Valuation: Undervalued

Investment Thesis:

Global Cord Blood Corp. (GCBC) is a life sciences enterprise based out of China that collects, analyzes, and stores blood and stem cell samples from the umbilical cords of newborn babies.
They currently have 882,982 people subscribed to their blood banking services, which ensures recurring revenues over an 18-year timeframe.
In 2020 GCBC’s revenue was $175.35M, their EBITDA was $90.19M, and their gross profit was $148.2M.
The potential upside for this investment is between 11.82% and 204.27%. However, evidence suggests that an upside closer to the range of 171% is most likely.

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:

Cord Blood Collection:
- Cord blood is collected by qualified physicians immediately after childbirth and delivered to GCBC’s labs within 24 hours.
Stem Cell Processing:
- Once the blood and stem cells are received at one of GCBC’s sites, they remove red blood cells, platelets, and other components.
- They then determine the cell recovery rate and the amount of total nucleated cells (TNC)
Lab Testing and Validation:
- Test for bacteria and viruses.
- Determine the percentage of stem cells contained.
- An HLA test is conducted to match the sample to potential donors and recipients.
- Test and extract other relevant information from the blood and record it in the client’s record.
Stem Cell Storage:
- Freeze the stem cells to -90°C
- Store the samples in tanks with liquified nitrogen (-196°C)
- Continuously monitor and track the sample to ensure safe storage.

Revenue:

GCBC has 2 steams of revenue when banking the blood/stem cell samples.

Processing Fee:
- A one-time up-front fee of 9800 Yuan ($1,842 CAD)
- Consists of the delivery, processing, testing and validation of the samples before they are stored.
Storage Fee:
- Customers have the choice to either make annual payments or one up-front payment for the storage of the blood and stem cell samples.
  - Upfront charge is 10,840 Yuan ($2,038 CAD)
  - Annual charge is 860 Yuan ($162 CAD/year)
- GCBC has 18-year contracts for their customers to endure the storage and safety of their children’s blood and stem cell samples until the child reaches adulthood.

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 2^nd and 3^rd quarters of each fiscal year, which could help the stocks when GCBC reports the earnings of these quarters.

Company information:

GCBC has accumulated and stored 74,060 blood and stem cell samples.
- 678 of these samples were used in medical treatments in 2020 alone.
GCBC has accumulated 833,094 total subscribers to their blood banking services.
- Grew 11.04% YoY (lower than CAGR because of COVID-19 impacts)
- Grew at a CAGR of 13.37% between 2016-2020.
Acquired many blood banks since their inception in 2003.
- Guangdong bord blood bank
- Zhejiang cord bank
Have invested in other cord blood banks
- 24% stake in Shandong cord blood bank. (2^nd largest newborn population by region)
- Invested in Cord life in 2007, which is now the largest blood bank in SE Asia
Have two accreditations:
- 1^st blood bank in China to receive ISO9001 in 2005
  - An international standard for quality management.
- Received AABB accreditation in 2013
  - Ensures high quality and operational systems, by meeting the standards of the International Society for Quality healthcare.
  - GCBC owns the only 3 blood banks in China with this accreditation.

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 (3^rd 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:

I got the WACC via tracktak. Tracktak is a site that provides information for DCF models and has a DCF calculator. They estimated that GCBC’s cost of capital was 7.08%, which is the figure used in my model.

Net income Growth Rate:

In GCBC’s 2020 Investor presentation they highlighted that their net income has grown at a CAGR of 25% over the past 4 years and expect it to continue into the future.

Depreciation Decrease Rate:

To arrive at this figure, I found the average annual decrease rate of the depreciation figure on GCBC’s financial statements between 2016 and 2020 and used it to forecast the future depreciation figures in the DCF model.

Average Capital Expenditures:

If you look at GCBC’s change in capital expenditures on the cash flow statement, you will quickly realize that the figures are very volatile YoY and do mot follow any sort of pattern. As a result of this, I used Ycharts average change in capital expenditures figure and applied it my DCF.

Average Change in Working Capital:

Once again, these figures (found on the cash flow statement) are very volatile and do not follow any pattern. As a result of this I took the average (from ycharts) and applied it to my DCF.

Other Valuation Information:

During the year of the Tiger and the year of the Dragon, births have usually increased by 5% in China historically, this is why you will see a spike in revenue in 2022 and 2024.
The past 4 years of the sheep (in China) have exhibited an average birth rate decrease of 2.84%, which is why you will see a slower revenue growth in 2027.

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:

GCBC has stated that they typically perform the best in the 2^nd and 3^rd quarters, knowing this we can assume that the earnings report for each of these quarters may be a catalyst that can help kickstart growth in the share price.
The year of the tiger (2022) and the year of the dragon (2024).
- As mentioned previously these years exhibit increases in the childbirth rate (historically about a 5% increase in births. This will be reflected in GCBC’s revenues come Fiscal Year’s Ending (FYE) 2022 and 2024
Investments and acquisitions can help the share price in the short term
- As stated in the report GCBC has acquired 2 cord blood banks in China since their inception.
- They have also acquired minority stakes in Shandong cord blood bank, and Cordlife
Any advancements in stem cell research can help the price of the stock.
- If scientists came out with positive results about stem cell applications to treat a disease like autism (currently being clinically trialed) it would send the share prices soaring.

Investment Risks:

GCBC is based out of China, and historically Chinese stocks have been undervalued by investors and are looked at as “riskier” due to possible tensions between US and China.
- This might not apply as much to GCBC as they have 2 international accreditations for their services, and their AABB accreditation is from an American board, this might help investors to have more trust in GCBC than some other Chinese stocks.
Negative releases about the effectiveness of stem cells.
- If scientists came out saying that stem cells are not as effective as they once thought, less people will be inclined to store their newborns stem cells.
Buyouts

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).