July 26, 2017 Open Letter to the Board of China Cord Blood Corp from Jayhawk Capital

NEW YORK, July 26, 2017 /PRNewswire/ --

The following is an open letter sent July 26, 2017 U.S. time to the Board of Directors of China Cord Blood Corp (NYSE: CO) from Jayhawk Capital.

We recommend the Board repurchase 30 million shares as an effective use of the excess cash on the balance sheet that benefits all shareholders.  Shareholders who would like to sell may do so of their own free will, while other shareholders like Jayhawk can hold their shares to participate in the future growth of the company.  This will increase the ownership of the remaining minority shareholders as well as the soon-to-be new majority shareholder, Nanjing Ying Peng Hui Kang Medical Industry Investment Partnership ("NYPHK").  NYPHK is an affiliate of the Sanpower Group, which recently completed the $820 million acquisition of Dendreon Pharmaceuticals LLC, the maker of a stem cell treatment for prostate cancer, from Valeant Pharmaceuticals International, Inc.

Following are four valuation models for China Cord based on free cash flow multiple, earnings multiple, asset value (balance sheet) and discounted cash flow:

1. Free Cash Flow Multiple: If the current annualized free cash flow of $116.6 million grows at 25%, free cash flows would be $146 million in FY2018, $182 million in FY2019 and $228 million in FY2020.  Using a multiple of 30x of FY2020 estimates would give a $7.6 billion valuation or $66 per share.
2. Earnings Multiple: Starting with FY2017 pro-forma earnings of $75.0 million and assuming 30% growth, earnings would be $97 million in FY2018, $127 million in FY2019 and $165 million in FY2020.  Using a multiple of 30x would give a $6.0 billion valuation or $50 per share.
3. Asset Valuation: Nanjing Xinjiekou Department Store Co. Ltd., a Chinese A-share listed company with a market cap of $5.9 billion, recently completed the purchase of 76% of the Shandong cord blood banking license at a $1.3 billion valuation.  China Cord holds the other 24% of the Shandong license, plus three others.  Guangdong and Beijing are more prosperous and have a higher penetration rate, so we value these at $3 billion and $2 billion, respectively.  Zhejiang is as prosperous as Shandong, but half the size so we use $0.7 billion.  This would value China Cord at $6.5 billion or $54 per share.
4. Discounted Cash Flow: Using a discounted cash flow model with current growth assumptions, a 3% terminal growth rate and a 10% weighted average cost of capital would yield a current stock price value of $67 per share.

Assuming the Board authorizes the share repurchase, and completes 30 million shares at an average price of $15 per share, the Company will still have over $100 million of cash on their balance sheet, plus generating $25 million of cash each quarter.  The reduction in share count would increase our average valuation of $59 per share to $74 per share, resulting in an increased value to the shareholders of the remaining 90.6 million shares (mostly NYPHK) of $1.4 billion!

We sincerely hope the Board immediately initiates this repurchase plan.  If the Board delays too long, the stock price could be above $20, which would greatly reduce the potential benefit to remaining shareholders.

Yours faithfully,

Jayhawk Capital

Media contact:
Michael D. Schmitz
+1 (785) 220-4085

SOURCE Jayhawk Capital