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

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.

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 discussions 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. [Operator Instructions] 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 sentiment 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 market continue to fight against the pandemic on the front line and maintained relatively strict control over access, which hindered our business growth. In regards to policy trends on newborns, 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 3 children. Although the 3-child policy intends 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 guideline. As we face new regulatory and market uncertainties, management will continue to engage with regulators while maintaining its focus on strengthening the brand, expanding marketing channels, penetrating existing markets and sourcing new opportunities for business development. 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 help 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 sentiment in China. Despite the lesser impact of adverse pandemic effects, 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.

Good morning, everyone. In the fourth quarter, revenues increased by 0.8% year-over-year to approximately CNY 302 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 newborns in our operating markets, 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 CNY 176 million, which accounted for 58% of total revenues compared to 61% of last year. By the end of March 2021, our accumulated subscriber base has surpassed 900,000. Accordingly, storage fee revenues for the fourth quarter increased by 9% year-over-year to approximately CNY 127 million. Gross profit in the fourth quarter remained at approximately CNY 256 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 CNY 148 million, and operating margin was 49% compared to 50% of last year. Depreciation and amortization expenses for the reporting quarter were approximately CNY 12 million, similar to the prior year period. Non-GAAP operating income decreased by less than 1% year-over-year to approximately CNY 160 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 CNY 60 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 CNY 43 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 CNY 5 million fair value loss of equity securities or mark-to-market loss as compared to CNY 24 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 CNY 155 million. Income tax expense for the reporting quarter was CNY 24 million. Net income attributable to the company's shareholders increased by approximately 32% year-over-year to CNY 128 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 RMB 1.05. These are the highlights of our fourth quarter results. We are now happy to turn to the floor for any questions.

[Operator Instructions] Our first question comes from Mr. Sandy Mehta from Evaluate Research.

Yes. Congratulations on the solid results. The new China policy with regard to 2 children and the now 3 children, what impact do you see that having on your business going forward?

Thank you for the question. With respect to the so-called 3-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 newborn numbers. So we believe the overall intention is positive. Unfortunately though, is that -- is it fair to assume that it will have -- it will need to provide additional incentive 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 mouths. 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 who have a lot of economic resources, I don't think -- let me put it this way, so for more economically affluent families, I think affording cord blood banking is definitely is a no-brainer. But for people who are actually thinking of having a second or third child, when their economic resources is a little bit stretched, preventive health care 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 milk formula or complete manufacturer of consumables for children or for kids or babies like diapers. I mean those companies are likely to be -- to benefit more from such a policy.