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Tug-Of-Fools: Cordlife Group – The Bull Argument

My name is Louis Kent Lee and this is my Bull case for Cordlife Group (SGX: P8A).

Cordlife Group is one of the most unique companies I’ve seen.

We buy insurance for a lot of things. Critical illnesses for instance, gets ranked in one of the top few among things people pay for to be covered.

Cordlife’s unique blood banking business specialises in storing a baby’s blood that remains in the umbilical cord.

The stem cells within the cord blood contains regenerative properties which have proven to be of extreme help for doctors to treat patients suffering from a range of complicated illnesses.

This includes leukaemia, inherited diseases, and even certain types of cancer.

Now, taking this into consideration, paying a few hundred dollars per year to store this (just in case), is not an overly expensive premium.

On top of that, if you’re a Singaporean citizen, the kid will have a Child Development Account (CDA), where the baby bonus from the government will be pumped into, and this can be net off from there.

And to be honest, parents these days, will be more than willing to do this when it comes to the life of their precious one, with or without the CDA.

Taking this in context, where China has a one child policy, parents will probably not save a small sum for a certain “insurance” concerning the child.

Recurring Premiums, Recurring Ammo For Growth

Other than Cordlife’s unique business that got me interested in the company, I was particularly fascinated by the recurring premiums received by the company.

It possesses the similarity of how premiums are collected by insurance companies. However, insurance companies, pays out a small percentage of such claims.

Cordlife doesn’t. This is because you’re not paying to get a lump sum coverage or whatsoever, you’re paying to store a part of you or your child which eventually could be a key to saving lives.

This creates a plethora of cash inflow for Cordlife, which can be used for acquisitions (growth) and more patent buyouts for new possible products (see corresponding investment and advances chart).

Source: Company’s Report, FactSet Research System

Superior Margins, Strong Balance Sheet

As you can see from the chart below, Cordlife commands a high level of gross margin, which is approximately 70 percent.

This is consistently seen in the past five years, endorsing superior operational profits. Net income is also correspondingly high, which has always been way above the 25 percent mark.

Earnings per share has also been gradually rising as a result, and have also clocked a CAGR gain of 18.9 percent over the period (2009 to 2013).

This level of earnings was achieved despite higher marketing expenses as a result of more aggressive marketing activities, while also incurring some restructuring expenses in Indonesia.

Source: Company’s Report, FactSet Research System

 Its long term debt position is also relatively low, which can be easily covered by its existing cash vault if it chooses to.

Taking into consideration of the amount of capital expenditure required for this business, Cordlife has managed to achieve constant growth in its Free Cash Flow position.

FCF growth from 2009 – 2013 reflected a 19.3 percent growth, and this further stems the power of its operational profits.

Strong Market Presence, Poised For Further Growth

Being one of the only two cord blood banking service providers in Singapore, Cordlife currently enjoys more than 60 percent of the market share.

It is also the second largest player in Hong Kong, and owns a 10 percent equity stake in the largest cord blood banking player in China.

This is due to its accreditation with the American Association of Blood Banking (AABB), which sets the gold standard for blood banking.

Because of this recognition coupled with its extensive and superb storage facilities, Cordlife works with a strong network of hospitals in Singapore, which opens up a ready pool of to be adopters of blood banking services.

Its presence in geographic regions like Philippines, Indonesia and China, where the penetration rate for cord blood banking is low, presents untapped growth potential that it can look forward to enjoy.

In addition, new product offerings such as cord tissue banking and new services that cater to the mother and child segment will see Cordlife benefitting from economies of scope.

In all, the super moat for me when it comes to Cordlife, is really its stream of maintenance premiums paid that is not only sustainable, but recurring.

Its efforts in expanding its geographical reach, where these regions are poised for growth potential in terms of penetration rate are also key things that got my attention.

I think I have made my bullish points. You can read the bear argument here.

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