CordLife Group

Kim Eng on 11 Dec 2014

• Unorthodox masterstroke to break into China. Convinced this is right move after meetings with CCBC.
• CCBC/Cordlife partnership in China mutually beneficial. 10% stake in CCBC should become more valuable.
• Maintain BUY & SOTP TP of SGD1.30. Catalysts from possible maiden dividends from CCBC, better sales traction in China.

Setting record straight
We returned even more positive from meetings in Beijing with the CFO of China Cord Blood Corporation (CCBC), China’s leading cord blood bank. In our view, Cordlife’s sell-down following its CCBC convertible-note purchase and loan to Magnum Opus reflects a lack of understanding and appreciation of the motivation behind the deal and risk measures in place. We hope to set this straight.

Mutually-beneficial partnership
Cordlife’s 10% stake in CCBC — 14.2% upon conversion of CBs in 2017 — should only become more valuable over time, in our view. New products from Cordlife are being pushed out via CCBC’s vast China network. We observe close working and personal relationships between the managements of both companies.

Unorthodox masterstroke to gain China foothold
While its loan to Magnum Opus was unorthodox, it was necessary to cement its relationship with CCBC. We view the loan as a proxy for a direct equity investment in CCBC. By controlling the debtor, Cordlife can control the equity part of the equation as well. Despite its mere 10% stake, Cordlife has been able to punch far above its weight.

Multi-layer risk measures in place
Auditing procedures for Chinese companies have been strengthened considerably since the Sino-Forest accounting scandal in 2011. CCBC believes this has not been sufficiently appreciated by investors. External auditors can now check bank balances independently every quarter, while budget-busting cash transfers would need the entire board’s approval and three senior signatories.

CordLife

Kim Eng on 27 Aug 2014

• FY6/14 core EPS (+23% YoY) below by 8%. Minor miss. Maintain BUY. SOTP TP raised to SGD1.50 from SGD1.43.
• Numerous positives await in FY6/15E. More new products in more markets. Stronger contributions from China.
• Raises China bet by buying CCBC’s CBs. May raise some eyebrows but there are strategic reasons.

Strong topline delivery; Minor miss
FY6/14 core earnings met 92% of our forecast. The slight miss was due to a higher-than-expected tax rate and lower-than-expected recognition of Stemlife licensing fees. Full-year revenue growth was an impressive 42% YoY, driven by the Philippines, India and Indonesia. These were growth markets it acquired last year. Hong Kong returned to profitability in 4QFY14 after a restructuring to adapt to the maternity ban on mainland Chinese women in 2013. We cut FY15E-16E EPS by 4-7% for higher tax rates.
Numerous positives await
The first is the rollout of new products (Metascreen, umbilical cord tissue storage) across the region even as its growth markets gain critical mass. The second is our expectation that Singapore’s birth rate will climb in 2015, in conjunction with its Golden Jubilee celebrations. Third, we expect maiden royalty income from China Cord Blood Corp (CCBC) and StemLife as they ramp up cord tissue storage services in China and Malaysia.
Buying more into China
Cordlife is also raising its investment in China via its accretive in-the-money acquisition of CCBC’s convertible bonds from Golden Meditech. We are optimistic on its China expansion in collaboration with CCBC, which monopolises the market. A loan facility given to a related party to buy the same CBs may appear unusual but does not change our positive view on the stock as we view this as a strategic investment. Maintain BUY. Our SOTP-based TP has been raised to SGD1.50 from SGD1.43 after incorporating the CBs’ value and some housekeeping adjustments.

Cordlife

OCBC on 14 May 2014

• 3QFY6/14 results disappointed due to softness in Singapore and Hong Kong, while operations in the Philippines, India and Indonesia delivered promising results.
• FY6/15E is set to be a strong year as positive catalysts converge, helped by new product rollouts, Singapore’s Golden Jubilee Year and stronger contributions from China.
• Reiterate BUY with TP of SGD1.43, based on SOTP.

Compensated by strong delivery from growth markets
Cordlife posted weaker-than-expected 3QFY6/14 results due to softness in Singapore and Hong Kong. This was somewhat compensated by strong performance in the Philippines, India and Indonesia (collectively account for 30-35% of revenue). Singapore’s revenue increased at an unexciting pace of 5-6% YoY in 3QFY6/14 due to slower birth rate. While Hong Kong continued to  be affected by maternity ban on mainland Chinese women since Jan 2013, the operation has broken even during the quarter.

Positives abound; eyeing a strong FY6/15E
There are various positives awaiting Cordlife in FY6/15E. First, new products (Metascreen, umbilical cord tissue storage) will be rolled out across the region at a time when its growth markets are gaining critical mass. Second, we expect birth rate in Singapore to rise next year in conjunction with the Golden Jubilee celebrations. Lastly, we expect maiden royalty income from CCBC as Cordlife and CCBC ramp up cord tissue storage services in China. A similar agreement has also been inked in Malaysia.

Earnings trimmed; outlook remains positive
We cut our FY6/14E forecasts by 7% to factor in weakness for its home market. While we leave our forecast for FY6/15E largely unchanged, we reduce that for FY6/16E by 6%. Notwithstanding, we maintain BUY on Cordlife given its strong earnings profile.

Cordlife Group

Kim Eng on 13 Feb 2014

1HFY6/14 in line
Cordlife’s 2QFY6/14 revenue grew 31% YoY to SGD12.1m while reported earnings fell 25% YoY to SGD4.2m. Stripping out exceptional items, core earnings of SGD2.1m were in line at 21% of  our full-year forecast (1Q: 19%). 1H core earnings accounted for 40% of our full-year forecast, in line with historical trends, and fell 13% YoY to SGD3.9m due to the temporary disruptions to businesses
at its newly-acquired entity in Indonesia and in the Philippines.

Stronger 2H expected
The second half of the financial year is traditionally stronger for Cordlife, and we expect the same this year (until June), aided by 2014 being the Year of the Horse, the second best Chinese zodiac to have babies. Catalysts: (1) a sustained turnaround for its Hong Kong operations (helped by restructuring and market share gain), and (2) more contributions from new products – cord tissue storage in Singapore (Aug 2013), cord tissue in the Philippines, Indonesia, Malaysia and China, and Metascreen in Hong Kong and Singapore.

Maintain BUY
We expect stronger growth as Cordlife moves past digesting its newly-acquired entities and launches new products across its expanded platform in Asia. We roll over our valuation base year to FY6/15E and switch our valuation methodology from P/E to SOTP to factor in (1) the reclassification of CCBC from associate to investment and (2) higher net cash (SGD40m) following a placement in Oct 2013, thus arriving at a TP of SGD1.42

Cordlife Group

Maybank Kim Eng Research, Sept 11

JUST a few months after acquiring access into the Philippines, Indonesia and India, Cordlife has acquired 19.9 per cent of Stemlife Bhd for RM30 million (S$11.7 million). Stemlife is the largest publicly-listed cord blood bank in Malaysia. It also holds a 40 per cent stake in Stemlife Thailand. The acquisition will be made either fully in cash or 10 per cent cash and eight million new shares at S$1.30 per share.

Cordlife bought its stake from Stemlife's founders and key management - CEO Sharon Low (who has already been on sabbatical for a year) and Christina Lim, her aunt. This is essentially a control stake as they will be ceding management to Cordlife. Berjaya Group's Vincent Tan owns 12.1 per cent.

First, margins can be enhanced significantly as Stemlife can do in-house sample testing, which Cordlife currently outsources to an external lab at a higher cost. Second, it brings two new underpenetrated markets - Malaysia and Thailand - with much higher birth rates than Singapore. Third, Stemlife has tonnes of cash and undervalued property assets. Lastly, Cordlife now has a low cost platform to fight off price-oriented competitors.

On the surface, Cordlife paid a high price (40x annualised PE) but they will gain a lot that cannot be quantified. On an EV (enterprise value)/Ebitda basis, the deal is actually favourable (Cordlife 24x vs Stemlife 6x) due to the RM76 million of cash and undervalued properties that have been kept at depreciated book value in Stemlife's balance sheet since 2006. If sold, we estimate the properties (freehold commercial assets in Klang Valley) could bring in a 50 per cent extraordinary gain. Short-term earnings boost, however, is small.

On another front, however, convertible bonds (CBs) issued by 10 per cent associate China Cord Blood (CCB) could present a tricky situation. Under IFRS standards, the CBs have to be separated into debt and equity, and the fair value (either loss or gain) of the equity portion has to be recognised. As CCB's share price has spiked, a fair value loss is expected in the current quarter. As this does not impact cashflow or core profits, we would urge investors to look beyond this issue.

We still like Cordlife in the long term as it continues to pursue a strategically-sound expansion plan. We keep a "buy" on the stock but caution that the fair value treatment for China Cord Blood's convertible bonds could introduce some volatility to earnings. Our TP of S$1.44 (down slightly on dilution from the acquisition) implies 25x FY14 forecast, which is one point above its global peers and 16 per cent discount to its local peers.

BUY

Cordlife Group

Voyage Research, Sep 5

YESTERDAY, Cordlife Group (Cordlife) announced the proposed acquisition of a 19.9 per cent stake in StemLife Berhad (StemLife) at about RM29.6 million, which will be fulfilled via the issuance of 8 million Cordlife shares and RM2.85 million cash. The consideration is arrived at after taking into account StemLife's cash balances of RM76.8 million as at end-June 2013, freehold land with an original book value of RM6.9 million and its fundamental prospects.

We see several benefits in this acquisition. First, it will enable Cordlife to expand its footprint into Malaysia and, potentially, Thailand. There may be an opportunity for a Cordlife-StemLife collaboration; they can cross-sell cord blood banking services in both nations and offer a different tier of services.

More growth will also be generated following Cordlife's intention to extend its product offerings in the mother-child segment. StemLife will be able to improve its gross margin as it can now ride on Cordlife for bulk purchasing and adopt more effective and advanced systems.

Most of the growth prospects will be gradually realised over the years. Hence, we are upping our terminal growth rate to 5.5 per cent from 5 per cent and assuming that StemLife will contribute S$0.5 million attributable profit in FY2014 and S$0.9 million profit in FY2015. Our model reflects a revised price of S$1.60 per share. Maintain "invest".

INVEST

Cordlife Group

UOBKayhian on 20 May 2013

·   Takeover of high-growth businesses and assets.Cordlife Group (Cordlife) has entered into a conditional sale and purchase agreement with its former parent to acquire the cord blood and cord tissue banking businesses and assets in India, thePhilippines, Hong Kong and Indonesia. Operations in the emerging markets of India, the Philippines andIndonesia have exhibited tremendous growth with revenues more than tripling over FY10-12. With this consolidation under Cordlife, we expect the group to benefit from better economies of scale, centralisation of management and increased awareness of cord blood and cord tissue banking in the region.

·   Net profit CAGR of 27.5% over FY13-15. While the new acquisitions will contribute positively to top-line immediately upon consolidation, we anticipate integration costs and increased marketing expense in the near term. Management estimates additional capex of S$3.5m will also be needed. Currently,India, the Philippines and Indonesia have 6,500, 1,500 and 3,600 clients respectively. As of end-Dec 12 (1HFY13), the Philippines had turned around and posted a net profit while India and Indonesiareported much smaller losses. We forecast an average 30% revenue growth p.a. for these new markets on the back of more intense marketing activities, rising middle class segments and stronger management support.

·   Rolling out new offerings. Cordlife's cord tissue banking services was officially launched in Singaporeon 12 May 13 and management noted that 10 clients signed up over that weekend. The payment plans are similar to cord blood banking schemes whereby a sum is payable upfront and a minimal fee is due each year. This should begin contributing to Cordlife's recurring cash flow after five years. As part of the group’s vertical growth strategy, there are plans to further expand its products and services beyond umbilical cord-related offerings in order to become a leading provider of healthcare options for mother and child.

·   Increased capacity from relocation to new HQ.Cordlife's fully-owned space at Yishun's A'Posh Bizhub can house up to 650,000 cord blood units. This will cover the group's long-term needs and will allow for rental savings. Currently, 50% of the space is being used by the group while the rest is intended to be leased out. Based on current rental yields, management expects only to breakeven on this.

·   Brighter outlooks in Singapore and China. While the Hong Kong office suffers from China's moratorium on women giving birth at Hong Kong private hospitals, this is mitigated by China Cord Blood Corporation's (10%-owned) aggressively expanding market share in China. The market carries huge potential for growth as the penetration rate of private cord blood banking is still at a low of 2.2%. Prospects are also looking better in Singapore with increased marketing efforts finally bearing fruit and the country's fertility rate improving. Management estimates that Cordlife's market share rose to 72% in 2012 from 62% in 2011.

·   Maintain HOLD; raised target price to S$0.87. We raised our earnings estimates by 30% to reflect the impact of the latest acquisitions and updated our outlooks on the cord blood and tissue banking businesses. However, Cordlife's share price has run up close to 40% since mid-April and we believe the market has priced in these positives. We applied a historical average PE of 16.1x to our FY14F EPS estimate of 5.4 S cents/share to derive our fair value. Currently, the stock is trading at 17x FY14F PE.

Cordlife Group

UOBKayhian on 15 Feb 2013

1HFY13 Results Highlights

·          Revenue up 18.4% yoy on higher client deliveries. Cordlife Group (Cordlife) benefitted from the baby boom during the Dragon Year as well as from successful educational efforts to raise awareness of the benefits of cord blood banking. The number of client deliveries increased 18.4% yoy in 1HFY13. Gross margin was sustained at a strong 69.9% (FY12: 69.6%) while EBIT margin jumped to 24.2% (FY12: 13.9%).

·          Net profit surged 123.2% yoy due to one-off gain on disposal of associate. Cordlife completed the disposal of its stake in Guangzhou Tianhe Nuoya Biology Engineering on 12 Nov 12. This resulted in a gain of about S$2.7m. Excluding this one-off gain, net profit grew 52.8% yoy to S$5.8m.

·          Earnings from China Cord Blood Corporation (CCBC) kicked in. In 1HFY13, Cordlife recognised two months of CCBC’s profit. Associate’s earnings grew 39.2% yoy to a substantial S$1.3m, mainly attributable to new customer sign-ups.

·          Interim dividend of 1 cent to be paid on 5 Apr 13. We forecast a full-year dividend of 3.2 cents, based on a 60% payout. This implies a yield of 4.8%.

Our View

·          Potential beneficiary of Singapore’s Marriage & Parenthood Package 2013.Cordlife directly benefits from the enhanced Baby Bonus scheme as savings in the Child Development Account (CDA) can be used to pay for private cord blood banking services. Should the government succeed in boosting fertility and birth rates, the greater awareness of cord blood banking could give a lift to the ~20% penetration rate in Singapore. Management believes there is significant upside to this as penetration rates in other Asian countries such as Korea and Taiwan are 50-55%.

·          10% stake in CCBC cemented; betting on a larger Chinese market. CCBC is the largest cord blood banking operator in China, holding exclusive licences in Beijing, Guangdong andZhejiang. It also holds a 24% stake in Shandong Cord Blood Bank. Management aims to ride on the growth opportunity in Chinawhere the penetration rate in provinces with cord blood banking operations is projected to reach 5% in 2015, from only 2% in 2010.

·          New HQ to incur one-time relocation expenses but will contribute additional income. Cordlife will incur one-off costs related to the relocation to its new facility in 3QFY13. Nonetheless, we also project gross margin to improve to 70% in FY13 and 71% in FY14 on rental savings. A new income stream could come in the form of sub-leasing income as management intends to lease out about 50% of its HQ space.

Valuation

·          We adjust our forecasts to reflect the higher contribution from CCBC. Share price has run up more than 21% ytd and we believe prospects are currently priced in. Maintain HOLD with a higher target price of S$0.65, pegged to 15.5x FY13F PE. We suggest an entry price of S$0.54 for a potential capital upside of at least 20%.

Cordlife Group

UOBKayhian on 14 Nov 2012

1QFY13 Results
·          Within expectations. Cordlife Group (Cordlife) reported a 13.0% yoy increase in revenue on the back of 2,150 client deliveries in 1QFY13, 150 more than in 1QFY12. The group attributes the increase to more births in the Dragon Year and to improved awareness of cord blood banking. Net profit rose 50.9% yoy, also on the back of higher contribution from Guangzhou Tianhe Nuoya and a S$0.3m additional interest income. 1QFY13 revenue and net profit accounted for 25% and 30% of our full-year forecasts respectively.
·          Increase in borrowings and PPE. Cordlife drew down S$3.0m from its term loan facility to pay for the purchase of Yishun A'Posh Bizhub, which is on track to being ready for occupancy by 1Q13. Power, Plant, & Equipment (PPE) also increased by S$2.9m on capex incurred for the new headquarters.
·          Forex loss of S$0.5m was recorded due to the strengthening of the Singapore dollar over the period.
Investment Highlights
·          New HQ to incur one-time relocation expenses but will improve gross margins. The group expects to incur one-off costs related to the relocation to its new facility. We expect this to affect bottom-line in the coming quarters. Nonetheless, we also project that gross margins will improve to 70% in FY13 and 71% in FY14 on rental savings. Gross margin deteriorated to 69.0% in 1QFY13 from 69.6% in FY12. Sub-leasing income should also enhance earnings.
·          Deeper stake in the 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. Mr. Jeremy Yee, Executive Director and CEO of Cordlife, was appointed as an independent, non-executive director of CCBC.
·          Takeover of high-growth assets in the medium term. Cordlife has the right-of-first-refusal (ROFR) 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 on 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.
Valuation
·          Maintain HOLD with a target price of S$0.62, pegged to a FY13F PE of 15.5x. Our valuation peg increased from 13.6x to 15.5x when we rolled over our peers’ PE average to FY13. We forecast an 80% payout which translates to yields of 6.1-7.3% in FY13F-15F.
·         We could change our call if higher contribution from CCBC offsets the expected decline in number of births as the Dragon Year comes to a close.

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%.

Cordlife

UOBKayhian on 15 May 2012

Results
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66), implying 12.8% upside from current price. We recommend entry price of S$0.42 for 25% upside.
· 5.3% yoy profit growth. Cordlife Group (Cordlife) reported 9MFY12 net profit of S$4.6m, down 25.4% yoy. Excluding one-off listing expenses of S$1.9m, net profit was up 5.3% yoy to S$6.5m, which made up 68.4% of our full-year net profit forecast.
· Revenue up 14.2% yoy. 9MFY12 revenue was up 14.2% yoy to S$21.3m, equivalent to 66.8% of our full-year forecast. The increase in revenue was mainly due to an increase in the provision of cord blood banking services of about S$1.9m driven by an increase in the number of client deliveries from about 4,900 in 9MFY11 to about 5,300 in 9MFY12 and revenue of S$0.7m from the newly-started cord tissue banking services.
· Gross margin declined. Gross margin decreased from 70.9% in 9MFY11 to 68.8% in 9MFY12, due to the increased cost of testing required due to a change in regulatory standards.

Stock Impact
· Sales growth below expectation. 3QFY12 revenue grew by 13.2% yoy, below our forecast of 24.1% yoy. We had anticipated much stronger sales as: a) FY12 revenue was expected to rebound strongly from a low base in FY11, which was caused by a deterioration of the global economic condition, b) 2012 falls in the Year of the Dragon and we had forecasted a higher number of births, and c) Cordlife was expected to recognise first time revenue contribution from the tissue banking service.

Earnings Revision
· Lowered forecast. We have reduced our FY12-14F revenue forecast by 9.7%, 9.1% and 11.1% respectively, accounting for lower-than-expected penetration rate growth for cord blood banking services. As a result, we have also lowered our FY12-14F profit forecast by 4.2%, 18.6% and 19.5% respectively.

Valuation
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66) as we roll over our valuation basis to FY13. We derive our target price by applying a 13.6x PE to our FY13F EPS of 3.9 S cents, in line with peers’ average. We also reduce our target valuation multiple from 16.1x to 13.6x due to lower earnings growth expectations.

Cordlife Group

Kim Eng on 4 Apr 2012

Background: Cordlife Group Limited is one of the first private cord blood banks in Asia. It has a 62% market
share in private cord blood banking in Singapore and a 28% market share in Hong Kong. The company also
provides umbilical cord tissue banking services in Hong Kong.

Recent developments: The stock closed at 37% above its IPO price of $0.495 on the first day of trading on 29 March 2012 and is now 48% above its IPO price. Of the net proceeds of $26.3m raised, Cordlife plans to use $16.6m to develop and expand its business operations in Singapore and overseas, $3.0m to renovate its new headquarters in Yishun, $2.0m for IT infrastructure investments, and the remaining for working capital purposes.


Businesses in developed stage. Cordlife was carved out from Australia-listed Cordlife Limited (CBB) and came with the Singapore and Hong Kong businesses which are already in the developed stage. It also owns a 10% indirect stake in the sole cord blood banking operator in China’s Guangdong province. This is a protected industry in China and Cordlife is the only foreign entity to have an interest in a China cord blood company.

Potential to acquire developing businesses. Cordlife also has the right of first refusal to acquire CBB’s cord blood banking businesses in Indonesia, the Philippines and India, which are currently in the developing stages. The India market may take up to five years to develop while Indonesia and the Philippines could take about three years.

Recurring cash flow. The cord blood business is essentially stable and recurring in nature. Cordlife’s 20,000-strong customer base currently generates a stable annual cash flow of about $5m. Growth expectations. According to a market report by Deloitte & Touche Financial Advisory Services, the cord blood storage market is expected to grow at 9-10% CAGR for Singapore and Hong Kong and 22% pa for China over 2010-15.

Share price surge makes valuation expensive. While this is a good business with high entry barriers, valuation is hard to determine as most comparable companies are illiquid. China Cord Blood and Cryosite, are trading at about 10-11x PER. Cordlife currently trades at 20x FY11 PER following the surge in its share price. We believe that share price may start to retreat after the initial euphoria.