Global Cord Blood Corp Looks Anemic on Slow Growth, Regulatory Concerns

Key Takeaways:

• Global Cord Blood Corp.’s shares jumped 31% in February on a positive development for treatments using umbilical cord blood, but quickly gave back the gains
• Investors may be wary over recent financial troubles at company’s majority stakeholder, as well as the potential for major new competition

By Shirley Lau

Rapid advances in stem cell technology have created a new group of investor darlings that often get a lift on periodic new breakthroughs in their space. Shareholders of Global Cord Blood Corp. CO, China’s largest cord blood bank operator, got a brief taste of that excitement recently after a patient was apparently cured of HIV using a breakthrough treatment involving umbilical cord blood.

In mid-February, the Wall Street Journal reported that the woman in New York with HIV and also a form of leukemia received a treatment including umbilical cord blood, the blood from a newborn’s umbilical cord that can be frozen for later use against certain diseases, cancers and blood disorders. Months after stopping antiretroviral treatment used to treat HIV, the patient has shown no signs of the virus in her blood tests.

Following the news, shares of Global Cord Blood Corp. (GCBC), which provides cord blood processing and storage services and also preserves cord blood donated by the public, jumped as much as 31.26% to $5.50 on Feb. 15.

But the excitement was momentary, and the stock quickly gave back most of the gains. The shares now hover around $4, where they have spent most of the past two years, well below the $6.05 they traded at when the company made its 2009 New York listing. A recent sell-off has seen them fall to $3.77 at Thursday’s close, valuing the company at about $460 million.

While the latest price surge was clearly fleeting, GCBC’s shares do seem curiously undervalued when one considers it operates in an industry with great growth potential and is a dominant player in its home China market, where it holds four out of only seven issued cord blood bank licenses. Some of that may owe to internal factors, including recent financial woes at its biggest shareholder. Potential for major new competition in the not-too-distant future may also be weighing on the stock.

Formerly called China Cord Blood Corp., GCBC became China’s first licensed cord blood banking operator, pioneering the commercialization of cord blood storage services, when it received its first license in Beijing in 2003. The company grew rapidly in its early years, expanding its China operations in Beijing and Guangdong province to establish cord blood bank operations in Hong Kong and other Asia-Pacific locations through an associated company. By the time of its 2009 listing, the company was No. 1 in the world terms of its geographic coverage and total addressable population.

The company’s New York debut came via a backdoor listing, and it took on its current global name in 2018 shortly after Chinese conglomerate Sanpower acquired 65% of the company from Chinese medical equipment maker Golden Meditech (0801.HK). Following that ownership transfer, GCBC’s revenue, operating profit and cash balance increased significantly.

GCBC’s revenue comes from two main sources: cord blood processing fees of $1,400, and annual storage fees of $125. As of June last year, the company had 920,195 accumulated subscribers, the biggest client base in China. Its stored cord blood samples account for half of the world’s total.

Thriving company

GCBC has thrived for a number of reasons, including a low annual churn rate of just 0.2% for stored samples, and willingness by many of China’s growing middle-class parents to pay for such services that could be used to treat their children or family members in the future. The company has also benefitted as one of China’s few officially licensed cord blood bank operators, even as other similar unlicensed companies call themselves “stem cell banks.”

Three of China’s seven official licensees – Beijing Cord Blood Bank, Guangdong Cord Blood Bank and Zhejiang Cord Blood Bank – are operated by GCBC. A fourth, Shandong Cord Blood Bank, is operated by a company that is 24% owned by GCBC and 76% by Sanpower. That dominant position has given GCBC 47% of the market for its services in China. And with a penetration rate of merely 4% in its operating regions, there should be plenty of room for growth.

In the fiscal year through March 2021, the company’s revenue grew by 2.55% year-on-year to $177 million, with net income up 16.74% to $78.8 million. Things picked up slightly in its latest reporting quarter through December last year, with revenue up 9.1% year-on-year. Like many others, the company has taken a hit from the pandemic, which has resulted in lockdowns through China in recent months and a current complete lockdown in the commercial capital of Shanghai.

Yet even after the pandemic recedes and business gets back to more normal levels, regulatory uncertainties could remain a thorn in the company’s side. Beijing previously froze the granting of licenses in new regions through 2020, and the policy continued last year. But when the freeze does end, the country is considering introducing 18 pilot free trade zones where licensed cord blood bank operators could operate. While that could provide new opportunities for GCBC, it would also provide an opening for new competitors.

GCBC also faces possible risk from any potential ban in China on for-profit commercial cord blood banks, or implementation of anti-monopolistic measures against big players like itself, according to its annual report. Although there are no strong signs to suggest such steps are imminent, the lack of a consistent and well-developed regulatory framework for the industry means those kinds of risks will linger.

Uncertainty has also come from its debt-laden majority shareholder Sanpower, which in the last three years was consumed with a debt restructuring plan. Some believe that major distraction may explain the sluggishness in GCBC’s stock. If that’s the case, things could change now that Sanpower’s restructuring is complete and GCBC’s parent can now pay more attention to its most profitable asset.

Also worth mentioning is a 2019 lawsuit that saw GCBC sued by minority stakeholder Jayhawk Capital Management, a U.S. hedge fund that said GCBC’s proposed merger with Singapore-listed Cordlife Group at a price of $7.50 per share did not value the company highly enough. GCBC subsequently terminated the deal in February last year.

At the end of the day, GCBC appears to offer both clear growth prospects but also uncertainties for investors. If regulatory concerns seem large, investors might put things in perspective by considering the market’s big potential. The global cord blood banking services market is expected to grow at an annual compounded rate of 12.42% over the seven years starting in 2019, reaching $6.63 billion in 2026.