China Cord Blood's (CO) CEO Tina Zheng on Q1 2015 Results - Earnings Call Transcript

Aug.29.14 | About: China Cord (CO)

China Cord Blood Corp (NYSE:CO)

Q1 2015 Results Earnings Conference Call

August 29, 2014, 8:00 am ET

Executives

Kevin Zhang - Vice President of Corporate Finance

Tina Zheng - Chief Executive Officer, Director

Albert Chen - Chief Financial Officer, Director

Yuen Kam - Chairman of the Board

Analysts

Scott Henry - ROTH Capital

Yi Chen - Aegis Capital

Alberto Bassetto - Jayhawk Capital

Darren Woodman - Woodman Capital

Operator

Welcome everyone to China Cord Blood Corporation's first quarter fiscal 2015 earnings conference call. All participant lines will be placed on mute during the presentation, after which there will be a question-and-answer session.

Now, I would like to introduce Mr. Kevin Zhang, Vice President of Corporate Finance to begin the presentation.

Kevin Zhang

Thank you, Vivian. Good morning, everyone. Welcome to our earnings conference call for the first quarter of fiscal 2015. A press release discussing our financial results has already been released, and a copy is available on our company's web site. During the call, our management team will summarize corporate developments and financial highlights for the quarter. A question-and-answer session will follow.

Before we begin, please note that today's discussion will contain forward-looking statements that are subject to certain risks and uncertainties and actual results could be materially different from these forward-looking statements. Please refer to our SEC filings for detailed discussions of potential risks.

In the interest of time, we will begin with our CEO's English remarks. After the discussion of our first quarter financial performance by our CFO, Albert Chen, our management will be available to answer questions during the Q&A session.

Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.

Tina Zheng

Good morning, ladies and gentlemen. Welcome to our first fiscal 2015 earnings conference call. Overall, our first quarter results demonstrated consistent performance in all key areas of our business. In what is a seasonally weaker quarter for our business, we continued to make progress with the execution of our growth strategy and operation plan in the first quarter. As a result, our number of new subscribers increased modestly year-over-year to 15,548.

Not surprisingly, the Guangdong market remained our largest contributor as measured by new subscribers. By emphasizing CCBC's strong focus on service quality and premium branding, we continue to gain traction recruiting new subscribers within the high-end market segment, a strategy that aligns with our emphasis on upfront payment clients. During the first quarter of fiscal 2015, the majority of new subscribers elected the upfront payment option which led to robust and consistent cash flow.

As we move into our new fiscal year, the constructions of our new facilities in Guangdong and Zhejiang have largely been completed and the corresponding capital expenditures have shifted to fixed assets resulting in increased depreciation expenses. However, these new processing and storage capacities will not only effectively resolve the processing bottleneck issue in Zhejiang, but also lay the foundation towards gradually ramp up in that region and further develop the Guangdong market.

We are in the final stages of this development process and are keen to put the new capacities to use as soon as possible. Aside from our most active market opportunities in Beijing, Guangdong and Zhejiang, where we continue to penetrate deeper into our target segments, our management remains active in evaluating other corporate development opportunities, both in China and around Asia, so that we can continue to enhance our market position and become more influential within the consumer healthcare service arena.

This concludes my remarks for the first quarter results and developments. I want to thank you for your ongoing support of CCBC. At this point I will turn the call over to our CFO, Mr. Albert Chen to review our first quarter financial performance in greater detail.

Albert Chen

Good morning, everyone. Thank you for joining the call today. We began fiscal 2015 with steady performance. In the first quarter, which usually exhibits some seasonal weakness, we recruited 15,548 new subscribers, representing modest year-over-year growth.

In terms of our topline, the rising trend continued in the first quarter. We achieved revenue of RMB153 million, representing approximately 19% increase from the prior year period. Driven by the modest increase in new subscribers and pricing difference, revenue generated from processing fees increased by approximately 18% to 19% year-over-year to RMB106 million.

Revenue generated from storage fees grew by about 20% year-over-year to approximately RMB47 million. As of June 30, 2014, our subscriber base has extended beyond the 392,000 mark to 392,171. In terms of revenue mix in the first quarter, revenue from processing fees accounted for approximately 69% of our total revenue, while revenue from storage fees represented 31% of the total revenue.

In the first quarter, gross profit grew by 18.5% year-over-year to approximately RMB124 million, which was consistent with our topline growth. Gross margin remained strong at 80.6%, but showed a slight year-over-year dip compared to 81% of the same period last year, mainly related to the increased raw material cost.

In the first quarter, both sales and marketing expense and general and administrative expenses increased reflecting the addition of our new facilities and expansion of our operational scale. Sales and marketing expense rose by 11.7% to RMB31.7 million in the first quarter of fiscal 2015. The increase was primarily due to more marketing and promotional activities in Zhejiang, where we are preferring to heighten our marketing intensity this fiscal year as our new facility is about to be put into use. Although sales and marketing expensed increased in terms of absolute amount, as a percentage of revenue it dropped from 22.1% to 20.7%, reflecting the effectiveness of our cost control effort and resource allocation.

First quarter G&A expense was approximately RMB29 million. Compared to the same period last year, G&A expense grew by approximately RMB2 million and it was mainly attributable to our higher depreciation expense and administrative overhead for the new facilities. As a percent of revenue, G&A expense declined from approximately 21% in the prior year period to approximately 19% in the first quarter. As we are in the process of expanding our operation, our management team has continued to carefully monitor and control our G&A expense.

Operating income for the first quarter increased by more than 31% year-over-year to RMB60.2 million, comparing to RMB45.9 million of last year. This increase was affected by solid revenue growth and operating margin expansion. Operating margin for the first quarter was 39.2%, representing an expansion of approximately 3.6 percentage points. This improvement was primarily a result of our successful effort in controlling operating expenses relative to our topline even when depreciation and amortization expense climbed to RMB11.4 million, as compared to only RMB8.6 million in last year.

In terms of non-operating items, interest expense increased to RMB24.9 million in the first quarter, up from RMB14.8 million in the prior year period. Interest expense increase year-over-year was due to the reduction of interest expense capitalization associated with the construction of our new facilities.

No interest expense was capitalized in the first quarter of fiscal 2015 compared to the capitalization of approximately RMB8.5 million interest expense in the prior year period. We expect interest expense to remain at the current level in the coming quarters, as our new facilities have largely been completed. Our dividend income in the first quarter decreased year-over-year to RMB1.2 million from RMB8.7 million of last year.

Although we experienced a solid improvement in operating income, with higher interest expense and lower dividend income, first quarter profit before tax decreased by 6.5% year-over-year to RMB41.5 million. Net income attributable to the company shareholders amounted to RMB29.7 million. Basic and diluted earnings per share for the first quarter were RMB0.37.

Cash generation continued to be strong in the first quarter, given that the majority of new subscriber choose the one-time upfront payment method. Net operating cash flow for the first quarter of fiscal 2015 amounted to RMB125 million and this already accounted for the $4.55 million coupon payment made during the first quarter of fiscal 2015.

This pretty much wraps up my presentations and we are happy, my Chairman and myself, we are happy to take any questions concerning the first quarter results as well as the company latest developments.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Scott Henry from ROTH Capital. Your line is open. Please go ahead.

Scott Henry - ROTH Capital

Thank you, and good morning. I guess, for starters, I just wanted to confirm that your guidance for new subscribers would still be in the 69,000 to 71,000 level for fiscal year?

Albert Chen

For the benefit of the audience, I just want to highlight that Yuen Kam is also with us today. So for those questions that are being raised in English, I will do a translation for the benefit of my chairman and I will respond subsequently.

[FOREIGN LANGUAGE]

Scott, replying to your questions, I think based on our latest information available to us as far as the market reactions, I think we are still confident in terms of achieving our full year new subscriber target, which is 69,000 to 71,000. So as of the time being, we have no intention to adjusting it downwards.

Scott Henry - ROTH Capital

Okay, and then could you give any color on the trajectory? Should we expect it to uptick in Q2 or a gradual uptick? And as well, when we think about pricing and revenue per subscriber, is Q1 reflective of the full year? It actually looks like the pricing was pretty strong in Q1.

Albert Chen

The pricing Q1 was -- on the ASP on Q1 is exceptionally strong, partly due to when compare it on a year-over-year basis is partly because of the pricing adjustment, which we launched back in the first quarter of the previous fiscal year. But that is mainly due to the pricing differentiations. But in terms of trajectory itself, we do anticipate that the ASP over the year should somewhat be similar to what happened in the third quarter. If I am not mistaken, I think third quarter ASP per processing was about RMB6,500 per client and that should be a good number going forward.

Scott Henry - ROTH Capital

Okay, great. Thank you for taking the questions.

Operator

The next question comes from the line of Yi Chen from Aegis Capital. Your line is open. Please go ahead.

Yi Chen - Aegis Capital

Hi. Thank you for taking my questions. My first question is for Mr. Kam. On August 26, China Cord Blood announced that the Magnum Opus and Cordlife will purchase the 7% senior convertible note from Golden Meditech. So I just like to know, what is the reason behind the purchase? And what are the intentions involved behind the purchase from both Golden Meditech and Cordlife? Thank you.

Yuen Kam

[FOREIGN LANGUAGE]

Okay. Well, first of all, my mind investment in China Cord Blood reflected my visions and my belief in the company. Obviously I take a positive view in the long-term outlook of China Cord, otherwise I won't increase my investment in China Cord. And also in the past, my effective interest in China Cord Blood has always been indirect through my ownership at Golden Meditech indirectly owning China Cord. I believe in this transaction will allow me to have the opportunity to directly own China Cord Blood shares under myself and at the same time, from Golden Meditech's perspective, it has been about two to three years time where they make this investment and genuinely speaking it is an investment in which they have generated decent amount in return. And from my perspective, it is kind of hard, especially given the size of this transaction, it is not something that can easily be done through open market purchase. So in my humble opinion, I think this transaction provides a decent amount of benefit to both the vendor as well as the purchaser. Now speaking about Cordlife, as you know, Cordlife has long been a shareholder of China Cord and they are also an operator of cord blood bank as well. And as again, they have indicated their interest in the China market. And this is obviously a decent way for them to gain exposure into the Chinese market. Based on the share price reaction of the three companies immediately after the announcement, it is fair to say that the market has taken this transaction positively.

Yi Chen - Aegis Capital

Thank you. My second question is, China Cord Blood reported cash position of RMB320 million cash at the end of the recent quarter. So I wonder what's the company's plan for the use of such cash going forward? Do you have any our acquisition target in the near-term? If not, is there any plan of dividend at all?

Yuen Kam

[FOREIGN LANGUAGE]

As pointed out, the capital on hand is rather abundant and at the same time, as you know, the business of China Cord Blood is generating a significant amount of capital and cash as well. Now, from our perspective, we have obviously been judging between the appropriate deployment of capital in return for growth trajectories and at the same time, how to maximize shareholders' value. While there is no definitive answer to your questions as of today, but please keep in mind that in the past, we have conducted several rounds of share repurchases, and we have also done several acquisitions as well. And going forward, we will continue to look for potential acquisition targets to strengthen the company growth momentum and at the same time balancing the wellbeing and the benefit of the shareholders. While we don't have a particular plan as of this point in time as to how to deploy the capital, but we will definitely continue to evaluate the options available to us.

Yi Chen - Aegis Capital

Thank you very much.

Operator

Our next question comes from the line of Alberto Bassetto from Jayhawk Capital. Your line is open. Please go ahead.

Alberto Bassetto - Jayhawk Capital

Hi, Albert. Good evening, Mr. Kam. I have a couple of question. But the first one is, once again, the cord blood quarter generated quite a lot of cash flow and I will guess, you mentioned before, it has to do with most of the people or large majority of people to pay everything upfront. Two questions here. Can you, as usual, my question is breakdown in types of payment net, number one? And number two, if that's the case, is it fair to say, this kind of cash is sustainable in terms of $20 million plus per quarter?

Albert Chen

Thank you, Alberto. Thank you for the questions. In terms of payment methodology breakdown, for the quarter ending June 2014, the new subscribers who choose normal payment options account for approximately about 36% of the total new subscriber for the quarter, people that choose upfront payment options or we tend to refer to as the bullet payment options account for about 51% of the total new subscribers. And then we have another 13% of others or so called miscellaneous, which ranges from six year installments to a regular installments. And that's kind of the payment option breakdown.

And allow me to direct your second questions to my chairman.

[FOREIGN LANGUAGE]

Yuen Kam

[FOREIGN LANGUAGE]

It is fair to say that in the near-term, we have no plans of amending or altering our operational strategy, which the focus will still be on highly economic affluent individuals and focus on developing the upfront payment market.

Alberto Bassetto - Jayhawk Capital

Okay. That is good. And then question is, can you breakdown very quickly between the Beijing, Guangdong and Zhejiang, just to get a sense?

Albert Chen

Beijing accounts for approximately 34% of new subscribers, Guangdong accounts for 57% of new subscribers, and the remaining goes to Zhejiang.

Alberto Bassetto - Jayhawk Capital

Okay. So Zhejiang is still on the 1,000 something per quarter. Here is a question for you or for Mr. Kam, can you give us a sense how Zhejiang is expected to ramp up? So if now each quarter you are still running very subdued in terms of capacity, when do you think you can get to say, 3,000 or 4,000 babies per quarter through Zhejiang? Are you in a position to give us some colors on that?

Yuen Kam

[FOREIGN LANGUAGE]

In terms of the Zhejiang operation, we do understand that there has been an excessive amount of delay in terms of the rollout. It is partly due to the construction process for Zhejiang new facilities, which even though is mostly been complete as of now, is the examination and approval process on the laboratories site is still getting into the way. But we are doing everything -- we are exercising our very best judgment as well as all the resources available to us to expedite the process. It is our belief that in the near-term, that we will have the process and the examinations with respect to the laboratory infrastructure completed and hopefully in the near term that the operation in Zhejiang site will be able to ramp up to a level which you can imagine with the market expectations.

Alberto Bassetto - Jayhawk Capital

Okay, and if I may, one very final quick question from me for Mr. Kam, if possible. Mr. Kam, can you give us an update on the Shandong? Insight of what is the future of that potential investment, number one? And then, this quarter, you didn't pay the dividend, as it did happen last year. So if they are going to be paid maybe in the second quarter or is that because they changed the policy? Can we get a little bit more color there? one, in terms of strategy, Albert, and also to dividend.

Yuen Kam

[FOREIGN LANGUAGE]

As for the investment in Shandong, based on my understanding, I think they are in terms of operations, I think they are still progressing as planned. And I still believe that the investment in Shandong is a rightful investment. In terms of the dividend itself, whether they declare dividend or not is really, to a certain extent, up to their own capital needs and their own strategic planning as well. However, they are being to be scheduling a shareholders meeting next month, which hopefully, by then I will be able to shed more color about that development as well. But as far as I am aware, the operation of Shandong still remains intact and is still a good business to be in.

Alberto Bassetto - Jayhawk Capital

Okay. Thank you very much. And that's all of my questions.

Operator

(Operator Instructions). The next question comes from the line of Darren Woodman from Woodman Capital.

Darren Woodman - Woodman Capital

You have powerful resources available to influence the growth rate of your company. Which do you think will be more important to you to influence that growth rate? Purchase shares or acquisitions? And also could you outline -- your growth was positive for operating income but it turned negative because of the charges that -- with the elimination of the charges that you outlined. When you think that net income will grow in a parallel way to operating income? Those are two related questions.

Albert Chen

[FOREIGN LANGUAGE]

In terms of how to facilitate the growth of the company from a profit after tax perspective, part of the reason why the growth in the operating income is not translated directly into the bottomline is because of interest expenses that related to the coupon that we previously issued. And unfortunately, company has no right to actually purchase back the convertible note. It is entirely up to the holder of the note. But now that we are in the almost at the third year since the issuance of the convertible note, so we are halfway into the process already. But it is fair to say that as of this moment, we have no particular plan in terms of buying back the convertible notes and not to mention that we don't have the right to do so.

I would defer to the other first question to my chairman.

[FOREIGN LANGUAGE]

Yuen Kam

[FOREIGN LANGUAGE]

Okay. In terms of the mechanism of tools available to us which we can leverage upon and also as a side grow the company, as you know, in the line of cord blood banking, it is not like running a traditional business where growth can actually accelerate overnight. It is a function of couple of underlying factors including, for example, the number of babies born in the underlying markets for that particular year, how much market resources we are putting into in educating and nurturing the market and let the market grow familiar with the cord blood banking. Obviously on that front, we can increase our marketing and promotion spending to improve the public knowledge and acceptance towards cord blood banking. Another way of growing the company is, our conventional was is through acquisitions. But as you know, the acquisition in China has been increasingly challenging nowadays because of the valuation discrepancy. For example, our peers who are listed in the Shanghai Asia exchange, they are carrying a remarkable valuation as compared to where we stand right now, but with that with that being said, we have not give up the avenue of growth through acquisitions entirely, and we still trying our very best to achieve inorganic growth if possible. So at the end of day, we are also very keen on improving our profit after tax growth and make it in conjunction or make it in line with our operating income growth.

Darren Woodman - Woodman Capital

The current multiples of your own stock. It appears that your own stock would be more attractive than making external acquisitions, but of course you would limit yourself strategically. How do you think that balance will work out?

Yuen Kam

[FOREIGN LANGUAGE]

As I mentioned early on, I mean, we are investigating and looking at the possibility of performing share repurchases or even in the form of dividends to repay our shareholders for their loyal support for us over so many years. None of these have been brought [ph] on the table, so this is still something that we have in mind.

Darren Woodman - Woodman Capital

I understand, and my last question relates to the change in China's birth policy. Do you feel that will materially affect an extrapolation of your historic growth patterns to be much faster than it was historically?

Yuen Kam

[FOREIGN LANGUAGE]

We believe that the amendment to the single child policy in China will definitely benefit the overall industry in terms of enlarging the number of babies born in China as a whole and also on absolute basis as well. Unfortunately, for example in the case of Beijing, they have actually formalized a policy at the end of March. We have not seen the actual benefit from the second child yet. So we will still continue to observe the benefit, but in the near-term, my guess is, it is fair to say that the immediate impact hasn't been felt yet.

Darren Woodman - Woodman Capital

Thank you very much for answering my questions.

Operator

At this point, there are no further questions at this time. I will now the turn the call back to Mr. Kevin Zhang.

Kevin Zhang

This concludes our earnings conference call for the first quarter of fiscal 2015. Thank you for your participation and ongoing support. Have a great day.

[FOREIGN LANGUANGE]

Operator, you may now --

Operator

That concludes our earnings conference call for the first quarter of fiscal 2015. Thank you for participating. You may all disconnect.

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China Cord Blood (NYSE:CO): FQ1 EPS of $0.06 beats by $0.01. Revenue of $24.71M (+18.0% Y/Y) in-line.