'Tis the Season

"Hey, hot Chinese IPO. You're stock is on a tear. Everyone loves you! What are you gonna do next?"

Hint: The answer is not, "I'm going to Disney World."

These days, it appears to be, "Well, duh, I'm gonna sell some stock!"

That was what we heard from China education play New Oriental Education (NYSE:EDU) last Friday, and it's what we're hearing from Chinese medical device maker Mindray Medical (NYSE:MR) as well.

But while New Oriental's follow-on offering is only mostly insider selling, Mindray's $309 million offering looks to be all insider selling. The directors and executives are selling pretty small portions of their holdings, but others who got in while the getting was good, like Goldman Sachs (NYSE:GS) are selling much larger portions of their holdings.

Shall we try and make a silk purse out of what looks like a real sow's ear? Maybe we can say, "Hey, at least the company isn't selling more shares, too," and conclude that the until-now decent free cash flow generation is ramping up. Let's hope it will also be enough to cover the recently announced $150 million expansion plans, plus all of the other capital investment requirements, at this sprinting device maker.

Mindray is a company I've been watching pretty closely these days. It aspires to be the leading brand in medical devices in the fast-growing Asian market. That's no simple task, as it puts the company directly into competition with heavyweights such as GE (NYSE:GE), Koninklijke Philips Electronics (NYSE:PHG), Abbott (NYSE:ABT), and Bayer (NYSE:BAY).

So far, Mindray has done well. From 2003 to 2005, revenues have increased at a compound annual growth rate of 53%. For the first half of 2006, the revenue growth rate was nearly 55% over the prior-year period. At that point, the product mix was roughly 41% patient monitoring devices, 28% diagnostic laboratory instruments, and 30% ultrasound imaging systems.

When I ran the numbers a couple of months back, here's what they showed.

What I like about this picture is this: While revenues have shown a CAGR of 55% from 2003 until 2005, net income's CAGR was 42%. Best of all, the CAGR of free cash flow was 75%. That suggests that the leverage is real and that earnings growth should continue to outrun revenue growth.

Whether or not it can zip ahead quickly enough to warrant today's expensive prices is the question.

Seth is a member of the Motley Fool Global Gains team, which works hard to find the best stocks in the world. To see what the team likes this month, a free trial is available.

At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here.