China Cord Blood (CO) Q3 2017 Results - Earnings Call Transcript

| About: China Cord (CO)

China Cord Blood Corporation (NYSE:CO)

Q3 2017 Earnings Conference Call

February 27, 2017 08:00 ET

Executives

Kathy Bian - VP, Corporate Finance

Albert Chen - CFO

Analysts

Michael Schmitz - Jayhawk Capital

Kent McCarthy - Jayhawk Capital

Operator

Welcome everyone to China Cord Blood Corporation's Earnings Conference Call for the Third Quarter of Fiscal 2017. Today's conference is being recorded. All participants' 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 Ms. Kathy Bian, VP of Corporate Finance to begin the presentation. Please go ahead.

Kathy Bian

Thank you, Hannah. Good morning, everyone. Welcome to our third quarter of fiscal 2017 earnings conference call. A press release discussing our financial results has already been published and a copy is available on our company's website. 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. Kindly refer to our SEC filings for detailed discussions of potential risks. In interest of time, we will begin with our CEO's remarks followed by a detailed report of our fiscal third quarter 2017 financial performance by our CFO, Mr. 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.

Good morning, ladies and gentlemen. Welcome to our third quarter fiscal 2017 earnings conference call. In the fiscal third quarter, there were a total of 19,712 new sunscribers that were added which represents 26.3% increase year-over-year. Through the first three quarters of fiscal 2017, the total accumulated number of new subscribers increased to 550,04,742 [ph]. We are pleased with our year-to-date performance which is in line with the management's expectation.

During the reporting period, the economic uncertainty in China continues to inactively impact consumer confidence and discretion rate spending. To counter look for consumer spending on precautionary healthcare services, the management continue to devote resources to expand sales channels, increase sales force and intensify the marketing campaign. This effort contributed to the steady increase in our subscriber number with no material changes in payment mix. Although our business performance remains subject to economic uncertainties as well as complex dynamics within our established regional markets, China Cord Blood's executive team will continue to proactively optimize our marketing and sales model prudently evaluate business opportunities, selectively expand new services to dynamic growth and profit opportunities ahead.

Additionally, the management team is focused on optimizing the group's existing resources and platforms. During the fiscal third quarter, we successfully monetize our cord blood banking resources by glancing Golden Meditech's limited access to the data derived from a portion of our public cord blood samples. This collaboration will later seemed further on locking the commercial potential for public cord blood bank and further enhancing our profitability. During the reporting quarter, we were informed that our substantial shareholder, Golden Meditech entered into an agreement to transfer all of its foundership in China Cord Blood Corporation to Nanjing Ying Peng Hui Kang Medical Industry Investment Partnership. We want to caution our shareholders and the potential investors that the transaction is not yet complete and remains subject to certain conditions including approval by Golden Meditech shareholders as well as related regulatory bodies. We will continue to pay close attention to any new developments and update our investors as mature news develops.

This concludes my remarks regarding our fiscal third quarter 2017 financial results. I'd like to thank you for your ongoing support of CCBC. At this point I would turn the call over to our CFO, Mr. Albert Chen to review our third quarter financial performance in greater detail.

Albert Chen

Good morning, everyone. We achieved favorable results for our fiscal year 2017 third quarter and managed to add more than 19,000 new subscribers. As a result of our focused efforts on new subscriber growth, revenues increased by 19% year-over-year to RMB201 million.

With new subscriber number increased by approximately 26% year-over-year, revenue generated from processing fees and other services in the reporting quarter increased to RMB130 million. As a result, revenues generated from processing fees now accounted for approximately 65% of total revenues. During the reporting quarter, we reclassified 1,847 private cord blood units as donated cord blood units because their recoverability was considered relatively low. Taking the reclassification into consideration, our accumulated subscriber base increased to 554,742 as of December 31, 2016.

Revenues generated from storage fees increased by nearly 17% year-over-year to RMB71 million. And storage fees now accounted for approximately 35% of total revenues. During the reporting quarter, the company provided advisory services related to cord blood processing device and consumables to Golden Meditech and in return, we recorded a fee of approximately RMB17 million as a reduction of direct cost. These associated products were used to process the cord blood units which we collected from time to time. As a result of the reduction of direct cost, gross profit for the third quarter of fiscal 2017 increased by 32% year-over-year to RMB176 million.

Gross margin also improved to 88% as compared to 79% of last year. Excluding the impact of the reduction of direct cost, gross margin for the reporting quarter remains stable at 79%, same as last year. To counter the lukewarm demand during the reporting quarter, we increased the frequency of our advertising and promotion activities to attract new subscribers. We also increased self-incentive and adopted new marketing measures to enhance public awareness with respect to the benefit associated with cord blood banking. As a result, sales and marketing expenses for the third quarter grew to RMB47 million as compared to RMB37 million of last year.

Sales and marketing expenses as a percentage of revenues increased slightly to 23% as compared to 22% of last year. General administrative expenses for the third quarter amounted to RMB51 million compared to RMB43 million of last year. The increase was partially due to the non-cash write-off of RMB2 million in the account receivable as a result of the reclassification of cord blood units as donated units and also the increase in professionals and related expenses as well. General and administrative expenses as a percentage of revenue therefore remain consistent at 25%, same as last year.

Operating income for the third quarter of fiscal 2017 doubled to RMB102 million. The increase was caused by both the improved gross profit and other operating income of RMB26 million which was related to a public bank collaboration between ourselves and Golden Meditech. In this project, we granted Golden Meditech exclusive access to certain data derived from a small portion of our donated cord blood samples, no such income was recorded last year. Excluding the reduction in direct costs and the amount related to this project, operating margins was then 29% which was similar to last year's 30% level.

Depreciation and amortization expenses for the reporting quarter remains stable at RMB13 million. Share based compensation expense increased slightly from RMB15 million of last year to RMB16 million for the reporting quarter, largely due to the currency weakness of RMB against U.S. dollars. Operating income before depreciation and amortization and share based compensation expenses increased RMB130 million representing a 66% increase year-over-year.

During the reporting quarter, interest expense was RMB31 million compared to RMB28 million of last year. Interest expense was mainly related to the company outstanding convertible notes denominated in U.S. dollars. The increase was due to the compounded interest effect of the convertible notes as well as the depreciation of RMB against U.S. dollars. During the quarter we also recorded an impairment loss on available for sales securities of nearly RMB3 million. That was related to the continuous decline in the market volume of Life Corporation Limited which was our ex-strategic investment in Australia.

Taking into account the magnitude and the duration of the decline and the current market condition, we concluded that the impairment loss on investment in Life Corporation Limited was considered as other than temporary. Therefore, the company recognized the impairment loss in the reporting quarter.

Income before tax for the third quarter of fiscal 2017 increased by 14% year-over-year to RMB73 million. Income tax expense for the reporting quarter increased to RMB17 million due to the recognition of other operating income. Net income attributable to the company shareholders for the third quarter of fiscal 2017 increased to RMB56 million. Net margin for the third quarter was 28% compared to 30% of last year.

Basic and diluted earnings per share for the third quarter increased by 11% year-over-year to RMN0.70. Net cash provided by operating activities for the third quarter of fiscal 2017 increased by 18% to RMB170 million.

These pretty much are the highlight for the third quarter results and I think we can now turn to the floor for any questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Michael Schmitz from Jayhawk Capital. Please go ahead, your line is now open.

Michael Schmitz

Thank you. And thank you, Albert, it looks like a very good quarter. One kind of comment and then a question for you related to the Golden Meditech transaction. Just because Golden Meditech has to sell at a low price because of their debt deals, it hasn't been anyone else as to obviously but could you comment please on any conversations you guys have had with Sam Power in kind of controlling the new buyer regarding -- you know, I'm assuming they are in contact with you hopefully about -- and if they are expecting to make any changes in the company, whether operations or capital structure or what have, you could -- you can comment on, and maybe you can't say specifics but just in general, how those conversations are going?

Albert Chen

Thank you, Mike. And -- well, first of all as you know, we have been actively exploring how to best utilize our resources on-hand including for example, our existing clientele and also our various asset and resources to continue to increase the profitability as well as the return to the company. And now this collaboration with Golden Meditech is being part of our effort, I will say it's more like a pilot program where part of our effort to continue to enhance our profitability. And as you also know, we also actively looking into space in China, as well as outside of China to trying to expand our service portfolio as well. So now with that being said, we've meet with the Sam Power team. I think fair to say, I think preliminary meeting seems to be going okay, and -- but given the fact that the transaction between Golden Meditech and Sam Power is still ongoing, as my Chairman has, as my CEO has highlighted in her remarks, that transaction is still subject to a series of approvals. So while I cannot comment on the status of that transaction, I will say that the preliminary meetings, I would say with Sam Power seems to be going well.

Michael Schmitz

Okay. So one other kind of follow-up question related to these service like Golden Meditech, you know, obviously the additional RMB3.8 million for this quarter, was that a one-time thing or is that something that will be expected like on a quarterly basis or yearly basis going forward?

Albert Chen

Let's just say from our perspective, if we can continue to do things and enhance the profitability of our company, it's certainly is a good thing but right now I think it is still a little bit premature to call this a recurring item.

Michael Schmitz

Okay, thank you.

Operator

We take our next question from Matthew Peterson [ph], a private investor. Please go ahead, your line is open.

Unidentified Analyst

What is Meditech's plan in the future? Just how do they plan on handling this large amount of cash that's currently just sitting on the balance sheet?

Albert Chen

I'd presume your question is addressing to the utilization of capital on-hand. With respect to trying to quote; part of the proceed that were part of capital that we have reserved on hand is always being used for expansion and business development purposes but in the past you have also realized that we also use our capital on-hand for example like share repurchases as well. So I guess the capital on-hand, it will be utilized -- going forward be likely to be utilized for a couple of things, business expansions, as well as a potential reward back to show, this is also possible.

Unidentified Analyst

Thank you.

Operator

[Operator Instructions] Our next question is from [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst

Hello, thank you for taking my question. I have actually one question and one comment, just on the Qilu, I mean you own a 24% stake in Qilu. Just -- I haven't seen any dividend income this quarter on Qilu because last year if I'm correct, it was during the Q3 of last year, so does that mean that there would be no dividend from Qilu this year or maybe Q4 because actually Qilu results you know, are increasing very strongly in China based on the SEC filing because Nanjing owns 76% of Qilu and you own the 24% remaining. So the other comment is on Qilu, I mean the valuation in the balance sheet for the 24% stake of Qilu is something like $25 million or maybe $30 million. And actually the fair value, I mean based on the latest transaction is much more higher, something like $300 million. So I mean I've already spoken with you about that by e-mail but I was wondering if you, if there is any changeabouts, revaluating the stake in Qilu?

And finally, I have just one comment on all the transaction, I mean I understand that you are waiting for -- and the special committee is waiting for the Sam Power transaction in Golden Meditech is complete before taking any decision which is normal I think in terms of process but I don't know why a special committee right now do not reject the novel offer of Golden Meditech. I mean it's technically a nonsense, this [indiscernible] and it's not fair value at all. I mean definitely, it's like a little bit strange you know, to have this pending offer Golden Meditech is selling its stake in China Cord so you should reject because despite your strong result and strong cash flow generation, I mean you start playing with [ph] cap by default for us at 640 because you have M&A arbitrage on people like us. So you know, I think at least you should reject and say, okay, let the transaction between Sam Power and Golden Meditech complete and then we will take a decision. Thank you.

Albert Chen

Well, thanks for your questions. Well, first of all I can't comment on behalf of these special committees but I'm pretty sure that based on the past couple of earnings calls, I think we have received various comments and inputs from shareholders and I'm pretty sure that their views and comments are being well heard. As for the -- sorry -- thank you for reminding; as for the operations of Qilu because we are taking as a strategic investment, so in terms of whether or not Qilu is willing to or intended to declare a dividend, it's actually based on -- I think it's based on its management perceptions and also the management planning as well. So unfortunately we did not recorded any dividend income from Qilu in our third quarter results and obviously if there is one, I'm more than happy to -- as an investor, more than happy to receive that dividend income. So in terms of how we accounted for Qilu investment because it's being treated as a long-term investment and I guess if there is a true appreciation in the value in Qilu; and if that happened in the future when we decided to dispose and successfully dispose off again Qilu, I think those gain will be recognized. But this is rarely a little bit incumbent for a strategic investment to be mark to market from a U.S. GAAP point of view. I guess I'm hoping that I can have answer to your question.

Operator

We now move to our next question from Kent McCarthy from Jayhawk China Funds. Please go ahead, your line is open.

Kent McCarthy

Albert, great quarter and great presentation as usual, you are true professional. Now for a comment with a question embedded, and whoever the last gentlemen was who asked that question, we totally agree. We own -- I think 8%, 9% or 10% of the company right now, we'd love to talk to you. Secondly, my comments, as you know after this quarter and the last few quarters were strongly of the opinion on; in a normal stock market your stock could be worth, $50, $60, $70 per share whether you compare it to the 24% ownership or the purchase price of the Singaporean Company or cash flow or anything else. However, given Golden Med's 10-year since we ranging the bell, self-dealing whether it's issuing convertible bonds, doing the stupid Australia deal, doing options; you didn't buyback more shares, you brought back about two, okay, and that cash on-hand is a big issue. There is a good way for this to end and have serious and fair negotiations with Sam Power where it can be a win-win-win.

For the record, I'm deeply troubled by these new business developments with Golden Med and you refer to the independent board, okay, we are entitled to their representatives on our behalf, okay. So those are my comments. I don't expect you to answer much, don't really want to ask you about why you need $400 million when you're generating $100 million, nor why you needed to issue a convertible bond, it was extremely dilutive to us. Also allowed Golden Med increase their ownership and then buyback demand, you and I both know your answers are less than adequate. We also know that you were kind of hamstruck [ph], okay.

So my question is real simple, are you and the independent board that has ties to Mr. Ken [ph] going to represent us, the minority shareholders who only stock since it went public at $6 10-years ago, 8-years ago; were the fundamentals by any measure have increased by 10/15 times. Are you; yes or no, going to try to represent in our best interest which are also your best interest Albert, who as a shareholder; which are also Mark Shen's [ph] best interest as a shareholder; and also is what is fair? So just a yes or no question; I'm sorry to the other shareholders for taking up this much time with my comment but I've got a hunch most of them are [indiscernible]. Thank you very much. I'll put it on mute.

Albert Chen

Kent, appreciate your question and thank you very much for your insight. And I'm sure that the special committee as well as the passengers of our company and all the shareholders and doing the negotiation process, whoever they are negotiating with.

Kent McCarthy

Thank you very much Albert. We'd really like to meet with you in the United States, whoever is representing once if and when this deal with Golden Med goes through. One last thing, them accepting 10/50 and having side deals with the Fund Corp [ph] deal and these business deals is more evidenced that those aren't the fair market value prices; and besides that Golden Meds got themselves in a mess with their bond deals and everything else were they need to capital, okay. Again, their price is not our price and I'm speaking for Jayhawk but I've got a strong suspicion I'm speaking for other shareholders on this call. Thank you again for all your professionalism, we appreciate that your stuck in a very difficult spot business we'd like to meet with you and try to end this in a fair and happy way for all including Sam Power; we think there is positive solutions for them as well if they are listening. Thank you very much. Bye.

Albert Chen

Thank you, Kent.

Operator

Our next question is from [indiscernible]. Please go ahead, your line is open.

Unidentified Analyst

Yes, my question was about the collaboration you guys currently have with public and core companies. Could you expand on the purpose of the collaboration? Also do you have [Technical Difficulty].

Operator

[Operator Instructions].

Unidentified Analyst

Yes, I'm just curious about you guys collaboration with public blood core companies in the purpose of the collaboration. Thank you.

Albert Chen

I presume you are referring to the collaborations worth far on the grant of access looking for information to Golden Meditech. What is the merits of the collaboration is actually provide -- it's actually for us granting a limited access to Golden Meditech because if you know we have collected, donated couple of samples from time to time and those -- and some of the information we have provided to the medical institution that they used for treatment and some of them are donors information which we are not reviewing to anyone and also there are other biological related datapoints as well. So the collaboration that we have with Golden Meditech is actually granting Golden Meditech access to a certain non-confidential information or non-personal or non-privacy related information with respect to a limited portion of our donated copper samples. And I believe they will have these -- they will use the information on their own research and development purposes, and maybe this is for development purposes as well. Now I don't mean to speculate but because this collaboration from our point of view is more like granting a client a certain access to a limited -- to restricted access to a limited portion of our donated samples; I think that's probably the best way to put it.

Unidentified Analyst

Thank you.

Operator

We'll take our next question from Alok Patel [ph], a private investor. Please go ahead, your line is now open.

Unidentified Analyst

Hi, I see that you guys had 19,000 new subscribers. I was wondering if you can break them down by provinces?

Albert Chen

Now the majority of the new subscriber derived from our Guangdong province of Guangdong market. Approximately 61%, 62% derived from our Guangdong market; 22% came from our Beijing market and 16% came from Zhejiang.

Unidentified Analyst

Could you repeat that Beijing number again please?

Albert Chen

That's about 22%.

Unidentified Analyst

Thank you.

Albert Chen

Operator

We'll take our next question from Brendon Hollander [ph], a private investor. Please go ahead, your line is open.

Unidentified Analyst

Hi, thank you for taking the question this morning. I know you mentioned that you were able to increase your gross margin at about 32% as a result of some direct cost cutting, utilizing general Meditech services and so I know it's currently in the process of a sale to Sam Power. So I was wondering how -- how that will impact the margins by maybe taking out those cost cutting and build it even -- and basically kind of like the overarching question is what benefits can Sam Power bring on an operational level from terms of any cost [indiscernible] or revenue generation?

Albert Chen

Thank you for your questions. I will like to caution the investor once again that the transaction between Golden Meditech and Sam Power is still ongoing and is still subject to series of approvals. So it's a little bit early to conclude that as the Sam Power is definitely coming in and then obviously we don't want to comment on that one as well. Now in terms of the operation, I can tell that as of at least upto now we are still operating as status quo, me and the rest of the team members are still operating independently without any help from Sam Power, if that is the question.

Unidentified Analyst

Okay, thank you.

Operator

[Operator Instructions] Our next question is from Jeff Morrison [ph], a private investor. Please go ahead, your line is open.

Unidentified Analyst

Thanks, Albert. I think the sentiments been kind of spread here that won't stay in power, it kind of looks like the role of Golden Med that could help you really look out for the minority shareholders and hopefully you will have the flexibility to make the decisions that can be pretty easy there based on your balance sheet and CFO. I want to follow-up a little bit on this collaboration in Golden Med which is also concerning to me; does this have any ties to the announced collaboration Golden Med had with MD Anderson down in Texas? And then my follow-up question is, do you have a sense of any timing based on what's Golden Med's release on their voting of on accepting or rejecting the Sam Power offer?

Albert Chen

I appreciate the questions. But I am not in the position to answer the questions on behalf of Golden Meditech, especially what's their business plan is and whether or not it's related to MD Anderson. In terms of their shows as approval, I think I'm -- I think they will just follow the process for Hong Kong's company which is not in a process I'm familiar with. It's hard to give you a definitive answer to when that gelled approval is going to happen.

Unidentified Analyst

Alright, thanks.

Operator

At this point, there appears to be no further questions. I will now turn the call back to Ms. Kathy Bian.

Kathy Bian

Thank you. Thank you, everybody for joining us today. This concludes our earnings conference call for third quarter of fiscal 2017. Thank you all for your participation and ongoing support. Have a great day. Helen, you may now disconnect.

Operator

Thank you, Ms. Bian. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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