Cordlife Group Ltd (SGX: P8A), or Cordlife for short, recently saw its share price surge by 24% from S$0.41 to S$0.51 before the company called for a trading halt. The company was not aware of any reason for the jump in the share price. As a recap, Cordlife is a consumer healthcare company which helps mothers store their babies’ cord blood and cord lining, and is a pioneer in private cord blood banking in Asia.
The group has processing and storage facilities in six countries across Asia – Singapore, Hong Kong, Malaysia, India, Indonesia, and the Philippines. Cordlife has a unique business model and is one of the market leaders in its field. However, does this make it a great business to own? Let’s take a look at some aspects and drivers of Cordlife’s business.
Cash paid up-front, services rendered over a long period
One attractive aspect of Cordlife’s business is that clients pay an upfront fee to extract and store their baby’s cord blood, and then continue to pay an annual fee for the storage and maintenance of this cord blood. This means that Cordlife obtains cash up-front to fund its working capital but only renders the services over the next two decades (or until the parent decides to terminate the storage arrangement).
Put another way, the clients are literally funding Cordlife’s cash flow while Cordlife only needs to invest in sufficient storage and processing space to be able to accommodate additional cord blood. This means that additional clients can contribute significantly to Cordlife’s revenue while its costs do not rise by the same proportion.
Tapping into Asia’s baby boom
Cordlife’s business hinges on the number of births in a country, as more babies born means more potential business for the group. In Singapore, the total fertility rate (TFR) recently hit a seven-year low of 1.16 in 2018, which means prospects are dim for Cordlife locally. However, other Asian countries have higher TFRs and should provide ample opportunities for Cordlife to market their services.
Asia’s rising middle class
Asia is also poised to see significant growth in its middle-class population in the years to come as previously less developed countries start to industrialise and modernise. With rising incomes, more parents are also able to afford to pay for cord blood banking, which could benefit Cordlife’s business.
The Foolish bottom line
Investors need to be comfortable with the operating characteristics of Cordlife’s business and also be confident of the group being able to tap into Asia’s rising middle class and the region’s baby boom. These factors will drive the long-term growth of the group, assuming Cordlife can maintain its competitive position in the markets it operates.
Cordlife has just seen both a change in its CEO as recently as February 2019, with Tan Poh Lan taking over from Michael Weiss (who went on sabbatical leave in January 2019 to attend to personal matters), as well as the emergence of a new controlling shareholder – Full Day Limited and Sincere View International Limited (both of which are controlled by Hong Kong businessman Hon Kwok Lung). Both these companies own a combined 21.55% stake in Cordlife. This should provide additional confidence in the group’s prospects moving forward.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in Cordlife Group Ltd.
Motley Fool Singapore 2019