Jun 22, 2017
Executives
Albert Chen - CFO Kathy Bian - VP, Corporate Finance
Analysts
Ajeya Patil - Evaluate Research Lin Yang - FM Capital Partners Michael Schmitz - Jayhawk Capital Peter Halesworth - Heng Ren
Operator
Welcome everyone to China Cord Blood Corporation's Earnings Conference Call for the Fourth Quarter and Full year of Fiscal 2017. All participants' lines will be placed on mute during the presentation after which there will be a question-and-answer session.
Now, I would like to introduce Ms. Kathy Bian, Vice President of Corporate Finance to begin the presentation.
Kathy Bian
Good morning, everyone. Welcome to our fourth quarter and full year of fiscal 2017 earnings conference call.
A press release discussing our financial results has already been published and a copy is available on our company's Web site. During the call, our management team will summarize corporate developments and financial highlights for this quarter.
A question-and-answer session will follow. Before we begin, please note that today's discussion will contain forward-looking statements that are subject to certain risks and uncertainties and actual results could be materially different from these forward-looking statements.
Kindly refer to our SEC filings for detailed discussions of potential risks. In the interest of time, we will begin with our CEO's remarks followed by a detailed report of our fourth quarter and full year of fiscal 2017 financial given by our CFO, Mr.
Albert Chen. Our management will be available to answer questions during the Q&A session.
Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation.
Good morning, ladies and gentlemen. Welcome to our fourth quarter fiscal 2017 earnings conference call.
During the fourth quarter, we recorded 20,566 new subscribers, representing a year-on-year growth of 42% and a quarter-on-quarter increase of 4%. A low comparison base together with our organic growth both contributed to the strong year-over-year rate.
For the fiscal year, the group managed to acquire a total of 74,952 new subscribers surpassing our target of fiscal 2017. The Guangdong market was the main driver of our growth and our Beijing and Zhejiang markets also developed progressively.
As of March 31, 2017, the group reached a total subscriber number of 575,040 which further underscores our position as a leading participant in China’s cord blood banking industry. Looking ahead, we are cautiously optimistic about the next fiscal year.
In fiscal 2018, we expect the number of new babies to increase. However, consumer discretionary spending will still be considerably constrained by economic uncertainty in China.
To increase our subscription base and improve market penetration, we will continue our new subscriber awareness initiatives regarding the value of cord blood storage by utilizing new media and marketing methods. The management team will also proactively explore various corporations and business opportunities to best serve our clients maternal needs throughout the prenatal and postnatal periods.
In doing so, we will leverage our existing resources and core competencies to develop more comprehensive preventive healthcare measures. In fiscal 2018, the group estimates the overall subscription number to be within the range of 77,000 and 80,000.
I’d also like to emphasize that recently the Board of Directors has taken the suggestion of the special committee and unanimously determined to terminate its negotiation with Golden Meditech Holdings Limited regarding its going private proposal to the Board. The group will continue to pay close attention to the development of the ongoing transaction between Golden Meditech and Nanjing Ying Peng Hui Kang Medical Industry Investment Partnership and update the market whenever relevant regarding this news.
This concludes my remarks regarding our fourth quarter results. I would like to thank you for your ongoing support of CCBC.
I will now turn the call over to our CFO, Mr. Albert Chen, to review our fourth quarter financial performance in greater detail.
Albert Chen
Good morning, everyone. Thank you for joining our call today.
As discussed in the CEO remarks, our fourth quarter results were encouraging as we recruited more than 20,000 new subscribers, thanks to the solid contribution from our Guangdong division. As a result, revenue increased to RMB202 million from RMB157 million in the same period last year.
Revenues generated from processing fees in the fourth quarter increased by 40% to RMB130 million, due to the combined effect of licensed subscription numbers and the low comparison base. Revenue generated from processing fees now accounted for 64% of revenues as compared to 59% in the fourth quarter of last year.
During the reporting quarter, we reclassified 268 private cord blood units as donated cord blood units because we consider the recoverability of these prior subscribers to be remote. By achieving these units as donated units, net accumulated subscriber base was 575,040 units as of March 31, 2017, up 14% year-over-year.
As a result of the expanded subscriber base, revenues generated from storage fees increased to RMB72 million, up 12% from last year. Storage fees now accounted for approximately 36% of the total revenues compared to 41% of last year.
Gross profit for the fourth quarter of fiscal 2017 increased to RMB161 million from RMB122 million last year and represented a gross margin of almost 80% despite the increase in raw materials and labor costs. In the fourth quarter, our sales and marketing expenses increased to RMB54 million compared to RMB37 million last year.
The increase was attributable to our various efforts to attract potential clients and penetrate existing markets. This includes expanding our sales force, granting an additional performance incentive of RMB5 million to the Guangdong sales team, and adoption of a new marketing campaign on social media to better align with the behavior of our clients.
Taking into account the performance bonus, sales and marketing expenses as a percent of revenue were 27%, up 3% from last year. General and administrative expenses for the fourth quarter increased to RMB48 million from RMB43 million last year as a result of the increased staff costs and other administrative expenses.
In the reporting quarter, we also recorded RMB1 million write-off of accounts receivable as we reclassified 268 private cord blood units as donated units. As a percentage of revenues, general and administrative expenses were 24%, down from 27% last year.
Operating income for the fourth quarter increased by 42% to RMB56 million compared to RMB40 million last year. Although top line growth was partially offset by increased sales and marketing expenses, robust performance still led to expansion of operating margin from 25% last year to 28% in the reporting quarter.
In the fourth quarter, depreciation and amortization expenses were RMB13 million compared to RMB12 million last year. Share-based compensation expense was RMB16 million compared to RMB15 million last year.
Operating income before depreciation and amortization and share-based compensation expenses increased by 26% to RMB85 million representing a margin of 42%. In the fourth quarter, the company incurred interest expense of RMB30 million compared to RMB28 million last year.
The increase was partially due to the compounding interest effect of the convertible notes and the exchange difference from the depreciation of Renminbi against U.S. dollars.
Subsequent to the reporting quarter, all outstanding convertible notes were converted into approximately 40.5 million ordinary shares. During the reporting quarter, we reversed an income tax provision of RMB18 million after we decided to reinvest our undistributed earnings within the PRC.
As a result, we recorded an income tax benefit of RMB3.9 million in the fourth quarter. Excluding the effect of such reversal, income tax expense was RMB14 million increased from RMB9 million last year, which was due to the increase in taxable income.
Net income attributable to the company shareholders for the reporting quarter increased to RMB38 million from RMB8 million last year. Due to the combined effect of improved operating income and income tax provision reversal, net margin for the fourth quarter of fiscal 2017 increased to 19% from 5% in the same period last year.
Basic and diluted earnings per ordinary share for the reporting quarter were approximately RMB0.45. As of March 31, 2017, the company had cash and cash equivalents of approximately RMB3.5 million and net cash provided by operating activities for the fourth quarter of fiscal 2017 was RMB201 million.
Now these are just the highlights of the fourth quarter results. We’re now happy to take any questions regarding the fourth quarter performance and the operations development of the company.
Kathy Bian
Operator, you may now connect everybody into the Q&A session. Thank you.
Operator
Thank you. [Operator Instructions].
We will now take our first question from Ajeya Patil of Evaluate Research. Please go ahead.
Ajeya Patil
Hi. Good morning, everyone.
So I just had one question. Can you breakdown the new subscribers as in – you had 20,500 subscribers this quarter, can you break them down by province please?
Kathy Bian
I’m sorry, Ajeya. Can you say it again and loudly because we can’t quite hear you here, sorry.
Thank you.
Ajeya Patil
Hi. Good morning.
So I just had one question. Can you breakdown the new subscribers that you have 20,500 by province?
Albert Chen
The new subscriber breakdown for the fourth quarter as I mentioned in my transcript, most of the subscribers come from the Guangdong market. You’re looking at approximately 65% of new subscribers coming from Guangdong and then about 20% from Beijing, the rest from Zhejiang market.
Ajeya Patil
Okay. Thank you for taking my call.
Operator
Thank you. Our next question comes from Jeff Neil of Alex Prong [ph].
Please go ahead.
Unidentified Analyst
Thank you and good morning. We’re relatively new investors to the company, so I have several questions pertaining to both balance sheet and operations if I could do so please.
Albert, first of all, you mentioned the convertible notes were redeemed in April post this reporting period, so if I understand that correctly that should leave you with no debt on the balance sheet. Is that correct?
Albert Chen
That’s basically correct. The majority of the debt on the balance sheet related to the convertible notes and now is being converted in April.
Unidentified Analyst
Right. And that would also eliminate the vast majority if not all of the 17 million of annual interest expense, correct?
Albert Chen
That’s a right way to look at it.
Unidentified Analyst
Next, the $29 million line item on your balance sheet available for sale equity securities, what is that?
Albert Chen
Basically our strategic investments such as CordLife, for example.
Unidentified Analyst
Okay. Next item, the $27 million line item titled other investments, is that your investment in the fourth province, cord blood license?
Albert Chen
That’s the investment in the Shandong Corporate Bank; 24% equity interest in Shandong Corporate Bank.
Unidentified Analyst
Right. Turning to operational aspects, what does a new subscriber usually pay and over what time period do they usually make payments?
Albert Chen
Well, they make the payment when they sign up for the contract. And the revenue gets recognized when the sample is being processed and the test result come and approved to be qualified for storage.
Unidentified Analyst
Okay. The last question is about revenue.
The prior quarter you had I believe a little over $2 million in revenue from Golden Med related sales. Were there any substantial revenues in this quarter related to that relationship?
Albert Chen
To answer your question in a straight forward manner would be no. But we will continue to look for other business opportunities whenever there are opportunities to capitalize on our existing client sales or our existing marketing platform.
We always look for new revenue streams.
Unidentified Analyst
Great. And then two final questions related to the structural events occurring with you guys.
One, can you provide us any update on either the timing or remaining government approvals necessary for the majority sale to Sanpower?
Albert Chen
I believe that question is regarding a transaction between Golden Meditech and the Nanjing Ying Peng fund. I think that transaction is still ongoing.
And if there is any update available – if we spot that there is any update, we’ll update the market accordingly. Right now I think that from our perspective it looks like an ongoing transaction which is not yet to be completed.
Unidentified Analyst
Okay. And my last question and thank you very much for taking my questions.
Can you comment on the payment structure between Golden Med and Sanpower related to something called Fortress Holding settlement? Specifically, Golden Med is to receive two payments from Golden Med that have the option of receiving shares from a Sanpower controlled public company.
Is it possible that that option could include shares of Cord Blood?
Albert Chen
I am certainly not aware that our company is involved in that transaction. Maybe that question is actually better addressed to the Golden Meditech company or their team.
May I inquire which transaction are you referring to?
Unidentified Analyst
The transaction involves a settlement between Golden Meditech and Sanpower related to an asset called Funtalk which was organized in an entity called Fortress Holding Group.
Albert Chen
I think that is a little beyond my scope. I think this is a totally different transaction.
Unidentified Analyst
Okay. Thank you very much for taking my questions.
I’ll get back in the queue.
Operator
Our next question comes from Lin Yang of FM Capital Partners. Please go ahead.
Lin Yang
Albert, congratulations. A very impressive set of results.
I think this proves again the management is very good operating on assets.
Albert Chen
Thank you.
Lin Yang
My question is more on the capital allocation. You generated almost 30 million of operating cash flow this quarter, $30 million.
Yet there are 510 million cash on balance sheet. Clearly you don’t really need the cash on balance sheet.
I just wonder if the Board and the management has any plans to return some of that to shareholders, for example, in the form of share buyback?
Albert Chen
The capital allocation decision which the Board and the management will have to determine based on the company capital need from time to time. As you recall from our prior earnings call, Board has always been open to various capital allocation alternatives subject to the parent company capital need and the company’s development plan and strategies overall.
But frankly as of today, the Board hasn’t made any of that decision explicitly regarding any share buyback or dividend at this stage.
Lin Yang
I see. Is any visibility on timeline, for example, are you waiting for the Sunpower/Golden Meditech to close before discussing this or is there something like in either agenda where you can talk about this and answer this?
Albert Chen
If the Board has made a decision, we’ll certainly announce to all the shareholders immediately.
Lin Yang
Okay, understand. These are my questions.
Thank you.
Albert Chen
Thank you.
Operator
Our next question comes from Mike Schmitz of Jayhawk Capital. Please go ahead.
Michael Schmitz
Hi, Albert. Great results.
Obviously you pretty handedly beat your 2017 guidance. Can you also provide us your new subscriber target guidance for fiscal 2018?
I’ll let you answer that first.
Albert Chen
To pursue the questions regarding the subscriber target for fiscal year 2018 as I mentioned in our CEO remarks, we are targeting a range between 77,000 to 80,000 new subscribers for fiscal '18.
Michael Schmitz
Thank you. I missed that.
And obviously now as one of the previous callers mentioned that with the converters gone, another side effect to that would be the GAAP income results start growing dramatically with that interest expense taken out. It will be even better when the restricting [ph] stock unit expense rolls off which I think will be at the end of third quarter this year.
So I’ve got pro forma GAAP income. If you’ve taken out those things kind of pro forma this year and also adjusted for deferred revenue, your GAAP pro forma income would be about 75 million or $0.63 a share which is probably growing like $0.75 and if you put 30 more pull on that, you’d have a $25 to $30 stock price right now.
And this can be even better if there was a significant amount of shares that were repurchased. And also support the previous caller’s comment about repurchasing shares with some of the excess cash on the balance sheet.
So I understand you’ve kind of already answered some of those questions but understanding you have to wait until Sanpower completes their acquisition from Golden Meditech. But we would be strongly in favor of using that cash to repurchase shares and think that the future strong results will lead to dramatically good results for all of us.
So thank you for all your hard work.
Albert Chen
Thank you for your compliments, Mike.
Operator
Thank you. We will now take our next question from Elizabeth Esparza of KCM Capital [ph].
Elizabeth Esparza, please make sure that your mute function is switched off. Elizabeth, please make sure that the mute function is switched off on your phone.
Unfortunately, we can’t hear you at this time. We’re going to move to the next question.
Please signal again to ask a question. Our next question comes from Peter Elisha [ph] of Wells Fargo.
Please go ahead.
Unidentified Analyst
Good morning, ladies and gentlemen, and thank you for my call. Just a quick question here.
So after the last few lackluster quarters of GAAP earnings, like CCBC did a great job this past quarter. Moving forward, how does management plan to carry this momentum either by investing structurally or are there other initiatives that you guys are looking into investing in?
Thank you.
Albert Chen
To make sure I get your answer correct, I presume is what is the management’s strategies in carrying this momentum and try to recruit as many new subscribers we can going forward. Now to answer that question that actually comes in two-folds.
We have actually tirelessly trying to look at other different means of media in promoting our services onto – hopefully to achieve two results. On one end is higher basically recruitment efficiency and on the second hand is – on the second one is we try to use a more different media that tries to reach deeper into existing – people into the existing markets.
Now one example will be something that we recently have adopted is actually establishing a social media platform to reach out to the clients. So that’s one way of targeting it.
We have also tried [indiscernible] that works and what doesn’t but we will continue to do that. So that’s one way to try and carry out our momentum going forward.
Secondly honestly is relying on the word of mouth of the existing subscribers. We maintain a continuous news flow.
We send out our monthly news letter, our quarterly news letter now to subscribers and trying to remind them on one hand is that the service that we are providing that they have been enjoying as subscribers and also hopefully through this kind of passive education allow them to alert their friends and family and their surrounding – people surrounding them that they are a subscriber of our existing services. And through them we kind of broaden our reach to other potential inhabited areas, I should say.
So these are two ways that we are looking at it. If you also look at the sales force that we actually we have been continuously not only building out our sales force, we are also actually constantly reevaluating the quality of our sales force as well.
I’m no shy to say that we constantly get rid of people but at the same time we make sure that quality are retained. So this is how we hopefully are going to continue to carry our momentum.
Ongoing certain market activities will still be ongoing. Sales force will still be stationed in the hospitals.
We will continue to support either promotion or activities such as talks and discussions. So hopefully as a conventional advertising channels plus the exploration of new marketing channels in combining with a better, stronger sales force going forward will help us to carry this momentum going forward.
Now with that being said, you also note that in our public filings we have talked about in the past couple of quarters about the rents [ph] that we thought as an economy in China which we have seen and experienced some sort of an impact with ourselves and sort of impact on consumer spending. So this is something that we have been constantly fighting against.
But unfortunately I think that this downward momentum in consumer spending may continue to still over cloud our new subscriber recruitment effort.
Unidentified Analyst
And I just have one quick follow-up question on that. As far as the social media program that you guys are developing, is that happening internally or are you guys contracting out to people that are experienced in marketing via social media?
Albert Chen
Right now we provide the content but the platform is still by our professional parties that we engage.
Unidentified Analyst
Thank you.
Operator
Our next question comes from Peter Halesworth of Heng Ren. Please go ahead.
Peter Halesworth
Thank you. A few quick questions.
First, I’m just curious without the increase in the gross margin if you could outline how the increase occurred considering that you mentioned this happened despite cost rising? Just wondering is it possibly because of some change in pricing strategy?
That’s my first question. I’ll have a follow up.
Albert Chen
Pricing strategy in terms of the pricing package has been relatively stable in the past couple of quarters. The margin actually – how should I say – the best way to put it, so the margin improvement is the result of economy of scale but which was unfortunately partially offset by an increase in raw material costs and labor costs which we’re seeing the upward pressure on both cost items for many quarters already.
But as you know, our revenue component consists of two parts, one of which is the processing fees and the other portion related to the storage fees. As the storage fees continued to becoming a bigger and bigger portion of the total revenue mix, it helps to offset some of these cost pressure I should say.
But pricing hasn’t changed.
Peter Halesworth
Okay. And then a follow-up question regarding the new subscribers in the quarter and the breakdown.
Do you have a breakdown of what types of plans the new subscribers are participating in?
Albert Chen
Right now in the fourth quarter, you’re looking at about 48%, 49% came from normal payment; about 48% came from one-time payment and the rest is four, five years in some programs.
Peter Halesworth
And just to clarify, Albert, normal payment means the installment fee or the upfront fee and then the 18-year maintenance fee. Is that correct?
Albert Chen
Normal payment means 6,800 processing fees and then 860 storage revenue for the first year and then second year they pay us 860 again. So that’s what we call the normal payment.
What you’re referring to is Qilu [ph] payment where the client pays 18 years of storage fee upfront but we still recognize that on storage revenue on a yearly basis only.
Peter Halesworth
Right. No, I meant the 18 years if they do participate in that maintenance fee program over the age of the trials youth anyway, so okay.
And then my last question is on expansion to other provinces for the industry, we know that currently I believe there are seven provinces that have this type of facility. Can you discuss or reveal to us what the status is of expansion to the large majority of Chinese provinces of umbilical cord storage and stem cell processing?
Is there any conversation with the government? Do they have plans to allow this to expand and grow throughout China nationwide; that would be helpful?
Thank you.
Albert Chen
As disclosed in our public filings, the NHFPC, the National Health and Family Planning Council basically have extended the policy regarding the one license per region. That is back in – I think back in early 2016 and that extension also means that there will still be one license per region no more than seven licenses until the end of 2020.
So this is the situation that we are currently in. We have no indication or evidence to suggest that there will be more locations opened up at this stage.
Obviously, if there is any new development from the government’s side and once that definition is made known to us, we’ll certainly announce it accordingly. But as of this point in time, there is no bases to actually speculate there will be more licenses in the near term.
So it’s still the seven licenses authorized in China only. Now if you know, we have to license to operate in Beijing, Guangdong and Zhejiang and also with our equity interest in Shandong Corporate Bank.
And we have to keep an open mind with respect to the possibility of expanding our operation both within and outside of China. So let’s just say that we are keeping our options open at this stage.
Peter Halesworth
Okay. So status quo on the seven licenses, okay.
Thank you very much.
Operator
Thank you. [Operator Instructions].
Our next question comes from [indiscernible]. Please go ahead.
Unidentified Analyst
Hello, and thank you for taking my questions. First, congratulations on the execution and the results.
I have two quick questions and one comment. The first question is regarding your stake in Qilu.
You have 24% exactly. You didn’t receive any dividend this year abruptly on this stake but Qilu on calendar 2016 generated more than $50 million on net income.
So do you have any indication that you would receive dividend maybe this year on this participation? And does the Board be thinking about taking a decision on this stake because as you know this stake is valued at $27 million in your balance sheet.
And based on the recent transaction just beginning of 2017 between Nanjing, an affiliate of Sanpower and Qilu, a majority stakeholder, the valuation was at more than $1 billion. So it means that your stake in your balance sheet at 27 million and it’s potentially worse $300 million.
So this is a hidden value. So does the Board have any intention to take care of that?
My second question very quickly is about the ownership of China Cord Blood. As you have seen of course since the end of March more than 25 million shares are traded.
As you know the float of the company is about 32 million shares because there is 2 million shares of Golden Meditech to be sold to Sanpower. There is your 7 million [indiscernible] stock unit.
So almost 100% of the float has traded in about two months and a half. So did you receive any threshold notification in terms of ownership?
And last question, it’s more a comment. I completely agree with the previous remark from different people.
I think that because your results should dramatically increase and improve over the next two years, especially the free cash flow, because you have no more financial interest on the convertible, for example. It is our opinion that a repurchase program should be done but it should be done now when you have a price at this level and I mean in interest of all shareholders, you should not wait that the stock is worth $20 or $25 to do the share buyback.
Thank you.
Albert Chen
I’ll try to capture the best I can regarding your questions. I believe that the first question is regarding our current ownership, our 24% equity interest in the Shandong Corporate Bank whether there has been any talks about disposing it.
To answer your question, currently we have not entered into any public conversations and negotiation regarding disposing any material at this stage. But obviously if there is a good reason or good to merger reasons which will benefit the company and shareholders as a whole, of course we will consider.
But nothing I think we’re announcing at this stage. As for the second question which is – [Foreign Language].
Kathy Bian
[Foreign Language].
Albert Chen
Regarding the shareholding of China Cord. Now as we pointed out in our earnings call, after or pursuant to the convertible note conversions, Golden Meditech now owns approximately 65.4% give or take of China Cord.
And then there are few schemes that issue shares of 7 million and then management own a small portion of the company as well. Other than those, majority obviously I believe is free float.
Now as the gentlemen kindly pointed out, we also noted there has been a lot of trading volume lately. Unfortunately, based on the SEC public filings, I’ve not seen any new filings lately.
So if you have information about where those shares are, do enlighten me.
Unidentified Analyst
Sorry? You told me if I know who are the shareholders who bought your share, right?
Albert Chen
Well, my information regarding shareholder ownership I’m mostly relying on the SEC filings and lately have not spotted any new filings.
Unidentified Analyst
Okay, that’s clear. And just on the revert shares, I mean just to comment not to question but I think it would be very positive for shareholders, including you, which is good in this – ownership structure is that all the minority shareholders are aligned with yours.
So we think definitely it would be good to do a repurchase program. Thank you.
Operator
Thank you. [Operator Instructions].
As there are no further questions in the queue, I would like to turn the call back to our speakers for any additional closing remarks.
Kathy Bian
Okay. Thank you all.
I think this concludes our earnings conference call for the fourth quarter and full year of fiscal 2017. Thank you all for your participation and ongoing support.
Have a great day. Operator, you may now disconnect.
Thank you.
Operator
Thank you. That will conclude today’s conference call.
Thank you for your participation. Ladies and gentlemen, you may now disconnect.