May 16, 2021
general Analysis
[9 min Read]
Valuation: Undervalued
Investment Thesis:
Company Overview:
Global Cord Blood Corp (Ticker: $CO), is a life sciences enterprise that is dedicated to storing umbilical cord blood stem cells and leverages their scientific developments to rapidly advance clinical applications of their stem cells.
GCBC operates in the People's Republic of China, and offers cord blood testing, processing, storage solutions, testing, and processing of the cord blood samples that they have banked.
GCBC hold 3 out of the 7 available cord blood banking licenses in China. As a result of this they have been able to grow their subscriber base to 882,982 (December 2020).
Operations:
Revenue:
GCBC has 2 steams of revenue when banking the blood/stem cell samples.
The reason why blood banking is so popular and why GCBC can charge as much as they do is because of the potential applications of stem cells. Currently, diseases like Osteopetrosis, Hodgkin's Lymphoma, Acute lymphoblastic Leukemia, and many more diseases can be treated with stems cells. Furthermore, there are currently clinical trials for the application stem cells to treat diseases like autism, cerebral palsy, pediatric stroke and many more.
A full list of diseases that are treatable or that are currently in clinical trial for tractability via stem cells will be linked below as an image.
Investment Information:
Financial Information:
GCBC reported their revenue to be $175.35M, and their EBITDA to be $90.19M for the fiscal year end 2020. Furthermore, in this same time frame GCBC reported a gross profit of $148.2M, which translates into a gross margin of 84.5%, which is incredible. Lastly, GCBC has a market cap of $602.89M.
The 3 regions where GCBC already has their blood banking license (Beijing, Guangdong, and Zhejiang), account for 2M annual newborn babies (40% of China's annual newborn population.) This shows that there is tremendous growth opportunity for GCBC if they can educate the population about the benefits of their service. Even if GCBC was able to acquire 20% of their TAM this year it would result in an additional 400,000 subscribers essentially increasing their revenue (and value) by 50%.
As previously stated, there are only 7 blood banking licenses available in China. This is because there is a “one license per region” policy in China for cord blood banking and there are only 7 regions in China that currently compete in the space. As previously stated, GCBC has 3 of these regions which amount to 48% of the TAM in China. However, GCBC also has a minority (24%) stake in Shandong cord blood bank, who currently holds the Shandong regional license, which represents 26% of the TAM. In total, GCBC has a majority or minority stake in blood banks that represent 74% of the TAM for blood banking in China.
GCBC's ability to generate a large portion of their revenue through recurring fees (18-year annual fee contracts) signifies that they have a very steady (yet growing) source of revenue that will be attractive for investors. Furthermore, the likelihood of seeing GCBC's revenue fall significantly are very low due to their recurring revenue business model.
GCBC's revenue is greatly influenced by Chinese Traditions and zodiac trends. An example of this comes from 2016 in which it was the year of the sheep in the Chinese zodiac. The year of the sheep is not a favourable year in Chinese tradition so the births that year were drastically reduced, having an effect on GCBC's bottom line. However, using this fact in conjunction with the Chinese Zodiac, we can predict that GCBC's revenues will spike in 2022 and 2024. This is because in 2022 it will be the year of the Tiger, and in 2024 it will be the year of the Dragon. These are the two most favourable years to have children in Chinese tradition, and it is common to see a 5% or more increase in childbirths in these years.
GCBC's net income has grown at a CAGR of 25% from 2016-2020, in this same time their revenues grew by a CAGR of 17% and their operating income grew at a CAGR of 19%.
Lastly, GCBC tends to perform the best in the 2nd and 3rd quarters of each fiscal year, which could help the stocks when GCBC reports the earnings of these quarters.
Company information:
Competition:
Their main competitors in China are Tianjin cord blood bank, Shanghai cord blood bank, and Sichuan cord blood bank. However, the Tianjin and Shanghai blood banking regions only account for 2% and 4% (respectively) of China's newborn population, as a result of this both Tianjin and Shanghai are not big threats to GCBC. This leaves the Sichuan cord blood bank, which could be considered GCBC's biggest competitor in China, as the Sichuan region accounts for 20% of China's newborn population (3rd largest region). However, with China's “one license per region” policy, GCBC can not compete with Sichuan directly, meaning these banks are not necessarily “competitors” but co-exist in the same industry, and in the same country.
Some other “competitions” are the companies in the comp's analysis. However, these companies are not really competition because they cannot directly compete in the same region. These companies consist of Cryo-Cell International ($CCEL), PerkinElmer Inc. ($PKI), Cordlife Group Ltd. ($CLIFF), and Vita 34 AG ($V3V).
Valuation Information:
In the discounted cash flow (DCF) model that will be discussed later, I used a variety of information from numerous sources t achieve a fair value and wanted to use this section to clarify/justify what data I used and why I used it.
WACC:
Net income Growth Rate:
Depreciation Decrease Rate:
Average Capital Expenditures:
Average Change in Working Capital:
Other Valuation Information:
Valuation and Plan:
Valuation:
In order to value GCBC I used a combination of a DCF analysis and a comparable analysis.
DCF:
The figures I used in this model and why I used them can be found above under the “valuation information” section of this report. With the being said, my DCF model arrived at an estimated fair value (of GCBC ($CO)) of $13.20/share, which implies an upside of 171.05%. To further investigate this valuation, I decided to undergo a comparable analysis to either validate/invalidate the figure achieved through the DCF model.
Comparable Analysis - P/S:
In this analysis I compared GCBC's price to sales ratio (P/S) to their publicly traded competitors listed above under the “competition” section. These companies are the only public cord blood banking stocks that I could find on the market, which is why there is a large discrepancy between market caps. With that being said, the P/S comparable found that GCBC ($CO) is currently undervalued, and the estimated fair value is $5.45/share. If this came to fruition the upside of this investment would be 11.82%.
Comparable Analysis - P/E:
In this analysis I compared GCBC's price to earnings ratio (P/E) to their publicly traded competitors. The P/E analysis found that the fair value for GCBC ($CO) should be $14.82/share, which implies an upside of 204.27%. This analysis confirms the results in the DCF and further instills my confidence that $CO can reach these levels.
Investment Plan:
Any entrance into a position in $CO under $5.45 will help to limit the downside risk of such an investment. This would also ensure that you are buying very close to the lowest fair value out of the 3-analysis conducted.
I would sell my shares when $CO's stock price reaches $13.20 to take profits while ahead rather than waiting and potentially never reaching the next level of $14.82.
However, I would also sell if this stock fell below $4.50 and look for a possible re-entry into a position around the $3.68-3.73 range.
Investment Catalysts:
Investment Risks:
Recently, there was an attempt to buy out $CO at $5/share, and if a deal like this was to go through, the share prices would dip (only if the buyout was under current share prices).