CORDLIFE: Maybank Kim Eng maintains 'Buy' call post CCBC meeting

We returned even more positive from meetings in Beijing with the CFO of China Cord Blood Corporation (CCBC), China’s leading cord blood bank. In our view, Cordlife’s sell-down following its CCBC convertible-note purchase and loan to Magnum Opus reflects a lack of understanding and appreciation of the motivation behind the deal and risk measures in place. We hope to set this straight.

Cordlife’s 10% stake in CCBC — 14.2% upon conversion of CBs in 2017 — should only become more valuable over time, in our view. New products from Cordlife are being pushed out via CCBC’s vast China network. We observe close working and personal relationships between the managements of both companies.

While its loan to Magnum Opus was unorthodox, it was necessary to cement its relationship with CCBC. We view the loan as a proxy for a direct equity investment in CCBC. By controlling the debtor, Cordlife can control the equity part of the equation as well. Despite its mere 10% stake, Cordlife has been able to punch far above its weight.

Auditing procedures for Chinese companies have been strengthened considerably since the Sino-Forest accounting scandal in 2011. CCBC believes this has not been sufficiently appreciated by investors. External auditors can now check bank balances independently every quarter, while budget-busting cash transfers would need the entire board’s approval and three senior signatories.

Full report here.