Cordlife Limited ACN

Transcription

1 Cordlife Limited ACN NOTICE OF MEETING To be held on 11 January 2013 simultaneously via video conference at the offices of: Middletons, level 25, 525 Collins Street Melbourne at 12.00pm (Melbourne time) and Ernst & Young One Raffles Quay, North Tower, Singapore , Level 17, Thomson Room at 9.00am (Singapore time) THIS IS AN IMPORTANT DOCUMENT If you are in doubt as to what to do with this document please immediately see your legal adviser, financial adviser or stockbroker { } Middocs v8 NZM

2 2 Cordlife Limited ACN Notice of Meeting Notice is given that a general meeting of shareholders of Cordlife Limited ACN (Company or CBB) will be held at the offices of Middletons level 25, 525 Collins Street Melbourne on 11 January 2013 at pm (Melbourne time) and simultaneously at Ernst & Young One Raffles Quay, North Tower, Singapore , Level 17, Thomson Room (at 9.00 am Singapore time) for the purpose of considering, and if thought fit, passing the following resolution: Resolution: Sale of interest in Shandong Cord Blood Bank To consider, and if thought fit, to pass, with or without amendment, the following resolution as an ordinary resolution: "That for the purposes of ASX Listing Rule 10.1 and for all other purposes, the shareholders approve the sale of the Company's interest in the Shandong Cord Blood Bank to a substantial shareholder of the Company (namely China Cord Blood Corporation ) on the terms and conditions of the Share Purchase Agreement described in the Explanatory Notes accompanying this Notice of Meeting." ADDITIONAL INFORMATION Please note that additional information concerning the above proposed ordinary resolution is contained in the Explanatory Memorandum that accompanies and forms part of this notice. ELIGIBILITY TO VOTE In accordance with the Corporations Act 2001 (Cth), a person's entitlement to vote at this meeting will be the entitlement of that person according to the Register of Members at 7.00 pm on 9 January All shareholders of the Company are able to vote on this Resolution. If you wish to vote in person, you must attend the General Meeting. If you cannot attend the meeting, you may vote by proxy, attorney or if you are a body corporate, by appointing a corporate representative. ADMISSION TO MEETING Shareholders who will be attending the general meeting, and who will not be appointing a proxy, are asked to bring the proxy form to the general meeting to help speed admissions. Shareholders who do not plan to attend the general meeting are encouraged to complete and return the attached proxy form for each of their holdings of CBB shares. If lost or damaged, a replacement proxy form may be obtained from CBB s external share registrar, Link Market Services Limited, on or +61 (0) SCRUTINEER CBB s external auditor, Ernst & Young, will act as scrutineer for any poll that may be required at the meeting. { } Middocs v8 NZM

3 3 PROXIES If you are a shareholder entitled to attend and vote you are entitled to appoint a proxy. That proxy need not be a shareholder of the Company. A shareholder who is entitled to cast 2 or more votes may appoint 2 proxies and may specify the number or proportion of votes that each proxy may exercise, failing which each may exercise half of the votes. If you want to appoint one proxy, please fax the form provided. If you want to appoint 2 proxies, please follow the instructions in Appointment of a Second Proxy on the reverse side of the proxy form. CBB s Constitution provides that, on a show of hands, every person present and qualified to vote shall have one vote. If you appoint one proxy, that proxy may vote on a show of hands, but if you appoint two proxies neither proxy may vote on a show of hands. To be effective the proxy form must be received by Link Market Services Limited, at the address on the enclosed reply paid envelope or by facsimile at the number below, not later than pm Melbourne time on 9 January By order of the Board: Mr Andrew Lord Company Secretary 10 December 2012 { } Middocs v8 NZM

4 4 Cordlife Limited ACN EXPLANATORY MEMORANDUM PROPOSED SALE OF A SUBSTANTIAL ASSET This document has been prepared to provide further information regarding the proposed resolutions in the attached Notice of Extraordinary General Meeting for Cordlife Limited THIS IS AN IMPORTANT DOCUMENT If you are in doubt as to what to do with this document please immediately see your legal adviser, financial adviser or stockbroker. { } Middocs v8 NZM

5 5 Cordlife Limited ACN Explanatory Memorandum 1. Introduction sale of interest in Shandong Cord Blood Bank In March 2012 CBB purchased a minority interest (approximately 4.08%) in "Shandong Qilu" (referred to as the Shandong Cord Blood Bank) from a non associated party (namely Oceanelite Group Limited) for a purchase price of US$8,160,000 (Original Purchase Price). The Original Purchase Price consists of two instalments, an upfront payment of US$7,352,000, and a further instalment of US$808,000 (which will be made by CBB to the original vendor on or before completion of the proposed subsequent sale to China CBC). The notice of meeting and the proposed resolution for consideration by CBB Shareholders concerns the proposed sale by CBB of its interest in Shandong Cord Blood Bank to China Cord Blood Corporation Inc (China CBC). The CBB Directors believe CBB will be better placed to realise cash for its minority interest in Shandong Cord Blood Bank, pay down bank debt and be able to devote personnel and resources to its existing wholly owned businesses and other potential opportunities which may arise. The original acquisition by CBB of the interest in the Shandong Cord Blood Bank was implemented via the acquisition by CBB's wholly owned subsidiary (namely Cordlife Services (S) Pte Ltd [CS Pte Ltd]) of 17% of the issued capital of Favorable Fort Limited (Favorable Fort), a company incorporated in Hong Kong. In turn Favorable Fort indirectly owns 24% of the Shandong Cord Blood Bank. The remaining 83% of the issued capital of Favorable Fort (excluding CBB's current shareholding) is already owned by China CBC. On 6 December CBB (via its wholly owned subsidiary CS Pte Ltd) entered into a conditional share buy back agreement with Favorable Fort (Share Purchase Agreement) pursuant to which CBB will effectively be selling its interest in Favorable Fort (and as a result its interest in the Shandong Cord Blood Bank) for a purchase price of US$8,650,000 (Shandong Proceeds), with the result that China CBC will on completion own all of the issued shares in Favorable Fort. This will generate a profit for CBB on the sale of approximately US$490,000 before transaction costs. From the aggregate Shandong Proceeds of $8,650,000, CBB intends to apply part of those proceeds (approximately S$2m) to discharge in full its current indebtedness to City Challenge Global Limited and use the balance as described in Section 5 below. This would leave CBB debt free. Shareholders should note that China CBC currently holds 14.7% of the issued capital in CBB. Accordingly the CBB Board have viewed the proposed sale of its interest in Shandong Cord Blood Bank as a disposal of a substantial asset to a substantial CBB shareholder. Accordingly completion pursuant to the Share Purchase Agreement is conditional upon CBB first obtaining CBB shareholder approval to this transaction. An Independent Expert's Report was commissioned by CBB for the purpose of assisting nonassociated CBB shareholders consideration and assessment of the merits of the proposed sale and the making of their decision whether to vote in favour of the Resolution. Shareholders are urged to carefully consider the Independent Expert s Report and to understand the scope of the report, the methodology of the valuation and the assumptions made. The CBB Board is of the view that shareholder value will be enhanced by its sale of its interest in the Shandong Cord Blood Bank. On Completion CBB will be debt free and able to devote personnel and resources to its other wholly owned business activities and any new opportunities that may arise. { } Middocs v8 NZM

6 6 This Explanatory Memorandum has been prepared to provide additional information to enable CBB shareholders to have sufficient information to assess the merits of the proposed sale of CBB's interest in the Shandong Cord Blood Bank to China CBC. You should carefully read this Explanatory Memorandum. 2. Overview The proposed resolution is that - for the purposes of ASX Listing Rule 10.1 and for all other purposes, the CBB shareholders approve the sale by CBB of its interest in the Shandong Cord Blood Bank pursuant to the terms of the Share Purchase Agreement. Listing Rule 10.1 requires CBB to obtain Shareholder approval to CBB selling a substantial asset to a substantial holder of CBB shares. China CBC (and its associates) will be excluded from voting on this resolution. 3. Regulatory Requirements A 'substantial asset' is defined by the ASX Listing Rules as an asset valued at greater than 5% of the equity interests of CBB, as set out in the latest accounts of CBB given to ASX by CBB. A 'substantial holder' is defined as a person (together with that person's associates) who holds at least 10% of the total votes attached to all voting shares. For the purposes of Listing Rule 10.1, the proposed sale of CBB's interest in the Shandong Cord Blood Bank to China CBC is subject to CBB shareholder approval because: (a) (b) the value of CBB's interest in the Shandong Cord Blood Bank exceeds 5% of the current equity interests of CBB; China CBC owns approximately 14.7% of the issued share capital of CBB and China CBC is therefore a substantial shareholder holder of CBB. Listing Rule provides that the Notice of Meeting seeking Shareholder approval for the purpose of Listing Rule 10.1 must include a report on the proposed acquisition from an independent expert. Accompanying this Explanatory Memorandum is an Independent Expert s Report prepared by BDO. This report contains a detailed examination of the proposed sale and has concluded that the proposed sale is both fair and reasonable to the non-associated Shareholders of CBB. 4. Share Purchase Agreement The Share Purchase Agreement provides that subject to certain conditions precedent (including the approval by CBB shareholders), CS Pte Ltd agrees to transfer to Favorable Fort and Favorable Fort agrees to buy back from CS Pte Ltd 1,700 shares in Favorable Fort (which equate to 17% of all of the issued shares in Favorable Fort) for consideration of US$8,650,000. The conditions precedent include the approval of this transaction by CBB shareholders, China Stem Cells (East) Co Ltd and KKR China Healthcare Investment Ltd and that China CBC obtains a fairness opinion in relation to the transaction to its satisfaction, all within 90 business days of the execution of the Share Purchase Agreement (Long Stop Date). If all of the Conditions Precedent are not satisfied (or waived by the party holding the benefit of the Condition Precedent) by the Long Stop Date, then the buy back of the shares will not proceed and the Share Purchase Agreement shall effectively be at an end (other than some continuing provisions relating to confidentiality and announcements). The warranties provided by each of CS Pte Ltd and Favorable Fort to each other under the Share Purchase Agreement are typical commercial warranties applicable for such a transaction, taking into account the structure of Favorable Fort, the fact CS Pte Ltd is selling a minority interest in { } Middocs v8 NZM

7 7 Favorable Fort and that CBB has not been involved in the conduct of the Shandong Cord Blood Bank business. There are also mutual indemnities provided by each party to the other in respect to any losses, costs, damages, claims, demands, proceedings, liabilities and expenses whatever that either may incur arising from a breach of any of the warranties made by the other. 5. Use of Funds CBB will direct CS Pte Ltd to first apply the Shandong Proceeds to fully discharge the loan CBB obtained from City Challenge Global Limited (approximately S$2m). This will leave CBB debt free. The balance of the Shandong Proceeds will be applied to consider other investment opportunities; and working capital requirements for CBB's existing wholly owned businesses. 6. Independent Expert s Report For the purposes of the Resolution, CBB's independent Directors have engaged BDO to prepare an Independent Expert s Report in accordance with ASX Listing Rule The Independent Expert has concluded that the proposed acquisition is both fair and reasonable to the non-associated Shareholders. The Independent Expert has identified a number of possible advantages and disadvantages associated with the proposed acquisitions in Sections and of its Report. Shareholders should consider these factors carefully. The following is a summary of the advantages and disadvantages for CBB in either proceeding, or not proceeding, with CS Pte Ltd's sale of 1,700 shares in Favorable Fort (which equate to 17% of all of the issued shares in Favorable Fort) for consideration of US$8,650,000 (Proposed Transaction). (a) Proposed Transaction proceeding (i) Advantages (A) (B) (C) Increase in cash for working capital on completion of the Proposed Transaction, the Directors intend to use the new proceeds of the Proposed Transaction to discharge the outstanding working capital facility with the balance remaining being available as working capital for the Company; Reduced gearing on completion of the Proposed Transaction, CBB will be debt free and will therefore not have the cash drain of debt servicing requirements. If the Proposed Transaction does not proceed, it is likely CBB would be required to drawdown additional funds from its working capital facility with City Challenge Global Limited, which (increased gearing) may lead to further financial stress; and Liquidity The Proposed Transaction provides CBB with an opportunity to realise a gross profit US$490,000 (before transaction costs) on the shares in Favourable Fort, which represents a gain of approximately 6.0% and certainty in respect of both the price and timing of realisation, which may not otherwise be available at a later date. (ii) Disadvantage Reduction in diversification on completion of the Proposed Transaction CBB will not have a presence in China, where the { } Middocs v8 NZM

8 8 cord blood bank industry is expected to experience significant growth. A full copy of the Independent Expert s Report accompanies this Explanatory Memorandum. Shareholders are encouraged to review the report in full before making a decision as to how to vote. 8. CBB Board Recommendation The CBB Board has also considered other alternatives to maximize the value of the interest it holds in Favorable Fort (and as a consequence the Shandong Cord Blood Bank), but believes the proposed sale provides the greatest potential value and certainty to CBB shareholders. The CBB Board has taken into account that it only holds a minority interest in Favorable Fort and in turn Favorable Fort only holds a minority interest in Shandong Cord Blood Bank. While CBB had been able to secure a one-time dividend guarantee in respect of its investment, CBB does not have control of either Favorable Fort or the Shandong Cord Blood Bank in contrast to the other current businesses owned by CBB. The market for CBB's interest in Shandong Cord Blood Bank (via its shareholding in Favorable Fort) is illiquid and while CBB views the China market as having significant growth opportunities, it now believes its funds can be better invested than via a minority interest in Favorable Fort. This will give CBB greater control of its investments and the sale is at a profit for CBB. In the absence of a superior proposal, the Board unanimously recommends that CBB shareholders approve the proposed sale of the Shandong Cord Blood Bank to China CBC on the terms of the Share Sale Agreement. The CBB Board also recommends that CBB shareholders seek their own financial and taxation advice concerning the sale of the Shandong Cord Blood Bank to China CBC. 9. Additional information A CBB Shareholder entitled to attend and vote at the General Meeting is entitled to appoint not more than two proxies. The Proxy Form to be used is to be read in conjunction with, and accompanies this notice of meeting. The Board of Directors is not aware of any other information which is relevant to the consideration by CBB Shareholders of the proposed resolution other than that which is detailed in the Notice. 10. Voting Exclusions Pursuant to ASX Listing Rules CBB will disregard any votes cast on the Resolution by: China CBC and any person who might obtain a benefit, except a benefit solely in the capacity of a holder of ordinary securities, if the Resolution is passed; and an associate of that person (or those persons). However, CBB need not disregard a vote if: it is cast by a person as a proxy for a person who is entitled to vote, in accordance with the directions on the proxy form; or it is cast by the person chairing the meeting as proxy for a person who is entitled to vote, in accordance with a direction on the proxy form to vote as the proxy decides. { } Middocs v8 NZM

9 INDEPENDENT EXPERT S REPORT CORDLIFE LTD 6 December 2012 The Proposed Transaction is fair and reasonable

10 Financial Services Guide This Financial Services Guide ( FSG ) is issued in relation to an independent expert s report ( IER ) prepared by BDO Corporate Finance (East Coast) Pty Ltd (ABN ) ( BDO ) at the request of the Directors ( Directors ) of Cordlife Ltd ( CBB ). Engagement The IER is intended to accompany an explanatory memorandum ( Explanatory Memorandum ) that is to be provided by the Directors of CBB to the non-associated shareholders of CBB ( Non-Associated Shareholders ) to assist them in deciding whether to approve the proposed sale of CBB s investment in Favorable Fort Limited ("Favorable Fort") ( Proposed Transaction ). Financial Services Guide BDO holds an Australian Financial Services Licence (License No: ) ( Licence ). As a result of our IER being provided to you, BDO is required to issue to you, as a retail client, a FSG. 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Benefits that BDO may receive BDO will receive a fee based on the time spent in the preparation of this Report in the amount of approximately $55,000 (plus GST and disbursements). BDO will not receive any fee contingent upon the outcome of the Proposed Transaction, and accordingly, does not have any pecuniary or other interests that could reasonably be regarded as being capable of affecting its ability to give an unbiased opinion in relation to the Proposed Transaction. Remuneration or other benefits received by our employees All our employees receive a salary. Employees may be eligible for bonuses based on overall productivity and contribution to the operation of BDO or related entities but any bonuses are not directly connected with any assignment and in particular are not directly related to the engagement for which our IER was provided. 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11 Tel: Fax: Level 14, 140 William St Melbourne VIC 3000 GPO Box 5099 Melbourne VIC 3001 Australia The Directors Cordlife Ltd Level 5, 190 Queen Street MELBOURNE VIC December 2012 Dear Directors Independent Expert's Report Introduction BDO Corporate Finance (East Coast) Pty Limited ( BDO ) has been engaged by the Directors of Cordlife Ltd ( CBB or the Company ) to prepare an independent expert s report ( IER or Report ) to express an opinion as to whether the proposed sale of its investment in Favorable Fort Limited ( Favorable Fort or the Target ) is fair and reasonable to non-associated shareholders ( Non-Associated Shareholders ) of CBB. CBB currently owns 1,700 shares in Favorable Fort, representing 17% of its entire issued share capital. Favorable Fort holds an indirect stake of 24% of the issued share capital of Shandong Province Qilu Stem Cells Engineering Co., Ltd ( Shandong Cord Blood Bank ), which provides cord blood banking in the Shandong Province in China. Favorable Fort is incorporated in Hong Kong ( HK ). On 6 December 2012, CBB (via its wholly owned subsidiary Cordlife Services (S) Pte Ltd ( CS Pte Ltd )) entered into a conditional share buy back agreement with Favorable Fort ( Share Purchase Agreement ) pursuant to which CBB will be effectively sell its interest in Favorable Fort (and as a result its interest in the Shandong Cord Blood Bank) for US$8.65 million in cash ( Shandong Proceeds ) with the result that China Cord Blood Corporation Inc ( China CBC ) will on completion own all of the issued shares in Favorable Fort ( Proposed Transaction ). Our Report is to be included in the Notice of Meeting and Explanatory Memorandum to be sent to shareholders of CBB and has been prepared for the exclusive purpose of assisting Non-Associated Shareholders in their consideration of the Proposed Transaction. ASX Listing Rule 10.1 requires the approval of an entity s shareholders where it is proposed to acquire a substantial asset from, or dispose of a substantial asset to: a related party or an associate of a related party a subsidiary or an associate of a subsidiary a substantial shareholder or an associate of a substantial shareholder. A substantial shareholder is defined by the ASX Listing Rules as a shareholder with a relevant interest at any time in the six months prior to the Proposed Transaction, in at least 5% of the total votes attached to the voting securities An asset is substantial if its value, or the value of the consideration for it, is greater than 5% of the total equity interests of the entity as at the date of the last audited accounts. As at 30 June 2012, CBB had total assets of $15.1 million and net assets of $9.3 million. The 17% equity interest in Favorable Fort was acquired on 31 March 2012 for a purchase price of US$8.16 million (equivalent to the carrying value of $7.99 million). BDO Corporate Finance (East Coast) Pty Ltd ABN AFS Licence No is a member of a national association of independent entities which are all members of BDO (Australia) Ltd ABN , an Australian company limited by guarantee. BDO Corporate Finance (East Coast) Pty Ltd and BDO (Australia) Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation (other than for the acts or omissions of financial services licensees) in each State or Territory other than Tasmania.

12 CBB s investment in Favorable Fort represents approximately 53% of the Company s total assets (based on book values), and is therefore regarded as a substantial asset. China CBC, the majority shareholder of Favorable Fort, is considered to be a related party by virtue of it owning an interest of 14.7% in CBB. Accordingly, CBB has commissioned BDO to prepare an IER to accompany the Notice of Meeting and Explanatory Memorandum in accordance with ASX Listing Rule The IER provides our opinion as to whether or not the Proposed Transaction is fair and reasonable to the Non-Associated Shareholders. Summary and Opinion The Proposed Transaction is Fair and Reasonable We have considered the terms of the Proposed Transaction, as outlined in the Explanatory Memorandum and summarised in the IER, and have concluded that the Proposed Transaction is fair and reasonable. A summary of our analysis in forming the above opinion is provided below. Fairness In accordance with our basis of evaluation (set out in Section 8.1) we have assessed whether or not the Proposed Transaction is fair to Non-Associated Shareholders with reference to the value of a 17% equity interest in Favorable Fort and the consideration offered. The results of our analysis are summarised in the table below. Table 1: Fairness Assessment of the Proposed Transaction Ref Low (US$m) Value per Share High (US$m) Value of 17% Equity Interest in Favorable Fort Section Value of Consideration Offered Section Source: BDO Analysis As the cash consideration offered is greater than our assessed value of a 17% equity interest in Favorable Fort, we have concluded that the Proposed Transaction is fair to the Non-Associated Shareholders. Reasonableness In accordance with Regulatory Guide 111 Content of expert reports ( RG 111 ), an offer is reasonable if it is fair. On this basis, as we have concluded that the Proposed Transaction is "fair", it is also considered to be "reasonable" under RG 111. Nevertheless, we have also considered advantages and disadvantages to the Non-Associated Shareholders if the Proposed Transaction is approved. The advantages and disadvantages that we have considered are set out in Section 8.2 and a summary is provided below: Table 2: Advantages and Disadvantages of Accepting the Proposed Transaction Advantages Increase in cash for working capital Reduced gearing Liquidity Source: BDO Analysis Disadvantages Reduced diversification BDO Corporate Finance (East Coast) Pty Ltd iv

13 Other Matters Shareholders Individual Circumstances Our analysis has been undertaken, and our conclusions are expressed, at an aggregate level. Accordingly, BDO has not considered the effect of the Proposed Transaction on the particular circumstances of individual Non-Associated Shareholders. Some individual Non-Associated Shareholders may place a different emphasis on various aspects of the Proposed Transaction from that adopted in this IER. Accordingly, individual Non-Associated Shareholders may reach different conclusions as to whether or not the Proposed Transaction either as a whole or individually is fair and reasonable in their individual circumstances and/or in their individual best interests. The decision of an individual Non-Associated Shareholder in relation to the Proposed Transaction may be influenced by their particular circumstances and accordingly, Non-Associated Shareholders are advised to seek their own independent advice. Current Market Conditions Our opinion is based on economic, market and other conditions prevailing at the date of this IER. Such conditions can change significantly over relatively short periods of time. Changes in those conditions may result in any valuation or other opinion becoming quickly outdated and in need of revision. BDO reserves the right to revise any valuation or other opinion, in the light of material information existing at the valuation date that subsequently becomes known to BDO. Sources of Information Appendix 1 to the IER sets out details of information referred to and relied upon by BDO during the course of preparing this IER and in forming our opinion. The statements and opinions contained in this IER are given in good faith and are based upon BDO s consideration and assessment of information provided by CBB. Under the terms of BDO s engagement, CBB agreed to indemnify the partners, directors and staff (as appropriate) of BDO East Coast Partnership and BDO and their associated entities, against any claim, liability, loss or expense, costs or damage, arising out of reliance on any information or documentation provided by CBB which is false or misleading or omits any material particulars, or arising from failure to supply relevant information. Limitations This IER has been prepared at the request of the Directors for the sole benefit of the Directors and Non-Associated Shareholders to assist them in their decision to approve or reject the Proposed Transaction. This IER is to accompany the Notice of Meeting and Explanatory Memorandum to be sent to the Shareholders to consider the Proposed Transaction and was not prepared for any other purpose. Accordingly, this IER and the information contained herein may not be relied upon by anyone other than the Directors and the shareholders of CBB without the written consent of BDO. BDO accepts no responsibility to any person other than the Directors and the shareholders of CBB in relation to this IER. This IER should not be used for any other purpose and BDO does not accept any responsibility for its use outside this purpose. Except in accordance with the stated purpose, no extract, quote or copy of our IER, in whole or in part, should be reproduced without our written consent, as to the form and context in which it may appear. BDO Corporate Finance (East Coast) Pty Ltd v

14 BDO has consented to the inclusion of the IER with the Notice of Meeting and Explanatory Memorandum. Apart from this IER, BDO is not responsible for the contents of the Notice of Meeting, Explanatory Memorandum or any other document associated with the Proposed Transaction. BDO acknowledges that this IER may be lodged with regulatory authorities. Summary This summary should be read in conjunction with the attached IER that sets out in full the purpose, scope, basis of evaluation, limitations, information relied upon, analysis and our findings. Glossary A glossary of terms used throughout this IER is set out on page 2. Yours faithfully BDO CORPORATE FINANCE (EAST COAST) PTY LTD Fiona Hansen Director Dan Taylor Director BDO Corporate Finance (East Coast) Pty Ltd vi

15 Table of Contents 1 The Proposed Transaction Scope of Report Profile of CBB Profile of Favorable Fort Industry Overview Valuation Methodologies Valuation of the Target Evaluation of the Offer/Proposed Transaction Qualifications Independence Disclaimers and Consents Appendix A Sources of Information Appendix B Comparable Company Information Appendix C Comparable Company Trading Multiples Appendix D Comparable Company Growth Rates and Margins Appendix E Comparable Transactions BDO Corporate Finance (East Coast) Pty Ltd 1

16 Glossary $ Australian Dollar, unless specified otherwise S$ Singapore Dollar RMB Renminbi HK$ Hong Kong Dollar US$ United States Dollar Act Corporations Act 2001 (Cth) ASIC Australian Securities and Investments Commission ASX Australian Securities Exchange BDO BDO Corporate Finance (East Coast) Pty Limited CAGR Compound annual growth rate CBB or the Company Cordlife Ltd CLGL Cordlife Group Limited (previously known as Cordlife Pte Ltd) COE Capitalisation of Earnings China CBC China Cord Blood Corporation Inc City Challenge City Challenge Global Ltd CS Cell CS Cell Technologies Pte Ltd CS Pte Ltd Cordlife Services (S) Pte Ltd DCF Discounted Cash Flows Directors Directors of CBB EBIT Earnings Before Interest and Tax EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation Favorable Fort or the Target Favorable Fort Limited HK Hong Kong IER Independent Expert s Report LTM Last Twelve Months Non-Associated Shareholders The shareholders of Cordlife not associated with the Proposed Transaction NPV Net Present Value NRV Net Realisable Value NTA Net Tangible Assets NPAT Net Profit After Tax Oceanelite Oceanelite Group Limited PRC People s Republic of China Proposed Transaction Proposed sale of CBB s investment in Favorable Fort Report This IER prepared by BDO RG 76 Regulatory Guide 76: Related party transactions RG 111 Regulatory Guide 111: Content of expert reports RG 112 Regulatory Guide 112: Independence of experts Shandong Cord Blood Bank Shandong Province Qilu Stem Cells Engineering Co., Ltd BDO Corporate Finance (East Coast) Pty Ltd 2

17 1 The Proposed Transaction 1.1 Overview of the Proposed Transaction CBB currently owns 1,700 shares in Favorable Fort, representing 17% of the entire issued share capital. Favorable Fort holds an indirect stake of 24% of the issued share capital of Shandong Cord Blood Bank, which provides cord blood banking in the Shandong Province in China. On 6 December 2012, CBB (via its wholly owned subsidiary CS Pte Ltd) entered into a conditional Share Purchase Agreement pursuant to which CBB will effectively sell its interest in Favorable Fort (and as a result its interest in the Shandong Cord Blood Bank) for cash consideration of US$8.65 million. On completion, China CBC will own all of the issued shares in Favorable Fort. CBB acquired the shares in Favorable Fort on 31 March 2012 from Oceanelite, which is an unrelated party, for a total purchase price of US$8.16 million with a one-time dividend guarantee of no less than US$400,800 payable by 31 January The total purchase price is payable in two instalments. The first instalment of US$7.35 million was paid on the acquisition date and a second instalment of US$808,000 which will be paid by CBB to Oceanlite on or before completion of the Proposed Transaction. Subject to approval of the Non-Associated shareholders, CBB will sell back the shares it owns in Favorable Fort. China CBC, the majority shareholder of Favorable Fort, is considered to be a related party to CBB due to it owning an interest of 14.7% in CBB. As the Proposed Transaction involves related parties, the sale is subject to Non-Associated Shareholder approval. 1.2 Strategic Rationale of the Proposed Transaction The Directors of CBB believe the Proposed Transaction provides an opportunity for CBB to realise cash for its indirect minority interest in Shandong Cord Blood Bank (owned through its investment in Favorable Fort), pay down bank debt and be able to devote personnel and resources to its wholly owned businesses and other potential opportunities which may arise. The Directors have also considered other alternatives to the sale of CBB s shares in Favorable Fort, and believe the Proposed Transaction provides the greatest potential value and certainty for the shareholders of CBB. BDO Corporate Finance (East Coast) Pty Ltd 3

18 2 Scope of Report 2.1 Report Requirements An independent expert, in certain circumstances, must be appointed to meet the requirements set out in the Corporations Act 2001 (Cth) ( Act ) and in some cases, the listing requirements of the stock exchanges on which a company is listed. We have summarised the requirements of the Act and the ASX listing requirements in Sections and below respectively. The sole purpose of this Report is to express our opinion as to whether the Proposed Transaction is fair and reasonable to the Non-Associated Shareholders. This Report cannot be used by any other person for any other reason or for any other purpose. A copy of this Report will accompany the Notice of Meeting and the Explanatory Memorandum to be sent to the shareholders by the Company. This Report is general financial product advice only and has been prepared without taking into account the objectives, risk profile, financial situation or needs of individual shareholders. Before acting in relation to their investment, Non-Associated Shareholders should consider the appropriateness of the advice having regard to their own objectives, financial situation or needs (including their own taxation consequences). Non-Associated Shareholders should read in full the Notice of Meeting and Explanatory Memorandum. The decision to vote in favour of or against the Proposed Transaction is a matter for Non-Associated Shareholders based on their expectations as to value and future market conditions and their particular circumstances including risk profile, liquidity preference, investment strategy, portfolio structure and tax position. Non-Associated Shareholders should consult their own professional advisers Chapter 2E of the Act Chapter 2E of the Act requires a public company to obtain the approval of its shareholders before (or a company it controls) giving a financial benefit to a related party, unless the giving of the benefit falls within one of the exceptions set out in sections 210 to 216 of the Act. Section 210 of the Act provides that member approval is not needed to give a financial benefit to a related party on terms that: Would be reasonable in the circumstances if the public company or entity and the related party were dealing at arm's length Are less favourable to the related party than the terms referred to above. We have been advised that there is no statutory requirement to prepare an IER in accordance with Chapter 2E ASX Listing Rules ASX Listing Rule 10.1 requires the approval of an entity s shareholders where it is proposed to acquire a substantial asset from, or dispose of a substantial asset to: A related party or an associate of a related party A subsidiary or an associate of a subsidiary A substantial shareholder or an associate of a substantial shareholder. A substantial shareholder is defined by the Listing Rules as a shareholder with a relevant interest at any time BDO Corporate Finance (East Coast) Pty Ltd 4

19 in the six months prior to the Proposed Transaction, in at least 5% of the total votes attached to the voting securities. An asset is substantial if its value, or the value of the consideration for it, is greater than 5% of the total equity interests of the entity as at the date of the last audited accounts. As at 30 June 2012, CBB had total assets of $15.1 million and net assets of $9.3 million. The 17% equity interest in Favorable Fort was acquired on 31 March 2012 for a purchase price of US$8.16 million (equivalent to the carrying value of $7.99 million). CBB s investment in Favorable Fort represents approximately 53% of the Company s total assets (based on book values), and is therefore regarded as a substantial asset. China CBC, the majority shareholder of Favorable Fort, is considered to be a related party by virtue of it owning an interest of 14.7% in CBB. Accordingly, CBB has commissioned BDO to prepare an IER to accompany the Notice of Meeting in accordance with ASX Listing Rule Assessment Methodology The expression fair and reasonable is not defined in the ASX Listing Rules or the Act. However, guidance is provided by Australian Securities & Investments Commission ( ASIC ) Regulatory Guides which establish certain guidelines in respect of IERs: Regulatory Guide 76: Related party transactions ( RG 76 ) establishes certain guidelines in respect of preparing IERs specifically in relation to related party transactions Regulatory Guide 111: Content of expert reports ( RG 111 ) provides guidance on the content of IERs for related party and other transactions and how experts should assess related party transactions The expert must also consider Regulatory Guide 112: Independence of experts ( RG 112 ). This Report has also been prepared in accordance with professional standard APES 225 Valuation Services issued by the Accounting Professional and Ethical Standards Board Limited Fair Where an expert is required to assess whether a related party transaction is fair and reasonable (whether for the purposes of Ch 2E or ASX Listing Rule 10.1), the assessment should not be applied as a composite test that is, there should be a separate assessment of whether the transaction is fair and reasonable, as in a control transaction. For related party transactions of a non controlling nature, RG indicates that a transaction is fair if the value of the financial benefit to be provided by the entity to the related party is equal to or less than the value of the consideration being provided to the entity. This comparison should be made assuming a knowledgeable and willing, but not anxious, buyer and a knowledgeable and willing, but not anxious, seller acting at arm s length. The Proposed Transaction will be fair to the Non-Associated Shareholders if the assessed value of the consideration received is greater than or equal to the assessed value of CBB s investment in Favorable Fort Reasonable RG indicates that an offer is reasonable if it is 'fair'. It might also be reasonable if, despite being not fair, the expert believes that there are sufficient reasons for members to vote for the proposal. BDO Corporate Finance (East Coast) Pty Ltd 5

20 RG sets out some of the factors that an expert might consider in assessing the reasonableness of a related party transaction, including: The financial situation and solvency of the entity, including the factors set out in RG , if the consideration for the financial benefit is cash Opportunity costs The alternative options available to the entity and the likelihood of those options occurring The entity s bargaining position Whether there is selective treatment of any security holder, particularly the related party Any special value of the transaction to the purchaser, such as particular technology or the potential to write off outstanding loans from the target The liquidity of the market in the entity s securities. 2.3 Expert s Opinion This Report concludes by providing our opinion as to whether or not the Proposed Transaction is fair and reasonable. While all relevant issues must be considered prior to forming an overall opinion, we assess the fairness and reasonableness issues separately for clarity. In this Report we have not provided any taxation, legal or other advice in relation to the Proposed Transaction. In the process of assessing the Proposed Transaction, we have relied on certain economic, market and other conditions prevailing at the date of this Report. We note that changes in these conditions may have a material impact on the results presented in this Report. We are not responsible for updating this Report in the event that these circumstances change. BDO Corporate Finance (East Coast) Pty Ltd 6

21 3 Profile of CBB 3.1 Overview CBB, together with its group of subsidiary companies, operates a network of cord blood banks in India, Indonesia, and the Philippines with full processing and cryopreservation facilities. CBB also indirectly holds a minority interest in Shandong Cord Blood Bank, which operates a cord blood banking facility in the Shandong Province in China. In June 2011, CBB disposed its wholly owned subsidiary Cordlife Group Limited ( CLGL ) via a capital reduction implemented by way of a distribution in specie of all its issued ordinary shares. The capital reduction effectively resulted in the demerger of CLGL from the Company. CLGL provides cord blood banking services in Singapore and Hong Kong. The Company is listed on the ASX and is based in Melbourne, Australia. 3.2 Financial Metrics A summary of financial metrics for CBB is set out below. Table 3: Summary of Financial Metrics for CBB CBB Balance Sheet Total Assets (30 June 2012) Net Assets (30 June 2012) Net Current Assets (30 June 2012) Liquidity Cash and Cash Equivalents (30 June 2012) Convertible Bonds (debt) (30 June 2012) Market Market Capitalisation (18 November 2012) Closing Price per share (18 November 2012) Source: CapitalIQ and ASX Announcements $15.1 million $9.3 million $0.4 million $1.4 million $1.1 million $7.8 million 4.5 cents 3.3 Recent Developments Set out below is a timeline of recent key events for CBB. Table 4: Recent Key Events for CBB Dates Key Events 30 June 2011 Demerger from CLGL 9 March 2012 CBB announced its wholly owned subsidiary CS Cell Technologies Pte Ltd ( CS Cell ) has issued a S$1.5 million convertible bond to CLGL, with the capital raised to facilitate an acceleration of the roll out and expansion of the Indian operations and exploration of new business models in Sri Lanka and Bangladesh 29 March 2012 City Challenge Global Ltd ( City Challenge ) exercised its option to redeem and convert its $7.4 million bond for 21.8 million ordinary shares in CBB. The result of the redemption and conversion is that City Challenge paid CBB $474,150 2 April 2012 CBB announced its acquisition of an indirect interest of 4.08% in Shandong Cord Blood Bank 27 April 2012 CBB announced that it has secured a loan facility of S$6 million from City Challenge for working capital purposes. The loan facility is secured by CBB s 4.08% indirect interest in Shandong Cord Blood Bank Source: ASX Announcements BDO Corporate Finance (East Coast) Pty Ltd 7

22 3.4 ASX Trading The graph below illustrates the movement in the daily CBB share price and volumes traded from 19 November 2011 to 18 November Figure 1: ASX Trading ,000, ,000,000 14,000, A B C D E F G H I 12,000,000 10,000,000 8,000,000 6,000, ,000,000 2,000, Dec-2011 Jan-2012 Feb-2012 Mar-2012 Apr-2012 May-2012 Jun-2012 Jul-2012 Aug-2012 Sep-2012 Oct-2012 Nov Volume - CBB Share Price - CBB Source: CapitalIQ Table 5: ASX Announcements Notation Dates Announcements A 23-Jan-12 Appointment of two new executive directors B 29-Feb-12 Announcement of 31 December 2011 half yearly results C 9-Mar-12 Funding for acceleration of expansion of Indian operations D 29-Mar-12 City Challenge exercise options D 30-Mar-12 Redemption of class A shares in CLGL E 2-Apr-12 CBB acquires indirect interest in Shandong Cord Blood Bank F 30-Apr-12 CBB secures S$6 million loan facility F 30-Apr-12 Announcement of 31 March 2012 quarter results G 28-Sept-12 Announcement of 30 June 2012 full year results H 3-Oct-12 Resignation of CEO I 31-Oct-12 Quarterly cash flows report Source: ASX Announcements The table below summarises the ASX trading in CBB shares over the 12 months prior to 18 November Table 6: Volume Weighted Average Price Analysis for CBB Period Price Price Price Cumulative Cumulative % of (Low) (High) VWAP Value Volume Issued Capital $ $ $ $ 1 day ,473 77,187 <1% 1 week , ,374 <1% 1 month , ,374 <1% 3 months , ,029 <1% 6 months ,982 2,273,843 1% 12 months ,866,058 24,828,476 15% Source: Capital IQ BDO Corporate Finance (East Coast) Pty Ltd 8

23 3.5 Consolidated Historical Financial Information - CBB Table 7: Consolidated Historical Statement of Financial Position for CBB As at 30 June Notes ($ 000) ($ 000) CURRENT ASSETS Cash and Cash Equivalents 1 5,322 1,441 Other Financial Assets 2 7,412 - Trade and Other Receivables 2,382 2,180 Prepayments Inventories Total Current Assets 15,392 3,993 NON-CURRENT ASSETS Plant and Equipment Trade and Other Receivables 1,334 2,562 Available for Sale Financial Assets 3-7,992 Deferred Tax Assets - 6 Total Non-Current Assets 1,996 11,108 Total Assets 17,388 15,101 CURRENT LIABILITIES Trade and Other Payables 3 1,808 2,927 Provisions Deferred Revenue Income Tax Payable - 10 Total Current Liabilities 2,109 3,546 NON-CURRENT LIABILITIES Deferred Revenue 670 1,145 Deferred Tax Liabilities 1,150 - Convertible Bonds 4 3,499 1,140 Total Non-current Liabilities 5,319 2,285 Total Liabilities 7,428 5,831 NET ASSETS 9,960 9,270 EQUITY Contributed Equity 5 64,707 71,177 Reserves 3,918 4,451 Accumulated Losses (58,428) (66,048) Attributable to Equity Holders of the Parent 10,197 9,580 Non-controlling Interests (237) (310) TOTAL EQUITY 9,960 9,270 Source: CBB s 2012 Annual Report (audited) We note the following in relation to CBB s consolidated statement of financial position: 1. CBB s cash balance increased to $1.7 million as at 30 September 2012 primarily as a result of drawdowns on debt facilities (based on its quarterly cash flows report). Absent any further debt drawdowns, this cash would sustain the level of operating cash outflow observed for the past year for a further 6 to 12 months (discussed further below). 2. Other financial assets held as at 30 June 2011 relate to the bonds issued to City Challenge, the proceeds of which were to be partially used for the investment in Favorable Fort. 3. Available for sale financial assets relates to the shares in Favorable Fort that are held by CBB at cost. The second instalment of US$808,000 for these shares is captured under Other Payables. BDO Corporate Finance (East Coast) Pty Ltd 9

24 4. This is the fair value of the liability portion of the convertible bonds issued to City Challenge and CLGL. The equity portion of the convertible bonds is reported as equity. 5. The increase in contributed equity from FY11 to FY12 is as a result of the issuance of 21.8 million shares relating to City Challenge exercising its option to redeem and convert its bond to equity. Table 8: Consolidated Historical Statement of Financial Performance for CBB Year Ended 30 June Notes ($ 000) ($ 000) Sales Revenue 4,768 7,271 Cost of Sales (1,867) (3,377) Gross Profit 2,901 3,894 Other Income 8 23 Distribution and Marketing Expenses (1,564) (3,010) Administrative Expenses (10,436) (6,731) Borrowing Costs (246) (2,400) Loss Before Tax from Continuing Operations (9,337) (8,224) Income Tax (10) 442 Loss After Tax from Continuing Operations (9,347) (7,782) Loss from Discontinued Operations 1 (25,845) - Net Loss for the Year (35,192) (7,782) Source: CBB s 2012 Annual Report (audited) We note the following in relation to CBB s consolidated statement of financial performance: 1. This relates to a loss on disposal of the Company s wholly owned subsidiary, CLGL and its subsidiaries, via a capital reduction implemented by way of a distribution in specie of all its issued ordinary shares. The capital reduction effectively resulted in the demerger of CLGL from CBB. BDO Corporate Finance (East Coast) Pty Ltd 10

25 Table 9: Consolidated Historical Statement of Cash Flows for CBB Year Ended 30 June Cash Flows from Operating Activities Notes ($ 000) ($ 000) Receipt from Customers 1 25,358 6,911 Payments to Suppliers and Employees 1 (26,422) (11,839) Interest Received Interest and Other Borrowing Costs Paid (64) (27) Income Taxes Paid (1,071) - Net Cash Used in Operating Activities (1,876) (4,706) Cash Flows from Investing Activities Purchase of Plant and Equipment (1,844) (200) Payment for Purchase of Non-Controlling Interests 2 (1,751) - Payment for Acquisition of Interest in Associate 2 (4,228) - Net Cash Lost on Disposal of Subsidiary (4,049) - Investment in Other Financial Assets 3 (7,412) (7,197) Redemption of Term Deposits 3-7,412 Net Cash Generated From/(Used In) Investing Activities (19,284) 15 Cash Flows from Financing Activities Proceeds from the Issue of Convertible Bond 3 7,412 1,149 Proceeds from Issue of Shares 11, Repayment of Borrowings - (744) Net Cash Generated from Financing Activities 19, Net Decrease in Cash for the Year (2,129) (3,812) Cash and Cash Equivalents (at the Beginning of the Year) 7,842 5,322 Effects of exchange rate changes (391) (69) Cash and Cash Equivalents (at the End of the Year) 5,322 1,441 Source: CBB s 2012 Annual Report (audited) We note the following in relation to CBB s consolidated statement of cash flows: 1. Cash receipts and payments in FY11 are significantly higher than revenues and expenses shown in the statement of financial performance, primarily as a result of the realisation of prior year receivables and payables. 2. CBB made payments for minority investments in Cordlife (Hong Kong) Limited and a Chinese company (both now part of CLGL post demerger). 3. Investment in other financial assets for FY11 relates to the issue of convertible bonds to City Challenge, which were redeemed and converted to equity in FY12. The proceeds were used to fund the first instalment of $7.2 million for the acquisition of the shares in Favorable Fort. Based on the above, the Company has been experiencing net cash outflows for the past two years. BDO Corporate Finance (East Coast) Pty Ltd 11

26 The Company s recent operating cash flows, by quarter, are as set out below: Table 10: CBB s Operating Cash Flows (by Quarter) Quarter Ended Cash Flows from Operating Activities 31 Dec Mar Jun Sept 2012 ($ 000) ($ 000) ($ 000) ($ 000) Receipt from Customers 1,549 1,713 1,838 2,199 Payments to Suppliers and Employees (2,573) (2,867) (2,997) (2,439) Interest Received Interest and Other Borrowing Costs Paid (7) (5) (7) (9) Income Taxes Paid (5) Net Cash Used in Operating Activities (897) (1,138) (1,161) (250) Source: ASX Announcements As at 30 September 2012, CBB had $1.7 million cash on hand. The net operating cash outflows for the past four quarters have been between $250,000 and $1.2 million. CBB s current cash balance would sustain this level of cash outflow for a further 6 to 12 months (from 30 September 2012). We also note that: CBB has a working capital facility of S$6 million with City Challenge (the facility was $785,000 (or approximately S$1 million drawn) as at 30 September 2012) CBB is required to pay the second instalment of US$808,000 relating to the purchase of shares in Favorable Fort on or before 30 November 2012 Should the Proposed Transaction not proceed, CBB is expected to receive a dividend of at least US$400,800 pursuant to the terms of the sale and purchase agreement for the shares in Favorable Fort. The purchase involved a guaranteed initial dividend of no less than US$400,800 which is payable by 31 January 2013 CBB is not restricted from selling its shares in Favorable Fort before paying the second instalment, but will still be required to pay the second instalment. BDO Corporate Finance (East Coast) Pty Ltd 12

27 4 Profile of Favorable Fort 4.1 Overview Favorable Fort is an investment holding company. Favorable Fort holds an indirect 24% interest in Shandong Cord Blood Bank, which provides cord blood banking in the Shandong Province in China. Favorable Fort is incorporated in HK. 4.2 Background to Shandong Cord Blood Bank Shandong Cord Blood Bank is a company incorporated in People s Republic of China ( PRC ) and is the sole authorised cord blood bank operator in the Shandong Province Marketing and Sales Marketing and sales for Shandong Cord Blood Bank is carried out through a mix of consumer and channel marketing including: Network of collaborative doctors and hospitals Advertising and promotion in mass media, including TV advertisements Participation in antenatal classes Collaboration with the Red Cross in cord blood education Pricing of Services Shandong Cord Blood Bank offers both full payment and instalment pricing plans to its clients Transplantation Track Record Shandong Cord Blood Bank has so far released more than 500 cord blood units for transplantation, including 10 units stored by private clients. 4.3 Corporate Structure The corporate structure of Favorable Fort is set out below. Figure 2: Corporate Structure CSC East (HK) CS Pte Ltd (SG) 83% 17% Favorable Fort (HK) 100% Jinan Bao Man (PRC) Other Shareholders 24% 78% Shandong Cord Blood Bank (PRC) Source: CBB Both Favorable Fort and its wholly owned subsidiary, Jinan Bao Man, are non-operating investment holding companies. BDO Corporate Finance (East Coast) Pty Ltd 13

28 On 31 March 2012, CBB acquired a 17% equity interest in Favorable Fort for a purchase price of US$8.16 million (equivalent to CBB s carrying value of $7.99 million), providing CBB an effective interest of 4.08% in Shandong Cord Blood Bank. 4.4 Capital Structure The current capital structure for Favorable Fort is set out below. Table 11: Capital Structure of Favorable Fort Shareholders Country Percentage Held Note China Stem Cell (East) ( CSC East ) Hong Kong 83% A subsidiary of China CBC, which also owns a 14.7% interest in CBB CS Pte Ltd Singapore 17% A wholly owned subsidiary of CBB Source: CBB and China CBC s 2012 Annual Report 4.5 Historical Financial Information Favorable Fort Table 12: Historical Statement of Financial Position for Favorable Fort As at Notes 30 Jun 2012 (HK$ 000) NON-CURRENT ASSETS Long Term Investment 1 12,000 Total Non-Current Assets 12,000 Total Assets 12,000 CURRENT LIABILITIES Amount due to Affiliated Company 2 (16) Total Current Liabilities (16) Total Liabilities (16) NET ASSETS 11,984 EQUITY Share Capital 10 Reserves 11,990 Accumulated Losses (16) TOTAL EQUITY 11,984 Source: CBB We note the following in relation to Favorable Fort s statement of financial position: 1. Long term investments comprise the investment in Jinan Bao Man, recorded at cost and assuming a RMB:HK$ exchange rate of 1.0 at the time of the investment. 2. Amounts due to affiliated company represent administration expenses paid for by related parties. BDO Corporate Finance (East Coast) Pty Ltd 14

29 4.6 Historical Financial Information Jinan Bao Man Table 13: Historical Statement of Financial Position for Jinan Bao Man As at Notes 31 Dec June 2012 (RMB 000) (RMB 000) CURRENT ASSETS Cash and Cash Equivalents Other Receivables 1 7,166 7,165 Total Current Assets 8,141 8,131 NON-CURRENT ASSETS Long Term Investment 2 12,000 12,000 Fixed Assets 1 1 Total Non-Current Assets 12,000 12,000 Total Assets 20,141 20,131 CURRENT LIABILITIES Trade Payables - 5 Other Payables 12 - Total Current Liabilities 12 5 Total Liabilities 12 5 NET ASSETS 20,129 20,126 EQUITY Contributed Equity 12,000 12,000 Reserves 3 3 Accumulated Profits 3 8,127 8,124 TOTAL EQUITY 20,129 20,126 Source: CBB We note the following in relation to Jinan Bao Man s statement of financial position: 1. Other receivables relate to short term loans to related parties. 2. Long term investment relates to Jinan Bao Man s investment in Shandong Cord Blood Bank at cost. 3. Accumulated profits reflect the dividends received from Shandong Cord Blood Bank. BDO Corporate Finance (East Coast) Pty Ltd 15

30 4.7 Historical Financial Information Shandong Cord Blood Bank Table 14: Historical Statement of Financial Position for Shandong Cord Blood Bank As at Notes 31 Dec Sep 2012 (RMB 000) (RMB 000) CURRENT ASSETS Cash and Cash Equivalents 1 155, ,928 Trade Receivables 14,158 22,244 Other Receivables 2 13, ,250 Deposits 3 81,479 87,038 Inventory 24,527 25,246 Total Current Assets 288, ,705 NON-CURRENT ASSETS Long Term Investment 4 20,427 10,347 Fixed Assets 43,074 43,057 Work-in-Progress - 25 Intangible Assets 10,558 10,375 Deferred Expenses Total Non-Current Assets 74,092 63,815 Total Assets 362, ,520 CURRENT LIABILITIES Short Term Loan 2 80,000 40,000 Notes Payable 2-80,000 Trade Payable 1,557 3,006 Advanced Payments from Customers 3 79, ,452 Payroll Payable (136) (145) Tax Payable 3,542 7,345 Other Payables Unpaid Others 66,942 3,975 Accrued Expenses 12,681 14,601 Total Current Liabilities 244, ,233 Total Liabilities 244, ,233 NET ASSETS 118, ,287 EQUITY Contributed Equity 50,000 50,000 Reserves 13,587 13,587 Accumulated Profits 54, ,700 TOTAL EQUITY 118, ,287 Source: CBB We note the following in relation to Shandong Cord Blood Bank s statement of financial position: 1. CBB has advised that cash is considered to be surplus to operational requirements. 2. Other receivables relate to loans provided to related parties and are considered to be surplus to the business. 3. Advance payments from customers are held in deposit accounts. Management estimates that approximately RMB 55 million held in deposit accounts would be sufficient to fund existing trade payables and the storage of all existing units for the maximum contracted term. Accordingly, approximately RMB 32 million in deposits is considered surplus to the business. 4. Long term investment relates to minority investments in non-listed PRC companies. These investments are not related to Shandong Cord Blood Bank s primary operation and are therefore considered to be surplus to the business. BDO Corporate Finance (East Coast) Pty Ltd 16

31 Table 15: Historical Statement of Financial Performance for Shandong Cord Blood Bank 31 Dec Dec Dec Sep 2012 Period ended Notes 12 months 12 months 12 months 9 months (RMB 000) (RMB 000) (RMB 000) (RMB 000) Sales Revenue 55, , , ,992 Cost of Sales (9,289) (28,221) (25,732) (22,403) Sales Tax (3,075) (7,809) (12,160) (11,780) Gross Profit 43,046 95, , ,810 Marketing Expenses (14,416) (35,978) (46,023) (39,955) Administrative Expenses (7,582) (7,565) (10,984) (11,103) Finance Costs (31) (227) (4,321) (3,190) Operating Profit 21,017 51,624 60,184 64,562 Gain on Investments 1-3,150 2,700 - Other Income 45 1, ,619 Other Expenses (405) (328) (232) (7) Profit Before Tax 20,658 55,928 63,508 66,173 Income Tax (3,125) (9,635) (9,459) (9,926) Profit After Tax 17,533 46,293 54,048 56,247 Retained Profits (Beginning of the Year) 4,887 20,145 41,674 54,453 Other Adjustments (522) (135) Retained Profits (End of the Year) 21,898 66,303 95, ,700 Legal Surplus Reserve (1,753) (4,629) (5,405) - Distributable Profits 20,145 61,674 90, ,700 Dividends 2 - (20,000) (36,000) - Distributable Profits, Net Dividend 20,145 41,674 54, ,700 Source: CBB We note the following in relation to Shandong Cord Blood Bank s statement of financial performance: 1. Gain on investments relates to the change in value of the long term investments. CBB has advised that these amounts are non-recurring and non-operational. 2. The dividends paid out in FY10 and FY11 represent dividend payout ratios of between 32% and 40% of distributable profits. 3. A breakdown of interest income and depreciation and amortisation expenses was not available. BDO Corporate Finance (East Coast) Pty Ltd 17

32 5 Industry Overview Shandong Cord Blood Bank is the sole authorised cord blood bank operator in the Shandong Province in China. Set out below are some observations in relation to the cord blood bank industry in China and specifically the Shandong Province. The observations regarding industry conditions are based on our review of publicly available documents. 5.1 Background Stem cells are used in the medical field as a treatment for life threatening diseases such as various types of cancer, blood disorders and other congenital diseases. Stem cells from umbilical cord blood is a safer alternative to the traditional use of bone marrow stem cells. Private cord blood banks store cord blood with a link to the identity of the client and charge the client for processing and storing cord blood. However, when the clients want to retrieve it later for the stem cells, no additional fees are charged except for the associated transportation cost. Storage periods are usually 18 to 20 years. There are also public cord blood banks, which are typically run by the medical community or nonprofit organisations. They are reliant on public donations, with the stored cord blood to be used by anyone in need, at no charge. 5.2 Market Overview The Shandong Province has the following demographics: Approximately 1.2 million new births per year Population of approximately 94 million people Urban population of approximately 50 million people Disposable income per capita of urban population of approximately US$6,000 per year Current market penetration rate of approximately 0.6% of total new births Projected market penetration rate at maturity to be 5% of total new births. The Shandong Province is an emerging market for cord blood banking with current penetration rate of only 0.6% of total new births. In comparison, a mature market such as Singapore which has a penetration rate of approximately 24%. As a result, the cord blood banking market in the Shandong province has the potential to grow. 5.3 Regulatory Environment Cord blood banks typically require either a human tissue or general blood bank license, or a specific cord blood bank license to operate. The Chinese central government has approved 10 provinces and municipalities for hosting regionally exclusive cord blood bank operations. To date, seven licences have been issued. BDO Corporate Finance (East Coast) Pty Ltd 18

33 5.4 Industry Risks The table below sets out the risks within the cord blood bank industry: Table 16: Industry Risks Risk Birth Rate Economic Regulatory Changes Technological Advances Details A lower than expected birth rate would decrease the number of customers and may adversely impact Shandong Cord Blood Bank s earnings. Any slowdown in Shandong Province s economy would reduce the disposable income of the population and may adversely impact the number of customers seeking private cord blood bank services. The Chinese Ministry of Health has implemented a one license per region policy in its regulation of cord blood banks. This policy may be changed at any time, and if new licences are issued in Shandong Province, Shandong Cord Blood Bank s market position as the sole authorised cord blood bank operator may be undermined. The Chinese government may also adopt new policies relating to the types of services or pricing that may have an adverse impact on Shandong Cord Blood Bank s financials and operations. New technologies in cryopreservation may render Shandong Cord Blood Bank s facilities inefficient or obsolete, creating the need for Shandong Cord Blood Bank to invest significant resources to keep pace with the new technological advances. Shandong Cord Blood Bank may not be able to pass the cost of the investment onto customers, and this may have an adverse impact on Shandong Cord Blood Bank s profitability. 5.5 Outlook Set out below are charts that illustrate the market outlook for the period up to Figure 3: Incremental Storage Volume in China Figure 4: Penetration Rate (Private) in China CAGR% 2007/ /15F Private: 29% 22% Public: 37% 9% % 9.0% 8.0% 9.1% % 6.0% 5.0% 4.0% 3.0% 7.1% 5.4% 5.0% F 2.0% 1.0% 0.0% 2.0% 1.0% 1.4% 0.2% 0.5% F Incremental Storage Volume in Private Banking (000s) Incremental Storage Volume in Public Banking (000s) Penetration Rate (Private, divided by annual births in provinces that have cord blood banks) Penetration Rate (Private, divided by annual births in China) Market Share of Public Banking Source: March 2012 Prospectus for the Listing of CLGL BDO Corporate Finance (East Coast) Pty Ltd 19

34 The private cord blood bank sector accounts for more than 90% of total storage volumes. Market share of public cord blood banks is forecast to decrease to 5.4% in 2015F. The forecast compound annual growth rate ( CAGR ) in incremental storage volume for private cord banks is approximately 22% between 2010 to 2015F, mainly driven by the increasing penetration rate in the market and the growing number of births annually. The trend in increasing penetration rates is predominantly attributed to: Rising public awareness, driven by the marketing efforts by the industry participants Increasing income levels and corresponding healthcare expenditures by the general population. The expected increase in penetration rates and market share of private sector cord blood banks supports future growth in the private cord blood bank market in China. BDO Corporate Finance (East Coast) Pty Ltd 20

35 6 Valuation Methodologies In undertaking our assessment of the value of Favorable Fort including its associated entities, the following commonly used business valuation methods have been considered: Discounted Cash Flow Method The discounted cash flow ( DCF ) method is based on the premise that the value of a business or any asset is represented by the present value of its future cash flows. It requires two essential elements: The forecast of future cash flows of the business asset for a number of years (usually five to 10 years) The discount rate that reflects the riskiness of those cash flows used to discount the forecast cash flows back to net present value ( NPV ). DCF is appropriate where: The businesses earnings are capable of being forecast for a reasonable period (preferably five to 10 years) with reasonable accuracy Earnings or cash flows are expected to fluctuate significantly from year to year The business or asset has a finite life The business is in a 'start up' or in early stages of development The business has major or irregular capital expenditure requirements The business is currently making losses but is expected to recover. Capitalisation of Earnings Method This method involves the capitalisation of estimated maintainable earnings ( COE ) by an appropriate multiple. Maintainable earnings is the assessed sustainable profits that can be derived by the vendor s business and excludes any one off profits or losses. An appropriate earnings multiple is assessed by reference to market evidence as to the earnings multiples of comparable companies or transactions. This method is suitable for the valuation of businesses with indefinite trading lives and where earnings are relatively stable or a reliable trend in earnings is evident. Net Realisable Value of Assets Asset based valuations involve the determination of the fair market value of a business based on the net realisable value ( NRV ) of the assets used in the business. Valuation of net realisable assets involves: Separating the business or entity into components which can be readily sold, such as individual business units or collection of individual items of plant and equipment and other net assets Ascribing a value to each based on the net amount that could be obtained for this asset if sold. The NRV of the assets can be determined on the basis of: Orderly realisation: this method estimates fair market value by determining the net assets of the underlying business including an allowance for the reasonable costs of carrying out the sale of assets, taxation charges and the time value of money assuming the business is wound up in an orderly manner. This is not a valuation on the basis of a forced sale where the assets might be sold at values materially different from their fair market value Liquidation: this is a valuation on the basis of a forced sale where the assets might be sold at values materially different from their fair market value BDO Corporate Finance (East Coast) Pty Ltd 21

36 Going concern: the net assets on a going concern basis estimates the market value of the net assets but does not take into account any realisation costs. This method is often considered appropriate for the valuation of an investment or property holding company. Adjustments may need to be made to the book value of assets and liabilities to reflect their going concern value. The NRV of a trading company s assets will generally provide the lowest possible value for the business. The difference between the value of the company s identifiable net assets (including identifiable intangibles) and the value obtained by capitalising earnings is attributable to goodwill. The net realisable value of assets is relevant where a company is making sustained losses or profits but at a level less than the required rate of return, where it is close to liquidation, where it is a holding company, or where all its assets are liquid. It is also relevant to businesses which are being segmented and divested and to value assets that are surplus to the core operating business. The net realisable assets methodology is also used as a check for the value derived using other methods. These approaches ignore the possibility that the company s value could exceed the realisable value of its assets. Share Market Trading History The application of the price that a company s shares trade on the ASX is an appropriate basis for valuation where: The shares trade in an efficient market place where willing buyers and sellers readily trade the company s shares The market for the company s shares is active and liquid. Constant Growth Dividend Discount Model The dividend discount model ( DDM ) is applicable for: Firms with stable growth rates Firms which pay out dividends that are high and approximate free cash flow to equity Firms with stable leverage Firms where there are significant or unusual limitations to the rights of shareholders. BDO Corporate Finance (East Coast) Pty Ltd 22

37 7 Valuation of the Target 7.1 Selected Valuation Methods As set out in Section 2.2.1, we have considered fairness by comparing the assessed value of CBB s investment in Favorable Fort including its associated entities, to the value of the consideration offered. Having considered the valuation methodologies listed in Section 6, our view of the most appropriate valuation methodologies to apply to Favorable Fort and its associated entities, Shandong Cord Blood Bank and Jinan Bao Man, on a stand alone basis are summarised as below. Figure 17: Summary of Possible/Adopted Valuation Methodologies Methodology Adopted Explanation DCF Long term forecast financial results for Favorable Fort and its associated entities are not available for the DCF to be applied as a valuation methodology. COE NRV Share Market Trading History A trend in earnings can be observed for Shandong Cord Blood Bank, and it is not unreasonable to assume that Shandong Cord Blood Bank would have an indefinite trading life. As such, we have valued Shandong Cord Blood Bank using a COE methodology. Favorable Fort and Jinan Bao Man are investment holding companies with no business operations or assets of their own. Accordingly, we have valued these entities using the NRV approach. Favorable Fort, Jinan Bao Man and Shandong Cord Blood Bank shares are not traded on any stock exchange. DDM CBB is entitled to a single guaranteed dividend in respect of the shares it owns in Favorable Fort. However, other than this initial guarantee, dividend forecasts are not available, and Shandong Cord Blood Bank has a limited dividend history upon which a trend can be observed. Accordingly, we have not applied the DDM for Favorable Fort or its associated entities. Source: BDO analysis Shandong Cord Blood Bank For the reasons outlined above, we have selected the COE method to value Shandong Cord Blood Bank. We have selected net profit after tax ( NPAT ) as the appropriate measure of earnings. NPAT multiples may reflect differences in financing structures, effective tax rates and depreciation/amortisation accounting policies. As such, EBIT and EBITDA multiples allow for a better comparison with earnings multiples of other companies. However, we could not apply these earnings measures, as details of interest income and depreciation and amortisation expenses for Shandong Cord Blood Bank were not available. We have cross checked our valuation of Shandong Cord Blood Bank by reference to implied multiples and past transactions in the equity of Shandong Cord Blood Bank Favorable Fort and Jinan Bao Man We have selected the NRV approach to value Favorable Fort and Jinan Bao Man, taking into account our valuation of Shandong Cord Blood Bank. Specifically, we valued these entities based on their adjusted net tangible assets ( NTA ) as at 30 June 2012 (based on the latest available financial information). BDO Corporate Finance (East Coast) Pty Ltd 23

38 7.2 Valuation of Shandong Cord Blood Bank In undertaking the valuation of Shandong Cord Blood Bank using the COE methodology, we have considered to the following: An estimate of maintainable earnings for Shandong Cord Blood Bank Selection of an appropriate earnings capitalisation multiple. In order to apply the COE method, we have undertaken a search for potentially comparable listed companies and appropriate transactions Comparable Company Analysis The set of broadly comparable companies we have selected primarily provide cord blood bank services. A business description of each of the potentially comparable listed companies selected is set out in Appendix B of this Report. We note that the selected companies vary in terms of size, country of operation, profitability and growth. There is also limited publicly available financial information for a number of the companies. Of all the potentially comparable companies listed in Appendix B, we consider China CBC and CLGL to be the most comparable to Shandong Cord Blood Bank: China CBC China CBC is listed on the New York Stock Exchange and provides cord blood banking services in China (albeit in different Provinces), and is therefore exposed to highly comparable industry conditions China CBC also holds 83% of the issued shares in Favorable Fort, which equates to approximately 20% of the equity in Shandong Cord Blood Bank China CBC has a similar NPAT margin of 28% compared to 33% for Shandong Cord Blood Bank. Shandong Cord Blood Bank had revenue growth of 21.3% in the latest full financial year, compared to 12.1% for China CBC. In addition, Shandong Cord Blood Bank s annualised revenue for the nine months ended 30 September 2012 reflects growth of 28.0%, compared to one year forecast revenue growth of 24.9% for China CBC China CBC is approximately twice the size of Shandong Cord Blood Bank based on revenue. However, both companies are relatively small compared to the broader market constituents China CBC is publicly listed on the New York Stock Exchange. However, China CBC is relatively illiquid, with only 29% of all outstanding shares being traded in the 12 months ended 18 November 2012 China CBC holds significant cash, which was boosted with the recent issue two tranches of convertible bonds for total proceeds of US$ 115 million. All else equal, excessive cash may translate to lower multiples. Coverage by Jeffries Equity Research also suggests that the market valuation of China CBC may be depressed as a result of a risk aversion by foreign investors to Chinese stocks. CLGL CLGL is listed in Singapore and primarily provides cord blood and umbilical cord tissue banking services in Singapore and Hong Kong. In November 2012, CLGL disposed of an indirect interest it held in the sole cord blood banking operator in the Guangdong Province of China, and it acquired a minority interest in China CBC The current penetration rate for cord blood banking services in Singapore and Hong Kong is currently higher than China, and the outlook for growth is therefore relatively lower than China BDO Corporate Finance (East Coast) Pty Ltd 24

39 Shandong Cord Blood Bank had revenue growth of 21.3% in the latest full financial year, compared to 12.1% for CLGL. In addition, Shandong Cord Blood Bank s annualised revenue for the nine months ended 30 September 2012 reflects growth of 28.0%, compared to one year forecast revenue growth of 11.6% for CLGL CLGL is similar in size to Shandong Cord Blood Bank CLGL has a comparable NPAT margin of 31% compared to 33% for Shandong Cord Blood Bank CLGL is publicly listed on the Singapore Stock Exchange and is highly liquid Approximately 479% of all outstanding shares were traded in the 12 months ended 18 November Both China CBC and CLGL have historical and forecast earnings multiples, whereas forecast multiples are not available for the majority of the other selected companies. However, the forecast multiples for these companies are calculated based on the forecast earnings provided by a single market analyst. Accordingly, we have placed more reliance on historical multiples, rather than forecast multiples. A summary of the share market trading multiples of the potentially comparable listed companies is available in Appendix C Maintainable Earnings In estimating maintainable earnings for Shandong Cord Blood Bank, we have considered the following: The financial performance of Shandong Cord Blood Bank from FY09 to FY11, the first 9 months of FY12 and the 12 month period ended 30 September 2012 The nature and quantum of any adjustments required to normalise earnings (discussed below) Analysis of the industry that Shandong Cord Blood Bank operates in and its general outlook, as set out in Section 5. For a better assessment of the trend in recent earnings, we have normalised Shandong Cord Blood Bank s earnings by excluding the gain on investments. CBB has advised the gains on investments are non-recurring and non-operational. Table 18: Normalisation of Earnings 31 Dec Dec Dec Sep Sep 2012 Period ended 12 months 12 months 12 months 9 months 12 months (RMB 000) (RMB 000) (RMB 000) (RMB 000) (RMB 000) NPAT 17,533 46,293 54,048 56,247 66,113 Less: Gain on Investments - (3,150) (2,700) - - Normalised NPAT 17,533 43,143 51,348 56,247 66,113 Normalised NPAT Growth n/a 146% 19% n/m n/m Normalised NPAT Margin 32% 33% 32% 37% 33% Source: CBB Note: n/a not available; n/m not meaningful We note the following in relation to Shandong Cord Blood Bank s normalised NPAT from FY09 to the first nine months of FY12: FY09 was the first year of operations for Shandong Cord Blood Bank. Accordingly. normalised NPAT increased significantly by 146% from RMB 17.5 million in FY09 to RMB 43.1 million in FY10 Growth in normalised NPAT was 19% in FY11 BDO Corporate Finance (East Coast) Pty Ltd 25

40 NPAT for the 9 month period ended 30 September 2012 is RMB 56.2 million. On an annualised basis, normalised NPAT for Shandong Cord Blood Bank for FY12 would be RMB 75.0 million, which is approximately 45.0% higher than FY11 Normalised NPAT for the 12 month period ended 30 September 2012 is RMB 66.1 million. The forecast CAGR in incremental storage volume for private cord banking is estimated to be approximately 22% between 2010 and Further, the forecast revenue growth for the next financial year for China CBC and CLGL (provided by CapitalIQ) is 24.9% and 11.6%, respectively. Accordingly, the strong growth in Shandong Cord Blood Bank s earnings is expected to continue. Given the lack of meaningful forecast trading multiples (discussed below), our estimated ME is based primarily on the historical earnings for the 12 months ended 30 September 2012 (being the most current financial performance). We have taken into account the expectation of relatively strong earnings growth in our selected multiple. Based on the above, we have estimated a maintainable NPAT for Shandong Cord Blood Bank of RMB 66.0 million for purposes of our valuation Earnings Multiple In selecting a range of earnings multiples to apply to maintainable earnings for the valuation of Shandong Cord Blood Bank, we have had regard to the trading NPAT multiples implicit in the share prices of the set of broadly comparable listed companies. The average and median NPAT multiples of the broadly comparable listed companies over the last 12 months ( LTM ) are 18.2 times and 17.8 times (excluding outliers) The LTM NPAT multiples for China CBC and CLGL are 10.7 times and 13.5 times, respectively The forecast NPAT multiples for China CBC and CLGL are 12.5 times and 11.3 times. As noted previously, these multiples were calculated based on the forecast earnings provided by a single market analyst, and have therefore been attributed less weighting than the historical trading multiples. We have also considered the following factors specific to Shandong Cord Blood Bank in selecting an appropriate range of NPAT multiples: Growth Companies with greater growth prospects will typically trade at higher multiples. Shandong Cord Blood Bank s historical and forecast revenue growth is higher than both China CBC and CLGL. Of the other selected companies, forecast revenue is only available for Cryo- Save Group N.V., which is forecasting a revenue decrease of 4.6%. All forecasts for these companies are provided by a single analyst Liquidity of shares listed companies may trade at higher earnings multiples than unlisted entities because of the liquidity in trading of their shares. Shandong Cord Blood Bank is an unlisted company, which we have taken into account in our selected multiple. CLGL is highly liquid, while trading in China CBC s shares is relatively illiquid Diversity of the business more diversified companies tend to be valued at higher earnings multiples than less diversified companies, which reflects the reduced risk in a more diversified business. Shandong Cord Blood Bank s business is not as geographically diverse as most of the other broadly comparable companies (including China CBC and CLGL), as its income stream is solely based in the Shandong Province Size of the business larger companies tend to be valued at higher earnings multiples than smaller companies, which reflects the benefits of size in matters such as market power, control over prices and costs, depth of management, and general operational and financial BDO Corporate Finance (East Coast) Pty Ltd 26

41 robustness. Shandong Cord Blood Bank s business is larger than most of the broadly comparable companies in terms of annual revenue. Shandong Cord Blood Bank is similar in size to CLGL and approximately half the size of China CBC based on revenue Monopoly companies with market monopolies typically have higher earnings multiples, as they would have no direct competition in their own markets and hence, they are more profitable than companies without a market monopoly. Shandong Cord Blood Bank operates with the same Province exclusivity as China CBC. CLGL has one private cord blood banking competitor in Singapore Control premium - The share market trading multiples summarised in Appendix C are based on market price for minority or portfolio shareholdings and do not include a premium for control. Favorable Fort holds a minority interest in Shandong Cord Blood Bank. Accordingly, we have not included a premium for control. Based on the above, we have selected a NPAT multiple range of between 10.0 times and 13.0 times for purposes of our valuation. The table summarises the comparison of Shandong Cord Blood Bank and the broadly comparable listed companies we have selected with regard to the discussion above: Table 19: Comparable Companies Analysis Listed Primary Locations Historical Revenue ($ million) Normalised NPAT Margin Shandong Cord Blood Bank No PRC 24 33% BIONET Corp. Yes Taiwan 19 3% Cord Blood America Inc. Yes USA 6 (56%) China CBC Yes PRC 58 31% CLGL Yes Singapore, HK and PRC 22 28% Cordlife Limited Yes Indonesia, India, Philippines and PRC 7 (77%) Cryo-Cell International, Inc. Yes USA 17 1% Cryo-Save Group N.V. Yes Europe, Asia and Africa 53 5% Cryosite Limited Yes Australia 8 9% Stemlife Berhad Yes Malaysia 6 11% Zhongyuan Union Stem Cell Bioengineering Co., Ltd. Yes PRC 38 7% Source: CapitalIQ, public company announcements and company websites BDO Corporate Finance (East Coast) Pty Ltd 27

42 7.2.4 Surplus Assets Surplus assets are assets which form part of an entity but do not contribute to the business earnings or cash flow generation capacity of that entity. These are assets that, if sold, would not impact on the revenue or profit generating capacity of the active business undertaking. Assets and liabilities which do not form part of the core business activity must be valued separately. Such assets are considered to be surplus to the main business undertaking, but nevertheless represent values which should be reflected in the overall value of the Company as they could be sold separately and the cash added to the value of the Company. After a review of Shandong Cord Blood Bank s financial position and discussions with management, we have considered that following assets are surplus to the business: Cash of RMB million Deposits of RMB 32.0 million Long term investment of RMB 10.3 million Other receivables (representing short term loans to related parties) of RMB million Valuation Table 20: COE Valuation of Shandong Cord Blood Bank Ref Valuation of Shandong Cord Blood Bank Low High (RMB'000) (RMB'000) Maintainable Earnings (NPAT) Section ,000 66,000 NPAT Multiple (on minority basis) Section % Equity Value (on a minority basis and before surplus assets) 660, ,000 Add surplus assets: Section Cash and Cash Equivalents 142, ,928 Deposits 32,000 32,000 Long Term Investment 10,347 10,347 Other Receivables (loans to related parties) 138, , % Equity Value (on a minority basis and after surplus assets) 983,524 1,181,525 24% Equity Value 236, ,566 Source: BDO Analysis BDO Corporate Finance (East Coast) Pty Ltd 28

43 7.2.6 Valuation Cross Check Implied Multiples Table 21: Valuation Cross Check for Shandong Cord Blood Bank Valuation Cross Check Ref Low High (RMB'000) (RMB'000) 100% Equity Value (on a minority basis) Section ,524 1,181,524 Add/(Less): Short Term Loan Section ,000 40,000 Notes Payable Section ,000 80,000 Cash and Cash Equivalents Section 4.7 (142,928) (142,928) Deposits Section 4.7 (32,000) (32,000) Long Term Investment Section 4.7 (10,347) (10,347) Other Receivables (loans to related parties) Section 4.7 (138,250) (138,250) Enterprise Value (on a minority basis) 780, ,000 Sales Revenue for FY12 (annualised) Section , ,990 Implied FY12 (annualised) Revenue Multiple Sales Revenue for Sept 12 (LTM) Section , ,070 Implied Sept 12 (LTM) Revenue Multiple EBIT for FY12 (annualised) Section ,336 90,336 Implied FY12 (annualised) EBIT Multiple EBIT for Sept 12 (LTM) Section ,421 81,421 Implied Sept 12 (LTM) EBIT Multiple Source: BDO Analysis We note the following in relation to Shandong Cord Blood Bank s implied revenue multiples: The LTM revenue multiples of the selected comparable companies range from 0.5 times to 3.4 times (excluding outliers) The LTM revenue multiples of China CBC and CLGL are 1.3 times and 3.4 times, respectively. The revenue multiple for China CBC is low given the substantial amount of cash that this company currently holds (which is excluded when calculating the revenue multiples) The implied revenue multiples for Shandong Cord Blood Bank are higher than the comparable listed companies. We note the following in relation to Shandong Cord Blood Bank s implied EBIT multiples: Details of interest income for Shandong Cord Blood Bank were not available. Therefore, we have calculated EBIT based on operating profit plus finance costs The LTM EBIT multiples of the selected comparable listed companies range from 3.6 times to 14.9 times (excluding outliers) The LTM EBIT multiples of China CBC and CLGL are 3.6 times and 12.2 times, respectively. The implied EBIT multiples for Shandong Cord Blood Bank are within the range of EBIT multiples of the comparable listed companies. Based on the above analysis, the implied revenue and EBIT multiples for Shandong Cord Blood Bank do not appear unreasonable. BDO Corporate Finance (East Coast) Pty Ltd 29

44 7.2.7 Valuation Cross Check Historical Transaction Multiples We note that there have been historical transactions that indirectly involved the equity of Shandong Cord Blood Bank. We have also undertaken a search for transactions involving companies with similar operations and operating in similar industries. A summary of the transaction multiples is set out below. Appendix E contains further details in relation to each transaction. Table 22: Valuation Cross Check - Transactions Multiples Target Acquirer Date Revenue Multiple EBIT Multiple NPAT Multiple China CBC CLGL Nov times (FY11 revenue) Favorable Fort CBB Apr times (FY11 revenue) 4.2 times 10.1 times 19.5 times 23.2 times China Cord Blood Services China CBC Jul times (FY10 revenue) n/a 27.8 times Favorable Fort China CBC (via CSC East) Source: CapitalIQ, BDO Analysis Feb times (FY09 revenue) 31.8 times 38.2 times Based on the above analysis of recent transactions, our assessed value of Shandong Cord Blood Bank does not appear to be unreasonable Conclusion We have calculated the value of 24% of the issued shares in Shandong Cord Blood Bank to be in the range of RMB million to RMB million. BDO Corporate Finance (East Coast) Pty Ltd 30

45 7.3 Valuation of Jinan Bao Man NRV We have valued Jinan Bao Man as a stand alone entity based on its NTA as at 30 June 2012 (ignoring transaction costs). We have adjusted the NTA of Jinan Bao Man to reflect our valuation of its 24% interest in Shandong Cord Blood Bank, which has been recorded at cost. The cost of this investment was the original contributed equity for Shandong Cord Blood Bank at inception, which is therefore substantially lower than our valuation given the passage of time and the growth in Shandong Cord Blood Bank since inception. Table 23: Adjusted NTA Valuation of Jinan Bao Man Ref Valuation of Jinan Bao Man Low (RMB'000) High (RMB'000) NTA as at 30 June 2012 Section ,126 20,126 Less: Book Value of Jinan Bao Man s 24% Investment in Shandong Cord Blood Bank Section 4.6 (12,000) (12,000) Add: Assessed Value of Jinan Bao Man s 24% Investment in Shandong Cord Blood Bank Section , ,566 Adjusted NTA for Jinan Bao Man 244, , % Equity Value HK$ (translated to HK$) 1 million Source: BDO Analysis Note: 1. Translation at RMB/HK$ exchange rate of as at 18 November 2012 HK$ million Conclusion We have calculated the value of 100% of the issued shares in Jinan Bao Man to be in the range of RMB million to RMB million, or HK$ million to HK$ million. BDO Corporate Finance (East Coast) Pty Ltd 31

46 7.4 Valuation of Favorable Fort NRV We have valued Favorable Fort as a stand alone entity based on its NTA as at 30 June 2012 (ignoring transaction costs). We have adjusted the NTA of Favorable Fort to reflect our valuation of its 100% interest in Jinan Bao Man, which has been recorded at cost. Table 24: Adjusted NTA Valuation of Favorable Fort Ref Valuation of Favorable Fort Low (HK$'000) High (HK$'000) NTA as at 30 June 2012 Section ,984 11,984 Less: Book Value of Favorable Fort s 100% Investment in Jinan Bao Man Section 4.5 (12,000) (12,000) Add: Assessed Value of Favorable Fort s 100% Investment in Jinan Bao Man Section , ,219 Adjusted NTA of Favorable Fort 300, , % Equity Value US$ 38.8 (translated to US$) 1 million 17% Equity Value US$ 6.59 (in US$) 1 million US$ 46.3 million US$ 7.88 million Source: BDO Analysis Note: 1. Translation at HK$/USD exchange rate of as at 18 November Conclusion We have calculated the value of 17% of the issued shares in Favorable Fort to be in the range of US$ 6.59 million to US$ 7.88 million. BDO Corporate Finance (East Coast) Pty Ltd 32

47 8 Evaluation of the Proposed Transaction 8.1 Fairness We are of the opinion that the Proposed Transaction is fair to the Non-Associated Shareholders of CBB. A comparison of the value derived for CBB s shares in Favorable Fort compared to the cash consideration of $8.65 million is provided below: Table 25: Fairness Assessment of the Proposed Transaction Ref Low (US$m) Value per Share High (US$m) Value of 17% Equity Interest in Favorable Fort Section Value of Consideration Offered (Cash) Section Source: BDO Analysis As demonstrated above, the cash consideration is greater than our assessed value of CBB s shares in Favorable Fort. Accordingly, the Proposed Transaction is considered fair to the Non-Associated Shareholders of CBB. 8.2 Reasonableness In accordance with RG 111, an offer is reasonable if it is fair. On this basis, as we have concluded that the Proposed Transaction is "fair", it is also considered to be "reasonable" under RG 111. Nevertheless, we have also identified the potential advantages and disadvantages that the Non- Associated Shareholders should consider in deciding on whether to approve the Proposed Transaction. The advantages and disadvantages that we have identified are summarised below Advantages of Approving the Proposed Transaction Increase in Cash for Working Capital For FY11 and FY12, CBB s cash payments exceeded its cash receipts. As at 30 September 2012, CBB had $1.7 million cash on hand, but had drawn down $785,000 from the City Challenge working capital facility. We also note that CBB will be required to pay the second instalment of US$808,000 relating to the shares in Favorable Fort on or before completion of the Proposed Transaction, which would only be partially offset by the one-time guaranteed dividend of US$400,800 that is payable by 31 January On completion of the Proposed Transaction, the Directors intend to use the net proceeds of the Proposed Transaction to discharge the outstanding working capital facility. CBB will then be: Debt free In a better position to fund the working capital requirements and improve the profitability of its existing wholly owned operations Able to consider other investment opportunities. BDO Corporate Finance (East Coast) Pty Ltd 33

48 Reduced Gearing On completion of the Proposed Transaction, CBB will be debt free and will therefore not have the cash drain of debt servicing requirements. If the Proposed Transaction does not proceed, it is likely CBB would be required to drawdown additional funds from its working capital facility with City Challenge. Increased gearing may lead to further financial stress. Liquidity The sale of minority interests in unlisted companies can attract significant discounts. Distressed sales may attract further discounts (which may be applicable to CBB at a later date, given its recent operating losses and working capital position). The Proposed Transaction provides CBB with the following liquidity advantages: An opportunity to realise a gross profit of US$490,000 (before transaction costs) on the shares in Favorable Fort, which represents a gain of approximately 6.0% Certainty in respect of both the price and timing of realisation, which may not otherwise be available at a later date Disadvantage of Approving the Proposed Transaction Reduction in Diversification On completion of the Proposed Transaction CBB will not have a presence in China, where the cord blood bank industry is expected to experience significant growth. BDO Corporate Finance (East Coast) Pty Ltd 34

49 9 Qualifications BDO has extensive experience in the provision of corporate finance advice, particularly in respect of takeovers, mergers and acquisitions. BDO holds an Australian Financial Services Licence issued by the Australian Securities and Investment Commission for giving expert reports pursuant to the Listing rules of the ASX and the Act. The persons specifically involved in preparing and reviewing this report were Fiona Hansen and Dan Taylor. They have significant experience in the preparation of independent expert reports, valuations and merger and acquisitions advice across a wide range of industries in Australia. 10 Independence BDO is entitled to receive a total fee of $55,000 (excluding GST and reimbursement of out of pocket expenses) for completion of this Report. Except for this fee, BDO has not received and will not receive any pecuniary or other benefit whether direct or indirect in connection with the preparation of this Report. BDO is wholly owned by BDO East Coast Partnership, a member of BDO International. Prior to accepting this engagement BDO considered its independence with respect to CBB and any of their respective associates with reference to the RG 112. In BDO s opinion it is independent of CBB and its respective associates. BDO and BDO East Coast Partnership do not have at the date of the Report, and have not had within the previous year, any shareholding in or other relationship with CBB or any of its respective associates, except in relation to the preparation of this report. A draft of this report was provided to CBB and its advisors for confirmation of the factual accuracy of its contents. No significant changes were made to this Report as a result of this review. 11 Disclaimers and Consents This Report has been prepared at the request of CBB for inclusion in the Notice of Meeting and Explanatory Memorandum which will be sent to all Non-Associated Shareholders. The Company engaged BDO to prepare an independent expert's report to consider the Proposed Transaction on behalf of the Non-Associated Shareholders. BDO hereby consents to this Report accompanying the above Notice of Meeting and Explanatory Memorandum. Apart from such use, neither the whole nor any part of this Report, nor any reference thereto may be included in or with, or attached to any document, circular resolution, statement or letter without the prior written consent of BDO. BDO takes no responsibility for the contents of the Notice of Meeting and Explanatory Memorandum other than this Report. BDO has not independently verified the information and explanations supplied to us, nor has it conducted anything in the nature of an audit or a review of CBB, Shandong Cord Blood Bank, Jinan Bao Man or Favorable Fort. However, we have no reason to believe that any of the information or explanations so supplied are false or that material information has been withheld. The statements and opinions included in this Report are given in good faith and in the belief that they are not false, misleading or incomplete. The terms of this engagement are such that BDO has no obligation to update this Report for events occurring subsequent to the date of this Report. BDO Corporate Finance (East Coast) Pty Ltd 35

50 Appendix A Sources of Information BDO has relied upon the following information for the purposes of this Report: a) Unaudited accounts for Shandong Cord Blood Bank, Jinan Bao Man and Favorable Fort b) Notice of Meeting and Explanatory Memorandum for the Proposed Transaction c) CapitalIQ d) Information available in the public domain e) Discussion with Directors and Management of CBB BDO Corporate Finance (East Coast) Pty Ltd 36

51 Appendix B Comparable Company Information Table 26: Business Description CIQ Ticker Company Name Business Description GTSM:1784 BIONET Corp. BIONET Corp. provides cord blood private banking services under the BabyBanks name in Taiwan. OTCBB:CBAI NYSE:CO Cord Blood America Inc. China Cord Blood Corporation Cord Blood America, Inc., through its subsidiaries, provides private cord blood stem cell preservation services to families in the United States and internationally. China Cord Blood Corporation, together with its subsidiaries, engages in the provision of umbilical cord blood storage and ancillary services in the People s Republic of China. SGX:P8A Cordlife Group Limited Cordlife Group Limited, an investment holding company, provides cord blood banking and umbilical cord tissue banking services. ASX:CBB OTCPK:CCEL Cordlife Limited Cryo-Cell International, Inc. Cordlife Ltd, together with its subsidiaries, provides human umbilical cord blood banking and cord tissue banking services primarily in India, Indonesia, and the Philippines. Cryo-Cell International, Inc. engages in cellular processing and cryogenic cellular storage, with a focus on the collection and preservation of umbilical cord (U-Cord) blood stem cells for family use. ENXTAM:CRYO Cryo-Save Group N.V. Cryo-Save Group N.V. operates as a family stem cell bank in Europe, Asia, and Africa. ASX:CTE Cryosite Limited Cryosite Limited provides specialized outsourced logistics services to customers in research, medical, pharmaceutical, veterinary, and biotechnology industries primarily in Australia. KLSE:STEMLFE SHSE: Source: CapitalIQ Stemlife Berhad Zhongyuan Union Stem Cell Bioengineering Co., Ltd. Stemlife Berhad operates as a stem cell banking and therapeutics company in Malaysia. Zhongyuan Union Stem Cell Bioengineering Co., Ltd. principally engages in the detection and storage of stem cell sources in the People s Republic of China. BDO Corporate Finance (East Coast) Pty Ltd 37

52 Appendix C Comparable Company Trading Multiples Table 27: Comparable Companies NPAT Trading Multiples (as at 18 November 2012) Company Name Country Latest FYE Market Cap Enterprise Value Normalised NPAT Multiple Normalised NPAT Multiple Normalised NPAT Multiple FY LTM FY+1 AUDm AUDm Actual Actual Forecast Cordlife Limited Australia 30 Jun nmf nmf n/a China Cord Blood Corporation Cordlife Group Limited Hong Kong 31 Mar Singapore 30 Jun Cord Blood America Inc. United States 31 Dec nmf nmf n/a BIONET Corp. Taiwan 31 Dec n/a Cryo-Cell International, Inc. United States 30 Nov n/a Cryo-Save Group N.V. Netherlands 31 Dec Cryosite Limited Australia 30 Jun n/a Stemlife Berhad Malaysia 31 Dec n/a Zhongyuan Union Stem Cell Bioengineering Co., Ltd. China 31 Dec n/a Average Median Average (excluding outliers) Median (excluding outliers) Source: CapitalIQ and BDO analysis Notes: 1. Enterprise value represents the sum of market capitalisation, preferred equity, minority interest and debt, less cash. 2. Outliers highlighted in grey. BDO Corporate Finance (East Coast) Pty Ltd 38

53 Table 28: Comparable Companies Revenue Trading Multiples (as at 18 November 2012) Latest Market Enterprise Revenue Company Name Country FYE Cap Value Multiple Revenue Multiple Revenue Multiple FY LTM FY+1 AUDm AUDm Actual Actual Forecast Cordlife Limited Australia 30 Jun n/a China Cord Blood Corporation Cordlife Group Limited Hong Kong 31 Mar Singapore 30 Jun Cord Blood America Inc. United States 31 Dec n/a BIONET Corp. Taiwan 31 Dec n/a Cryo-Cell International, Inc. United States 30 Nov n/a Cryo-Save Group N.V. Netherlands 31 Dec Cryosite Limited Australia 30 Jun n/a Stemlife Berhad Malaysia 31 Dec nmf n/a Zhongyuan Union Stem Cell Bioengineering Co., Ltd. China 31 Dec n/a Average Median Average (excluding outliers) Median (excluding outliers) Source: CapitalIQ and BDO analysis Notes: 1. Enterprise value represents the sum of market capitalisation, preferred equity, minority interest and debt, less cash. 2. Outliers highlighted in grey. BDO Corporate Finance (East Coast) Pty Ltd 39

54 Table 29: Comparable Companies EBIT Trading Multiples (as at 18 November 2012) Latest Market Enterprise EBIT Company Name Country FYE Cap Value Multiple EBIT Multiple EBIT Multiple FY LTM FY+1 AUDm AUDm Actual Actual Forecast Cordlife Limited Australia 30 Jun nmf nmf n/a China Cord Blood Corporation Cordlife Group Limited Hong Kong 31 Mar Singapore 30 Jun Cord Blood America Inc. United States 31 Dec nmf nmf n/a BIONET Corp. Taiwan 31 Dec n/a Cryo-Cell International, Inc. United States 30 Nov n/a Cryo-Save Group N.V. Netherlands 31 Dec Cryosite Limited Australia 30 Jun n/a Stemlife Berhad Malaysia 31 Dec nmf n/a Zhongyuan Union Stem Cell Bioengineering Co., Ltd. China 31 Dec n/a Average Median Average (excluding outliers) Median (excluding outliers) Source: CapitalIQ and BDO analysis Notes: 1. Enterprise value represents the sum of market capitalisation, preferred equity, minority interest and debt, less cash. 2. Outliers highlighted in grey. BDO Corporate Finance (East Coast) Pty Ltd 40

55 Appendix D Comparable Company Growth Rates and Margins Table 30: Comparable Companies NPAT Margin (as at 18 November 2012) Company Name Normalised ROS Normalised ROS Normalised ROS FY-2 FY-1 FY Cordlife Limited % % -76.9% China Cord Blood Corporation 30.1% 30.6% 30.6% Cordlife Group Limited 28.8% 32.1% 27.9% Cord Blood America Inc % -72.6% -55.9% BIONET Corp. 9.0% -8.0% 3.1% Cryo-Cell International, Inc. 8.0% 6.9% 0.6% Cryo-Save Group N.V. 6.6% 7.5% 5.0% Cryosite Limited 0.3% 3.3% 9.2% Stemlife Berhad -12.6% -1.6% 11.2% Zhongyuan Union Stem Cell Bioengineering Co., Ltd. -2.0% 5.8% 7.4% Average -18.2% -10.9% -3.8% Median 3.5% 4.6% 6.2% Source: Capital IQ and BDO analysis Table 31: Comparable Companies Revenue Growth (as at 18 November 2012) Company Name Revenue Growth Revenue Growth Revenue Growth FY-2 FY-1 FY Cordlife Limited -90.2% 104.6% 52.5% China Cord Blood Corporation 34.4% 29.8% 12.1% Cordlife Group Limited 24.7% -8.8% 12.1% Cord Blood America Inc % 27.5% 37.3% BIONET Corp. 8.5% -18.6% 28.5% Cryo-Cell International, Inc. 2.2% 0.6% 0.9% Cryo-Save Group N.V. 30.2% 5.2% 3.6% Cryosite Limited -3.1% 7.8% 20.6% Stemlife Berhad -14.5% 4.4% 8.6% Zhongyuan Union Stem Cell Bioengineering Co., Ltd. 6.8% -13.5% -8.1% Average -2.3% 13.9% 16.8% Median 4.5% 4.8% 12.1% Source: Capital IQ and BDO analysis BDO Corporate Finance (East Coast) Pty Ltd 41

56 Appendix E Comparable Transactions Target Country Acquirer Date Amount % Revenue Multiple EBIT Multiple NPAT Multiple Comments China CBC China Cordlife Group Limited Nov-12 $20 million times (FY11 revenue) 4.2 times 10.1 times China CBC is a listed HK based company engaged in provision of umbilical cord blood storage and ancillary services through its subsidiaries Favorable Fort Hong Kong (with investment in China) CBB Apr-12 US$8.2 million times (FY11 revenue) 19.5 times 23.2 times It is assumed there is no significant asset or liability on the balance sheet other than the investment in Shandong Cord Blood Bank, consistent with the 30 June 2012 accounts Revenue multiples are calculated based on Shandong Cord Blood Bank's revenue as Favorable Fort has no operation other than through its investment in Shandong Cord Blood Bank Revenue, EBIT and NPAT are translated using a US$/RMB exchange rate of 6.25 as at 31 March 2012 China Cord Blood Services China China CBC Jul-09 $471 million times (FY10 revenue) n/a 27.8 times China Cord Blood Services is a provider of cord blood collection, laboratory testing, hematopoietic stem cell processing and stem cell storage services Favorable Fort Hong Kong (with investment in China) CSC East (a subsidiary of China CBC) Feb-10 US$20 million times (FY09 revenue) 31.8 times 38.2 times It is assumed there is no significant asset or liability on the balance sheet other than the investment in Shandong Cord Blood Bank, consistent with the 30 June 2012 accounts Revenue multiples are calculated based on Shandong Cord Blood Bank's revenue as Favorable Fort has no operation other than through its investment in Shandong Cord Blood Bank Source: CapitalIQ and BDO analysis Revenue, EBIT and NPAT are translated using a US$/RMB exchange rate of 6.67 as at 28 February 2010 BDO Corporate Finance (East Coast) Pty Ltd 42

57 PHONE ADELAIDE BRISBANE CAIRNS CANBERRA DARWIN HOBART MELBOURNE PERTH SYDNEY BDO International is a world wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity. The network is coordinated by BDO Global Coordination B.V. incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number ) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. BDO is the brand name for the BDO International network and for each of the BDO Member Firms. BDO in Australia is a national association of separate entities (each of which has appointed BDO (Australia) Limited ACN to represent it in BDO International). Liability of each Australian entity is limited by a scheme approved under Professional Standards Legislation other than for the acts or omissions of financial services licensees. Disclaimer. This publication is issued exclusively for the general information of clients and staff of BDO in Australia

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