Cordlife purchased USD44m worth of convertible bonds from Golden Meditech.
A loan of USD46.5m was extended to Magnum Opus, a vehicle formed by Mr Kam Yuen and CCBC's senior management, to facilitate the purchase.
The CBs have a face value of USD50m, an expiry date of Oct 2017, and a coupon of 7% (USD3.5m pa).
Cordlife's portion of the CBs is USD25m, with an effective coupon of 4% (USD1.75m pa).
Upon conversion, Cordlife will own 14.2% of CCBC, with the potential to increase to 22% if Magnum Opus's shares are also converted.
China Expansion Strategy
Cordlife is increasing its investment in China by acquiring CCBC's CBs, aiming to leverage CCBC's market dominance and existing sales channels.
CCBC holds exclusive licenses in key provinces like Beijing, Guangdong, and Zhejiang, with a 543-person sales force.
Cordlife plans to introduce new products such as cord lining storage and Metascreen into these markets.
The company believes that building its own sales channels would be prohibitively expensive and not realistic, given the limited number of licenses issued per province.
Financial Impact
Funding Needs and Gearing:
Cordlife's net gearing is expected to increase to 59% post-transaction.
The company estimates a positive carry of SGD2.86m from the CBs, after accounting for interest costs.
Net Investment Income:
Cordlife will benefit from SGD2.9m pa in net investment income from the CBs, contributing to its FY15E profit forecast.
Earnings Adjustments:
FY15E and FY16E core EPS were reduced by 4-7% due to higher tax rates and lower licensing fee recognition.
The deal is expected to partially offset these reductions, with a net income of SGD2.9m pa.
Share Price Performance
1 Month: +9.0%
3 Months: +6.3%
12 Months: -0.8%
Relative to Index: +9.9% (1M), +5.0% (3M), -7.9% (12M)
Peer Comparison
Peer
P/E (Current)
P/E (Forward)
EPS Growth
P/BV
ROE (%)
Gross Margin (%)
Op Margin (%)
Net Margin (%)
Div Yield (%)
Cordlife Group Ltd
30.3
25.0
33.4
2.3
70.2
19.6
18.4
1.7
7.6
Bionet Corp (TWN)
45.15
35.1
-22.5
1.9
67.3
10.6
10.0
2.6
-
CryoLife Inc (US)
10.08
30.3
21.4
1.9
11.1
9.8
11.5
1.1
-
Stemlife (M'sia)
0.50
83.3
-60.4
3.7
39.2
27.1
18.9
7.0
-
Summary of Key Points
Cordlife is increasing its stake in China through the acquisition of CCBC's convertible bonds and a loan to Magnum Opus.
This strategy aims to leverage CCBC's existing sales channels and market dominance to expand Cordlife's operations in China.
The company's FY6/14 core EPS was slightly below expectations, primarily due to higher tax rates and lower licensing fee recognition.
Cordlife's core business showed strong revenue growth of 42% YoY, driven by growth markets in the Philippines, India, and Indonesia.
The company's target price has been raised to SGD1.50, reflecting the value of the CBs and strategic adjustments.
The SOTP valuation includes the value of CCBC's market value and CBs, with a target price of SGD1.50.
Cordlife's core business has a forward P/E of 25.0, lower than the average of its peers (31-38x).
The acquisition is seen as a strategic move to monetize its investment in CCBC and gain a stronger foothold in the Chinese market.
The company has a 10% stake in CCBC and is expected to increase this stake to 22% upon full conversion of the CBs.
The deal is expected to provide Cordlife with recurring investment income and future royalty income from CCBC's operations.
Cordlife's financials show a shift in focus towards monetizing its investment in CCBC and improving its market position in China.
