Cordlife Group Limited is a fast-growing company with an annualized revenue growth rate of 28.8% for the past three years. Number of clients also grew 33% to 21,085 in 2015 from the previous year. Those are impressive numbers, but what is Cordlife’s nature of business?
Cord blood banking.
When a baby is born, the umbilical cord that is cut after delivery contains cord blood. Cord blood is a very rich source of hematopoietic stem cells. Cord blood stem cells are currently used to treat blood and immune system related genetic diseases, cancers, and blood disorders. Due to its numerous benefits, Cordlife collects and stores cord blood (immediately after the birth of a baby) for clients who wish to save it.
What are the chances you might need your cord blood in the future? According to the company, 1 in 217 persons may need stem cells for treatment in their lifetime. Because it is not easy to find a suitable match for cord blood, it makes sense to save it now for potential use in the future. Hence, there exists a market for cord blood.
You could say saving cord blood is the same as buying an insurance policy: Something you (or your child) needs but hopes never to use.
I learned some new and interesting things about cord blood and the cord blood industry during the AGM, and I also received some important takeaways about Cordlife’s business as well. So here are…
7 Things I Learned from Cordlife’s AGM 2015
- According to CEO Jeremy Yee, Cordlife is the largest player in the region when it comes to private cord blood banking. Their market share in 2013 in the respective countries are as follows:
- Malaysia: 65%
- Singapore: 70%
- Indonesia: Near monopoly as it is the only licensed provider
- Philippines: Near monopoly as it is the only licensed provider
- Hong Kong: 25% among four competitors
- India: Number 2 among 18 competitors
- Cordlife swapped an equal percentage stake in its Chinese investment, Guanzhou Tianhe Nuoya, with the largest cord blood banking operator in China, China Cord Blood Corporation (CCBC) in 2012. That transaction effectively allowed Cordlife to own a 10% stake in CCBC which is listed on the New York Stock Exchange. This year, CCBC has received multiple offers in a bid to privatize the company. In the Extraordinary General Meeting’s presentation, the management expects its investment in CCBC to pocket approximately S$46.7 million in profit. A special dividend can be expected once the divestment is successful.
- Despite the depreciation of the rupee, India remains a star performer for Cordlife in 2014. When asked about the percentage contribution of India to the group’s total revenue for 2015, I was surprised to hear from the CEO that Cordlife doesn’t disclose revenue by geography because they don’t want competitors to know the magic number. However, a quick look at segmental reporting quickly reveals the answer: India contributed around 22% of the total revenue in 2015. Besides, the revenue from this market has almost doubled to $12.6 million (+94%). As you can see, there is a lot of hidden information hidden in the footnotes which insiders are not even aware of. As a shareholder of any company, I urge you to read the financial footnotes for your analysis.
- The management expects increasing pressure on gross and net profit margins as the company increases their growth in India. Why? Four reasons: 1) Indians are more price sensitive than consumers in Singapore, 2) Higher advertisement and marketing costs in an attempt to grow market share, 3) More point of sales needed to create a network effect to reach out to more customers and 4) Cost of engaging customers by giving more talks.
- The management believes that the best year to incur all of the above costs is when Cordlife divests it investment in China. Simply said, management wants to grow aggressively (which incurs higher costs) without making a dent on its profit; the gains from the realized investment profit in China will cushion the higher expenses. Minority shareholders must take note of these one-time exceptional gains. Profits may look good one year but it may look completely different when the one-time gains are no longer reflected in the bottom line.
- Anyone looking into Cordlife must take note of the numerous fair value gains and losses in its profit & loss statement. The first item, a fair value gain on investment properties amounted to $1.1 million. Another impairment loss on its investment in its Malaysia associate, StemLife Berhard, amounted to S$2.6 million (caused by the ringgit depreciation) was provisioned in its financial statements in 2015. When calculating price to earnings multiples, it’s important to remove these non-cash and one-time items!
So why would a company not in the fund management business book fair value gains or losses so regularly? The rationale is to increase the transparency of their accounting; management has stated that they do not want to hide the value of the underlying investments on the balance sheet. So they have made the decision to book investments at market value (rather than at cost).
- Additional director’s fees amounting to $120,000 was paid to non-executive chairman, Dr Ho Choon Hou, who has contributed significantly to the company’s success today. CEO Jeremy Yeo indicated he will vote through this resolution as recognition of Dr Ho’s hard work and contribution. Dr Ho also sits on the board of an associate company, StemLife, where directors’ fees are paid to Cordlife. A quick flip to shareholding stakes in the annual report shows that the chairman and CEO don’t own any significant stakes in Cordlife — not more than a percent each. That explains why the additional fees are needed since profit sharing in Cordlife has little impact on their direct remuneration.
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