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Global Cord's (NYSE:CO ) business is executing better than I initially expected. There have been positive developments with Sanpower completing its restructuring which may unlock value for Global Cord shareholders in the form of capital return or Global Cord being acquired by Sanpower. China's policy shift from regulation to growth will benefit Global Cord. Finally, the Year of the Tiger will drive a meaningful increase in births in China which will boost subscriber growth and accelerate revenue growth.

I updated my estimated fair value to USD$17/share today based on (1) US$8.06/share of net cash, (2) US$0.87/share of FCF x 8x EV/FCF = $6.96/share, and (3) $1.93/share for Qilu. I estimate fair value in 2028 is $35/share, giving the potential for +47% CAGR over the next 6 years.

I previously posted about Global Cord on July 30, 2021 here.

Given the changes happening with the company and in China, I thought it would be a good time for an update. I will not rehash the investment thesis from the article, so I recommend re-reading the link above. I remain optimistic about the long-term prospects for CO and believe there have been a few favorable developments for the company.

Since posting the writeup, the company has reported three quarters of continued growth, profitability, and strong FCF generation. Revenue has grown at an average of 10.4% y/y, operating profit has grown at 17.8% y/y, and FCF has grown at 18.7% y/y over the three quarters. The company is executing ahead of my long-term model assumptions, which if correct, value the company at $35/share in 2028.

The restructuring includes state-owned asset manager China Huarong Asset Management (OTCPK:CHUAF) injecting US$1.25bn of fresh funding. Given Sanpower has other life sciences business lines, including 76% ownership in Qilu (Shandong cord blood operator), I think it is likely that Sanpower will want to consolidate its ownership of cord blood assets by acquiring Global Cord shares. Plus the company could certainly use CO's cash balance and free cash flow generation to reduce its debt load. In 2021, the board received an unsolicited takeover from a PRC-based private equity firm at $5/share, which they rejected as undervaluing the company.

At the time I wrote the last article, China was in the middle of a crackdown on for-profit education companies and beginning to shift its focus to regulating technology firms, particularly those with leaders whose power rival that of the Chinese Communist Party. That regulation has crippled many technology firms. In addition, since then, China's property market has weakened and economic growth slowed. The CCP's focus has shifted from increased regulation to economic growth. The cord blood industry is far too small to matter to the CCP, at a moment when they are trying to stimulate faster economic growth. Xi has told his party to ensure the economy grows faster than the US in 2022. This shift in focus from regulation to growth will benefit firms that were not hit with the regulation and that advance common prosperity, which Global Cord does.

The government has shifted to focusing on policies and actions that will accelerate GDP growth in the near term. I believe this will include fiscal and monetary stimulus. Regarding the fiscal stimulus, I think actions that advance the CCP's long-term goals are most likely to get stimulus money. These areas include common prosperity (handouts to lower-middle income, rather than tax cuts) and increasing the declining birth rate. I mentioned in my original writeup that the government could turn to paying families to have children which would be a significant tailwind for Global Cord's business. I think the economic slowdown and shift to stimulating growth meaningfully increases that potential outcome.

The strict lockdowns in Shanghai have had a significant impact on day-to-day life. However, I believe this will have limited impact on Global Cord for a few reasons. First, the company's operations are in Guangdong, Zhejiang, and Beijing (no operations in Shanghai). Second, CO's marketing at hospitals since early 2020 has been significantly impacted – the results the company has been delivering have been with limited sales efforts by the company's sales force (booths at hospitals, educational classes for expecting parents, etc.). Parents will continue to deliver babies during COVID, and a certain percent (~4%) will buy cord blood storage. When marketing resumes in full swing, I estimate the company might be able to increase that number to ~5% penetration. But prolonged lockdowns will have limited impact on CO's growth rate from here.

While not as much a part of Western culture, the zodiac calendar has a significant impact on when families plan to have a baby, especially if only having one or two children, which is most common for mid-upper income families in China. The year of the Tiger began Feb 1st, 2022. The two preferred zodiac years are the year of the Tiger and the year of the Dragon. 2010 was the last year of the Tiger and 2012 was the last year of the Dragon. The year of the Dragon will fall in 2024. I expect the Tiger in 2022 and Dragon in 2024 to drive a meaningful increase in subscriber growth and an acceleration in revenue growth.

Further, 02/22/22 is a popular birth date among those who follow horoscopes and are superstitious. I have a friend who had a natural birth in the Los Angeles area on 02/22/22, and she said hospitals were packed that day because of planned births. And the USA is generally not as superstitious as the Chinese culture – I can only imagine the impact the date had on births in China!

Global Cord's business is executing better than I initially expected. There have been positive developments with Sanpower completing its restructuring which may unlock value for Global Cord shareholders. China's policy shift from regulation to growth will benefit Global Cord. Finally, the Year of the Tiger will drive a meaningful increase in births in China which will boost subscriber growth and accelerate revenue growth.

I updated my estimated fair value to US$17/share today based on (1) US$8.06/share of net cash, (2) US$0.87/share of FCF x 8x EV/FCF = $6.96/share, and (3) $1.93/share for Qilu. I estimate fair value in 2028 is $35/share, giving the potential for +38% CAGR over the next 6 years.

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Disclosure: I/we have a beneficial long position in the shares of CO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.