Global Cord Blood Corporation (CO) Earnings Call Transcript & Summary

Welcome to Global Cord Blood Corporation's Earning Conference Call for the Fiscal 2021 Second Quarter. [Operator Instructions] Now I would like to introduce Ms. Cathy Bai, Vice President of Corporate Finance, to begin the presentation. Ms. Cathy Bai, over to you.

Thank you, Jean. Good morning, everyone. Welcome to our fiscal 2021 second 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 the forward-looking statements. Kindly refer to our SEC filings for a 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 second quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session. [Operator Instructions]. Today, on behalf of our CEO, Tina, I will read her prepared remarks. Let's begin our presentation. Good morning, ladies and gentlemen. Welcome to our second quarter fiscal 2021 earnings conference call. During this reporting quarter, the COVID-19 pandemic and the ongoing impact on consumer sentiment continue to affect our operations. As the management team continued to adjust its sales and market impact based on the changes in the field, the group managed to recruit 17,643 new subscribers this quarter, down by 18.1% year-over-year and up by 2.4% quarter-over-quarter in line with management's expectations. By September 30, 2020, our accumulated subscriber base expanded to over 867,000. During the second quarter, there was a noticeable decline in newborn numbers across Beijing, Guangdong and Zhejiang, although the magnitude of such decline varied across this different regions. In addition, anti-pandemic measures tend to vary from region to region as some hospitals still adopted stricter entry and access policies, which hindered our ability to reach potential clients. Meanwhile, due to the COVID-19 impact, households tend to prioritize spending related to pandemic prevention over other value-added health care services, which further hindered our client conversion assets. We also believe that consumers remain cautious as the rate of economic recovery has varied across industries and within in China. Together, these factors continue to weigh on our business operations. That being said, now that we are 9 months into the pandemic, consumers are slowly adapting to the new normal, and the extent and magnitude of the pandemic shock on consumer behavior has began to fade. As we start to improve our sales activity and consumer experiences off-line, we have also expanded our online marketing efforts to reach a broader pool of potential consumers and intend to continue improving the online experience for potential clients. We have noticed that our target consumers have been more willing to participate and engage in our online marketing activities compared to the pre-COVID-19 era. Overall, the management team remains hopeful that we will reach our new subscriber target for full fiscal 2021 of between 62,000 and 67,000. Looking ahead, the current one license per region and no more than 7 licenses policy will expire by the end of 2020. The management team will continue to closely communicate with various departments within the National Health Commission and prepare for multiple possible outcomes in China's cord blood banking industry. The management team will simultaneously continue to seek business development opportunities in health care industry with the goal of expanding our business and revenue channels. This concludes my remarks regarding our second quarter fiscal 2021 financial results. Thank you for your support of Global Cord Blood Corporation. I will now turn the call over to our CFO, Mr. Albert Chen, who will address our second fiscal quarter financial performance.

Good morning, everyone. Thank you for joining our call today. In the second quarter, revenues decreased by 9% year-over-year to CNY 286 million, as the decline in new subscribers resulted in a decrease in revenues from processing fees and other services. Various challenges were still in place during the reporting quarter, however, we managed to overcome these difficulties and remain on track to achieve our annual targets. In the second quarter, we recruited 17,643 new subscribers, representing a decrease of 18% year-over-year. Correspondingly, revenues generated from processing fees and other services decreased by 18% year-over-year to CNY 164 million, which accounted for approximately 58% of total revenues compared to 64% in the prior year period. By the end of September 2020, our cumulative subscriber base exceeded 867,000. Accordingly, storage fees revenues for the second quarter increased by over 7% year-over-year to CNY 121 million. Gross profit in the second quarter decreased by 9% year-over-year to approximately CNY 241 million. Gross margin decreased by 30 basis points to approximately 84% as raw material costs continue to add pressure to the margin despite our cost-saving efforts. As we applied various measures to enhance cost efficiency and preserve our margins, operating income decreased by less than 4% year-over-year to CNY 139 million. And operating margin improved to almost 49% from 46% of last year. Depreciation and amortization expenses were approximately CNY 12 million, representing a slight decrease from the prior year period. Non-GAAP operating income decreased by less than 4% year-over-year to approximately CNY 151 million, while non-GAAP operating margin improved to 53% from 50% in the prior year period. To cope with the current situation, we selectively reduced the size and remuneration for our sales force as well as our promotional activities to optimize efficiency. As a result, sales and marketing expenses decreased by 17% year-over-year or 2% quarter-over-quarter to CNY 54 million. Sales and marketing expenses as a percentage of revenues decreased to 19% from 21% in the prior year period. General and administrative expenses decreased by 14% year-over-year to approximately CNY 43 million due to lower staff costs and provisions. General and administrative expenses as a percentage of revenues decreased to less than 15% from approximately 16% in the prior year period. In the second quarter, we also recognized an increase of approximately RMB 6 million in fair value of equity securities or more commonly known as mark-to-market gain, compared to a mark-to-market loss of CNY 7 million in the prior year period. This past reporting quarter, we also received an approximately CNY 1 million dividend income from our equity investments, whereas no dividend income was recorded in the last year period. As the recognition of mark-to-market gain and dividend income compensated for the decline in operating income, income before tax for the second quarter increased by 8% year-on-year to CNY 156 million. Net income attributable to the company's shareholders increased by 9% year-over-year to CNY 131 million. Net margin improved to 46% as compared to 38% in the prior year period. Basic and diluted earnings per ordinary share for the reporting quarter was RMB 1.08 per share. These are the highlights of our second quarter results. We are now happy to turn the floor for any questions.

[Operator Instructions] We have the first question from Mr. [indiscernible] from Lone Star Funds.

I have 4 questions. The first is can you share your new subscriber breakdown by region and payment options, please?

For the second quarter of fiscal 2021, in terms of new subscriber breakdown, about 69% of new subscribers came from the Guangdong regions, approximately 20% came from the Zhejiang regions and the remaining came from the Beijing regions. In terms of payment option breakdown, new subscribers who elected normal payment option represent approximately about 28% of this quarter new subscribers. When of the payment option, subscribers account for 42% of this quarter total. And the remaining 28%, 29% came from basically installment options across different regions, which remain at a relatively high level as compared to a year ago.

My second question is how do you feel about the current margins levels? Do you believe they are sustainable?

This is actually a very good question. In order to cope with the current situations, on one hand, we have some lingering effect from the recent pandemic, which to a certain extent, affected our access to potential clients. And then at the same time, we are looking at the market with falling number of births. So I guess to maintain our cost efficiency, while at the same time, trying to control our costs in this troubled times, we have done a lot of -- we're putting a lot of extra cost measures in place. But with that being said, you notice that in terms of absolute amount, for example, our general and administrative expenses is now standing at around RMB 43 million per quarter as compared to, for example, in the first quarter of this year, which is only about RMB 44.5 million. And these are relatively low level, and we're trying to keep it that way. And in terms of the sales and marketing expenses, as we highlighted during the briefing, it now only accounted for less than 20% of our revenue. This is probably one of the lowest levels that we have seen in the past couple of years. Obviously, management is on a ongoing crusade to enhance the company operating efficiency and cost effectiveness. But I think that if we -- if things gradually recovered, and as we too are starting to tune up our marketing and promotion activities, as we restart our hiring engine again, I will not be surprised to see at the SG&A start going back up again. So I guess the current margin level, I think the current cost structure is already at a relatively low level. We try to suppress as much as we can. But if we're going to tune up the activities going forward, I will not be surprised to see that costs will start to go back up again. I think this is probably the best way to answer your questions.

Lastly, do you have any update regarding the one license per region?