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Global Cord Blood Corporation (CO) Q1 2020 Earnings Call Transcript

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CO earnings call for the period ending June 30, 2019.

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Global Cord Blood Corporation (CO)
Q1 2020 Earnings Call
Aug 28, 2019, 8:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Welcome everyone to Global Cord Blood Corporation's Earnings Conference Call for the Fiscal 2020 First Quarter. [Operator Instructions]

Now I would like to introduce Ms. Cathy Bai, VP of Corporate Finance to begin the presentation.

Cathy Bai -- Vice President, Corporate Finance

Thank you, Anna. Good morning, everyone. Welcome to our fiscal 2020 first quarter earnings conference call. A press release discussing our financial results has already been published and a copy is available on our company's website. During the call, our management team will summarize corporate developments and financial highlights for the 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 fiscal 2020 first quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session.

In view of recent developments, we understand investors and shareholders have various questions to ask. To give everyone a chance to ask questions, we would appreciate if you could ask one question at a time.

Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin the presentation.

Good morning, ladies and gentlemen. Welcome to our fiscal 2020 first quarter earnings conference call. During the first quarter of 2020 the number of newborns in China was similar to that of the prior year period. Consumer sentiment also remained cautious under the pressure of a slower economic growth in China as well as the US-China trade tensions. Therefore, it remained challenging to convert a prospect into a client. Despite the unfavourable conditions, and taking into consideration the short-term impact of the processing fee adjustment implemented in April, we managed to recruit 20,815 new subscribers in the reporting quarter, in line with our expectations. Guangdong remained the key driver of the growth.

By the end of the first fiscal quarter, our accumulated subscriber base had surpassed 770,000, further enhancing our leading position in the Global Cord Blood banking industry. However, as we head toward a period of unprecedented macroeconomic uncertainty, compounded by the potential regulatory changes in China for the Cord Blood banking industry, we will closely monitor the macroeconomic impact on consumer demand, especially, the related preventive healthcare services.

We must also stay alert on any new regulatory developments in our operating markets and be ready to further adjust our sales and marketing strategy in various potential scenarios. Meanwhile, for the long term benefit of the company and our shareholders, we continue to reiterate the need to expand our revenue source and diversify our risk profile. In addition, to expanding our current business, we will also seek future development opportunities through acquisition in the healthcare industry and other compelling options. This concludes my remarks regarding our fiscal 2020 first quarter results. Thank you for your ongoing support of Global Cord Blood.

I will now turn the call over to our CFO, Mr. Albert Chen, to review our first quarter financial performance in greater detail.

Chen Bing Chuen Albert -- Chief Financial Officer and Director

Good morning, everyone, and thank you for joining our call today. In the first quarter, revenues increased by approximately 17% year-over-year to RMB273 million. Top line growth was mainly driven by the increase in processing revenue, as the new processing fee was put in place in April of this year. In the first quarter, we managed to recruit 20,815 new subscribers, despite pressure from an upward price adjustment of the processing fee as well as a generally weaker consumer spending environment. Consequently, first quarter processing revenue increased by 17% to RMB168 million. And our Guangdong division remained the core driver in our business.

Our accumulated subscriber base increased to over 770,000 at the end of June, as a result, first quarter storage revenue increased by 17% year-over-year to RMB106 million. Storage revenue now accounted for approximately 39% of total revenue which was a similar percentage to the prior year period.

First quarter gross profit increased by 19% year-over-year to RMB228 million. Gross margin increased to 83% from 82% of last year, as the increased processing fee exceeded our increase in direct costs such as raw materials and collection costs. As gross profit improvement was partially offset by the increase in operating expenses, operating income increased by 18% year-over-year to RMB112 million. Depreciation and amortization expenses in the first quarter were RMB12 million, compared to RMB13 million last year. Non-GAAP operating income increased by 15% year-over-year to RMB125 million.

In the reporting quarter, sales and marketing expenses were RMB61 million, compared to RMB51 million last year. Taking into account the upward adjustment of the processing fee and the lukewarm [Phonetic] consumer sentiment, we proactively accelerated our sales and marketing activities as well as our sales force recruitment.

Sales and marketing expenses as a percentage of revenues remained at 22%, which was similar to the prior year period. General and administrative expenses for the first quarter totaled RMB50 million, compared to RMB41 million last year. The difference was mainly a result of high administrative expenses, staff costs, legal and professional fees. General and administrative expenses as a percentage of revenues remained at 18%. Again, similar to last year.

In the first quarter, an increase in fair value of equity securities or more commonly known as mark-to-market gains of RMB10 million was recognized, while a decrease in fair value of equity securities of RMB9 million was recorded last year. The changes were mainly attributable to the company investment in Cordlife. As a result of the increase in operating income and the increase in fair value of equity securities, income before income tax for the first quarter increased by 42% year-over-year to RMB129 million.

Net income attributable to the company's shareholders for the first quarter increased by 47% to RMB108 million. Net margin for the reporting quarter improved to 40% from 31% last year. Basic and diluted earnings per ordinary share for the first quarter increased to RMB0.89 compared to RMB0.61 over the prior year period. These are the highlights of our first quarter results.

We are now happy to take any questions concerning our latest financial results and our recent operation and developments.

Questions and Answers:


Thank you Albert. [Operator Instructions] Your first question is from Chun Ding from CRCM. Your line is now open. Please go ahead.

Chun Ding -- CRCM -- Analyst

Good afternoon, Albert and Tina, and thank you for taking the time answering shareholder questions. First of all, the numbers looks good, despite the difficult environment. Thank you very much for the good work. My question is only one thing, which is with our stock price way below the cash value of $4.60, why are we going to acquire other business? Can we buy back shares or pay dividends at this level? It's -- there's nothing out there that's as cheap as we are. Thank you.

Chen Bing Chuen Albert -- Chief Financial Officer and Director

Thank you for your questions. I appreciate your comment regarding the operation achievements. Allow me to say that this -- this particular first quarter has been challenging, and at the same time we are also taking a relatively cautious view regarding the risks -- the near term outlook of our business, that's also because of the macro uncertainties I should say, respect to the China economy as well as all the negative headlines. But with that being said, I trust that you have read our CEO's transcripts and as pointed out our -- in our previous earnings calls, we believe that it is important to take a prudent approach in this market environment. And at the same time, we should continue to look for opportunities regarding how to diversify our risk and at the same time as to expand our revenue streams as well.

Regarding the share price, I noted the share price has been relatively weak recently. That is a -- I think it is a combination of multiple factors, including the uncertainty that we are currently facing, as well as the -- I'll say, the potential exposure -- let me rephrase, the expirations of the license for region policy as well. So I think there are multiple factors that actually are affecting us and hopefully we can cruise through this troubled waters.


Thank you. Your next question comes from Mike Schmitz from Jayhawk Capital. Your line is now open. Now, Mike, please go ahead.

Michael Schmitz -- Jayhawk Capital Management -- Analyst

Hi, Albert. Could you, I believe you discussed this on the last quarterly call as well slightly. But could you describe in more detail some of the reasons why the Board decided not to pay a dividend, and in what way that was in the best interests of all shareholders?

Chen Bing Chuen Albert -- Chief Financial Officer and Director

Again, thank you for the questions. I think in terms of the capital deployment decisions, I think the Board has taken into multiple factors into account. On one hand is the pending expirations of the existing licensing regimes, and at the same time is the company's future growth and the ability to expand our services to go beyond just purely Cord Blood banking within one single market. So I think it's a multiple factors that we have to take into account, and that's why no dividend was recommended in the prior quarter.


Thank you. Once again, Mike do you have any follow up questions?

Michael Schmitz -- Jayhawk Capital Management -- Analyst

Yes. I was just asking if there was a certain amount of cash that you feel you need for those activities that above which you could begin paying dividends again?

Chen Bing Chuen Albert -- Chief Financial Officer and Director

That really depends on the situations and the opportunity that we explore. So it is actually hard to put a hard figure in that -- its hard to put a particular hard figures as a threshold.


Thank you. [Operator Instructions] Your next question is from Jonathan from Cedar Street. Your line is now open Jonathan, please go ahead.

Jonathan Brodsky -- Cedar Street Asset Management -- Analyst

Albert, good afternoon. Thank you for taking the call. Can you extrapolate a little bit more on the revision to the licensing regime, the process by which you understand that development to be occurring and the timeline for it please.

Chen Bing Chuen Albert -- Chief Financial Officer and Director

Thank you for the questions. As you recall from our prior filings, the cord blood banking industry has the licensing regime in China in order to provide the umbilical cord blood stem cells storage services, one will require to possess a license issued by the government authorities. And also pursuant to that policy is the one license per region policy. The original policy was scheduled, I think it was meant to expire in 2010. And I think at the beginning of 2011, the authorities has extended that policy from 2000 -- policy deadline from 2010 to 2015 and remain one license per regions no more than seven licenses.

And I think before the end of 2015, the authorities once again extended that -- the policy deadline from 2015 to 2020. Again, we remain to be one license per region and no more than seven licenses. So -- another interesting aspect is that the -- would be the existing licensing regimes coming to an expiration at the end of next year, there is always a possibility that the licensing regime may change. Because, in China right now there are a total of seven umbilical cord blood banking licenses, but technically, if the authorities follow one license per region, they can issue up to 31 licenses, because there are many other parts of China where cord blood banking license simply does not exist.

So as a result, every time when there is a potential change in policies, there is change in policies, there's -- this always brings uncertainties. While we are continuous --- while we are continuously monitoring the situations, we are not at the present time getting any clear indications. So, fair to say that the policy may change at the end of 2020. So I think this is one of the uncertainty that we're currently facing.


Thank you. [Operator Instructions] We have a follow-up question from Mike from Jayhawk Capital. Please go ahead, Mike.

Michael Schmitz -- Jayhawk Capital Management -- Analyst

Hi, Albert. Especially since no one else has asked about this, could you please provide an update on the work the special committee has done, if any on the proposed merger with Cordlife. You know, what have they done since they haven't rejected the deal, but they don't appear to have hired any advisors to help them evaluate the deal. Could you please comment on that?

Chen Bing Chuen Albert -- Chief Financial Officer and Director

Again, Mike, thank you for the questions. I think regarding the work of the special committee, I think this is more related or at least this is definitely [Phonetic] within the preview of the special committee, so I don't have the liberty to comment upon, but I guess that it is fair to say that even at this stage, there is no certainty that a deal will happen or whether the deal will actually happen or not. So, however, I mean, upon the special committee instructions, we will definitely publish the relevant press release and update the market regarding the Cordlife proposal offer.


Thank you Albert. Once again, since there are no more questions at this point, I will now turn the call back to Ms. Cathy Bai. Please go ahead, Cathy.

Cathy Bai -- Vice President, Corporate Finance

Thank you, Anna. This concludes our earnings conference call for the fiscal 2020 first quarter. Thank you all very much for your participation and ongoing support. Have a great day. Anna you may not -- now disconnect.


[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Cathy Bai -- Vice President, Corporate Finance

Chen Bing Chuen Albert -- Chief Financial Officer and Director

Chun Ding -- CRCM -- Analyst

Michael Schmitz -- Jayhawk Capital Management -- Analyst

Jonathan Brodsky -- Cedar Street Asset Management -- Analyst

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