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Global Cord Blood Corporation (NYSE:CO)
Q3 2020 Earnings Call
Mar 12, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome everyone to Global Cord Blood Corporation's earnings conference call for the fiscal 2020 third quarter. [Operator Instructions] Now I would like to introduce Ms. Cathy Bai, VP of Corporate Finance to begin the presentation. Please go ahead, Cathy.

Cathy Bai -- Vice President of Corporate Finance

Thank you, Anna. Good morning, everyone. Welcome to our fiscal 2020 third 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 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 fiscal 2020 third 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'd appreciate if you could ask one question at a time.Today, on behalf of our CEO, Tina, I will read her prepared remarks to begin the presentation. Good morning, ladies and gentlemen. Welcome to our fiscal 2020 third quarter earnings conference call. During the third quarter suspension of the US China trade war briefly lifted consumer sentiments. However, due to a drag from the expectations on slower economic growth in China, potential clients remained cautious on healthcare expenses, and attracting new clients remained challenging.

In response, each subsidiary adjusted their respective marketing strategies and resource deployment aiming to maintain steady volume and momentum. In the third quarter, the Group managed to recruit 23,387 new subscribers, in line with management expectations. By the end of December 2019, the accumulated subscriber base had expanded to 815,000.

As previously announced, the Group's operations so far in 2020 have been substantially impacted by the unprecedented Coronavirus outbreak. Promotional and sales activities have been significantly impacted by various factors. For example, some hospitals are in lockdown mode, have raised their alert levels or are limiting access to hospital staff and patients only.

Expectant mothers are cutting down on hospital visits and checkups. Meanwhile, the cost of procuring additional protection gear for our staff is adding to operational costs. Although the Group is trying its utmost to achieve its new subscriber target for fiscal 2020, it is expected that fiscal fourth quarter results will be impacted and that impact may spill over into next fiscal year. As we mentioned in earlier press release during the reporting quarter a new regulatory policy in relation to the cord blood banking industry was rolled out by National Health Commission or NHC of China. The new policy has not yet provided specific implementation details.

So, we assume more specific industry related policies or implementation rules shall be issued in the future.

Bearing in mind that the current policies of one license per region and no new licenses before 2020 may expire in the near future. We will continue to closely monitor any policy developments or implementation rule announcements and assess the potential impact to our business. We will continue communicating with the NHC and other relevant government agencies, while preparing ourselves for different scenarios.

Looking ahead, the regulatory uncertainty and concerns over slowing economy still remain and the impact of the Coronavirus outbreak lingers. In addition, we have entered the year of the Mouse which traditionally is not a year associated with high birth rates in China. We will continue to keep a close eye on all these factors, proactively address new issues, remain nimble and be ready to quickly and frequently adjust our deployment of resources.

We will also continue to explore new marketing and sales channels to foster organic growth and step up our efforts to assess opportunities to expand our service offerings and mitigate our business concentration risks.

This concludes my remarks regarding our fiscal 2020 third quarter results. Thank you for your ongoing support of GCBC. Together, I believe, we will overcome this time of difficulty. I will now turn the call over to our CFO, Mr. Albert Chen to review our third quarter financial results in greater detail.

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Good morning, everyone. Thank you for joining our call today. In the third quarter revenues increased by 32% year-over-year to RMB335 million, which was the result of the new processing fee that became effective in April 2019, and subsequently lifted processing fees revenues. As a result of the new pricing, revenues from processing fees and other services increased by 39% year-over-year to RMB219 million. This represented approximately 65% of our total revenues as compared to 62% of last year. The Group managed to recruit 23,387 new subscribers in the reporting quarter, representing a 1% year-over-year decrease as concern over slower economic growth in China overshadowed positive progress made in relation to US-China trade war, which placed pressure on our target clients.

By the end of December 2019 our accumulated subscriber base reached 815,000. Accordingly, as a result of the expansion of our subscriber base, storage fees revenues for the third quarter increased by 20% year-over-year to RMB116 million. Gross profit in the third quarter grew by 37% year-over-year to approximately RMB283 million. As the increase in processing fees exceeded the increase in raw material costs, gross margin improved to 85%, similar to that of our second quarter.

Operating income in the third quarter increased by 65% year-over-year to RMB153 million. Operating margin increased to 46%, similar to that of last quarter. Depreciation and amortization expenses were approximately RMB12 million. Non-GAAP operating income increased by 57% year-over-year to RMB165 million. Non-GAAP operating margin also increased to 49%. In the third quarter, we proceeded to ramp up our marketing and promotion activities to raise awareness regarding cord blood storage.

To achieve conversion target, we also expanded our sales team and improved their incentive. As a result, sales and marketing expenses increased by 17% year-over-year to RMB76 million. Sales and marketing expenses as a percentage of revenues was 23%, down by 3 percentage points from last year, but up by 2 percentage points from last quarter. General and administrative expenses amounted to RMB48 million compared to RMB45 million of last year. The increase was mainly attributable to rising labor cost, which awaited the effect of cost saving measures and the lower bad debt provision.

General and administrative expenses as a percentage of revenues decreased by approximately 3 percentage points to 14%.

In the third quarter, we recognized an increase in fair value of equity securities or more commonly referred to as mark-to-market gain of RMB8 million compared to the mark-to-market loss of approximately RMB28 million in the prior year period.

The benefit from the new processing fee pricing coupled with the increase in fair value of equity securities contributed to the increase in income before tax, which surged by 129% year-over-year to RMB172 million. Net income attributable to the Company's shareholders increased by 136% year-over-year to RMB145 million. Net margin also improved to 43% from 24% of last year. Basic and diluted EPS for the third quarter were RMB1.19.

These are just the highlights of our results and we are now happy to take any questions concerning our latest financial results, our recent operations and as well as our future developments.

Questions and Answers:

Operator

Thank you, Albert. [Operator Instructions] Your first question is from Mike Schmitz from Jayhawk Capital. Your line is now open. Please go ahead.

Mike Schmitz -- Jayhawk Capital -- Analyst

Hi. Thanks, Albert. Looks like you guys had a very strong quarter operationally again. So, thank you for that. I did not hear some -- I'm assuming there has been no change to your guidance for the year in terms of total number of new subscribers suspected, but my question relates to, I noticed that about $20 million was spent this quarter on investing activities, which I didn't see any explanation about in the release or hear anything about yet, and I noticed that it looks like about $16 million of that looks like it probably went into the non-current deposits, which is also where the previous deposit that's kind of been sitting there for years and years with no explanation as well. But if you could maybe elaborate a little bit on what that was -- what that current amount was for and any update you have on the existing amount in that non-current deposit account. Thank you.

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Thank you for the questions. Well, first of all to answer for the first question regarding the guidance, as many of you are aware, the coronaviruses and the outbreak has certainly affected a lot of companies in the PRC and including ours as well, and we've seen a lot of challenges in the current quarter, but based on the numbers that we have seen so far. I think we are still trying our very best to achieve our original guidance which we have -- which we indicated back in June of last year.

So the guidance for current fiscal year 2020 is still within 80,000 to 85,000 new subscribers and we have still trying very hard to trying to achieve that. So, at this point in time we have no intention of lowering our guidance for fiscal year 2020, bearing in mind that we are now in -- it's already in the final quarter of the year.

Anyway, so but it if there is any more developments, obviously, we will keep the market updated.

With respect to the non-current deposit, as you are aware, the Company is exploring multiple alternative for the purpose of expanding our operations both geographically as well as trying to address our business concentration risk. So some of the projects that we have looked at previously didn't work out, and we have actually received those money back. But as for this juncture, as for the December quarter, we are currently looking at more than one potential target and we have [Indecipherable] capital in case we need to proceed so that's why you see an increase in non-current deposits.

But right now, I mean, we are still in the due diligence and negotiation process. So, I think nothing is definitive at this stage. But if we decided to proceed on any particular transactions, we will certainly make an announcement and keep the market informed as well.

Operator

Thank you [Operator Instructions] At this point, there appears to be no further questions. I will now turn the call back to Ms. Cathy Bai.

Cathy Bai -- Vice President of Corporate Finance

Thank you, Anna. This concludes our earnings conference call for the fiscal 2020 third quarter. Thank you all for your participation and ongoing support. Have a great day and you may now disconnect. Thank you.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Cathy Bai -- Vice President of Corporate Finance

Chen Bing Chuen, Albert -- Chief Financial Officer and Director

Mike Schmitz -- Jayhawk Capital -- Analyst

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