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NEW YORK, March 19, 2015 --
As a substantial and long term shareholder (Jayhawk Capital has been a shareholder in the company since before it was listed on the New York Stock Exchange in 2009), we applaud you and the management team for the impressive results you have achieved in operating the company.
On a fully diluted basis, Jayhawk Capital is the third largest non-affiliated shareholder at 9.1%. KKR owns 19.1% and Cordlife Group (a Singapore-based cord blood company) owns 13.4%. Golden Meditech and other company affiliates own 35.2%. China Cord has become the largest umbilical cord blood operator in China and the company has generated and is expected to continue to generate huge amounts of free cash flow as shown in the table below.
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This strong cash generation, however, has not been reflected in the stock price of the company. Using a 20x multiple of FY2016 (ends March 2016) cash flow would indicate that the stock price should be $16.81 per share. Even at this price, the stock would be trading at a discount to where the two main comparable companies, Zhongyuan Union Cell (Shanghai ticker 600645) and Cordlife Group (Singapore ticker CLGL), currently trade. Please note that this is the same Cordlife Group which owns 13.4% of China Cord and it would be accretive to their earnings if they were to acquire China Cord.
China Biologic (CBPO) is another U.S.-listed Chinese company operating in the blood industry whose stock price went from $9.80/share in October 2012 to $85.29/share as of March 18, 2015. CBPO is generating cash at a slightly lower rate than China Cord and is growing at approximately the same rate, but has an enterprise value of $2.1 billion USD, 8 times the $265 million USD enterprise value of China Cord.
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In an effort to maximize shareholder value, we urge the Directors of China Cord to:
• Approve the payment of an extraordinary cash dividend in the amount of $125ml USD.
• Approve a tender offer to repurchase $150ml USD worth of stock.
• Going forward, initiate a consistent share repurchase and/or dividend program with the available cash flow.
If the actions we suggest are taken, the common shareholders would receive a dividend of $1.18 per share and the stock price should be $22.56 using a 20x multiple of FY2017 cash flow (assuming the $150mm USD tender offer occurs at a price of $7.50 per share). The estimated cash balance at the end of FY2016 and FY2017 would be $220ml USD and $333ml USD, respectively. It is clear that, even after the extraordinary dividend and tender offer we request, there will provide plenty of cash to pay a large recurring dividend and establish an ongoing share repurchase program.
The reasons for the Board to consider and approve the above plan are summarized as follows:
1. Directors are under a duty to maximize shareholder value as part of acting in the best interests of the company. Given the very low valuation, the special dividend and tender offer are necessary to return value to the company shareholders.
2. The company has not provided a compelling reason to its shareholders for its need or determination to hold on to such a growing balance of un-used cash. Capital expenditures should be minimal going forward. The company spent significantly on capital expenditures over the past several years, building out ample capacity for the future. The acquisition of an additional license for expanding to a new province also does not appear to be a viable option.
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3. $125ml USD special dividend is significantly less than the cash on hand and is not much more than only one year's free cash flow.
4. After the special dividend and tender offer, the company will still maintain a substantial cash balance that continues to increase substantially through operations.
5. The company has not declared a cash dividend since listing on the NYSE in 2009.
Jayhawk Capital believes that the time is right and it is appropriate for the company to take these actions to benefit all of the company's shareholders. We appreciate your attention to and consideration of this matter and we look forward to continued strong operating results from the company which, when combined with the dividend payments and share repurchases, will result in superior investment returns for committed, long-term shareholders such as Jayhawk.
Sincerely
Jayhawk Capital
