation. We believe that the company's profitability is expected to continue to maintain a high level of ROE.
Taken together, Mindray Healthcare's endogenous growth is more steady and is still at a higher stage of growth compared to leading international medical device companies. At the same time, all relevant indicators reflecting its profitability are significantly superior to the central level of domestic and foreign TOP20 companies, and are expected to enjoy a certain valuation premium. However, judging from the current point of view, the company's valuation is clearly underestimated, whether compared with domestic and foreign target companies or its own historical data, and has a clear investment cost ratio.
Profit forecasting and valuation
We believe that as the new wave of global medical infrastructure brings about the rapid release of the demand side of medical devices, the company's expansion in overseas and high-end markets accelerates, and the expansion of emerging businesses gradually opens up a long-term growth ceiling, the company is expected to continue to maintain a relatively stable growth trend. We expect the company's EPS to be 11.53, 13.95, and 16.95 yuan in 2024-2026, and the current stock price is 26.0 times PE in 2024, maintaining a “buy” rating.
Risk warning
The risk of changes in industry policies, collection, etc. bring the risk of falling product prices and the risk that the promotion of new products falls short of expectations.