China Cord Blood: Speculator's Radar;
(From Briefing.com) the first and the largest cord blood banking operator in China, thinly traded though (5.70 +0.09)
Many of the biggest winners in 2009 have been Chinese stocks that have moved from the bulletin boards to a listed exchange. Some examples include: RINO +460%, YUII +290%, YONG +280%, CMFO +260%. Over the past week or so, we have profiled a series of companies that fit this description: Gulf Resources (GFRE), a bromine producer, China Biologic (CBPO), the largest non-state-owned plasma-based biopharma co in China, and China Gerui (CHOP), the largest Chinese manufacturer of high precision cold-rolled narrow strip steel. All can be found in the InPlay archive using PROFX as the search ticker.
Today, we wanted to take a look at another interesting name: China Cord Blood (CO), the first and the largest cord blood banking operator in China. It made the move from the bulletin boards to the NYSE just about a month ago. China Cord Blood is a provider of cord blood banking services in China. Expectant parents pay the co to process and store the cord blood of their children at birth for potential future use in medical treatment. CO charges an initial processing fee at birth and a storage fee each year. CO also preserves cord blood units donated by the public and charge fees to patients in need of transplants when there is a match, but this accounts for only a small percentage of sales.
CO has benefitted from the Chinese govt's "one license per region" policy, allowing each cord blood bank licensee to operate without competition. CO has a partnership with over 90 major hospitals in Beijing, China's second largest city, and it acquired the right to operate in Guangdong, the most populous province in China, through the acquisition of Nuoya in May 2007. Currently, CO is the sole cord blood banking licensee in Beijing and Guangdong. So far, cord blood banking licenses have been issued for only six of China's 31 regions, and CO owns two of them. However, another four licenses are expected to be issued in 2010. CO's existing operations cover an aggregate population of 110 mln people, including 94 mln in Guangdong, which is larger than all but 12 countries in the world. There were 1.2 mln newborns in Beijing and Guangdong in 2007.
The co expects demand to continue to increase due to rising disposable incomes in urban areas; greater attention to health issues; an emphasis on children under China's one-child policy; and heightened public awareness of the benefits of cord blood storage. The financials look great as the co is profitable and Q2 (Sep) revenue rose 30.4% yr/yr to $9.4 mln, with huge operating margin of 37%. Subscribers currently total 105,812 with 21,752 new subs signed up in 1H09, up 47% yr/yr. The co is highly profitable, but having to spread net income across a pretty high share count (66.1 mln) makes the P/E valuation somewhat high (no ests) and it results in a $380 mln market cap, which is on the high side for a co with $18 mln in revs for the 6 mos ended Sep 30.
Bottom Line, any Chinese stock trading below $10 is likely a speculative idea, including CO. However, based on the moves of some of these other undiscovered names, these stocks have the potential to be big winners. The primary concern with CO is that the Chinese govt's "one license per region" policy could change at anytime and lead to greater competition. On the positive side, the application process to become a cord blood banking licensee takes several years and is expensive, which should help to discourage more entrants. Another concern is the heavy float at 65 mln shares, light volume (has cracked 100k share volume only once in the last 16 days) and a fairly high share count (see above).
However, CO looks attractive overall as China's first and largest cord blood bank operator. This is an emerging technology in the most populous country on earth. By holding two of the six cord blood banking licenses in China and being the exclusive operator in the Beijing municipality and Guangdong province, the co has the potential to dominate this market over the coming years and it is looking to acquire other licensees. Mkt cap $380 mln, float 65 mln, avg vol 43k.
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