Global Cord Blood Corporation: The Unknown Biotechnology Stock That Can Define a Generation

Global Cord Blood Corporation (CO) is a micro-cap biotechnology company headquartered in Beijing, China. The company is the largest cord blood storage provider in China, where it operates a private cord blood storage service for new parents to store their children’s umbilical blood stem cells after birth, which acts as biological insurance against future life-threatening illnesses. Furthermore, the company also operates as a public blood bank where the company pools its resources and matches compatible recipients and donors for life-saving treatments. The company has various storage facilities in China and is expanding in the Asia Pacific region through leveraging its partnerships with over 360 hospitals, ^[1] and on strong economic trends such as the rising Chinese middle class, the relaxation of the one-child policy and the development of stem cell technology.^[2]

Corporate Timeline

Management Overview

Ms. Zheng Ting, Tina

Chairperson, Chief Executive Officer and Director

Ms. Zheng is the Chairperson, Chief Executive Officer and Director. She has been in charge of operations since 2003 and is primarily responsible for strategic development and overall management of GCBC. In her previous roles, she served as a Director at Golden Meditech where she played a crucial role in the initial public offering of Golden Meditech on the Hong Kong Stock Exchange in December 2001. During her tenure as CEO of GCBC, she played an important role in the acquisition of Nuoya (“Guangdong Province Cord Blood Bank”) and investments in Cordlife (“Life Corporation Limited and Cordlife Group Limited”). She received an EMBA degree from the Renmin University of China.

Mr. Chen Bing Chuen, Albert

Chief Financial Officer and Director

Mr. Chen serves as the Chief Financial Officer and Director. He is in charge of GCBC’s accounting and budget planning. He is also involved in GCBC’s corporate structuring and development, including mergers and acquisitions, and investment in foreign healthcare companies. Most notably he played a crucial role in the acquisition of Nuoya and investments in Cordlife. In his previous tenure, he served as the corporate finance Vice President of Golden Meditech since March 2005. Before Meditech, Mr. Chen worked in several financial institutions and is a CFA charter holder and received his bachelor’s degree in commerce from Queen’s University, Canada, School of Business in 1999 with a major in finance and accounting.

Ms. Arashiyama, Rui

Chief Executive Officer of Guangdong and Zhejiang Divisions

Ms. Arashiyama is the Chief Executive Officer in the Guangdong and Zhejiang divisions. She oversees the daily operation and management of Nuoya and Lukou and is responsible for the marketing strategy for the Guangdong and Zhejiang markets. She joined Nuoya in March 2009 and has over 10 years of sales and marketing experience. From 1999 to 2009, she worked for Jatco Company Limited and was responsible for new market development, execution and cost management. She was also with Nissan Motor Company Limited with main responsibilities of overseas market development in the APAC region. She graduated from Beijing International Studies University in 1981 with a bachelor’s degree in Japanese culture. In 1988, she completed a postgraduate mass media program at Japan Sophia University.

Ms. Xu, Xin

Chief Technology Officer Ms. Xu serves as the Chief Technology Officer. She is in charge of the daily operations and logistic control of the cord blood bank laboratories, and oversees the laboratories’ procedures about the processing, separation and preservation of cord blood stems cells to ensure that storage facilities comply with national standards. Before joining in November 2004, Ms. Xu gained over 20 years of experience in Cryobiology research and had lectured in Cryobiology at Beijing Medical University.

To truly understand a business, one must require extensive knowledge of how the company generates revenues and the primary factors that drive its future growth and profitability. Here in this section, our team of analysts will break down complex scientific, financial and economic concepts for your convenience. Continue reading!

The Science: Simplified

GCBC’s primary business segment is to store and preserve cord blood from childbirth to capture the opportunities made available by evolving stem cell treatments.

Cord blood is blood contained within the umbilical cord and the placenta which is collected immediately upon childbirth for harvesting stem cells. Stem cells can develop into other cell types in the human body, a property known as plasticity. These cells can replace lost or damaged cells, thereby contributing to the ability to potentially renew and repair lost or damaged tissues which can be used to treat a wide range of diseases. Blood storage undergoes a 3-step procedure which is outlined below. ^[2]

Industrial Analysis

The cord blood banking industry can be separated into the types of services the company provides. The first type is private services which involve the storage of cord blood stem cells for the sole benefit of children and other family members potentially for future use in a transplant or medical procedure. The second type is public services, which involve the collection of cord blood with the intention of donating it for public use. The donated cord blood is available for anyone who is a Human Leukocyte Antigens (HLA) match, which is a type of protein found in human blood which needs to be compatible for use in stem cell transplants or medical research. ^[3] This is described in the figure below. ^[4]

Uniquely, GCBC provides both private and public cord blood banking services, known as a hybrid model. This has several advantages as revenues are slightly more diversified, generating income from an initial deposit cost, monthly or yearly storage fees (depending on the plan) and matching fees (when compatible patients are matched with donor blood). ^[1] Secondly, the biggest advantage is the ethical and regulatory benefits of using a hybrid model which I will describe later in more detail.

Global Demand 

The demand for the global cord blood banking industry is driven by increasing awareness of the wide range of diseases that stem cells can be used to treat. Improved healthcare has resulted in increased life expectancy where an ageing population has led to increased disease and demand for medical care. Furthermore, as medical science continues to discover new applications for cord blood stem cells, then more awareness can be raised of its benefits. ^[5]

The demand for cord blood banking services can be measured in terms of penetration rates, which are affected by the number of newborns and the awareness of the benefits of stem cell therapies. ^[5] Therefore, sales and marketing activities play a crucial role towards revenue growth alongside economic growth which has historically favoured increased expenditures on healthcare measures. ^[2]

National Demand

According to the China Statistical Yearbook 2019, China has over 15.2 million newborns in all 31 regions, the second-largest newborn population in the world. ^[6] GCBC currently holds a maximum of 7 licences to practice out of 31 regions. Currently, they operate in 4 of the 7 regions. 3 are majority holdings (red), and Shandong is a minority holding (grey) as summarised in the table below. ^[2]

GCBC has a lot of potential in expanding their client base through building new storage facilities in Tianjin, Shanghai, Sichuan which could increase their client base by 26%. There is more good news for investors as according to the new “one region policy” implemented by the NHC (government regulators), the regulations imply that the 7-region limit can in theory be increased to 19, providing GCBC with an opportunity to potentially acquire more market share in the long-term. ^[2] In 2016 government regulators relaxed the one-child policy, ^[7] meaning that families can have more than one child, and recently in a landmark and historical shift the Chinese government announced the scrapping of the two-child policy in May 2021 to mitigate the falling birth rate and an ageing population. ^[8] These policy changes should translate to an increase in demand for cord-blood storage which is very positive for the long-term outlook of GCBC.

Strong economic trends and a focus on healthcare and biotechnology can propel this business to great heights. According to the China Statistical Yearbook 2019, GDP per capita in China grew by 7.3%, 10.3% and 9.2% in 2016, 2017 and 2018. As the disposable income of families continues to grow, parents are more likely to spend money on healthcare and cord blood banking services. This is highlighted by a tenfold growth in healthcare expenditures, which grew from RMB 458.7 billion in 2000 to RMB 5912.2 billion in 2018. ^[6]

Other catalyst includes increasing public awareness, where GCBC strategically works with a 700+ sales team promoting their services in over 360+ hospitals and clinics. ^[2] This combined with Chinese consumers increasing favourable sentiment towards technology and healthcare up from 68% in 2008 to 74% in 2018, alongside nearly two-thirds (62%) of the Chinese public believe that healthcare should be focusing resources towards preventative care, which suggests a growing awareness of science-related issues and the benefits over the long-term. ^[19] 

Furthermore, the Chinese zodiac may also affect the number of annual newborns. For example, the Year of Dragon is favourable whereas the Year of Sheep is not. Many parents could go out of their way to ensure their baby is born in the right year to ensure a prosperous future. This trend may be accelerated due to the relaxation of the one-child and two-child policy, which was previously thought to make it inconvenient for parents to act under zodiac beliefs. ^[9] This would in theory increase the volatility of annual revenues for the foreseeable future, however, only time will tell.

GCBC Revenue Model GCBC private business generates revenues through two pricing plans. These fees are increased year-on-year which is dependent on inflation rates and adjusted on the rising cost of sales and operations. ^[2] The two pricing plans are described in the figure below.

Private Blood Banking

Furthermore, in addition to private banking services, GCBCs offers public blood banking which charges a matching fee of RMB 15,000 per client which is approximately 1% of its revenues and is projected to rise. ^[2]

Competition 

There are currently only 7 companies in China that hold a licence to practice, three of which belong to the Beijing Cord Blood Bank, Guangdong Cord Blood Bank and Zhejiang Cord Blood Bank which are all operated by GCBC. The fourth licence is to Qilu, in which GCBC own a 24.0% equity interest and 76.0% is owned by GCBC’s controlling shareholder, essentially creating a monopoly. ^[1] From what the ChineseAlpha analyst team sees there isn’t any meaningful competition to GCBC in China as the rest of the licence holders are based only in one region, which pales in comparison to GCBC a publicly traded and multinational company. There is a possibility that the NHC (government regulators) will take the position of a fee-based commercial cord blood banking service, which can drive down the pricing of GCBCs storage service, however, this is speculative at best. ^[2]

An issue with GCBC is the potential action of anti-monopolistic Chinese regulators, which can serve to provide a more stringent oversight on the industry and possibly implement stricter policies on the pricing of the services and dish out fines which may affect business operations. 

GCBC in 2020 has been strategically expanding in the Asia Pacific region through a proposed partnership with Cordlife which is a cord blood storage provider in Singapore and operates in Hong Kong, India, Indonesia, Malaysia and the Philippines. Currently, GCBC owns 10% of the equity shares in Cordlife and is planning to buy more. This partnership may find competition from national and local cord blood banks in foreign territories. 

Ethics

One of the biggest hurdles to the adoption of private cord blood banking services is the ethical considerations. Whilst, GCBC claims that 80 diseases can be treated by stem cell transplant this is true to a certain extent but is misleading. ^[10]

The benefits of cord blood stem cells in treating another person with a matching HLA type with stem cells (HSCT) is very clear. Which is the primary purpose of most public cord blood banks to provide a rapidly available source of stem cells with proven clinical outcomes. In contrast, the banking of cord blood in private cord blood banks is based on the hope that in the future, there is therapeutic benefit in treating a disease in a family member. At present this is entirely speculative as the likelihood of a family member to access their cord blood stem cells for established therapeutic interventions is extremely low (3 in 100,000). This may present an issue of informed consent in which some would argue that advertising private services are exploitative. Furthermore, the rapid growth of private cord blood banks provides a significant challenge to the viability of public cord blood banks for the competition of clients, which arguably redirects stem cells from established to more speculative uses as described below. ^{[11] [12]}

In the Senior Analyst expert opinion, who is an IBMS accredited and fully qualified Biomedical Scientist with previous experience in Haematology, ‘GCBC offers a well-balanced medium between profitability and altruism given that the company has opted for a hybrid model, which operates both as a public and private cord blood bank. However, this hybrid model may present itself as an ethical dilemma, where there could be a conflict of interest to prioritise private banking over public banking due to the profit-driven nature of business’ – Kevin Francis Marcaida.

Financial Performance

This is the section that is beating the heart of any informed investment decision which separates the speculators from the professional investors. We at ChineseAlpha want our readers to have the best quality experience to make the best investment decisions of their life. Keep reading and we will break down the financial statements (income statement, balance sheet, cash flow statement) and valuation metrics for your ease.

In GCBC’s 2020 annual report, the financial highlights are one of the first items to appear to investors. A bold and strategic move! Why you may ask? In traditional annual reports, financial highlights are situated near the middle. By management formatting, the financials in this way is an in-your-face statement to investors “Look at how amazing our financial statements are”, our analysts at ChineseAlpha will put this statement to the test.

Revenue’s growth is very positive, growing 5% from 2018 to 2019 and 24% from 2019 to 2020. This is primarily driven by the company raising the cost of the service, as, from the figure below, the number of customers from 2020 to 2021 has decreased, which is likely driven by blood collecting issues and lower newborns numbers during the coronavirus pandemic. ^[1] 

This strongly highlights the pricing power of GCBC which is effectively a monopoly and suggests that as long as demand is restored in the future, with restriction easing and the pandemic loosening its grip, the company should continue to increase its top-line growth. As of now GCBC only operates in 3 of the 7 areas it’s licenced for, should the company create new blood storage facilities then revenue growth should be sustainable in the long term. Quite impressively GCBC boasts a very strong gross margin and EBIT margin (%) which grew from 80.6% to 84.5%, and 29.9% to 45.8% from 2018 to 2020. Furthermore, the 3 key profitability ratios return on assets, return on equity and return on capital have all consistently increased during this period which measures profit efficiency. These factors highlight a company that is financially proficient with very competent management that is capable of reducing its non-operating and operating costs whilst simultaneously stimulating growth. This is truly an impressive income statement.^[2]

The first thing that comes to mind is a large amount of capital in cash and short-term investments, which highlights a company that is highly liquid and can easily pay of its short-term obligations (1-fiscal year) this can be measured by the 2020 current ratio at 9.9x and the quick ratio at 9.8x respectively. However, some analysts would argue that this is an inefficient use of capital. In fact, GCBC holds so much cash and very little debt that its enterprise value is negative which is an extremely rare scenario and a questionable decision.

Quite interestingly a high proportion of liabilities is the line item “Unearned revenues”, which means that the company collects cash upfront before providing a service, this paired with an increasing accounts receivable turnover rate from 8.5x in 2018 to 12.1x in 2020 which measures a business’s ability in collecting the debt owed to the company, all indicate that GCBC is very good in managing its cash flows. Lastly, GCBC has absolutely no debt, and even if leases are counted as debt this only amounts to $0.6 million, essentially nothing comparative to the assets it holds. Overall an impressive balance sheet.

The net income is consistently increasing year-on-year, whilst notably, there is a decrease in cash from operations from $122.7 million to $96.7 million from 2019 to 2020, digging into the cash from operations deeper, the cause of this is a drop in the “change in unearned revenues” this is quite logical as customers are less likely to pay upfront for non-essential healthcare during the middle of a pandemic where cash is king. This combined with a large cash outflow in cash from investing which is due to the business acquiring shares of “Cordlife Singapore” – A multinational cord blood banking provider in Asia resulted in decreased net change in cash in 2020. These changes are ultimately bad for short-term liquidity, however, if things go to plan, then these changes should boost free cash flow in the longer term. Overall a respectable cash flow statement.

Valuation

We will take you through each phase of the Discounted Cash Flow Model (DCF) and provide our key assumptions. Our analyst selected only the DCF Perpetuity Growth model, where the driver of value is solely based on the forecasted cash flow of the company. Our analyst did not factor in the DCF Multiples Exit, where the intrinsic value is derived from similar publicly traded companies. This is because Global Cord Blood Corporation is unique, it’s a monopoly with virtually no worthy competitors in the same country – There is no point in comparing a giant to ants. Furthermore, our analyst extend the growth period for 10 years, which reduces ‘valuation drag’ the reliance of the intrinsic value on the terminal value.

Step 1: Calculate the Weighted Cost of Capital (WACC)

Cost of Equity (CAPM)

We will treat GCBC as a Chinese business given where it conducts the majority of its operations. Furthermore, treating the company this way should produce conservative estimates. Normally our analysts will factor in the value of a “bottom-up levered beta” which is the volatility (risk) of a stock compared to similar businesses within an industry, however, we mentioned that GCBC is effectively an industry monopoly. Therefore, a regression beta – The risk of a stock compared to the risk of the market will have to suffice on its own.   

Using the Capital Asset Pricing Model (CAPM) the inputs used is as follows:

10-Year Risk-Free Rate = 3.08% (10-year China Government Debt) – Capital IQ

Damodaran Equity Risk Premium = 5.40% ^[13]

Country Risk Premium = 0.68% ^[13]

Beta = 0.39 % – Capital IQ

Plugging these figures into the equation:

Cost of Equity = Risk Free Rate + Beta * (Equity Risk Premium) + Country Risk Premium 

Cost of Equity = 5.866%

Cost of Debt (Synthetic Credit Rating Approach)

Global Cord Blood Corporation, doesn’t have an official credit rating therefore by calculating its interest coverage ratio (EBIT/Interest Expense), a ‘synthetic’ credit rating can be created using professor Aswath Damodaran’s lookup table.

Interest Coverage Ratio = Greater than 12.5

Credit Rating = AAA ^[14]

Default Spread (AAA) = 0.63%

Country Default Spread (China) = 0.62% ^[13]

Average Corporation Tax (China) = 25% – 2021 CN PWC Tax Report ^[15] 

10-Year Risk-Free Rate = 3.08% (10-year China Government Debt) – Capital IQ

Plugging these figures into the equation:

Cost of Debt = (Risk-Free Rate + Default Spread + Country Default Spread) x (1-T)

Cost of Debt = 3.2475%

Weighted Average Cost of Capital (Discount Rate)

Total Debt = Current Debt + Long Term Portion of Debt + Current Leases + Long Term Leases

Market Equity Value = Diluted Shares Outstanding x Current Share Price 

Weight of Debt = 0.09%

Weight of Equity = 99.91%

Weight of Preferred Shares = 0%

WACC = 5.865%

Discounted Cash Flow Analysis Using 5-year historical financial statements and forecasts up to 2027 provided by Research and markets. ^[16] We extend the forecast period to 2032 and by using conservative assumptions provided by our internal team and corporate partners. Our analyst used the XNPV function (XNPV = Discounted rate, cash flow, date) with midpoint discounting alongside the year fraction to ensure cash flows are discounted appropriately according to the fiscal year-end date. We use a 3% perpetuity growth rate which is appropriate as GCBC by the end of 10 years should be nearing maturity in a high growth Chinese emerging market and is in line with the 10-year risk-free rate of 3.08%, which is a reliable proxy to estimate the 10-year future growth of an economy and should produce conservative assumptions.

Base case – $44.38

The base case is the most probable course of action of the growth and operations of a company as predicted by our analysts.

• Implies 9.4% CAGR until 2027 
• CAGR of 4% to 2032 
• The Cordlife partnership is successful
• No new blood storage facilities are created within the 10-year forecast period

According to the base case, there is a potential 717% upside from the current price at $5.43. Furthermore, by testing this assumption using the sensitivity analysis, which is a model that tests out the inputs of a model in case our analysts misjudged the values. Even with an ultra-conservative discount rate of 9% and a perpetuity growth rate at 1.5%, the lowest intrinsic value would still be $25.37 which is nearly a 5x upside from the current price making global cord blood corporation potentially a fantastic investment opportunity.

Grey sky case – $40.54

The grey-sky case is an alternative assumption that there is a worse than expected outlook for the growth and operations of a company.

• Implies 6% CAGR until 2027 
• CAGR of 3% to 2032 
• The Cordlife partnership fails
• No new blood storage facilities are created within the 10-year forecast period

Blue sky case – $50.39

The blue-sky case is an alternative assumption that there is a better-than-expected outlook for the growth and operations of a company.

• Implies a 12% CAGR until 2027
• CAGR of 4% to 2032
• Cordlife partnership is successful 
• One new blood storage facility is created within the 10-year forecast period

• GCBC’s business model is at risk if it cannot continue to attract enough clients. Its business is fundamental to penetration rates which are dependent on spreading public awareness of the benefits of stem cells, if the business fails to spread awareness or if stem cells do not meet the expectations of the public, then GCBC could be at risk. Furthermore, China has a declining birth rate with fewer newborns every year, if the three-child policy is unsuccessful in mitigating this concern then GCBC could be strongly at risk.
• GCBC may be at risk of inflation, this is because GCBC holds a significant amount of cash and marketable securities – If inflation increases the purchasing power of cash and marketable securities decreases – Right now China’s Year-on-year GDP has grown 18.8%, however, YoY CPI and Core CPI has only grown 1.3% and 0.7% suggesting that inflation remains low despite a fast-growing economy. ^[17]
• GCBC may be targeted by the Chinese regulators as the government has been historically cracking down on business monopolies which may be problematic for the market dominance of GCBC in the cord blood banking sector. Chinese regulators may issue fines, regulate the pricing of its services, or break up the company. This remains a constant theme in 2021. Based on history Chinese regulators seem to only target large-cap tech stocks and not smaller companies such as GCBC, this might be subject to change.

Technical Analysis

Technical analysis is a pricing method used to predict the future price action of a stock based on history. Pure technical analysts fully or partially believe in the “efficient market hypothesis” meaning that all information both private and public are fully represented in the price. Technical analysis is often disregarded in academia and the “purist” investing community as akin to horology, or astrology, and hence why it is not widely taught in business schools. However, the general consensus of academic papers has shown that the usage of technical analysis significantly outperforms strategies purely based on fundamental analysis alone. ^[18] This is why our analysts at ChineseAlpha believe in the importance of technical analysis.

GCBCs price is in a strong long-term uptrend since May 2020 as noted by the parallel blue lines (upwards channel), the price is in a recent pullback starting from the last week of May 2021 where the price bounced at the top of the channel to the bottom, where it has found a key support level (purple band). Furthermore, price is also at the bottom of the channel which can act as a “dynamic support line” and is currently in a key area of confluence (region of interest). The Relative Strength Index (RSI) indicated by the purple band at the bottom of the chart, is near oversold indicating that the price is at an interesting level to trade to the upside. These factors strongly indicate that price is ready for a shift of momentum to the upside.  Our analysts recommend using a “break and retest” trading strategy with favourable price momentum coupled with the rising volume on higher timeframes (1 day and above) which is supported by research to create positive returns in small firm stocks.^[19]

Recommendation

Based on the Peter Lynch 6 categories we describe GCBC as a Stalwart. Our analysts recommend that GCBC is a long-term hold as there are near term causes for volatility including the execution of the partnership with Cordlife Singapore, increased inflation expectations and regulatory crackdowns on business monopolies. GCBC looks like it has short term trading potential given a recent pullback to a strong support level from a long-term uptrend, which could be a fantastic opportunity for swing traders for a buy-entry.

Summary

Global Cord Blood Corporation (CO) looks like an interesting investment with a potential 7x upside based on our valuation, even in the more conservative cases the price still looks highly undervalued. This coupled with strong economic and social trends which can accelerate businesses revenues and strong financial management demonstrated by improving financial statements indicate a business that is ready to rocket in the upcoming years as long as risk factors are kept to a minimum.  Based on our analysis GCBC is a strong buy recommendation.