Cordlife Group

UOBKayhian on 14 Sept 2012

Investment Highlights
· Deeper stake in the fast-growing Chinese market with a 10% acquisition of China Cord Blood Corporation (CCBC), the largest cord blood banking operator in China. Through CCBC, Cordlife Group (Cordlife) will be able to leverage on the cord blood banking businesses in Guangdong, Zhejiang, and Beijing where CCBC holds exclusive licences. CCBC will become the sole indirect shareholder of Guangzhou Tianhe Nuoya once Cordlife surrenders its 10% indirect stake under the agreement.

· Takeover of high-growth assets in the medium term. Cordlife has the right-of-first-refusal to acquire its former parent’s remaining cord blood banking operations in India, Indonesia and the Philippines. Management noted that operations in these markets are finally at their inflection points and revenue should see significant growth from here due to higher awareness of cord blood banking and economies of scale. Takeovers of these assets may come in the medium term when they are deemed to be value- accretive to Cordlife.

Financial Outlook
· Gross margin should improve from FY13 onwards after Cordlife relocates to Yishun A’Posh Bizhub, a property owned by the group. Cordlife will not only benefit from rental savings but also from sub-leasing income. We forecast gross margin to improve from 69.4% in FY12 to 71.1% in FY13-14.

· One-time relocation expenses may affect bottom line in FY13-14. The A’Posh Bizhub will be ready for occupancy by early-13. The group expects to incur one-off costs related to the relocation.

Earnings Revision
· Reduce net profit forecasts by 2.2% and 3.0% to S$9.0m and S$9.6m for FY13 and FY14 respectively to account for the additional expenses for the relocation.

Valuation
· Maintain HOLD with a higher target price of S$0.62 (previously S$0.53), based on its peers’ average of 15.9x PE and applied to our FY13F EPS of 3.9 S cents. Our valuation peg increased from 13.6x to 15.9x PE as we roll over our peers’ PE average to FY13. Total dividend for FY12 was 3.8 cents, or a yield of 7.0%.