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

Welcome, everyone, to Global Cord Blood Corporation's Earnings Conference Call for the Fiscal Year 2022 Second Quarter. [Operator Instructions] Now I would like to introduce to Madam Cathy Bai, VP of Corporate Finance, to begin the presentation. Madam, please go ahead.

Thank you, Sofia. Good morning, everyone. Welcome to our fiscal 2022 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 these forward-looking statements. Currently 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 2022 second quarter financials given by our CFO, Mr. Albert Chen. Our management will be available to answer questions during the Q&A session. We understand investors and shareholders may 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. Let's begin the presentation. Good morning, everyone, and welcome to our second quarter fiscal 2022 earnings conference call. During the reporting quarter, the group managed to recruit 19,066 new subscribers, up 8% year-over-year as a result of the relatively low base in the previous year period and down 3% quarter-over-quarter in line with management's expectations. At the end of September 2021, our accumulated subscriber base surpassed 938,000. During the second quarter, although business environment continued to improve long-standing challenges remained. As a result of the effective COVID pandemic control measures implemented in our operating markets, potential clients were less concerned about hospital admissions for childbirths, and pandemic impacts on our business were gradually alleviated. However, as economic activities resumed, occasional local outbreaks forced certain hospitals to maintain strict access policies, thereby still hindering our sales activities in hospital channels. In addition, the overall number of women of childbearing age and newborns continue to decline. Given its intractable nature, we do not expect this demographic trend to reverse in the near future. Compared to the previous quarter, there have not been many observable industry-related policies or changes that affected the group's business in the second quarter. Regarding the three-child policy, various regulatory bodies in China rolled out [ Series 2 ] follow-up rules and measures aimed at reducing the cost of childbearing and raising children such as expansion of childcare services, ratification of off-campus education and training and curbing of house prices in select school districts, among others. Despite these efforts, current contribution of a family's third child have yet to make a substantially notable difference to the group's new subscribers. As discussed last quarter, concerns over cord blood banking licensing regulations and bio-security laws have yet to subside. The management team continues to closely monitor any new development related to these policies and potential industry-wide implications that may be announced. With this in mind, the management team maintains the guideline for the fiscal 2022 new subscriber target, which is expected to fall within the range of 72,000 to 75,000. Facing regulatory and market uncertainties, the management team will continue to focus on the company's long-term development, maintain active communications with relevant regulatory agencies, expand marketing and sales channels and carry out extensive work as we dive deep into new business development opportunities. This concludes my remarks regarding our fiscal 2022 second quarter results. Thank you for your ongoing support of Global Cord Blood Corporation. Now I will turn the call over to our CFO, Mr. Albert Chen, to discuss our second fiscal quarter financial performance. Mr. Chen, please go ahead.

Good morning, everyone. Thank you for joining our call today. In the second quarter, revenues increased by 10% year-over-year to approximately CNY 314 million, driven by the increase in revenue from both processing fees and storage fees. During the second quarter, the group recruited more than 19,000 new subscribers, representing an increase of 8% year-over-year, partially due to the low comparable base in the same quarter of last year, the improved business environment and also our sales efforts during these challenging times. As a result, revenues generated from processing fees and other services increased by approximately 10% year-over-year to CNY 180 million, which accounted for 58% of total revenues. By the end of September 2021, our accumulated subscriber base expanded to over 938,000 and storage fee revenues for the second quarter increased by 10% year-over-year to approximately CNY 134 million. Gross profit in the reporting quarter increased by 11% to approximately CNY 268 million and gross margin improved to 85% from 84% of last year. Economy of scale continued to drive margin improvement but partially offset by higher labor costs. In the second quarter, operating income increased by 15% year-over-year to approximately CNY 161 million, mainly due to the top line growth, coupled with a relatively moderate increase in SG&A expenses. As a result, operating margin improved to 51% from 49% of last year. Depreciation and amortization expenses for the reporting quarter were CNY 12 million, similar to last year. Non-GAAP operating income increased by 14% year-over-year to CNY 173 million and non-GAAP operating margin improved to 55% from 53% last year. Sales and marketing expenses in the second quarter increased by 5% year-over-year to CNY 57 million, primarily attributable to an increase in labor costs, but at the same time, we continue to scale down marketing and promotional activities. Sales and marketing expenses as a percentage of revenue decreased to 18% from 19% in the prior year period. General and administrative expenses increased to approximately CNY 45 million from CNY 43 million of last year, mainly due to the increase in labor costs. General and administrative expenses as a percentage of revenue decreased to 14% from 15% of last year. In the second quarter, the company recognized a decrease of approximately CNY 13 million in fair value of equity securities or mark-to-market loss compared to approximately CNY 6 million of mark-to-market gains in the prior year period. In addition, during the reporting quarter, we did not record any dividend income from equity investments. As the increase in operating income were offset by a mark-to-market loss of equity securities, income before income tax for the second quarter stood at CNY 156 million. Income tax expense for this quarter was CNY 28 million. Net income attributable to the company's shareholders decreased by 4% year-over-year to CNY 126 million. Basic and diluted earnings per ordinary share for the reporting quarter was CNY 1.03. These are just the highlights of our second quarter results. We are now happy to turn to the floor for any questions.

[Operator Instructions] So we have 1 first question from Mr. Jeff Oliver from Stephans.

Can you discuss the geographical breakdown of your new subscribers? And also, could you provide a payment method breakdown as well?

Thank you for the questions. For the second quarter, new subscribers break down by geographical regions is as follows: Beijing region represent approximately 12% of our total new subscribers recorded in the second quarter, Guangdong represented approximately 66% of our total new subscribers recorded in the second quarter and the remaining 21% new subscribers derived from the Zhejiang Province. In terms of payment method breakdown, approximately 30% of new subscribers recorded during the second quarter elected the normal payment scheme or more commonly referred to as Option 1 of our payment option -- of our payment method, approximately 40% of our new subscribers signed up during the second quarter elected upfront payment or more commonly known as Option 2 and the remaining 30% are subscribers who elected installment payment plan either in the form of 3 years or in the form of 10 years.

Thank you, sir. We have no other questions. [Operator Instructions] So we have next question from Mr. [ Ben ] John from [ Paramus ] Capital.

It's Sam John. Can you talk about the time line it might take for the special committee to evaluate the offer that was made 9 months ago? That's question number one. Number two, how do you think about the potential for a stock buyback. What are the returns you might be able to achieve on deploying your cash for a stock buyback as opposed to maybe CapEx? And then the third question is, do you have any CapEx estimates or a budget for next year?