Cochlear Ltd just made a $50 million bet on China

The Cochlear Ltd (ASX: COH) share price is up 2.5% to $153.60 this afternoon after the hearing implant manufacturer announced it is to “deepen its commitment” to China by spending $50 million to construct a manufacturing facility in the country.

China is already among Cochlear’s top five international markets and is its fastest growing market by volume, with potential to deliver more strong growth over the next decade.

However, it’s also a politically complex market with the company largely reliant on government favour to meet its giant reimbursement bills as cut-price competitors also seek to win government tenders for hearing implant devices.

China also has a private patient market, but the government tenders remain key and investing $50 million in the country is likely to be met with approval by the one-party state. The deal has been agreed with the People’s Government of Chengdu City where the facility is to be built and on completion it is expected to deliver capacity to increase “global cochlear implant production by around 50 percent”.

The deal looks a shrewd long-term move by Cochlear’s management team and in my opinion it remains among the top five growth stocks on the ASX. It’s no secret though with the stock trading on around 40x analysts’ expectations for earnings per share in FY 2017.

I expect the company will need to deliver another year of earnings growth above 15% in FY 2018 to justify today’s valuation, which means there’s some downside risk if its growth disappoints over the short term. Over the long term though it should reward investors with today’s China deal a good example of its global growth potential supported by a profit moat derived from its market-leading technology.

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Motley Fool contributor Tom Richardson owns shares of Cochlear Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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