Global Cord Blood Corporation (CO) Q4 2021 Earnings Call Transcript

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Global Cord Blood Corporation (CO -3.85%)
Q4 2021 Earnings Call
Jun 29, 2021, 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 2021 Fourth 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, Jess. Good morning, everyone. Welcome to our fiscal 2021 fourth 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 discussion of potential risks.

In the interest of time, we will begin with our CEO's remarks, followed by a report of our fiscal 2021 fourth quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the QA session. 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. Let's begin the presentation.

Good morning, ladies and gentlemen. Welcome to our fourth quarter fiscal 2021 earnings conference call. This quarter, we experienced a recovery in consumer sentiments in China due to the ongoing implementation of pandemic prevention and control measures. As the Group continued to adjust its strategies and tactics to deal with prolonged challenges from occasional localized COVID-19 outbreaks, we managed to recruit over 19,000 new subscribers during the reporting quarter. As a result of the relatively low base, new subscribers in the reporting quarter increased by 4.8% year-over-year and 8.8% quarter-over-quarter. By the end of March 2021, our accumulated subscriber base has surpassed 900,000.

During the fourth quarter, hospitals in our operating markets continued the fight against the pandemic on the frontline and maintained relatively strict control over access, which hindered our business growth. In regard to policy trends on newborn, the Central Committee of the CPC and the State Council officials approved a new policy on May 31, 2021 which allows each couple in China to have up to three children. Although, the three-child policy intends to improve birth rates and realization will be encouraging, it will take time for policymakers to develop and release supportive measures and the results will be subject to a degree of acceptance by the new generation of expectant parents.

With respect to China's cord blood banking industry regulations and biosecurity law, our management team proactively continued its efforts to communicate with regulatory bodies. However, the National Health Commission and other government agencies have yet to release any official update or guidelines. As we face new regulatory and market uncertainties, management will continue to engage with the regulators while maintaining its focus on the strengthening the brand, expanding marketing channels, penetrating existing markets, and sourcing new opportunities for business developments.

Our accumulated client base has gradually expanded to a substantial amount and the management team will continue to explore opportunities to expand our lines of service as we aim to increase regular interactions with our existing clients to better serve them and hope to nurture growth and new income sources.

Looking ahead, with the COVID-19 vaccination programs in progress, we expect to see a potential uptick in sentiments in China. Despite the lesser impact of adverse pandemic effect, we still may not be able to overcome the general trend of fewer newborns. In addition, hospitals in our operating markets are likely to uphold strict anti-pandemic measures, directly limiting our client access and promotion capabilities. Taking these circumstances and other factors into consideration, the management team expects the annual new subscriber target for fiscal 2022 to be in the range of 72,000 to 75,000.

This concludes my remarks regarding the fourth quarter fiscal 2021 financial results and outlook for the next fiscal year. Thank you very much for your ongoing support. I will now turn the call over to our CFO, Mr. Albert Chen to discuss the company's financial performance for the reporting quarter.

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

Good morning, everyone. In the fourth quarter, revenues increased by 0.8% year-over-year to approximately RMB302 million, mainly driven by the increase in storage fee revenues. During the reporting quarter, the Group recruited over 19,000 new subscribers, representing an increase of 5% year-over-year. Due to the ongoing COVID-19 impact and fewer newborn in our operating market, we offered additional pricing incentives to encourage subscriptions. As a result, revenues generated from processing fees and other services decreased by 4% year-over-year to approximately RMB176 million, which accounted for 58% of total revenues compared to 61% of last year.

By the end of March 2021, our accumulated subscriber base had surpassed 900,000. Accordingly, storage fee revenues for the fourth quarter increased by 9% year-over-year to approximately RMB127 million. Gross profit in the fourth quarter remained at approximately RMB256 million as higher raw material costs and a slight increase in processing volume offset the increase in storage revenues. Gross margin decreased slightly to 85% from 86% of last year. Operating income for the fourth quarter decreased slightly by 0.7% year-over-year to RMB148 million and operating margin was 49% compared to 50% of last year.

Depreciation and amortization expenses for the reporting quarter were approximately RMB12 million, similar to the prior year period. Non-GAAP operating income decreased by less than 1% year-over-year to approximately RMB160 million. Non-GAAP operating margin was 53% in the reporting quarter. Sales and marketing expenses in the fourth quarter decreased by 2% year-over-year to approximately RMB16 million, in light of a reduction in sales force headcount and limited promotional activities. Sales and marketing expenses as a percentage of revenue was down to 19.7% compared to 20.2% of last year. General and administrative expenses increased slightly by 0.4% year-over-year to approximately RMB43 million, mainly due to the increase in provision for doubtful accounts and administrative staff expenses, which were partially offset by a reduction in professional fees. G&A expenses as a percentage of revenue remained at 14%, same as last year.

In the fourth quarter, we recognized an approximately RMB5 million fair value loss of equity securities or mark-to-market loss as compared to RMB24 million mark-to-market loss in the prior year period. Income before income tax for the fourth quarter increased by 16% year-over-year to approximately RMB155 million. Income tax expense for the reporting quarter was RMB24 million. Net income attributable to the company's shareholders increased by approximately 32% year-over-year to RMB128 million. Net margin for the fourth quarter improved to 42% from 32% of last year period. Basic and diluted earnings per ordinary share for the reporting quarter was RMB1.05.

These are the highlights of our fourth quarter results. We are now happy to turn to the floor for any questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mr. Sandy Mehta from Evaluate Research. Your question, please.

Sandy Mehta -- Evaluate Research -- Analyst

Yes. Congratulations on the solid results. The new China policy with regard to two children and the now three children, what impact do you see that having on your business going forward? Thank you.

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

Thank you for the questions. With respect to the so-called three child policy now, overall I think it should be a positive development, because it signals the regulatory body is aware of the issues and also trying to make measures to counter the decline in newborns number. So we believe the overall intention is positive. Unfortunately, though, is that it is fair to assume that it will have -- it would need to provide additional incentives for the -- before the general public can actually incentivize to have additional child. As many of you are aware that the living expenses in China is skyrocketing and having to take care of the elderlies at home and then raising additional children and the sole income earners being the husband and wife in the family, they basically have to support a lot of [Indecipherable]. So I guess it is fair to say that the overall intention is fairly positive, but I think there are a lot of additional supportive measures need to be in place before the general public will be incentivized.

If the number of newborns in China increase over the long run, we believe that it should be positive for the economy as well as the cord blood banking industry as a whole, but that's more like a long-term benefit. Near term, we do not anticipate a huge benefit on our end, because for people that who have a lot of economic resources, I don't think -- let me put it this way, if -- for more economically affluent families, I think affording cord blood banking is definitely -- is a no-brainer. But for people who are actually thinking about having a second or third child, when their economic resources is a little bit stretched, preventive healthcare measures may not be the first thing that comes to their mind. So I think the immediate impact on the cord blood banking front will be limited as compared to, for example, companies that manufacture new formula or companies that manufacture consumables for children for kids or babies, like diapers, I mean, those companies are likely to be -- to benefit more from such a policy.

Operator

Thank you Sandy. [Operator Instructions] Next, we have Pichot from Altimeo. Your question, please.

Cyrille Pichot -- Altimeo Asset Management -- Analyst

Yes. Hello, thank you for taking my question. First, congratulation on the strong set of results, especially on the cash generation. So actually I have three very little questions. The first one is, can you tell us a little bit about your acquisition strategy? Maybe, do you anticipate to do some acquisition maybe outside of China to reduce your geographic risk? So is there any advance projects on this side? Also, second question is just about Qilu. You have a stake in Qilu which is a valuable company, which is valued at around $30 million in your balance sheet. It's not distributing any dividend. Do you expect to do something with that because, I mean, the value on the balance sheet is just completely ridiculous based on the financials of Qilu? And the last question is just about new regulation that is coming regarding secondary listing in Hong Kong. At the end of March, Hong Kong authorities published a draft project to broaden the qualification for secondary listing in Hong Kong, actually to make it easier to get a secondary listing and especially the ongoing exchange plans to substantially lower capitalization qualification to let smaller companies raise funds in Hong Kong based on the text of the regulation you will be eligible. So do you anticipate potentially to think about that, based on the risk, which is about two or three years from now, the risk of delisting in the US? Thank you very much.

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

Thank you for the questions. First of all, regarding the company's strategic directions, especially concerning the potential acquisition, the company is looking into expanding our service revenue or our service portfolio. And part of the expansion strategy definitely will involve acquisitions and we are not limiting ourselves to acquisition targets within the PRC. There are interesting opportunities, which we are currently exploring. So it is fair to -- I guess, it is fair to say that, I think there are definitely opportunities available, but none of that have reached announceable stage, put it this way. So if we make any material developments on the acquisition front, we would definitely announce it to the market in a timely manner.

But as you also touched on the regulatory issues, I also want to highlight that, as many of you are aware, at the end of 2020, the authorities had made a public statement regarding the corporate banking policy in the PRC. We always talk about the one license per region policy, but in the latest publications put out by the National Health Commission back in December 2020, if I am not mistaken, they are pretty much putting the licensing regime on hold by stating that they will not accept additional new license or they would not accept any new applications regarding new licenses for year 2021. So like we pointed out in our previous earnings call, this new -- this so-called latest statement by the National Health Commission has definitely introduced some layer of uncertainties because there is -- right now there is no official statement whether or not the one license policy is still ongoing. The officials from the NHC is basically saying that they are not accepting any new application. So in the absence of further guidelines or implementation details, there is still a relatively high level of ambiguities and uncertainties with respect to cord blood banking.

And also, in April of 2021, the new biosecurity law has become effective. And this is concerning mostly regarding the human genetic resources and how it's being handled on collection, storage and so forth. It certainly has an impact on cord blood banking industry as a whole and -- but again, right now, there is still lack of implementation details. So we are still monitoring the situation, because of all the uncertainties surrounding the cord blood banking industry regulations, we believe that it is prudent to look at opportunities outside of China, because to a certain extent, not only we need to expand our service portfolio, but we also to the extent possible minimize our geographical risk and China's specific regulatory risk as well. So to answer your question, yes, we are looking at opportunities outside of China as well as opportunities in China as well.

Regarding the Hong Kong listing itself, I need to apologize, I'm not aware that the latest SEHK policy revision regarding listing requirement. I thought they increased the listing threshold rather than decreasing it. But I will certainly have a look at that as well. As you rightfully pointed out, the PCAOB issue is certainly something that we are aware of and we are also monitoring the situation 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, Corporate Finance

Thank you, Jess. This concludes our earnings conference call for the fiscal 2021 fourth quarter. Thank you all for your participation and ongoing support. Have a great day. Thank you for your help, Jess. You may now disconnect.

Operator

Thank you, Ms. Cathy. [Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Cathy Bai -- Vice President, Corporate Finance

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

Sandy Mehta -- Evaluate Research -- Analyst

Cyrille Pichot -- Altimeo Asset Management -- Analyst

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