International Wire Blood Company: An Undervalued Enterprise However Possession And Merger Complicate Issues (NYSE:CO)

Funding Thesis

International Wire Blood Company 5-year share worth efficiency. Supply: TradingView.

International Wire Blood Company (CO) seems to be a comparatively easy funding alternative after we contemplate its present low worth, enterprise mannequin that generates recurring income streams, addressable market, and dominant market place.

GCBC – a dominant participant in China’s twine blood storage market, offering stem cell storage alternatives for expectant dad and mom – posted revenues of $172m in fiscal 12 months 2020, with a internet revenue margin of 37{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}, giving it a worth to earnings ratio of 6.3x. Moreover, the corporate has internet money per share of $6.3 – almost twice the present worth of its share worth, which stands at $3.51.

As spectacular as these figures are, they don’t fairly current the complete funding image referring to GCBC, which is difficult by a number of components – most notably an ongoing wrangle between minority and majority shareholders over a proposed statutory merger of the corporate with Cordlife Group Restricted – an organization listed on the Singapore Inventory Trade through which GCBC at the moment holds a ten{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} stake – at a worth of $7.5 per share.

GCBC is being sued by Jayhawk Capital Administration – who maintain an 11.5{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} stake within the firm – on the grounds that the proposed consideration doesn’t worth the corporate extremely sufficient, and that the committee set as much as evaluate the merger proposal isn’t sufficiently unbiased. In August 2019, a consent kind was despatched to minority buyers from a gaggle calling itself the Committee For China Wire Equity, encouraging buyers to object to the way in which the proposed deal was being dealt with.

Amongst different issues, the committee factors out that, ought to GCBC delist from the NYSE and be a part of the Singapore Inventory Trade, buyers would now not be protected by NYSE laws and Cayman Islands governance and legislation, and that there’s a battle of curiosity referring to the truth that GCBC’s majority shareholder can be a big shareholder of Cordlife Group, and should use the deal to dump debt from its troubled China mainland company Sanpower onto GCBC, additional damaging minority shareholder’s pursuits.

As a substitute, minority buyers want to see a brand new administration construction, extra accountability, and a dividend or share buyback coverage launched – which has been promised for years, they level out.

The deeper you look into the possession construction of GCBC, the extra advanced the image turns into as this text – included within the committee’s web site assets – outlines in some element. There may be even a conspiracy principle circulating that GCBC administration is making an attempt to maintain the corporate’s share worth artificially low with a purpose to subsequently make a suggestion to take the corporate non-public, by paying a premium of ~20{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of its 180-day common worth.

One factor we will say for certain is that GCBC inventory seems to be buying and selling at a considerable low cost to its honest worth worth, which a DCF evaluation suggests to me should be ~$16, if revenues proceed to develop at ~10{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} each year, which is lower than the common of the previous 2 years, which I calculate to be ~13{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}.

Again in June, GCBC traded at simply $2.5, therefore if the non-public buyout principle proved to be right, shareholders would realise little or no achieve on an funding. But when the reverse merger was to undergo, though buyers could also be left holding a extremely illiquid inventory with little or no management over the long run route of the corporate, they might nonetheless make a good-looking return on funding at a worth of $7.5.

If that is the worst-case state of affairs, then you possibly can nonetheless make a case for an funding in GCBC, based mostly on the draw back case being negligible – except the bulk proprietor runs the corporate fully into the bottom with debt – and the upside nonetheless being appreciable whether or not the merger goes by or not.

There may be additionally an argument – made in a earlier SA article – that the Singapore market can be a greater house for GCBC than NYSE, because it offers the corporate higher publicity to Asian markets and buyers in Asia.

Weighing it up, the promise of GCBC’s enterprise swings it for me. Though there are some headwinds within the form of falling new subscription volumes, rising costs and a possible drop-off in total subscribers when the top of the everyday 18-year subscription interval comes into play, when the merger enterprise is lastly resolved, it’s onerous to not see GCBC shares rapidly gaining in worth – whether or not it’s on the NYSE, or SGX.

In the remainder of this text, I’ll take a deeper dive into the corporate and its enterprise mannequin, and supply some extra color on the implications of the reverse merger.

Firm Overview

GCBC is the main supplier of twine blood banking providers in China. Wire blood banking basically offers expectant dad and mom the chance to retailer a number of the blood that is still within the umbilical twine and placenta post-delivery, which is wealthy in hematopoietic stem cells – the sort used for transfusions when treating a number of ailments (as proven under) to assist heal and restore broken cells.

Illnesses treatable with twine blood stem cells. Supply: GCBC company presentation

The Chinese language authorities function a one blood financial institution per area coverage, and have to this point granted solely 7 regional licenses (out of a attainable 31), of which GCBC owns 3 – in Beijing, Guangdong and Zhejiang – as effectively a ~24{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} stake in rival Qilu, which operates the Shandong province license, giving GCBC a ~47{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} market share of the present market in China – or entry to ~2.3m new child youngsters each year.

GCBC China market share. Supply: company presentation.

GCBC’s income mannequin is made up of two elements: a processing payment of RMB 9,800 (~$1,400 USD), and an annual subscription payment of RMB 860 (~$125 USD), which lasts for a interval of 18 years, or prospects can decide to pay the complete charges up-front, or pay the processing payment in installments. In fiscal 12 months 2020, 36.6{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} opted for the primary technique, 49.9{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} selected the second, and 13.5{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} selected the third. Subscribers even have the choice to decide out of the settlement on an annual foundation.

In accordance with GCBC’s annual report for fiscal 12 months 2020, the corporate has a 793-strong gross sales staff, who’ve direct entry to expectant dad and mom at 367 hospitals in Beijing, Guangdong and Zhejiang due to collaboration agreements struck by the corporate. Between 2007 and 2020, GCBC’s subscriber base has grown from 23,322, to 833,094.

In complete, GCBC has ~1,200 staff, and has accredited storage amenities and laboratories, plus workplace house in all 3 of its working areas. Abroad, the corporate has a ten{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} fairness curiosity in Cordlife Singapore, which operates twine blood banking amenities in Singapore, Hong Kong, India, Indonesia, Malaysia and the Philippines, and has a model presence in a number of different Asian international locations.

GCBC turned registered within the Cayman Islands on June 30, 2009, and listed on the NYSE that 12 months, elevating $23 million by promoting 3.3m abnormal shares at a worth of $6.05.

Current Efficiency

GCBC subscriber development & seasonality. Supply: Company presentation.

As we will see above, the variety of new subscriber signups has fluctuated considerably in recent times, and is on a slight downtrend, however this has been greater than offset by the rising subscriber base, and a rise within the annual processing payment since 2019, from RMB 6,800, to RMB 9,800 (USD $1,000 to USD $1,400).

In fiscal 12 months 2020, GCBC grew total revenues by 24{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} to $172.5 million, with storage payment revenues rising by 17{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} to $63.8 million, based mostly on 84.2k new subscribers and 833.1k complete models deposited. The corporate posted internet revenue of $67.5m, for EPS of $0.56, reaching a formidable P/E ratio of simply 6.3x, with a internet revenue margin of 39{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}.

In Q121, GCBC elevated revenues by 2.8{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} year-on-year to $39.8m, including 17,233 new subscribers and rising the variety of subscribers to 849,933. Working revenue was $18.9m, and the online revenue margin was 47{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}. On the finish of the quarter, GCBC had $788k of money, and complete liabilities of $477.6k.

Enterprise Headwinds and Tailwinds

GCBC administration has put the softness in its new subscriber numbers relative to prior years and quarters – revenues from processing charges decreased by 3.3{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} year-on-year to $22.9m – all the way down to pandemic pressures, explaining that hospital channels and enterprise operations, in addition to normal client sentiment had been negatively affected, and it additionally appears probably that the elevated charges may have put some prospects off in a time of financial hardship.

Adjustments to the way in which that the Chinese language authorities will distribute licenses within the coming years additionally look set to have an effect on GCBC’s enterprise, though at this level it’s onerous to say whether or not the adjustments can be detrimental or optimistic.

China’s Nationwide Well being Fee (“NHC”) has stated that it’s going to not grant any additional licenses in new areas in 2020, however there are plans afoot to approve twine blood financial institution licenses in 18 pilot Free Commerce Zones, which suggests (in accordance with GCBC’s 2020 annual report) that the variety of licensed areas may develop from 7 to 19 – probably offering GCBC with the chance to increase into new markets – and that extra licenses might be granted in Beijing, Guangdong and Zhejiang – which may erode the corporate’s market share in its core markets.

A worst-case state of affairs may see the NHC prohibit fee-based business twine blood banking providers altogether, which might be disastrous for GCBC, while the comfort of the international locations’ one-child coverage may imply that twine blood banking falls in reputation, since a sibling may present matching stem cells.

Wire blood alternative in international markets. Supply: firm presentation.

On the flipside, as we will see above, twine blood banking is booming in lots of international locations that do not function one-child insurance policies, so this threat could also be overstated. Plus, given the medical progress that stem cell applied sciences are making, within the coming years there could be an increasing number of causes for folks all around the world to wish to retailer twine blood.

Additionally it is value taking into account that, regardless of the pandemic-induced financial downturn, China has an enormous and fast-growing prosperous center class – GCBC’s most evident goal demographic. Provided that GCBC estimates its present penetration to be simply 4{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} in its present working areas, its obtainable market might develop exponentially within the coming years.

Truthful Worth

GCBC inventory started the 12 months buying and selling at $4.6. In August 2017, GCBC inventory hit an all-time excessive of $13.5, which could be traced again to a run on the inventory induced, I think, by the December 2016 sale of a large holding of 78.87m shares – which represents a 65.4{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} majority holding within the firm – from Golden Meditech Holdings Restricted, to Nanjing Yingpeng Hulkang Medical Business Funding Partnership – a non-public deal which happened at a worth per share of ~$10.5.

The shares had been subsequently transferred to a different entity, Blue Ocean Construction Funding Firm Ltd., which nonetheless holds them. On the time of the unique buy, GCBC shares traded at $5.74, however the premium paid presumably led buyers to conclude that the corporate was undervalued.

There appears little doubt in my thoughts that GCBC’s core enterprise is considerably undervalued. The corporate’s free money move over the previous 3 years, by my calculation, has been round $45m, $48m, and $54m, and with OPEX solely representing ~55{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of revenues, and a income development projection of 9-10{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} each year (which I calculate utilizing a 5{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} development price in fiscal 12 months 2021 owing to pandemic pressures, added to the common of the previous 2 years’ development), CAPEX of ~$6m (common of the previous 3 years), and impartial working capital prices, offers me an FCF of $65m in 2021 and >$100m by 2026.

Utilizing a WACC of 8{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} (anticipated market return of 8{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} as a result of downturn, and a conservative beta of 1 (in comparison with the 0.4 quoted by Google Finance), and RFR of 1.6{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05}, I calculate a gift day agency worth of $1.9bn, and a gift FVP of $16. The corporate’s present market cap is simply $427m.

The Possession/Takeover query

Whether or not or not GCBC has the chance to take advantage of its present market and obtain my projected development charges stays the important thing query nevertheless. The proposed merger with Cordlife may in principle give GCBC a lot better entry to markets equivalent to India, that are even bigger than the Chinese language markets, however will GCBC’s majority shareholder permits this to occur.

Not in accordance with the literature and arguments equipped by Jayhawk and minority shareholder teams. In these, the bulk shareholder is recognized as Nanjing-based entrepreneur, Yuan Yafei, who owns 97.5{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} of enterprise conglomerate Sanpower, which is almost all shareholder of Nanjing Yingpeng Hulkang Medical Business Funding Partnership – the bulk shareholder of GCBC. Yafei apparently additionally holds a 31{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} stake in Cordlife International.

The minority shareholder’s argument goes that Yafei desires to merge these two entities to extract money to fund his different failing companies, have them buy his indebted belongings, thereby reaching a better valuation which he can use to collateralise his firm’s money owed.

The connection between GCBC and Cordlife goes again a few years to when Cordlife was listed on the Australian inventory alternate, with GCBC aiding with varied fundraising efforts by shopping for shares in Cordlife, earlier than Cordlife ultimately delisted. A 3rd firm, Golden Meditech (keep in mind them?) makes most of its revenues promoting items and providers to GCBC.

The doc I shared within the introduction from the Committee For China Wire Equity comprises many extra tales of market manipulation and so-called “self-dealing” and I would definitely encourage buyers to evaluate. I do see one or two holes in a number of the arguments nevertheless.

Firstly, the doc accuses GCBC of being a failing enterprise, with demand for its providers dropping and the saved twine blood hardly ever, if ever used.

GCBC twine blood models utilized in medical therapies previous 3 years. Supply: firm Type 20F FY20.

While it is true, as we will see above, that the samples are hardly ever used, this isn’t essentially a persuasive argument in opposition to utilizing GCBC’s service – the 55 samples utilized in 2020 may need saved 55 youngsters’s lives. Additionally, it’s a unusual line of argument to pursue when attempting to argue that GCBC should have a a lot greater valuation.

Secondly, this can be very onerous to know what plans Sanpower might have for GCBC, and far of the proof submitted relating to its plans is very speculative. GCBC has not responded in sort to the claims, and actually, little appears to have occurred previously quarter, or certainly because the reverse merger was initially proposed and minority buyers protested. GCBC does state the next in its annual report nevertheless.

GCBC assertion relating to Jayhawk court docket case. Supply: firm Type 20F FY20.

GCBC additionally provides:

if the plaintiffs are profitable in acquiring an injunction prohibiting the defendants from finishing the merger on the agreed-upon phrases, then such injunction might forestall the merger from changing into efficient, or from changing into efficient inside the anticipated timeframe.

To my thoughts, GCBC would appear to be just too small an organization to have the ability to realistically help with wiping out the $7.3bn of debt Sanpower is allegedly being pursued for, and the advanced net of various firms and possession constructions could also be troublesome to unpick, however isn’t essentially proof of something apart from the truth that multi-billionaire entrepreneurs have a tendency to maneuver in mysterious methods, and it is not straightforward to second guess them.

Conversely, minority buyers have each proper to problem majority shareholders and put up a struggle when actions are taken that they don’t approve of, and so they might effectively reach pushing up the worth of any deal to merge GCBC, or take it non-public, or forestall any such deal happening in any respect.

Conclusion

Ever the optimist, and regardless of the continued authorized battles, I feel that GCBC presents an fascinating funding alternative right now and nonetheless really feel bullish.

On the energy of its enterprise alone, an funding is a no brainer – the corporate’s shares are value maybe 5x greater than their present worth, based mostly on my evaluation. Sure, there are some headwinds: are costs going up as a result of subscriptions are happening, and in that case, will revenues decline long run, and can the Chinese language market change into fragmented when new laws are available? However there are additionally promising tailwinds. Penetration is just 4{5667a53774e7bc9e4190cccc01624aae270829869c681dac1da167613dca7d05} within the Chinese language market, and there are additionally alternatives to maneuver into abroad markets. When pandemic pressures ease, the inventory worth might leap considerably on improved earnings.

Concerning the remainder, I see one among three eventualities enjoying out. GCBC stays on the NYSE, and when the mud settles, the share worth grows to replicate the corporate’s true worth. GCBC merges with Cordlife, and the corporate is transferred to Singapore – this deal may happen at $7.5 per share, or maybe as excessive as $10, if minority shareholders get their means, and should give the corporate contemporary momentum. Or, GCBC is ultimately taken non-public at a cheaper price than the $7.5 on the desk from Cordlife, however nonetheless, almost certainly, at a premium to the present share worth.

Therefore, for me, the upside potential outweighs the draw back, which makes GCBC a possible “Purchase” for a risk-on investor. Personally, I intend to do some additional due diligence earlier than making a remaining choice whether or not to speculate, however I hope on this article I’ve laid out a number of the key arguments for and in opposition to opening a place in GCBC.

I’d look to get in at a worth under $4, and never delay a choice for too lengthy, because the inventory is at the moment on an uptrend and will transfer upward rapidly if the subsequent set of earnings impresses or there’s motion on the merger entrance.

Achieve entry to the entire market analysis and monetary analytics used within the preparation of this text plus unique content material and pharma, healthcare and biotech funding suggestions and analysis/analytics by subscribing to my channel, Haggerston BioHealth.

Disclosure: I/we’ve no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

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