MITA No. 033/06/2006

Please refer to the important disclosures at the back of this document.

SINGAPORE Company Report

Kelly Chia

(65) 6531 9817

e-mail: kelly@ocbc-research.com

30 March 2007

Initiating Coverage

BUY

S$0.56

Fair Value: S$0.80

Stock Code:

Reuters: LMAI.SI

Bloomberg: LMA SP

Event: Initiate Coverage

General Data

Issued Capital (m) 581

Mkt Cap (S$m/US$m) 328/216

Major Shareholder Venner Capital

(32.1%)

Free Float (%) 55%

NAV per share (US$) 0.126

Daily Vol 3-mth (?000) 1,596

52Wk High (S$) 0.940

52Wk Low (S$) 0.515

Market leading yet undervalued

at about US$4.5m/quarter and it has a healthy cash balance of US$28m

with no debt. LMA trades at an unwarranted 78% discount of 8.5x PER

when compared to its comparable medical peers' average of 38.9x PER.

Admittedly, its present main business of laryngeal masks is not breaking

headline news but it continues to generate strong clinician end-user

conversion to its products and repeated loyalty. Average FY06 gross profit

margin was outstanding at >70% and EBIT margin at >27%. LMA's peers'

average gross margin was at 52.7% and EBIT margin at 14.7%.. LMA's core operations generate cash

M&As and new management.

dividends and we are expecting a major M&A to occur soon with the cash

pile of US$28m in its balance sheets. We expect the acquisition to be

along the theme of other operating theatre respiratory instrumentation or

urology to synergise with LMA's current infrastructure and knowledge of

these market segments. We are expecting the next acquisition's gross

margin to be in line with LMA Stonebreaker's 70% range. Newly appointed

CEO, Michael Ashton, is largely focusing on this aspect.Management has not paid out any

2007 looks brighter.

restructuring in major markets was completed in 2006. We expect that

going into 2007, the key markets in US, Japan, Germany and Australia

will show better performances. In particular, Germany's 4Q06 sales showed

an encouraging 21% YoY growth due to the conclusion of hospital strikes

and management changes.Management has indicated that corporate

Positioned for a good year.

high standards of safety, strong IP and establishing its International

marketing infrastructure to achieve long term growth. Although we forecast

revenue growth of 8.3% YoY to US$98.1m for FY07, we anticipate improved

earnings quality with net profits expanding 12% YoY to US$25.2m. Based

on a substantial 70% discount to its peers, we derive a conservative fair

value of S$$0.80 at reasonable FY07 PE ratio of 12x PER. This presents

an attractive 43% potential upside from its current share price and an

opportunity to get into this stock prior to positive and earnings accretive

news flow via impending M&As. We initiate coverage on LMA with a LMA continues to set barriers of entry throughBUY

rating.

Undervalued and ready for long term growth

LMA International NV

Year to Turnover Gross Profit Net Profit EPS EPS Growth PER Net Div Yield

31 Dec (US$m) (US$m) (US$m) (US cents) (%) (x) (%)

FY 05 86.3 64.0 -2.5 4.3 - 8.6 -

FY 06 90.6 64.2 22.5 4.1 -2.9 8.8 -

FY 07F 98.1 70.8 25.2 4.4 5.0 8.4 -

FY 08F 109.9 78.8 27.8 4.8 10.2 7.6 -

Page 2 30 March 2007

LMA International NV

INVESTMENT HIGHLIGHTS

LMA International NV (LMA) designs, develops, markets and distributes

medical equipment, principally the LMA

supraglottic airway management devices. These devices are used by

physicians to allow respiration, provide ventilation to, and support the airway

of patients undergoing surgical procedures and life-saving interventions.

LMA's first product, the LMA-Classic

in the United States in 1991 and has since grown its portfolio of laryngeal

mask airway products to a strong stable of 8 products.TM laryngeal mask airway range ofTM, was approved by the FDA for use

Market leading.

technology is authenticated by a strong portfolio of about 315 patents and

applications to protect its intellectual property (IP). LMA has been

aggressively defending its IP against competitors since 2005. In Nov 06,

LMA announced that it is filing to claim about US$4m plus costs in damages

against German competitor AMBU for the territory of Germany. LMA will

continue to pursue claims in all other EU territories that AMBU infringes its

IP.LMA's forerunner status in the laryngeal mask airway

Cash generative and diversifying.

at about US$4.5m/quarter and it has a healthy cash balance of US$28m

and no debt. The LMA Stonebreaker from LMA Urology is the first product

outside LMA's core airway management product and was launched in Feb

07. We estimate that revenues for the Stonebreaker will contribute US$3m

in FY07 and grow 120% YoY to US$6.5m in FY08.LMA's core operations generate cash

M&As and better management.

that M&As will be a key theme for LMA in 2007 to give earnings the next

boost. We expect LMA to work on the urology arena to synergise its

operations with Stonebreaker's infrastructure. New management has also

been put in place in key markets such as US, Germany and Japan. With

LMA's optimism in urology, the group's COO, Paul Malloy, has been put in

charge of this segment to accelerate its growth.We have indication from management

More market share coming up

anaesthetists are also demanding better products to mitigate complications

from endotracheal (ET) tubes which are the present state of the art. On

average, there are about 600 deaths/year directly related to the use of the

ET tube. The laryngeal mask has had zero fatalities directly linked to its

300m uses worldwide.. As technology surges ahead for surgeons,

Good macro trends.

will grow by 12.3% CAGR (2005-2012) and the US market will grow at

27.9% CAGR (2004-2011). These macro trends for laryngeal mask bode

well for LMA as the leader in this market segment.F&S reports that the EU market for laryngeal masks

Page 3 30 March 2007

LMA International NV

Overview of recent performance

Admirable performance in a competitive FY06.

its FY06 results with a marginal 5% YoY rise in revenue to US$90.6m but

recorded a flat net profit of US$24.1m (excluding non-recurring stock

compensation charges). Despite maintaining a 20-30% price premium,

facing aggressive price competition and a slowing conversion of reusables

to single use masks, LMA sales still grew 3% in the US and 7% in the

International market, authenticating its market leadership position.LMA recently reported

Good trends in units sold.

good growth in units sold and sales of 30% YoY to 4.78m units and 13%

YoY to US$43m respectively. The reuseables saw a decline of about 9%

YoY units sold to 217.2k units, but only a marginal 0.5% YoY drop in ASP

demonstrating LMA?s sustainable price premium. Taking the net effect of

price depression and increase in units sold, we are encouraged to see a

continued uptrend in sales.In FY06, LMA single use masks experienced

Strong gross margins.

its quality medical products and continues to maintain a price premium

above its competitors. Although there are 36 various brands of laryngeal

masks in the market, of which 19 are made in China, management has

indicated that even the Chinese hospitals are continuing to use LMA branded

masks.LMA continues to enjoy >70% gross margins for

2007 looks brighter.

in major markets was completed in 2006. We expect that going into 2007,

the key markets in US, Japan, Germany and Australia will show better

performances. In particular, Germany?s 4Q06 sales showed an encouraging

21% YoY growth in sales due to the conclusion of hospital strikes and

management changes.Management has indicated that corporate restructuring

Page 4 30 March 2007

LMA International NV

Figure 1: Revenue breakdown by products (US$?000)

Source: Company, OIR estimates

Why use a laryngeal mask?

Main alternative ? Endotracheal (ET) tube.

the nose or the mouth into the trachea, in order to establish a definitive

airway, for the purpose of ventilating the lungs during anaesthesia or intensive

care. This procedure is known as intubation, and the physician inserts the

tube with the aid of a laryngoscope (allows physician to see where he?s

going) introduced into the mouth and upper airway. The purpose of the tube

is not only to maintain a patent airway, but also to protect the lower airway

from aspiration and to allow the suction of secretions and other foreign

materials, which could obstruct the airway. Placing an ET tube generally

requires a high degree of skill to insert it correctly and if not, will induce

tracheal tears and sore throats. It also requires the use of a laryngoscope

and requires more drugs to sedate a patient. There are also about 600

deaths/year directly linked to the use of the ET tube.ET tubes are inserted through

The better and safer way ? Laryngeal mask.

without the use of a laryngoscope, less drugs needed for sedation and

most importantly 300m uses without a single fatality directly linked to the

LMA mask. The LMA laryngeal mask stands out as a revolutionary product

in the anaesthetic field. In fact, the laryngeal mask is so easy to use that

paramedics and critical care nurses can use it without guidance from the

anaesthetist.Quicker and easier insertion

4 9 , 2 4 2

2 7 , 2 5 7

4 6 , 3 5 0

3 7 , 9 6 7

4 2 , 2 3 8

4 2 , 9 9 3

3 9 , 8 6 8

4 6 , 9 0 8

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007F

Reusables Single Use Others Urology

Page 5 30 March 2007

LMA International NV

Figure 2: LMA Classic

Source: Company

Figure 3: LMA Endotracheal tube

Source: Company

Page 6 30 March 2007

LMA International NV

Key product range

1. Reusable Airway Management Products

Trends cause units to decline.

in units sold primarily due to the trend of use-and-throw (single use). This is

mainly due to concerns of cross infections and increasing costs of

sterilisation. However, markets in the emerging economies have tended to

reuse LMA?s masks beyond the mandated 40 times due to pressures on

bottomline. The combined effect of cross infection concerns in developed

economies and over reuse of the mask in emerging economies have steadily

reduced the number of reusable units sold. However, ASP remains strong

and we estimate that the reusables still command a strong gross margin of

>75%.LMA?s reusable products have been falling

Competition.

in the anaesthetist community and it will be challenging for competitors to

take market share without taking a big hit in their margins. However, the

quality of LMA may be its own undoing, as feedback within the industry of

reusing the masks for more than 40 times due to its high quality of build.

We expect that better education of void warranties and clinical proof of

significant breakdowns past 40 uses of its reusable products will reduce

this trend of overuse.We view LMA?s brand name and quality as well entrenched

Sales of ?Others?.

Mcgrath and is segmented as these are sold as capital equipment to the

hospitals. We see very promising uptake of the Ctrach in the past quarters

in the US and continue to see good traction in this product line in the years

ahead. For FY07, we forecast a 72% YoY swell to US$8.4m sales.This segment consists of sales of the Ctrach and

Forecasts for resuables.

profitably to the group but at a steadily declining rate. It was a point of

inflexion of sales mix in FY06 as single use devices overtook reusables for

the first time. For FY07, we anticipate reusables to contribute about 41%

of total sales, a marginal decline of about 6% YoY to US$39.9m but to

retain its gross margins of >75%.We expect reusables to continue to contribute

Page 7 30 March 2007

LMA International NV

Figure 4: Resuable units sold and ASP

Source: Company, OIR estimates

210

220

230

240

250

260

270

280

290

300

2004 2005 2006 2007F

162.0

164.0

166.0

168.0

170.0

172.0

174.0

US$

Reusable units sold in '000 (LHS) Reusables ASP (RHS)

2. Single-use Airway Management Products

Always sterile, always new.

medical products due to its inherent advantages. First, cross contamination

is the main concern whereby more viruses are easily passed on via contact.

Fluid contact devices like syringes, needles and sutures are now designed

to be disposable to stem the tide of diseases. LMA?s single use masks are

delivered sterile and ready to use. This reduces high overheads for

sterilisation costs, logistical tracking of number of uses and ease in planning

for inventory.There is an evident trend towards disposable

Supremacy has arrived.

in Singapore and Australia. The LMA Supreme complements the range of

single use offerings in LMA?s stable as its most advanced product with a

built-in drainage tube. Made in Singapore, this new device is expected to

spur conversions from reusable into single use products and to wrest more

market share from the ET tube with its gastric access feature. Management

has indicated that the scenario is being prepared for the Supreme to be

launched in the US in 1H07.LMA has recently launched the LMA Supreme

Stabilisation of average ASP.

new product, we are likely to see the net effect of good cost controls,

decreasing ASP and increasing units sold to be positive in stabilising the

downward trend of the single use units. We expect that when Supreme is

launched in the US in 2H07, economies of scale would kick in as volume

increases.With the introduction of the Supreme as a

Page 8 30 March 2007

LMA International NV

Forecast for single-use.

units sold in FY06 showed it is the way to go for laryngeal masks. We are

conservative in our estimation and forecast 20% YoY rise in the number of

single use units sold for FY07 translating to a 9% YoY increase in sales to

US$47m. We think that the price compression will be mitigated with Supreme

and with new management in place in the key markets.The 31% YoY jump in the number of single use

Figure 5: Single use units sold and ASP

Source: Company, OIR estimates

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2004 2005 2006 2007F

-

2

4

6

8

10

12

14

US$

Single Use units sold in '000 (LHS)

Single Use ASP (RHS)

Figure 6: LMA airway products

Source: Company

LMA Supreme

LMA McGrath

Page 9 30 March 2007

LMA International NV

3. Urology Products

Urology market potential.

addressing the urinary tract stone problem. Each year, more than 600k

Americans, mostly aged between 30 and 60 suffer from urolithiasis (the

process of stones forming in the kidney, bladder and/or urethra). These

stones range in consistency (soft to hard) and size (speck-sized to walnutsized).LMA has opted to enter the urology market by

?Stone hard? facts:

- 12% of Americans will have a kidney stone some time in their life

- Prevalence of urolithiasis in the American population is 5.2% (up

from 3.8% from 30 years ago)

- In 2000, 600k Americans went to the emergency room for stone

related pain

- 1/3 of all visits to a urologists are for kidney stones

- The development of the stones is related to decreased urine volume

or increased excretion of stone-forming components such as

calcium, oxalate, urate, cystine, xanthine, and phosphate. It is

expected to be increasingly prevalent.

Emerging markets are calling.

Pacific HQ in Singapore is due to the proximity of major emerging markets

of China (2.1b people) and India (1.1b people). Stone burden is large and

complex systems are costly and are only available at large hospitals,

rendering the majority of the rural population without an adequate solution.

The Stonebreaker will give urologists a compact, portable and self powered

device to address this huge rural need.A primary reason that LMA has its Asia

Page 10 30 March 2007

LMA International NV

Table 1: LMA urology product comparison

Source: Company

Figure 7: LMA Stonebreaker (portable hand held size)

Source: Company

LMA?s Stonebreaker (CE marked) Competitive products

Lower cost: Higher costs:

US$5-10k per Stonebreaker unit Shockwave: US$60k-300k per machine

US$45-90 per probe (consumable) Laser: US$50k per machine

US$5-10 per CO

(consumable)

Ballistic: US$20k per machine

FDA 510K certification expected in

1H07

No electricity needed Mains electrical power needed

About 20 shocks per patient Shockwave system requires 4000

shocks. Ballistic systems requires

hundred of shocks.

No probe movement. Little

retropulsion (stone will not move

away)

Ballistic systems cause severe

retropulsion

Chiselled fragments. No clouding

gives clear vision

Micro fragments from jack hammer

movement clouds vision

Laser and ballistic systems (20kg),

Shockwave system (300kg).

Translates 30 bar of pressure into

energy from small disposable

cartridge.

Wall gas outlet only provides 6 bar of

pressure. Wall gas not readily available

at smaller hospitals.

Portable and lightweight (500g).

Ideal for rural mobile clinic use2 cartridge

Page 11 30 March 2007

LMA International NV

Figure 8: Stonebreaker with probes

Source: Company

Positive clinician feedback.

positive for LMA. When we visited the 18

held in Singapore (1-3 Mar 07), we were impressed by the positive feedback

from the end user clinicians on the ease of use and efficacy of the

Stonebreaker. We also investigated competing devices from Dornier

MedTech (shockwave technology), Lumenis (laser technology) and the

Swiss Lithoclast (pneumatic technology) and came away with the impression

that these machines cost more and/or took a longer period of time to break

stones (less efficient).We view this diversification into urology asth Video Urology world congress

Energy delivery system.

Stonebreaker is the method which the device is able to transfer energy to

the tip of the probe which will be in contact with the stone. The kinetic

energy delivered to the stone then utilises the natural faults in the stone to

fragment it into manageable sized fragments for removal. There is minimal

probe movement thus reducing stone movement away from the probe

(retropulsion).The key Intellectual Property (IP) behind the

1

come from the sales of the device. With an average sale price of US$7500,

it comes much more affordable than other lithotripsy machines. Capital

good purchases typically have a threshold below US$10,000 so hospitals

or small urology centres will be able to easily get their hands on the

Stonebreaker without much paperwork. The Swiss Lithoclast has an

estimated installed base of about 5000 worldwide and we expect LMA to

be aggressive in taking its market share and to promote this in the Asian

region due to its portability and lower price point.st phase revenue stream. The Stonebreaker?s 1st phase of revenue will

Page 12 30 March 2007

LMA International NV

2

expect to see higher usage and thus an increase in revenue of the

consumable probes and CO2 cartridges. Management has highlighted that

these consumables are difficult to replicate for the Stonebreaker to deliver

the same performance. We note that the likelihood of re-use of probes is

more probable than buying cheaper 3

has mentioned that new flexible probes are being designed as an additional

offering to the present straight probe.nd phase revenue stream. With an increase in the installed base, werd party consumables. Management

Endorsement of product.

LMA has signed an exclusive distributorship agreement with EDAP. EDAP,

with more than 25 years of experience in sales and distribution, has a

strong knowledge of the medical community in France. The company has

significant expertise in the domestic lithotripsy market and a dedicated

distribution network.As a show of quick marketing execution footwork,

Current Stonebreaker capacity.

are able to produce Stonebreakers by the ?hundreds? from their Switzerland

plant but it would be simple to replicate the production line and thus

quadrupling capacity if necessary.Management has indicated that they

Forecast for Urology.

for the Urology segment. As guided, we forecast that the Stonebreaker will

grow exponentially from its small base to contribute about US$3m in FY07

and grow 120% YoY to contribute US$6.5m in FY08.Management is confident of achieving strong growth

Manufacturing and distribution

Low cost centre advantage.

its single use products, including the high yielding new Supreme product,

in Singapore. The EU and US still continue to produce the reusable products

as ASP compression in that segment does not weigh in on costs. LMA

also utilises Singapore?s status as a global transport hub to efficiently ship

products all over the world and a launch pad to reach the rest of Asia as

key emerging markets like China, India and Australia are within an 8-hour

flight radius.LMA compresses costs as it produces all of

Page 13 30 March 2007

LMA International NV

Figure 9: LMA?s global presence

Source: Company, OIR

Industry and growth prospects

Increase in surgical procedures.

surgical procedures done in a year all over the world and is growing at the

rate of 20% (per year till 2012). The market for airway management devices

is dependant mainly on the number of surgical procedures conducted. Every

procedure conducted with general anesthesia has to use an airway

management device. This boosts the need for airway management devices

and hence acts as a driver to the market. LMA management estimates

that they take up about 38% of the total airway management products

used in surgeries.F&S reports that there are over 170m

More day surgeries.

down on costs as they do not need to spend a night in the hospital as

surgical procedures improve. Laryngeal masks are easier to use and unlike

ET tubes, the patient has to take less drugs for sedation and thus patient

can come out of sedation quic