Tuesday, August 6, 2013

Cordlife: Rumoured relaxation of China’s one child policy (MKE)

Cordlife Group Limited
Buy (Unchanged)
Share price: SGD1.055
Target price: SGD1.29 (unchanged)
Rumoured relaxation of China’s one child policy

 Possible relaxation of one child policy. According to a Chinese press report, there is a strong rumor on the mainland that China may relax its one child policy by the end of 2013 and fully implement the policy in 2015 via several stages. China’s baby stocks have reacted positively on the news according to our Hong Kong’s consumer analyst, Jacqueline Ko.

Benefit via direct stake in China’s largest player. If realized, this will be great news for Cordlife as it holds 10% stake in China Cord Blood Corp (CCBC), the largest cord blood player in China with operations in 4 provinces (wholly owned operations in Beijing, Guangdong, Zhejiang and owned 24% stake in Shandong) which in aggregate account for 73% of China’s newborn population in the regions licensed for cord blood storage. So far, only 7 Cord Blood licenses have been issued (refer to figure 1 for further details).

Ongoing expansion to meet excessive demand. CCBC currently has a massive warchest (US$241 milion cash) from its accumulated cash and issuance of convertible bonds to KKR and Golden Meditech amounting to US$115 million in April and October 2012 respectively. Currently, it is pursuing an expansion plan to add new storage capacity in Guangdong and build a new storage facility in Zhejiang due to excessive demand. In the longer term, they plan to expand into other provinces as well.

KKR’s presence boosts confidence. KKR China’s 24% stake in CCBC in the form of convertibles notes also serve as a strong confidence booster for the company as they play a crucial scrutinizing role in ensuring the sound performance of CCBC. KKR is known for its prowess in privatizing well performing and high potential companies. We understood that KKR favours Cordlife Singapore’s management team and has been pushing for Cordlife to assist CCBC in its operations. For instance, Cordlife has played a substantial role in the AABB accreditation of CCBC Beijing. We see a possibility in future where KKR together with Cordlife might wholly acquire CCBC.

Reaping benefits. To sum up, China Cord Blood is in a good stead to reap the benefits of the high potential China cord blood market and this will benefit Cordlife via its 10% stake in CCBC. We maintain our positive view on the stock and reiterate BUY with TP of SGD1.29 (23x FY14F PER).

Excellent investment gain. Since Cordlife’s purchase of its 10% stake in CCBC, its share price has gone up by over 40% from $2.80 to above $4.00. As a shareholder, Cordlife will benefit from CCBC’s price hike as they previously acquired 7.3 million CCBC’s share at only USD2.85, bringing its total gain of USD8.8 million (around SGD4.5 cents per share)

Service price hike. Earlier on, CCBC had decided to increase its processing fees from RMB 5,800 to RMB6,800 (17% increase) and gross annual payment from RMB 5,800 to RMB6,800 (58% increase). We have incorporated the price hike in our forecast for FY14. We are confident that the increase will not impact on its customers’ sign up rate given CCBC’s position as a local monopoly player in each region that they operate in.

Source/Extract/Excerpts/来源/转贴/摘录: MKE-Research,
Publish date: 05/08/13

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