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

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 


Still believing in a takeover 

  • 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. 

At least three Chinese parties now in Cordlife 

  • 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. 

No intention for GO… yet 

  • 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. 

Opens doors to Asia, hedges risks 

  • 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.

Financial Metrics 

  • 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.

Swing Factors 


Upside 

  • 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%. 

Downside 

  • 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


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