Bank your Cord, Bank for more

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1 Cordlife Group Limited Target Price: 0.91 SGD (+30.70%) 8 th February 2015 Last Closed Price: 0.91 SGD 12M Target: 1.19 SGD Bank your Cord, Bank for more Upside Potential: 30.70% GICS Sector: Healthcare Facilities & Svcs GICS Sub-Industry: Healthcare Services Bloomberg Ticker CLGL SP Equity 1Y Price v. Relative Index Company Description Cordlife Group Ltd. owns and operates private cord blood banks in Asia. The Company's business is focused on providing Cord Blood Banking Services which include the collection, processing, testing, preservation and storage of umbilical cord blood at birth. Key Financials Market Capitalization (mil SGD) Shares Outstanding (mil) A.D. Value Traded (mil SGD) Dividend Yield (%) Beta P/E (ttm) (USD mil) FY12A FY13A FY14A FY15A P/E (x) P/B (x) ROE (%) m Gross Div Div Yield (%) D/E EPS (SGD) Key Executives Chairman CEO / Executive Director Lead Independent Director Chief Financial Officer Senior Director Research Analysts: Xu Meng Teai Juin Wen Raffles Ng Cordlife Group STI Index Ho Choon Hou Yee Pinh Jeremy Ho Sheng Thet Hnin Yi Jonathan Liau Yen San xumeng0621@hotmail.com juinwen.teai@gmail.com raffles_ng@hotmail.com Prospective Upside Catalysts Potential revenue from collaboration with China Cord Banking Corporation (License to provide cord lining services in China) Competitive advantage from the continuation of market dominance and hence, taking advantage of the economy of scope. Developing full, all round medical services for cord blood banking related healthcare services. Abundant possibilities of revenue growth: Cordlife s growth potential is not limited in existing markets. The number of newborn babies (India, Indonesia and Philippines amounting to 25.2 million increase in population yearly) is set to grow. With current product penetration rates woefully low at 1.1%, 0.3% and 0.11% for India, Indonesia and the Philippines respectively, there is potentially a vast horizon for expansion. Furthermore, increased finances allocated to marketing (63% increase from 2013 to 2014) Cordlife s products signify the Group s dedication to market positioning. We project Cordlife s revenue to grow at CAGR of 21.9%. In CCBC we trust: Cordlife s plummeting stock price after the purchase of CCBC convertible bonds worth US$44m and US$46.5m loans to Magnum Opus indicates that investors underestimate the return and overestimate the risk of the deal. Besides lucrative interest return of US$3.5m, investment in CCBC also strengthens Cordlife s access to the expanding high-barrier-to-entry China market where each region of the PRC only permits one licensed cord blood banking operator. Moreover, CCBC s well-established sales platform facilitates the promotion and sales of Cordlife s core products such as cord tissue storage and newborn screening services. Through the investment in CCBC, Cordlife rides upon the growing private blood banking market in China. We expect the stock price to recover after investors see the upside potential of Cordlife s collaboration with CCBC. Cementing a leadership position and building a brand empire: Cordlife is the market leader in Singapore, Indonesia, and the Philippines, 3 rd in India as well as 2 nd largest private cord blood operator in Hong Kong. Accredited with numerous service excellence awards, collaborating with Duke Medicine Research for potential medical advancements and launching high quality diagnostic services, Cordlife will able to take advantage of its leadership position and benefit from the economy of scope and increase average revenue generated per customer by complimenting their services (60% of customers opt for cord lining tissue banking alongside cord blood banking). This strategy is transforming Cordlife from a cord blood banking company into a full medical service provider for the mother and child segment.

2 Figure 1: Key Markets Business Description Cordlife Group Limited is a consumer healthcare company that specializes on umbilical cord blood and cord lining banking services. They are headquartered in Singapore and they are one of the first private cord blood banks to be established in Asia. Having the largest market share of private cord blood banks in Singapore, Indonesia and the Philippines, they are also one of the top few market leaders for private cord blood banks in Hong Kong (2nd) and India (3rd). The Group has a 10.02% direct stake in China Cord Blood Corporation (CCBC), the top cord blood bank operator in China. Core Businesses Figure 2: Revenue by Region Cord blood banking: Cord blood is blood that remains in the umbilical cord and placenta following the birth of a baby. It is also called "placenta blood" and it is rich in hematopoietic stem cells (HSCs). These could be used to replenish blood and regenerate the immune system. With figures showing that every 1 in 217 people may need stem cells for treatment in their lifetime, private cord blood banking would be crucial to every newly born child. Cord blood banking is the main revenue contributor to Cordlife. Cord lining banking service: Umbilical cord lining is a rich source of mesenchyme stem cells (MSCs) and epithelial stem cells that can potentially help repair the body in different ways such as burns, heart failure and cartilage injury. Although the true value of stems cells from cord lining has yet to be fully exploited, cord lining service plays an increasingly important role in generating revenue for Cordlife. Diagnostics: Cordlife has also recently established a new Diagnostics Business Unit to offer complementary products and services such as MetascreenTM that caters to the mother and child segment. In addition to cord blood banking, cord lining banking services opens up an additional revenue stream for Cordlife. Excellent Corporate Governance and Transparency Figure 3: Revenue Drivers Cordlife is well-known for their corporate governance and transparency. In August 2013, the Group was presented with Merit Award for the Singapore Corporate Awards 2013, Best Investor Relations Award. In November 2013, Cordlife was named the Most Transparent Company 2013 in the Retail & Household Goods Category and Mainboard Small Caps Category at the 14th SIAS Investors Choice Awards. Excellent corporate governance and transparency boosts investor s confidence and safeguards the long-term sustainable growth of Cordlife. Insider Trade The company has been frequently doing share buybacks in Substantial stakeholders are also actively increasing their shareholdings in This reflects positivity and optimism as they believe that the company is undervalued with extremely good growth prospects.

3 Figure 4: Porter's Five Forces Analysis Industry & Competitive Analysis IC R B O E T O S Industry Prospects Currently, a few big players dominate the private blood banking industry which has high barrier-to-entry. This industry is a niche market, however, it has abundant growth opportunities, given a growing middle class population and increasing penetration rates in the Asian markets. B P S Source: Team B P C Singapore- Despite declining number of births and total fertility rate in Singapore, birth rates are expected to pick up from 2014 due to various initiatives such as the $2 billion Marriage and Parenthood Package rolled out in January 2013 by the government and Jubilee Baby Gift for Jubilee newborn babies. The penetration level in Singapore is expected to reach 22.4% by 2018 from 22.0% in Figure 5: SWOT Analysis Hong Kong- The penetration rate of private cord blood banking is expected to increase from 7.5% in 2013 to 10.3% in India, Indonesia and the Philippines- There is rapid growth in the cord blood banking operations in India, Indonesia and the Philippines as a result of a fastrising middle class in these countries. The expected CAGR of annual incremental storage units for private cord blood banks in India, Indonesia and the Philippines are 39%, 30% and 26% respectively. China- With a growing middle class population, the penetration rate of private cord blood banking is expected to increase to 5.2% from the low 2.1% in Porter s Five Forces Source: Team High barriers of entry (BOE) In Singapore, the chances of a new license for cord blood banking issued by the Ministry of Health (MOH) is low as the authorities require a company that is well established and equipped with a fully operational team and fully functional facilities. The market in Hong Kong is highly competitive as the market is dominated by three main players, thus making entry unfeasible. In China, each province only permits one blood banking operator. Low threat of substitutes (TOS) There have been a growing number of cord blood donations according to the Singapore Cord Blood Bank. However, this is often an altruistic move rather than insurance protection for the donor and his family. Moreover, according to a study done by the Singapore Cord Blood Bank in 2012, the study showed that 40-60% of patients requiring transplants were not able to find a suitable match from the public cord blood bank. Thus, private operators still face a low threat of substitutes. Low bargaining power of customers (BPC) In the healthcare industry, customers are often price takers. This is evident in the high gross profit margin in the private blood banking industry. High bargaining power of suppliers (BPS) Medical personnel with specialised skills are needed in extracting cord blood. Specialised equipment and consumables are needed to support the use of the device, thus this gives suppliers strong pricing power.

4 Figure 6: Market share comparison Average intensity of competitive rivalry (ICR) In general, competition in this industry is average as the market is still dominated by a few players. However, competition level differs in different regions. In more regulated markets such as China, private blood banker operates as a monopoly whereas in less regulated markets, competition is growing which can be seen from the increasing average marketing expense of the industry. Peers comparison Singapore- Stemcord is the only competitor to Cordlife in private cord blood banking. However, Cordlife is able to stay ahead of Stemcord due to the adaptation of the latest technology such as SEPAX 2 and accreditation from the gold standard accrediting body such as AABB. Cordlife enjoys about 62% of the market share in Singapore. Hong Kong- There are two other major players in Hong Kong, namely Cryolife and Healthbaby, which also offer cord blood banking services. Healthbaby is also the first Asian blood bank to receive the Foundation for Accreditation of Cellular Therapy (FACT). However, Cordlife is still able to distinguish itself and maintains 27% market share despite the stiff competition. Cordlife steadily grow their market share through word of mouth instead of relying on costly campaigns used by Healthbaby. China- Cordlife is able to establish a strong foothold in China through collaboration with CCBC, which operates 4 out of 7 licensed cord blood banks in China. CCBC is now responsible for 62% market share in China. India, the Philippines and Indonesia- Cordlife has the largest market share of private blood banking in the Philippines and Indonesia and the 3rd largest market share in India. Competitive Edge Strong Brand Name and a Leading Market Leader Cordlife is one of the first private cord blood banks in Singapore and Hong Kong to release cord blood units for transplants and other therapeutic use. They are also the first private cord blood bank to release cord blood units for cerebral palsy. They became the first private cord blood bank in Asia to launch SEPAX 2, a Swiss-made FDA-approved, GMP compliant automated stem cell processing system that maximizes automation while ensuring consistently high cell recoveries. Their processing and storage facilities in Singapore, India and Hong Kong are highly reliable, and are accredited by AABB. These helps Cordlife construct a premium brand name resulting in strong customer loyalty.

5 Figure 7: Growing Middle Class Investment Thesis Abundant possibilities of revenue growth Market Growth: Birth rates in less mature markets such as India, Indonesia and Philippines have shown healthy figures of 2.0%, 1.7% and 2.4% respectively. The increase in the number of newborns is coupled with the increment of urban population in these markets. As the potential markets grow and people are more likely to be exposed to Cordlife s products, Cordlife s customer base is expected to increase significantly. Riding on the wave of affluence growth: The rise of the middle class in Asia suggests that the affluent population in Asia and developing markets will increase as follows. Affluent customers are more educated and will be more willing to subscribe to Cordlife s products. The middle class is estimated to increase more than 400% from 2011 to 2031 and is beneficial for Cordlife as high potential target market (middle class) is quickly expanding. Figure 8: Marketing Expenses Source: Bloomberg Potential from increased product penetration rate in developing economies: Product penetration rates in matured markets such as Singapore and Hong Kong have reached around 22.5%, but they are only 1.1%, 0.3% and 0.11% for India, Indonesia and the Philippines respectively. It is potential for growth as penetration rates improve gradually due to marketing and educating the general population. Penetration rates are estimated at CAGRs of 35%, 28% and 25% for these countries. Cordlife had devoted approximately 63% more into marketing in FY2014, targeting the Group s Philippines, Indian and Indonesian subsidiaries. We believe the marketing cost is vital for educating potential customers, promoting customer s awareness on existing and new products and establishing brand name. As a result, in FY2014, Cordlife s revenue rose 41.5% from the increased client base in India, Philippines, Indonesia, and we will expect similar growth rates resulting from similar marketing expenses for the years to come. Steady revenue for fixed periods: Cordlife s products offer customers a choice to undertake annual payment plans. As around 50% of its customers choose deferred payment plans, the company enjoys steady premium collection for 20 years. Cordlife also enjoys minute default risks with the low customer default rate at less than 1%. We also feel that Cordlife s business model is similar but has an edge over products such as term life insurance. In comparison to life insurance, cord blood banking requires the customer to commit from infancy, whereas most term life insurances are purchased during years of family building, which possibly gives cord blood banking 20 years more revenue than term life insurance schemes. Believing in the investment in CCBC Establishing Cordlife s access to growing China market: Under the One License per Region policy, one cord blood-banking license is issued in a province and only 7 licenses have been issued in China. The license application process not only takes many years to complete (figure), it also requires significant upfront financial commitment with highly uncertain result. By collaborating with CCBC, which covers four licensed regions equivalent to 46% of the licensed markets, Cordlife can better tap on growing China market. Cordlife had recently signed licensing agreements and launched cord tissue banking services with CCBC in March 2014, which are expected to contribute to earnings since FY2015. Banking services have been launched in Beijing by CCBC in June 2014 and are expected to launch to Zhejiang, Guangdong and Shandong provinces progressively with a steadily growing stream of royalty income. Cordlife also plans leverage on the CCBC sales platform to sell its new healthcare services (maternity/delivery screening tests). As the target customer

6 Figure 9: Application Process base is expected to grow from 290 million in 2011 to 590 million by 2025 (as shown in figure), Cordlife can benefit from economies of scale by selling diversified products to the progressively growing customer pool. Strong bullish outlook for CCBC: Due to the one-child policy, it has become a culture in China for Chinese parents pamper their children and invest heavily on their children s general wellbeing. Despite the penetration rate of CCBC in China has been rising steadily since 2006 (from figure), cord blood banking is deeply underpenetrated at around 1% as compared to other regions in Asia (from figure). Number of new births in China is ranked 2nd in the world and with the easing of one-child policy, the market is expected to grow even bigger (figure) for CCBC which are already operating in 4 provinces. CCBC has already established a strong financial record as compared to its peers from FY2009 to FY revenue, EBITDA, net income and operating cash flow enjoyed CAGRs of 24%, 24%, 52% and 166% (figure) respectively. The bullish financial result is also supported by a progressively increasing accumulated customer base with CAGR of 55.6% (figure). With few potential competitors in the near future, wellplanned expansion plan to increase capacity in Zhejiang, Guangdong and Shandong and expanding marketing efforts through online platforms and apps, prospects of CCBC will definitely remain bullish. Figure 10: History of penetrating new markets Source: CCBC Figure 11: Cordlife Financials Source: CCBC Underestimated return and overestimated risk in Cordlife s investments of CCBC bonds: Cordlife will enjoy steady recurring annual coupon payments of US$1.75 million from CCBC s convertible bonds (CB) with US$25 million principal and US$3.26 million from the US$46.5 million loan to Mr Kam Yuen, CCBC s chairman for his purchase of CCBC s CB with US$25 million principal. If the CBs are out-of-the-money at expiration and Mr Kam defaults on the loan, Cordlife could potentially lose around US$40 million (about S$50 million). However, this is an extremely unlikely event given the current price of US$4.38 on 19 Jan 2015 and the bullish outlook of CCBC (justified earlier), enhanced by the fact that Mr Kam currently owns 26.2% share of Golden Meditech worth HK$1.82 billion on 19 Jan Moreover, CCBC also has a cash pile of US$351 million with market cap of US$327. With Mr Kam having an interest shortfall of US$1.5m (CB from CCBC pays him US$1.8m and he needs to pay interest of US$3.3m to Cordlife, he needs an annual dividend of at least US$0.37 per share from CCBC to break even. With that, he will push hard for dividend payments. With sufficient cash, CCBC can also repurchase stock if its share price tumbles.

7 Figure 12: Key Markets Cementing a leadership position and building a brand empire Strong Brand Name: Every year, Cordlife s facilities around the world go through and successfully pass many stringent audits by some of the world s gold standards including AABB, International Organisation for Standardisation (ISO) and other country regulators such as DEPKES Indonesia, Department of Health of Philippines and Drugs Controller General of India. The company s strong commitment to quality is attributed to its success. With a high chance of retaining customers (Parents choosing the same service 2nd birth and onwards), and trust built on the quality services provided, Cordlife has successfully built a premium brand name and expanded throughout Asia markets. Figure 13: CAGR of Gross Margins Dedication in Research and Development: Besides rendering cord blood related services, Cordlife works closely with Duke University medicine research to explore all potentials of cord blood and cord lining. The Duke Medicine research programme had already confirmed Cordlife s long-held belief that the potential for future use of cord blood and cord lining will grow with the advancement in cell therapy. Moreover, important breakthroughs in stem cell applications could underline the need for cord blood banking, expanding this sector even greater. Most importantly, a close relationship with research centres in this field will definitely ensure that Cordlife acts swiftly to any new or potential medical breakthroughs. Being the pioneer in this market, Cordlife is positioned one step ahead of others to preserve its competitive advantage. Product expansion: To benefit from the economy of scope, the Group is transitioning into a consumer healthcare company catering maternity-screening services to the mother as well now. In FY2014, the Group established the Diagnostics Strategic Business Unit to further expand their range of available consumer healthcare. The first product introduced under this business unit was Metascreen, a comprehensive non-invasive metabolic screening test specially designed for newborn babies. Metascreen was first launched in India in 2013 and it has since been extended to Hong Kong and the Philippines in Going forward, the company plans to roll out the service to other countries progressively. In addition, after successful introduction of cord lining banking into India (6 out of every 10 patients already take up Cordlife s cord-lining storage along with cord-blood storage), in early 2014, Cordlife went into licensing agreements with CCBC and StemLife to offer the cord lining banking service to their prospective clients in China and Malaysia respectively. We believe the big profit margin of the service, coupled with the huge market size of Malaysia and China, can help the business reach a higher profit margin level in the next 12 months. Figure 14: Revenue Growth

8 Financial Analysis Cordlife does not have a direct competitor in local market. Therefore, comparison over time is focused in the analysis and comparison with its peers such as CCBC, Stemlife and Cryolife from other markets is mainly suggestive. We average the financial ratios of these three companies as the industry average as they are most relevant. Revenue/Profitability Source:BBG Figure 15: Return on Equity Revenue increases 41.5% YoY to $49.1m due to increments in Cordlife s client base. Given the high barriers of entry into this business due to license requirements, high tech equipment employed, and the relevant technical expertise needed at management level, there is a limited competition for Cordlife at this stage. Hence, GPM is still observed to be high at 71% as compared to industry average of 61.48%. However, due to Cordlife s expansion of business into less efficient regions such as India, GPM is likely to fall slightly in the future. SG&A have likewise increased in tandem from $18m to $27m to support the increase in sales. However, this is positively balanced by a one-off $25m gain1 from changes in fair value on financial assets. Taking in a $2.4m loss attributed to the decrease in share of profit of associates, a net profit for the fiscal year still emerged to be much stronger at $30m, a 125% increase YoY. Noted that without taking into consideration the one-off $25m gain, net profit would have been much lower at $5.4m (FY13: $13.5m). Liquidity and Solvency Cash flow from operations was positive at $3.7m albeit lower than previous year of $8.7m due to negative variances (lesser increase in deferred revenue) from working capital. Source:BBG Total debt increased from $6.2m to $13.2m as the Group took on more bank loans, both short and long-term. Nonetheless, the Group had cash hoard of $32.6m, sufficient to cover its total debt of $13.2m. These loans are secured by a first mortgage over the Group s leasehold building. Debt/Equity is low at 0.091x as compared to industry average of 0.131x. This shows that the company is not reliant on debt to fund its business expansions. Current Ratio is acceptable at 3x, which indicates the efficient use of money as compared to industry average of 7.78 while Interest Coverage Ratio was solid at 146x. Balance Sheet Balance sheet remained fundamentally stable. Total assets stood at $190.7m with investment in associates of $16.8m (8.8% of total assets), current and noncurrent trade receivables of $58.7m (24% of total assets), cash and cash equivalents of $32.6m (17.1% of total assets), and fixed deposits of 11.8m (6.2% of total assets). These are mainly funded by trade payables of $8.9m, deferred revenue2 of $20.7m (of which $5.3m is current), total loans of $13.2m (of which $4.8m is current), and total equity of $141.3m. Noted that share capital has increased from $53.5m to $96.7m mainly with the issuance of shares pursuant to private placement. Management of the company has shown commitment to the business by ploughing back profits into the business; retained earnings have increased from $26.2m to $51.3m. Figure 16: Profit Margin

9 DuPont Analysis: Return on Equity: Cordlife s ROE has increased sharply over the last three years to over 25% in 2014, positioning them well above market average of below 10%. Profit Margin: Cordlife s profit margin also increased significantly over the past three years from 25% to over 60%. Although the surge was partly due to a oneoff capital gain, Cordlife s profit margin is still far superior as compared to industry average of about 18%. Asset Turnover: Cordlife s average asset turnover dropped slightly to around 32%, which is below industry average of 40% mainly due to its operations in less efficient regions such as India. However, the high industry average value is mainly due to extremely high average asset turnover value (84%) of Cryolife. Source:BBG Figure 17: Asset Turnover Equity Multiplier: Cordlife s equity multiplier has stayed relatively constant (1.38) for the past three years and below industry average of It show Cordlife is less leveraged and has potential to borrow money to facilitate its future expansion plan. Overall: it appears that Cordlife s high ROE is driven by its high profit margin. Considering that Cordlife only has a relatively low average equity multiplier of 1.38 (CCBC s equity multiplier is 2.53), its ROE is a strong indicator for us to invest in Cordlife Valuation & Key Investment Risks Valuation DCF with EBIDTA Multiple Terminal Value (Revenue-Based Valuation) Major Assumptions: Source:BBG a) Revenue Estimates: Revenue projections are calculated based on population, birth rate, penetration rate, market share and acceptance rate and are separated based on region into Hong Kong, Singapore, China and India. Mature markets are expected to be stable whereas Cordlife s market share and penetration rate of growing markets are expected to increase linearly based on past years averages. Average revenue contributed by each customer is estimated to grow at 1% annually because of the diversity of products offered by Cordlife. China and Malaysia are expected to contribute to total revenue from FY2015 onwards. As the revenue (for China and Malaysia) is based on royalty income, the average revenue contributed by each customer estimated only 50% of that of India, which is the lowest among all countries. The estimation of acceptance rate of Cordlife s products in China and Malaysia is conservative and set as 10% only. b) Expansion factors: As Cordlife is expanding its operations into less developed countries (India, China and Indonesia), the gross margin is expected to decrease gradually to 68%. Operating expenses, which will stabilize at 50% gradually as percentage of Revenue, are expected to remain high for FY2015 and FY2016 due to aggressive marketing campaign and expenditures to new operations in these countries.

10 Figure 18: Equity Multiplier c) Conservative assumption on Cordlife s equity investments: Despite the prosperous outlook of CCBC and Stemlife, we assume that equity price of CCBC and Stemlife remain stable and there is no capital gain due to an increase in stock price. We also assume loss due to currency rate is minimal. Capital expenses are expected to be stable after FY2014 as Cordlife is assetlight. d) We use the DCF model with EBIDTA multiple terminal value to analyze the intrinsic value of Cordlife s stock price as we think the ability to generate free cash flows of the company is essential. Based on data from Bloomberg, Cordlife s annual report and other research papers, we calculate the value of the WACC to be 5.13% with the following input: risk free rate (1.88%), beta (0.4), market risk premium (8.49%), cost of debt (1.84%), and the conservative estimation of terminal EBIDTA multiple terminal value of 13. Relative Valuation using Multiples Source:BBG Relative valuation tools (PEG, P/B, EV/EVITDA and P/E) have been used in the valuation of Cordlife. This valuation takes into consideration the local and international competitors such as Raffles Medical Group, CryoLife Inc, CCBC, Stemlife and Q&M Dental Group. Based on PEG, P/B, EV/EVITDA and P/E models, the share value of Cordlife is estimated to be $1.41, $1.75, $1.09 and $1.62 for mean multiples and $1.12, $1.36, $0.87 and $1.36 for median multiples. We allocated 90% of weightage to DCF (Revenue-Based) model and 1.25% to each multiple valuation. The rationale of allocating heavy weightage to the DCF model is that it best reflects the fundamentals and growth potential of Cordlife. No weightage is given to dividend discount model (DDM) as DDM is not appropriate for expanding companies such as Cordlife. The 12-Month Target Price is calculated to be $1.19 with 33.7% upside potential. Sensitivity analysis of share price against WACC and Terminal EV/EBITDA multiple is shown in the table below. Figure 19: Sensitivity Analysis Terminal EBITDA Multiple 12x 13x 13.6x 14x 4.13% $1.16 $1.23 $1.28 $ % $1.14 $1.21 $1.27 $1.29 WACC 4.73% $1.12 $1.19 $1.24 $ % $1.09 $1.17 $1.21 $ % $1.07 $1.14 $1.18 $ % $1.04 $1.11 $1.15 $1.18

11 Figure 20: 9-box grid risk analysis Risk Analysis Market Price Risk Pegged on Stemlife s and CCBC s Stock Prices Cordlife holds 31.81% share of Stemlife and 10.00% share of CCBC. The change in stock prices of these two companies contributes largely to Cordlife s net income as capital gain or loss. If the share price had been 5% higher/lower, the Group s profit for the year would be consequently US$2.5m higher/lower. Although such an event is highly unlikely given the high positive outlook of Stemlife and CCBC, Cordlife may suffer a huge capital loss if the share price of Stemlife and CCBC drops. As Cordlife recently acquired US$44m worth of CCBC convertible bonds, the loss due to drop in CCBC s price was magnified. Source:Team Industry Risk Medical Advances Medical research paper shows that umbilical cord blood is an important source of blood stem cells, but its full potential for treatment of blood disorders is yet to be revealed. Unfortunately, the research of cord blood stem cells and other sources of stem cells are also ongoing. Carthur Caplan, PhD. bioethicist and chairman of the department of medical ethics at the University of Pennsylvania recently announced that he feels optimistic about techniques using embryonic stem cells or stem cells derived from adult tissue for treatment of diseases and mention that there is also possibilities that other treatments to certain disease besides the use of stem cells may be discovered. A possible discovery could potentially undermine the profitability of the entire industry because cord blood banking would be rendered irrelevant. The risk of discovery of substitutes of cord blood or cord tissue remains the most significant challenge to the company. We hence believe that Cordlife s attempt to manage the risk may be limited, unless the Group diversifies its products to be less reliant on cord blood and cord lining banking. Business Risk Unsuccessful Expansion Recently, Cordlife had a fast-paced expansion into other Asian countries. However, being a new market player, Cordlife may not be successful at entering certain markets and may not be accepted readily by the foreign market as private cord blood banking is highly regulated and only one licensed operator in each province is allowed to run the business. Chinese customers have already became loyal customers to CCBC and other Chinese operators. Even if regulation is relaxed in China, Cordlife may not be able to launch its products successfully. Although the consequences may not remarkably affect the company s revenue due to the low revenue contribution of China market, the chances of occurrence are moderate. Credit Risk Loan to Mr. Kam: Cordlife lent US$46.5m to Mr. Kam for his purchase of CCBC s convertible bonds with US$25m face value. If CCBC s stock price drops below US$2.84 and Mr. Kam goes bankrupt, Cordlife will suffer a loss of US$20m (approximately SGD$25m). Although such an event is highly unlikely given Mr. Kam s portfolio and positive outlook of CCBC, the negative impact on Cordlife will be sizable given Cordlife s small core net profit at SGD$7.6m in 2014.

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