Cordlife Group - Maybank Kim Eng 2016-01-06: No Shortage of Suitors

CORDLIFE GROUP LIMITED P8A.SI

Cordlife Group (CLGL SP) - No Shortage of Suitors

We believe control of Cordlife will provide value to Chinese buyers hoping to gain traction outside China and spread their China risks, through Cordlife’s globally-recognised technology and markets in Asia.
Our view was reinforced recently by the entry of Kunlum as its single largest shareholder. Kunlum paid SGD1.70, a hefty premium over Cordlife’s market price and entered even after the latter paid its special dividend.
We raise our TP to SGD1.72 as we raise core P/E to 41x, the low end of peers’ range of 41-46x.

Even then, this is still at the low-end of our estimated takeover offer range of SGD1.62-2.09.

Two Chinese investors have emerged as big shareholders even as early investors such as China Cord Blood Corp (CCBC) keep its skin in the game.
Zhongyuan Union Cell owns 7% through China Minsheng while Kunlum, the latest, owns 16.1%.
Just as Minsheng is a known front for Zhongyuan, we suspect Kunlum could represent another party. Kunlum is managed by private equity fund Lighthouse Capital.
CCBC and Zhongyuan are the two biggest cord blood bank operators in China.

Kunlum has told Cordlife that it currently does not have intentions to make a GO. This is probably true, as we believe it is the ultimate buyer behind the purchase that should harbour such an intention.
To go from a zero shareholding to the single largest in such a short time seems to suggest a thought-out end-game.
In the meantime, we estimate free float has dwindled from 62% to 29% and downside is limited, in our view.

In our view, control of Cordlife offers instant access to Asian markets to any Chinese buyer.
Cordlife is a top player in Asia, already honed and refined in the toughest market of all. It can offer internationally recognised technology and market access to the most important markets in Asia.
In addition, Chinese players will be able to hedge their risks in China where their advantage stems from a malleable licensing policy.

Client deliveries in India, Philippines and Indonesia to be main revenue drivers. Expect 15-20% growth in emerging markets vs 8-9% in mature Singapore/HK.
Expect EBIT margins to improve in FY16 as A&P spending in India peters off after major expansion.
A&P spending in Indonesia and Philippines to rise as more marketing resources will be channelled there after India but should be below India’s.

Expect news flow on ventures into China to provide catalysts.
Earnings-accretive M&As with net cash of SGD57m as of Sep 2015 or SGD0.32/share after payment of special dividend.
Higher-than-expected growth rates in emerging markets, currently estimated at 15-20%.

Failure to collaborate with new partners and/or regulatory risks in China.
Losing share in highly-competitive markets such as India.
Slower-than-expected acceptance of private cord blood storage services in emerging markets.

John Cheong Maybank Kim Eng | Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-06

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 1.72 Up 1.54