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Tug-Of-Fools : Cordlife Group – The Bear Argument
My name is Ser Jing, and this is my Bear Case for Cordlife Group.
Since its listing on 29 March 2012 at S$0.495 each, Cordlife (SGX: P8A) has been on a tear, gaining some 142 percent to its current price of $1.20 (as of 29 April 2014).
Compared to the Straits Times Index’s (SGX: ^STI) eight percent gain to 3,238 points in the same period, it’s only fair to say that the cord blood banking outfit has been a true market beater.
Those gains were likely helped by its growing profits, which has jumped by 190 percent from $6.2 million in the financial year ended June 2009 (FY2009) to $18 million for the 12 months ended December 2013.
That translates into a compounded annual growth rate of 26.7 percent for its earnings. When coupled with its trailing price earnings ratio of just 16, it does seem that the market might even be underestimating the company.
But, it isn’t just beds of roses for Cordlife – there are thorns beneath too.
But First, What’s Cord Blood?
According to the Singapore Cord Blood Bank (a public cord blood bank as opposed to a private cord blood bank like Cordlife), cord blood – the blood found in the umbilical cord and placenta after child birth – is “a rich source of blood stem cells, which are also known as “haematopietic” stem cells.
These stem cells have been successfully used in the treatment of blood related cancers, immune and genetic diseases.”
Given their medical importance, it won’t be a surprise to see parents wanting to store the cord blood of their new born child. In Singapore, there’s one public cord blood bank (that’s Singapore Cord Blood Bank) and two private banks, of which Cordlife is one.
Where Are Cordlife’s Customers?
When looking at Cordlife’s business, a key figure to focus on would be client deliveries – that is, the number of new clients that have signed up to store their children’s cord blood. And, that is where the thorns start to appear.
Between FY2009 and FY2013, there’s no clear trend in the growth of client deliveries. And while the first half of FY2014 has been fantastic with more than 7,400 client deliveries, it seems that much of the growth had been due to contributions from the cord blood banking businesses in Philippines, India, and Indonesia that were acquired in June 2013.
Hong Kong (one of Cordlife’s two primary markets alongside Singapore prior to June 2013) in particular, had seen a drop in revenue – and by extension, a drop in client deliveries – due to regulatory restrictions preventing mainland Chinese mothers from giving birth in the region.
There was no breakdown given for how well the company had done in Singapore. But it would seem that client deliveries here haven’t done too well either.
That’s deduced from: 1) The much larger population sizes in Philippines, India, and Indonesia; and 2) the historically strong rates of growth in cord blood banking activity in the three countries (between 2007 and 2011, the compounded annual growth rates of “annual incremental storage units for private cord blood banks… are at 38 percent for Indonesia, and 35 percent for the Philippines and India” according to a press release from Cordlife last May).
From the looks of things, sustained growth in business volume isn’t happening in Cordlife’s core markets.
Cord Blood Is Not All That Unique
One of the main draws of private cord blood banks is that the blood that’s stored is meant exclusively for the family’s use. With public cord blood banks, it’s a little different as described by the Singapore Cord Blood Bank:
“Public cord blood banks, such as the SCBB, do not reserve any cord blood units for the specific family’s usage. However, if the family requires the unit and it is still available in the bank, we will work with your Transplant Physician on the release of the unit, if it has been found to be suitable. If the cord blood unit has already been released for transplantation, we will also work with your Transplant Physician on finding another suitable unit.”
That seems scary on first glance. What’s going to happen if someone requires his or her own cord blood and realises the sample that was stored in public cord blood bank has already been used up?
Turns out, “[r]esearch has shown that there is an extremely low probability that the donor should ever need or benefit from his/her own cord blood unit,” according to the Singapore Cord Blood Bank.
In addition, “Transplant Physicians may not feel that the patient’s own cord blood unit is the best choice as it may already carry the genetic abnormality that led to the blood disorder or immune system failure.”
As it is, cord blood from unrelated members of the public can actually suffice most of the time for patients that are in need of such treatment.
So, given the above, the attractiveness of the ability to call upon one’s own cord blood for use in a private cord bank would be largely negated.
Parents who are weighing up the costs and associated benefits of public versus private cord blood banks might well go with the former.
That’s especially so given how the services of public cord blood banks are free, as opposed to private banks; Cordlife has price plans that charge an upfront payment of $1,730 followed by 21 years of annual payment of $275 for each client.
The Bottom line
So to sum up, while valuations for Cordlife do not seem overly exuberant, there are lingering doubts about its business momentum going forward in addition to question marks hanging over the utility of the services it’s providing.
You can read the Bull argument on Cordlife here.
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