CORDLIFE: Near-term catalysts include potential partial offer

Excerpts from analysts' report

Jayhawk’s second open letter to CCBC

NEW YORK, April 30, 2015 /PRNewswire/ -- The following is an open letter sent April 30, 2015 to the Board of Directors of China Cord Blood Corp (NYSE: CO) from Jayhawk Capital.

We trust that the special committee of the independent directors of China Cord Blood Corp ("China Cord") will REJECT the extremely low privatization offer of $6.40 per share from Golden Meditech Holdings Co Ltd ("Golden Med"). Certainly, a going private transaction at $6.40 per share would greatly benefit Golden Med and Mr. Kam, the Chairman of both China Cord and Golden Med. It would not, however, be in the best interests of ALL shareholders. We are disappointed you have not acted so far on our proposal to have China Cord make a $150ml tender offer to repurchase shares and pay a $125ml special dividend. This tender offer and special dividend, along with an ongoing share repurchase program and a consistent dividend would benefit ALL shareholders, not just Golden Med and Mr. Kam. We are confident that these actions coupled with the impressive free cash flow generation (soon to be over $100ml per year) would drive this stock to above $20 per share, again benefitting all shareholders, not just Golden Med and Mr. Kam.

Cayman law requires that directors "must apply their minds and exercise independent judgment in the ordinary course of business". For the special committee of the independent directors of China Cord this means you must ensure you have all the facts to make an informed decision to support management's initiatives. As independent directors you must adopt due diligence and care to investigate the real commercial benefit for China Cord and ALL its shareholders regarding: a) repeated capital raising by China Cord, whether from third parties or from related parties; b) issuing large amounts of new shares for an employee compensation plan; and c) stockpiling excess cash with no viable commercial rationale for doing so. Some of the fiduciary duties owed by China Cord Directors' under Cayman law include: a duty to act in good faith in the best interests of the company; a duty to exercise their powers for the purposes for which they are conferred; a duty of trusteeship of the company's assets; a duty to disclose personal interest in contracts involving the company; a duty not to make secret profits from the Directors' office; and a duty to act with skill, care and diligence.

Many investors believe that Golden Med has a plan to effectively relist the shares of China Cord at $50-$60 per share through a merger with Zhongyuan Union Cell & Gene Engineering Corp Ltd (Shanghai ticker 600645) ("Zhongyuan"), a Chinese A-Share listed company in the stem cell business. Golden Med and Zhongyuan were suspended from trading April 27th (the date the take private offer was announced). Zhongyuan, through an investment banker, offered Jayhawk (which Jayhawk rejected) approximately $8 per share in February 2015. Below are key China Cord and Zhongyuan metrics.

* CO Net Profit adds back interest on 7% Senior Convertible Notes

From the above table, China Cord has over twice the cash flow, twice the cumulative subscribers (babies), and three times the new subscribers (higher growth), and trades at 1/10th the enterprise value. Clearly, China Cord at $6.40, with two to three times the operating metrics and 1/10th the enterprise value, would be valued at well north of $60 per share in the A-Share market. Clearly, one can see why Zhongyuan and Mr. Kam might like to combine the companies or Mr. Kam might want to list the company on the A-Share market independently. If the plan of relisting in the A-Share market is true, ALL shareholders should be allowed to participate and not be squeezed out of such an opportunity.

Cordlife Group Ltd (Singapore ticker CLGL) ("Cordlife") (which operates in the stem cell business and owns 13.8% of China Cord) also trades at a significant premium to China Cord. China Cord has almost three times the revenue, approximately five times the number of stored umbilical cords, and ten times the free cash flow, yet trades at a similar net enterprise value to Cordlife. An analyst for Cordlife at Maybank Kim Eng stated in a report dated April 28, 2015 (after the $6.40 per share offer was announced) that they believe the "ultimate end-game" for Golden Med is to relist China Cord in China at much higher valuations. They went on to say they believe China Cord's Directors "now have a fiduciary duty to invite more offers that are more attractive" than the $6.40 per share offer.

This low ball offer is being made at a time when management will no longer be able to "hide the ball" as cash flow and other metrics will continue to accelerate rapidly with the ramp up of the Zhejiang province, the re-acceleration of Guongdong and the relaxation of the one-child policy in China. We and other significant shareholders have sent various letters to the Board of Directors of China Cordwhich raised a number of issues regarding cash expenditures, corporate governance and related party transactions that have had the cumulative effect of severely depressing China Cord's stock price. These are issues under Cayman law which need to be diligently investigated by China Cord's Audit Committee (the independent directors) in conjunction with its independent auditors, KPMG. The investigation of these issues become even more pressing if they were done as part of a scheme or arrangement to artificially depress the stock price of China Cord in order for Golden Med to privatize the company well below intrinsic value.

One of the particularly egregious transactions that helped depress the stock price occurred October 3, 2012, when China Cord issued $50ml of 7% convertible bonds with a conversion price of $2.838 to Golden Med, a RELATED PARTY. Jayhawk and other investors asked repeatedly to invest at the same terms and were denied. This transaction was unnecessary and extremely dilutive, yet extremely profitable for Mr. Kam and Golden Med. Now, two years later, China Cord shareholders are effectively being asked to pay $117mm plus the interest to redeem them.

Jayhawk Capital again requests that China Cord rejects the offer of $6.40 per share. We again request an immediate announcement and execution of a tender offer by the company to repurchase shares and the payment of a large special dividend to ALL China Cord's shareholders. These two initiatives are for numerous reasons in the best interest of ALL the shareholders and would result in a markedly increased stock price.

Yours faithfully,
Jayhawk Capital