Saturday, April 7, 2012

Cordlife Group - Potential Growing Recurring Income?

This seemed to be one of the most spectacular IPO that I have seen after Sheng Siong, with the share price being driven up by 50% from its original IPO price of $0.49. At the current price of 20, seemed like people is treating it as a healthcare stock like RMG and Q&M Dental.

On the surface, the business model does look pretty enticing. It is the market leader in Singapore with a market share of 62% and the market is still relatively untapped at only 25%. CAGR is expected to be 9-10% till 2015 and competition is weak with 2 other competitors - Stem Cord and a public cord blood bank.  Most importantly, it has a recurring income as after you deposit with them they will continue to recognise revenue over the next 18 years. On a closer examination, this stock is more like a rose where the thorn is hidden underneath.

Let's start off with the 62% market share. What exactly is the difference between Cordlife and its rival StemCord that creates a 26% disparity in market share? Both started at around the same time in 2001 and 2002. Both have enough spaces for storage of cordblood for many many more years to go. The key advantage that Cordlife has over StemCord lies in its AABB accreditation. From what I found on the web, this accreditation as well as the Sepax technology seemed to be the one that pushes people to choose Cordlife over StemCord, not unexpected. A quick look at the AABB and it seemed like it is not really hard to get one. If StemCord can get pass Singapore's standard, I doubt it can't get AABB. StemCord does have a FACT-NetCord accreditation, but the name is just not as sophisticated as AABB. So in essence, what is driving the market share is a better image though I am sure 90% of the people that chooses CordLife really understand AABB and Sepax. This is of course not a durable competitive advantage as nothing is stopping StemCord from getting it. Imagine StemCord having FACT-NetCord and AABB, then Cordlife will lose its market leadership.

There's another challenge coming up from the Singapore Cord Blood Bank, which is a public cord blood bank with an AABB accreditation too. There's no fee in depositing with them as it is supposed to be a donation.Currently, it has a cumulative storage figures of 7000 and they are working towards the 10,000 figures by 2014. And when that happens, it means that they are able to provide Asian and Singapore's patients an 80% chance of finding a suitable match, which will make private cord blood banking rather pointless though there will still be people who will pay for it. This is possible because it is unlike a traditional bone marrow transplant which requires a 100 percent match.

As for its Hong Kong's operation, there's a lot more competition there such that they only manage to secure 28% market share. There's 3 big player, 2 small players and 1 public bank. The largest is Healthbaby with a 45% market share and Cryolife with a market share of 23%. In Hong Kong, there is no regulation  to act as a barrier of entry as all that's needed is the registration of business.

An estimated CAGR of 9-10% is pretty impressive which means a total increase of 40% - 46% by 2015. To achieve such growth for the industries, either the acceptance rate increases or the number of live birth increases. As seen from the above figures, total number of live birth remain the same after 30 years despite our population doubling from 2.4m to 5m. As such, to expect our total number of live birth to grow is simply ridiculous.

For acceptance rate to grow from 25% to 38%, I am not too sure either. It's possible but checking with figures worldwide reveal that Singapore has one of the highest penetration rate at 25%. Estimated penetration rate in the UK and US are lower than that. In countries like Italy and France, private cord blood banking is banned as they believed in public bank. Other than acceptance, cost will be another major issue given that it's not exactly cheap either. The reason why acceptance rate remains low throughout the world is that it is still at an early stage of development where the long term applicability is still in doubt. It is only able to support the transplant of a person weighing at most 50 kg. Thus it is a limited 18-years insurance and not a whole-life policy.

Given that 2011 has passed, let's look at whether there's the claimed 9% increase in number of customers. 2009 was a period of strong growth as Cordlife had a 60% growth in client deliveries. It continued to enjoy a 25% growth in 2010 of which Singapore's figure grow by 20%. This was also the year where the DTFAS report stated that penetration rate for Singapore reached 24%. This remarkable result is not very surprising given that the initial penetration rate was only 16%. Looking at 2011 results, Hong Kong suffered a 25% drop while Singapore had a 10% drop in deliveries. If CAGR is really at 9-10%, it just means that Cordlife loses its 62% market share in 2011 or that the the penetration rate drop by 10%. This is not forgetting the fact that in 2011, total live birth increases by 5% as seen from the figures earlier. The reason provided was due to "leading-on effects arising from the deteriorating global economic condition", which makes me wonder what will happen in a full-blown recession...

If it's existing market fails to thrive, there's always new market to expand into. This paragraph in the prospectus catches my attention.

"Currently, our targeted markets for acquisitions include Indonesia, India and the Philippines. In connection with our demerger from CBB, we had entered into the ROFR Agreement pursuant to which we were granted a right of first refusal to acquire CBB’s cord blood banking businesses and operating companies in Indonesia, the Philippines and India, should CBB propose to sell their cord blood banking businesses in these jurisdictions within the respective periods as stipulated in the ROFR Agreement. The Non-Compete Agreement prohibits our Company from undertaking any activities or carrying on any business or trade that competes directly with the business carried on or proposed to be carried on by CBB in Indonesia, India and the Philippines for the respective periods."

"Furthermore, it is envisaged that once Cordlife India turns profitable, our Company, pursuant to the Right of First Refusal, will have the first opportunity to acquire Cordlife India, should CBB decide to dispose of Cordlife India at that time."

This reminds me of the great business model of CapitaMalls Asia where, CMA will develop the asset before selling to its REITs. It seemed like the whole purpose of a demerger and listing in SGX is to help to provide cashflow to CBB who is listed in ASX. This is crucial to the survival of CBB who has been profitable in only 2 of the 8 years it has been listed. While it is normal to see accumulated profit in the Balance Sheet, there's only an accumulated losses of $62m found. The equity raised as well as future cash flow will all be used to fund acquisition of India, Indonesia and Philippines operation when they turned profitable. This is a reason why the management hinted that dividend payout will only be 10-25% despite the $5m recurring cash flow it will have. 

Lastly, we shall talk about the recurring cash flow, which is worth around $5 million annually based on 20,000 customers multiplied by $250. This is pretty tricky as it is a recurring cashflow of $5m and not recurring revenue.

"Revenue is recognised upon the completion of processing of cord blood units collected and subsequently at the completion of each year of storage. Once the processing of the cord blood unit is completed, based on existing costs information, approximately 88.0% of the total revenue is recognised. The remaining 12.0% is recognised in approximately equal portions at the completion of each year of storage."
What this means is of the $6200 lump sum paid, $5456 will be recognised as revenue leaving $744 to be recognised over the next 21 years. This will be 0.6% per year subsequently which means recurring revenue is at its minimum. Even if you will to let Cordlife run for another 21 years, it will only generate at most 12% of recurring revenue. Then how did Cordlife mange to produce $5m recurring cashflow yearly, which is currently around 16% of its revenue?

This is the key to the question. 3 payment options are provided but this does not change the way revenues are recognised. As mentioned, 88% of the cost is incurred at the initial stage ($5456) which means that the company will have receivables of $1200 or $3500 in their first year. Thus, in 2011, it has a non-current trade receivables of $23m and current trade receivables of $7m, which is $5m more than its total revenue in 2011. Of course, for those that paid in advance, it will be booked as Deferred Revenue which stands at $9.5m. So is the recurring cashflow to be desired? Obviously no, as the best case scenario will be for the customers to pay them $6200 upfront and not through instalment. The 20 years instalment will give them a total of $6950 in Future Value which is equivalent to $5700 using a 2.73% discount rate (Singapore's historical inflation rate) for the instalment. Not only do they have to take a 10% discount, they will also have to bear the initial cost for at least until the 14th years before they can recoup back. If cost were to be raised significantly, there's no way that they are going to pass on the cost to the customer.

To conclude, any future rise in profit is likely to come from increased penetration rate on the assumption that Cordlife can maintain its dominance in Singapore. It has chosen a very good year to be listed as the Year of Dragon has always lead to at least 10% increases in total live birth. However, this does means that profit is likely to drop next year as the Dragon only comes round once every 12 years. If this bumper crop is only able to bring its clients deliverables to the 2010 standard, it simply means that 24% is likely to be the peak in the penetration rate. As with the CMA model, expect Cordlife to continue to feed its cash flow to the dying CBB, who is trying to cash out on whichever business that turns profitable first. At the current PE of 20, all potential growth seemed to have been accounted for.

And of course, it does make CBB a better long option than Cordlife who is intending to give much more dividend to its parent than the shareholders.


  1. great effort once again. it would seem that this business will need some differentiation. how would they be able to value add over competitors. because the cost to value add is so low, what you do i can also do better. End stage they will all be the same.

    still this may still be good business. thats a high PE. earnings yield 5%. rather low don't you think? the upside is overseas expansion

    1. they are pretty lucky in Singapore due to regulations. In many other countries like Hong Kong, there's no regulation on who is allowed to start a cord blood bank. The best way will be a really aggressive marketing campaign such that the moment people think of cord blood banking they will only think of Cordlife Group. Alternatively, it will be to tie up with hospitals, especially KK hospital, for an exclusive right.

      As for overseas expansion, it's a gone case already as they are not allowed to expand to where CBB is operating. What I think they will do is that CBB will try to make any of the business profitable and then sell it to Cordlife Singapore at a huge premium. Thus, Minority shareholder of Cordlife might suffer badly in times to come. This seemed to be what Cordlife Singapore is meant for.

  2. Hi thanks for the detailed analysis supported by numbers. Always a pleasure to read good analysis. :)

    Two points I wish to bring up. One is that aggressive marketing needs to be spent to increase penetration rate and raise awareness of the benefits of cord blood, and this basically means cash burn with no guaranteed cash inflow back (depends on the country's jurisdiction and laws and also people's attitudes).

    Another is that once the cord blood is used, I believe it's a one-off in that it cannot be used a 2nd time. This means that Cordlife has to refund the remainder of the unutilized storage fees which it originally collected upfront. It would be good to compare how many % of their clients have historically utilized the cord blood, out of say a customer base of 20,000. This could be a potential contingent liability, akin to warranty claims, and will be a cash drain.

    Also, kind of curious as to why they recognize 88% of the payment upfront and the rest over the storage life. Shouldn't it be amount paid divided by 21 years and deferred revenue reversed out equally over the 21 years? Perhaps I missed something here.


    1. Aggressive marketing will definitely means cash will be burnt. However, this is necessary for a business with no sustainable competitive advantage.

      Cordlife needs not refund the remainder of the unutilized storage fee but they have to do the retrieval for free. As for %utilization, the first one was only in 2009. I believed the rate to be very very low (less than 10 so far) and this is instead something that's negative. It simply shows that the likelihood of using it is very low and should that happen you have 80% chance of getting one from the public bank.

      88% are recognised based on cost structure which means a majority of the cost goes to processing and freezing of the cord blood. Storage probably takes up little fee since you just put them into the freezer and pay for the electricity.

  3. Can you explain their business model again? How did u get the receievables to 1200 or 1500?

    1. According to the prospectus, 88% of the cost is incurred at the initial stage ($5456). Since cost is incurred, the revenue will be recognised at 88% of $6200 which is 5456.

      If they opt for the payment option of $4200 for the first 10 years, they will incur receivable of $1256 since they recognised $5456 in revenue but only collected $4200.

      If they opt for the payment option of $1950 for the first year as deposit, they will incur receivable of $3500 since they recognised $5456 in revenue but only collected $1950.

      Revenue is recognised when cost is incurred under standard accounting practice

  4. Hey i am my very first comment on your site. ,I have been reading your blog for a while and thought I would completely pop in and drop a friendly note. . It is great stuff indeed. I also wanted to there a way to subscribe to your site via email?

    Revenue Management

  5. Revenue recognition is not accurate if u compare with the number of deliveries they provide.. For instance, FY2012 deliveries are 7,200 but revenue is only 28.8 million. If you work(6200*88%*7,200), u get 39.2 million. But their figure is only 28.8 million. I wonder wat's the actual rev they recognise for each delivery.

    1. As stated earlier, a maximum of 88% of revenue will be recognised in the first year and the rest will be spread over the contract. Another problem is that Hong Kong and SIngapore might have different price charged.

  6. Can anyone shed some light as to why Cordlife has been going up lately for the fact that the fundamental has not changed much? Thanks in advance.

    1. No too sure.

      3 Q result was up due to lesser administrative expense incurred for IPO and 9M benefitted from a disposal gain.

      However, ppl thought that the coming acquisition is a good news. Apparently,the company never reveal the profitability of these to be acquired subsidiary. Shareholder should question the management on the profitability or is it merely to offload burden from CBB

  7. Agreed with the sophisticated analysis. Being a banker I understand that all that impacts valuation of any kind of "repository", be it financial or cord blood, is the associated reputation risk. Now lately given the desperation of upselling the CBB services Cordlife has started moving on a risk path of association with distributors of services like newborn screening from providers who have been rated illegal in court of law. While taking a sales pitch from a CBB i came to know about this fact. Can you do a thorough search and also factor-in such subjective details in your analysis. I am a great fan of technical analysis but give a very high weight to such subjective factors which make sometimes company go bust specially in the field of medicine.