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Edited Transcript of CO earnings conference call or presentation 27-Nov-19 1:00pm GMT

Q2 2020 Global Cord Blood Corp Earnings Call

Central Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Cord Blood Corp earnings conference call or presentation Wednesday, November 27, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert Chen

Global Cord Blood Corporation - CFO & Director

* Cathy Bai

Global Cord Blood Corporation - VP of Corporate Finance

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Conference Call Participants

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* Cyrille Pichot

* Michael D. Schmitz

Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Global Cord Blood Corporation's Earnings Conference Call for the Fiscal 2020 second quarter. (Operator Instructions)

Now I would like to introduce Ms. Cathy Bai, VP of Corporate Finance, to begin the presentation. Thank you, Cathy. Please go ahead.

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Cathy Bai, Global Cord Blood Corporation - VP of Corporate Finance [2]

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Thank you, Anna. Good morning, everyone. Welcome to our fiscal 2020 second quarter earnings conference call. A press release discussing our financial results has already been published, and a copy is available on our company's website.

During the call, our management team will summarize corporate developments and financial highlights for the quarter. A question-and-answer session will follow. Before we begin, please note that today's discussion will contain forward-looking statements that are subject to certain risks and uncertainties and actual results could be materially different from these forward-looking statements. Kindly refer to our SEC filings for detailed discussions of potential risks.

In the interest of time, we will begin with our CEO's remarks, followed by a detailed report of our fiscal 2020 second quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the QA session.

In view of recent developments, we understand investors and shareholders have various questions to ask. To give everyone a chance to ask a question, we'd appreciate if you could ask one question at a time.

Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.

Good morning, ladies and gentlemen. Welcome to our fiscal 2020 second quarter earnings conference call. During the second fiscal quarter, consumer sentiment and behavior remained cautious under the pressure of slower economic growth in China as well as U.S.-China trade tensions. Despite this headwind, we managed to recruit 21,551 new subscribers, staying on track with our annual target.

The growth was mainly derived from our Guangdong operation. By the end of the reporting quarter, our accumulated subscriber has surpassed 791,000. In addition to enhancing sales activities and education markets, we continued to solidify our leading position through improving operations and services in the second quarter.

During the reporting quarter, Zhejiang received the American Association of Blood Banks, or AABB, accreditation. Hence, all of our facilities are now accredited by AABB, in line with international standards.

Recently, the regulation of the People's Republic of China under the administration of Human Genetic Resources came into effect. The regulation covers a large scope of companies that are in possession of substances containing human genes such as organs and cells, as well as information about human genes. As announced last week, we are in the process of evaluating the implications of the regulation, and we intend to keep investors informed of any new developments.

Looking ahead, we will continue to explore opportunities and channels to broaden our revenue sources. We will also closely monitor the impact of the macroeconomic environment on consumer demand of preventive health care services. We remain alert on any new regulatory developments in our operating markets and are ready to adjust our overall strategy and market positioning based on any potential changes. Bearing all these in mind, we remain committed to our fiscal 2020 new subscriber target, which is between 80,000 and 85,000.

This concludes my remarks regarding our fiscal 2020 second quarter results. Thank you for your ongoing support of Global Cord Blood Corporation. I will now turn the call over to our CFO, Mr. Albert Chen, to go over our second fiscal quarter financial performance.

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Albert Chen, Global Cord Blood Corporation - CFO & Director [3]

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Good morning, everyone. In the second quarter, revenues increased by 27% year-over-year to CNY 314 million. Similar to last quarter, the increase was mainly driven by the upward adjustment in processing fees from RMB 6,800 per client to RMB 9,800 per client, which became effective in April 2019. In addition, storage revenues increased as a result of the company's enlarged subscriber base.

In the reporting quarter, driven by concern over slower economic growth as well as the ongoing U.S.-China trade tensions, consumer sentiment in our markets remain conservative. At the same time, our target segment was adjusting to the new pricing.

Despite such conditions, we managed to recruit 21,551 new subscribers, which is in line with management expectation and only a 6.6% year-over-year -- only at a 6% year-over-year decrease. With a boosting effect from the new processing fee, revenues generated from processing fees and other services increased by 32% year-over-year to CNY 201 million. This represents approximately 64% of total revenues as compared to 61% last year.

By the end of September 2019, our accumulated subscriber base has exceeded 791,000. Accordingly, storage revenue for this quarter increased by approximately 18% year-over-year to CNY 113 million.

Gross profit in this quarter increased by 33% year-over-year to nearly CNY 265 million. Gross margin also improved to 85% as the increase in processing fee exceeded the increase in labor-related cost.

Benefiting from new pricing, operating income increased by 38% year-over-year to CNY 144 million, and operating margin increased to 46%. Depreciation and amortization expenses were approximately CNY 13 million, similar to last year. Despite the increase in operating expenses, non-GAAP operating income still increased by 33% year-over-year to CNY 157 million. Non-GAAP operating margin increased to 50%.

In the face of cautious consumer sentiment in the second quarter, we continued to expand our sales team and scaled up our marketing and promotion activities. Therefore, sales and marketing expenses increased by 26% year-over-year or 7% quarter-over-quarter to CNY 65 million.

Sales and marketing expenses as a percentage of revenue was 21%, same as last year and down from 22% of last quarter. General and administrative expenses amounted to CNY 49 million compared to CNY 40 million of last year. The increase was mainly attributable to the increase in staff costs, bad debt provisions and legal and professional fees. That said, general and administrative expenses as a percentage of revenues decreased to less than 16%.

In the second quarter, we recognized a CNY 7 million decrease in fair value of equity securities or more commonly known as mark-to-market loss. This was significantly less than the CNY 31 million, which was reported last year. As a result of an increase in operating income and a significant decrease in mark-to-market loss from equity securities, income before tax increased by 78% year-over-year to CNY 144 million.

Net income attributable to the company shareholders increased by 85% year-over-year to CNY 120 million. Net margin improved to 38% from 26% of last year. Basic and diluted earnings per ordinary share for the second quarter were CNY 0.99.

These are the highlights of our second quarter financial results. We are now happy to turn to the floor for any questions with respect to the financial results as well as our recent operational development.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Michael Schmitz from Jayhawk Capital.

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Michael D. Schmitz, Jayhawk Capital Management, LLC - CFO and Chief Compliance Officer [2]

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Albert, I'm not sure what technical difficulties you may have been having, but the lines didn't actually start -- weren't able to hear what you were saying until about 5 seconds before it was opened up for questions. So I don't know if you need to repeat everything or if that was just for me.

But the question I have, the new regulations that were issued in June and are fully addressed in your 20 assets, puzzling that the company felt the need to issue last week's press release 5 months later just to say that you still don't know yet of any implications from the regulations. There's been no discernible action from the special committee to even start to evaluate the Cordlife proposal from June 4, which was about 6 months ago, although the special committee has been collecting a handsome fee every month for that purpose. Obviously, the most important issue that continues to be ignored by the company is how the plan to utilize the cash resources that are now and have been for some time, greater than the market cap of the company. The fact that the majority owner has not chosen to remove any board members seems to indicate to me that they're happy with the Board's performance, and since shareholder value continues to be significantly depressed by any reasonable valuation metric, I can only assume they prefer not to return cash to shareholders and would like to keep the stock price depressed. I don't know if we're happy with the Board's willingness to go along with this. It was announced that the majority holder will be selling its stake in the company to Nanjing Xinjiekou Department Store, or the A-share company that's also controlled by Sanpower, although no terms have been disclosed yet. Since then, Mr. Yuan Yafei has actually resigned his chairmanship of that company. I'd appreciate any comments you can provide about that.

But my real question, just regards to the use of company cash. The company and the Board should be making decisions independent of the direction or anything from any particular shareholder and should instead consider only the best interest of all shareholders. The company continues to operate very well, but can the company articulate any steps they're taking from a corporate finance perspective to actually increase shareholder value.

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Albert Chen, Global Cord Blood Corporation - CFO & Director [3]

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Well, Mike, let me, first of all, apologize. It was brought to my attention that many, many callers have difficulty listening to our earnings debriefing. Instead of going through the material again, I think, maybe it's for the best use of everybody's time, we will just make the transcript available online. That may be easier for everyone.

Now my responses to Mike questions a moment ago, I think there are a couple of set of questions: one of them concerning the status of the recent discussion between company and Cordlife, the other regarding the usage of capital and the other one is relating to the latest regulation. I'll try to address the best I can to each of these -- each of the 3 questions.

Let me begin by saying that with respect to the nonbinding proposal from Cordlife, while I'm not authorized to respond to questions relating to the special committee or the proposed offer, I do understand that investors are eager to learn about the latest development regarding Cordlife nonbinding offer. As you are aware, the committee is comprises of both new and old directors who are independent from the overall and they will review and evaluate the proposed offer free from conflict of interest and will do what's in the best interest of all stakeholders.

Many investors have urged the special committee to provide more information regarding the status of the proposed offer, and we will reiterate that message internally as well. Rest assured, the company, as well as the special committee will continue to comply with this disclosure obligation, and we will make further announcement accordingly.

As for the latest regulations with respect to the administrations on human genetic resources, I just want to say that I think the regulation itself is remained ambiguous. And to a certain extent, I think is rather unclear. Overall, it has a strong emphasis on genetic research, but it also penalize foreign entities from obtaining so-called sensitive genetic information who are not in compliance with the regulations. There are many parts and sections in the regulation which seem very unclear to us. And we need to reconsult with different government agencies before drawing any definitive conclusions.

I think at this stage, we have not obtained enough credible information to predict the impact of this regulation and how it will affect the PRC-covered banking industry in 2020 and beyond. But as stated in our press release, we are seeking many clarifications, and we will keep the market informed along the way.

While this regulation can potentially impact on our strategic thinking and our expansion strategy, it does not change the fact that the company strategy going forward, and it will require some form of diversification or service extensions. So that the overall direction hasn't changed, but it certainly bring forth a layer of uncertainty.

And I believe that the other questions regarding how the company issued -- allocated capital, given the company capital on hand. Let me begin by saying that we are constantly reviewing our capital structure, and we are also looking into different ways to deploy our capital. And there are multiple ways to deploy capital, including like using the capital for growth -- organic growth or even in M&A activities or even in dividend, et cetera. And we need to take into consideration the current business environment and the company's long-term goals.

Because of the PRC-covered banking regulatory uncertainty, we have to look at various possible scenario and compare those scenarios with the various strategies that we can implement. Taking into account what may or may not happen beyond 2020, it seems prudent to keep as many options open as possible.

But once again, our strategy towards taking the company to the next phase through continuous market penetration and, at the same time, exploring the possibility of exploring or expanding our service offering and to the extent, diversify our geographical risk, business concentration risk, those parameters is still valid after that. I hope those address your questions.

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Operator [4]

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Our next question is from Cyrille Pichot from Altimeo.

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Cyrille Pichot, [5]

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Just 2 question. Can you give us an estimation of the breakdown by region and by payment type for this quarter? And second question is, it's about the regulatory. Do you have any update about the licensing regime in China, I mean, because I think it was in 2020, there will be some update. So maybe you have some information to give to your shareholders.

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Albert Chen, Global Cord Blood Corporation - CFO & Director [6]

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Thank you for your questions. In terms of payment option breakdown, for the second quarter of fiscal 2020, approximately 41% of new subscribers elect the normal payment option. Approximately 49% of new subscriber elected the upfront payment options, or we call it the bullet payment options. The rest are on installment base. It's about 10%. So this is slightly higher than our usual norm, but I think it is important to keep certain market presence as well as certain volume ongoing for the interest -- for the long-term benefit of the near term -- for the long-term and near-term benefit of the company. So that's why we want to keep certain percentage of installments.

So in terms of the licensing regime itself, it was unfortunate that I don't have any new information to share at this stage. To be fair, I think it's fair to say that we don't have any, like, conclusive evidence at this stage. But we would definitely -- if there's any new development, we'll definitely notify the market and all shareholders as quickly as possible because we are also very eager to find out. But it is in the time of this uncertainty, given that uncertainty level is relatively high, so I think it is important that we remain flexible and keep our options open at this stage.

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Operator [7]

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(Operator Instructions)

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Albert Chen, Global Cord Blood Corporation - CFO & Director [8]

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I, once again, want to apologize to all the caller in this conference call. Because of technical difficulties, I understand some of you is not able to hear what we talked about during the results highlights as well as the CEO remarks. We will -- we will make sure that the transcript will be available shortly after this earnings call. Once again, I apologize for the technical issues.

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Operator [9]

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(Operator Instructions) As there are no more further questions in the queue, I'd like to thank everyone for their time today to participate in the conference call. This concludes our conference call for today, everyone. Thank you for your participation. You may all now disconnect.