The author is vested in Cordlife, and has 6% of his portfolio "invested" in Cordlife.
Today is 14-May-2024, and the AGM for Cordlife had ended a few hours ago. Unlike many other AGMs before it in the recent weeks, this was a contest for board control, one that was ignited since tanks storing Cryopreserved Cord Blood Units (CBUs) were found to fail temperature controls and checks. For the full story, read the MOH summary here.
The story will be written from an investor/opportunist/vulture point of view.
Long story-short, here is the sized down story:
CBUs stored in tanks, where samples were tested to be non-viable (damaged) are called the high risk group. On the other hand, there were several tanks found to have temperature excursions, but all but one were found to have misplaced temperature probes—the remaining one had the highest temperature recorded at -144 degree Celsius (the requirement was -150).
Since then, MOH has concluded their part in the matter. The high risk group was offered compensation, and the company disclose that if all parties in the high risk group accept the offer, the P&L would be affected by an estimate of 9.2million.
As a investor, the main bits of the saga were:
a) CAD arrested all the directors on board and the CFO, with the exception of 3 which are not interviewed yet. 2 are from the Nanjing XinJieKou group (“NJXJK”), who will attend the interview on the 21-May; and the other was Mr Joseph Wong (previous Chairman) who had retired from the board and is overseas, citing health reasons.
b) The reason cited for the arrest is not confirm—but as of now, the company’s announcement hinted that it was due to untimely disclosure.
c) The company has two main substantial shareholders/factions:
-TransGlobal, who acquired shares from Mr. Hon Kwok Lung back in the 2021. I believe the share price was about 50 cents
-Nanjing XinJiekou, who acquired shares in 2016 from two parties, one of which was Bonvest Holdings and its entities. I believe the share price was about $1.4.
d) A requisition was made by both parties to remove directors from the other group as the issue brewed.
e) A contentious private placement, which will result in 51.2m new shares, was announced (more on why it is contentious later)
f) An interim injunction against the private placement was applied by NJXJK and was approved by the high court
g) The board applied to set aside this interim injunction on the 10-May. The court rejected this interim injunction and ordered the company to pay for legal fees.
h) After the hearing, the board announced that the private placement would be terminated.
What Happened in the AGM
The AGM was held at Temasek Club, Grand Ballroom at 9am this morning.
As expected, there was a lengthy Q&A by shareholders to the board. All of the directors answered questions, excluding TransGlobal’s Mr. Yiu Ming Yiu. Most of the questions were directed and answered by Dr. Ho Choon Hou, who I felt demonstrated calm and professionalism in the Q&A segment as well as after the AGM resolutions were voted.
The issues raised during Q&A could be generally classified into the following:
Private Placement
- Why the private placement was necessary despite a strong balance sheet
- A legal representative suggested that there was possible vested interest between the TransGlobal group and the private placement subscriber, CDH, owned by Mr. Jiao Shuge.
- The CEO explained that some of its banks (UOB/DBS) bankers have placed Cordlife under high alert, and as such could not borrow to address cash crunch needs.
- A shareholder hint that there was an overlapping period of which Cradle Investments (which is a client of Southern Capital, of which Dr. Ho is a director) were in negotiations to acquire Cordlife, and that a tank was found to be compromised. The acquisition did not go ahead in the end.
Dr. Ho claim that whatever he had advised Cradle was publicly available information. The shareholder further quizzed if the company was aware of who was trading the shares during the period (there was significant volume). The board and Dr. Ho claimed ignorance, adding that it was impossible to track as it would be handled in nominee accounts anyway.
Disclosure issues; Is the board hiding material information from the public?
- The board claimed that they were only aware that one tank was affected (and not 7 as MOH had realized later on), and that the members of board wanted to convene a COI when the issue became serious. I was observing every member of the board during this conversation and I believe this to be true.
Why KPMG decided to walk away
- I read what KPMG had said in the SGX announcement so I wasn’t paying attention. All I could say is the KPMG partner-in-charge was ice-cool and poker-faced.
Outcome of the resolutions
The announcement is not uploaded on SGX at the moment, but from what I could recalled:
a) The resolution to re-elect Ms Chen Xiao Ling received significant support. This was a sign, at that point of time, that things are going NJXJK’s way.
b) Mr Yiu Ming Yiu and Mr Chow Wai Leong was re-elected with a more modest result than Ms Chen’s.
c) Resolution 10: to allot and issue shares was denied. I think everyone have enough after the private placement.
d) The share purchase mandate was also denied, which is very odd indeed.
e) The resolution to remove all existing board of directors, namely Dr Ho Choon Hou, Mr. Yeo Hwee Tiong, Mr Cheong Titus, and Mr Joseph Wong (who had retired) was voted FOR. I think all of them accepted the results with grace, and even stayed on after the AGM to talk to press and shareholders alike. Commendable.
f) All the directors proposed by NJXJK was voted into the board.
g) Right after this resolution, Mr. Yiu Ming Yiu requested the Chairman to withdraw all the requisitions made by TransGlobal. This amounted to a concession and hence the meeting is concluded.
I had the opportunity to mix around with some of the shareholders and none of them responded to the events vindictively. One lady was impressed with how professional the directors were. I could speak briefly with Ms Chen, congratulated her and wished the company well. Dr Ho stuck around and interact with media and shareholder alike, and I can't help being impressed by him.
Valuation
Now that the fate of the board is more or less settled, they can proceed to account for the incident and also repair the reputation of the company. As such, I think it is opportune for me to speak about valuation.
I have never been a fan of estimating a company’s value through its earnings—earnings don’t interest me although I do think they have the most direct impact on share price.
The company is expected to endure a few years where business is poor. However, at liquidation value (meaning, the company is forced to unwind itself, sell assets, pay liabilities and then return the remainder to shareholders), the current share price is very attractive. We will put aside the question of compensation until the end.
Liquid Assets
There were about 62m of contract assets versus 70m of contract liabilities. So the net contract asset value is -8.348m
There were 22.6m of trade receivables, of which we will discount 25% in the event of collectability issues. Net off payables of 6.2m, the net trade receivables is 6.22m
There is cash and equivalents of 18.4m, ‘pledged fixed deposits’ (FD) of 8.86m, unpledged fixed deposits of 40.7m. We will take all these value as it is.
There is also investments in a company call CRC, valued at 5.85m. I remove this from consideration as it is unquoted equity.
Summing it all up, there is a total net liquid assets of 65.8m
If we divide this value with all outstanding shares, the company, with only liquid assets in consideration, is worth $0.257 a share.
The stock market is pricing this company at $0.13 as of writing.
What about the non-current assets?
It has an investment property worth 4.7m. I believe this refer to office space being rented out.
It has Intangible assets; value of stake in Stemlife Berhad, Healthbaby and Cordlife HK, worth 29m. We will discount this value by 40% (estimation). It has a PPE stated at 16.3m, of which 5m is for its working premises. This value is likely conservative due to depreciation over the years. We will use 5m for the value of PPE, disregarding everything else (other than the property).
The non-current assets add another 26.5m to the value of the company. Along with the liquid assets, the company is worth a total of 92.47m, or $0.36 per share.
Compensation
But what about compensation? I believe the low risk group would turn out to be fine. If I were to guess-- that the total compensation would amount to some 30 over million, the company, with all assets considered, is worth at least $0.24 a share. With just liquid assets in consideration, the current price would be fair value. Hence I would not increase my shareholding without impunity unless the market price it down further.
The “3 stages” and where we are now
In early-mid April, I looked at the timeline of events and estimate the valuation (which you saw in the earlier section), along how I should act based on the probable outcomes.
There were three important events, two of which had already lapsed, and one of which would not happen because of the outcome of the AGM
1) The result of the private placement hearings
If the private placement is allowed to go through, this investment idea is half-dead in the water. Certain entities would have more than enough votes to have de facto control. Before this moment, I already have a few shares in my account, just to keep myself interested. I believe even if the private placement go through, the company has enough value-price gap that can be overcome through time... but I am not willing to inject so much capital, time-adjusted returns wise.
As you might already know, the Duty Hearing Judge rejected the appeal and the private placement was then terminated by the board.
After the outcome was announced on 13-May (yesterday), I bought more shares.
2) The outcome of the AGM.
As an opportunistic investor, the best outcome for me is that board members then retain power, but not win so decisively that NJXJK is discouraged from making a general offer in the future.
In other words, the votes should close enough that NJXJK felt like they have a good chance to get enough Yays in a general offer. The AGM resolution is a “free” way for them to gauge the success, and support from the substantial shareholders.
This would of course, realized my investment returns sooner.
I spent enough time looking at the substantial shareholders, asking SGX RegCo and the company if certain parties have to abstain from certain resolutions, in order to gauge the odds. I concluded that it would be very close if certain entities are NOT allowed to vote (my guess from the votes is that they were allowed to), and if the two other substantial shareholding entities belonging to Li Defu and Chen Yi Dan were to be neutral (and abstain).
So did I vote for the TransGlobal group? I did not. I voted for NJXJK because I believe it is the right thing to do. I believe that when you do the right things, eventually you will end up alright. That leads us to the last stage (that would not happen…)
One of my friend was extremely puzzled by my decision...
3) A mass general offer (This would not happen anymore!)
In the event that the outcome for the AGM resolutions do not go favorably for NJXJK, there is enough value in the stock for them to make a general offer.
In other words, they will not be acting out of spite.
I have also checked their balance sheet and I believe a general offer should not strain their books too much. A competitive bid could come from TransGlobal and ultimately the shareholder will prosper.
Judging from the votes today , I think NJXJK won by a substantial amount. TransGlobal would fail in their requisitions put forward in the AGM, or any possible EGMs in the near future. I think the substantial shareholders has made their choice very clearly.
Based on the votes FOR Ms Chen Xiaoling (129m for, 71.8m against), TransGlobal and a small amount of shares stood alone against NJXJK. With so many votes for, I suppose the JPL for GCBC could vote, and both Li Defu and Chen Yi Dan controlled entities voted for NJXJK.
I would go as far to say that unless NJXJK failed to do better than the board in the days to come, a general offer from TransGlobal is very unlikely.
So there you go. This is how I felt about this Cordlife idea. As for the parents, I think they could be deal with more generously. It is the only way to repair the company’s reputation, and ensure a better future.
-end.
