The Stock

The Trade: China Cord Blood Corp (NYSE: CO)–Buy < USD4

Why Now: China Cord Blood Corp is a front-runner in one of the health care industry’s fastest-growing segments and geographic markets: cord-blood storage in China. The stock has pulled back significantly during the recent downdraft in the broader market, providing us with a good entry point at an attractive valuation.

The Story

Unable to sleep after a long flight from Athens, Greece to Washington, DC, Yiannis calls Elliott at 3:00 am to talk shop. Most people would ignore a late-night phone call from the addled Greek, but Elliott is wide awake and culling through quarterly reports from US natural gas producers for this week’s issue of The Energy Strategist.

A phone call from the Grecian sensation provides a welcome break from staring at the Bloomberg terminal. Elliott practices his German accent and then answers the phone.

Elliott: Guten tag, this is Frau Merkel. Do you have my money?

Yiannis: Very funny, man. You get loopy when you don’t sleep. What are you working on tonight?

Elliott: I’m researching another short play as a hedge for The Energy Strategist. Have you returned stateside?

Yiannis: I cleared customs a few hours ago. In Athens, I’d be tucking in to a delicious Greek breakfast right now; instead, I’m wandering around the house while everyone else is asleep.

Elliott: Has the Greek economy cratered since I left?

Yiannis: The polis is unbroken, though the economic problems persist. You should know that, Frau Merkel.

Elliott: Are you still bullish on last month’s deep-value play, National Bank of Greece (NYSE: NBG)? The stock is down roughly 27 percent since Aug. 2, 2011.

Yiannis: I still rate National Bank of Greece’s American depositary receipt a buy because you’re buying actual assets for next to nothing. The stock can also gap higher; the shares surged 37 percent on Aug. 29, 2011. If Greece’s economy doesn’t collapse completely, the stock will rally.

Elliott: Do you have any ideas for this month’s issue of Cocktail Stocks? Your 10-hour flight should have provided you with ample time to reflect on all the investment ideas you came up with on the beach in Mykonos

Yiannis: Actually, I spent my last few days in Athens at the hospital attending to a family emergency.

Elliott: I hope all is well now.

Yiannis: All is well. And all the time I spent at the hospital reminded me about a stock I’ve had on my watch list for some time. Are you familiar with cord-blood banking?

Elliott: Are you referring to private bankers who bleed you dry?  

Yiannis: Ha. That is a good one, man. But this investment idea is no joke.

Elliott: I’ll bite. What do you have in mind?

Yiannis: It’s a Chinese company that trades on the New York Stock Exchange.

Elliott: The suspense is killing me.

Yiannis: China Cord Blood Corp (NYSE: CO).

Elliott: Never heard of it. The stock’s one-year price history doesn’t look too appealing, either. What does the company do?

Yiannis: China Cord Blood Corp provides blood collection, laboratory testing, hematopoietic stem-cell processing and stem-cell storage services.

Elliott: I’m not sure what that means. Did you just read that from the company’s website? I know this might be difficult–especially after you spent the summer in your native land–but can you explain what the firm does in plain English?

Yiannis: The company stores umbilical-cord blood for parents to save stem cells in the event that their children require future treatment. China Cord Blood is the first stem cell bank operator in China and holds the most licenses within the country.pl

Elliott: All of that sounds good, but I need more details about the market to form an opinion about the company and its growth prospects.

Yiannis: Regulators allow only one licensed company to operate a cord-blood bank in each region. The government has granted only seven licenses thus far. China Cord Blood holds four of these seven licenses. China’s Ministry of Health recently stated that no more than 10 licenses will be issued for cord-blood banking services through 2015.

Elliott: A government-mandated semi-monopoly makes for a solid competitive moat.

Yiannis: China Cord Blood has a minority stake in an Australian outfit called CordLife (ASX: CBB) that operates in its home market, India, Indonesia, Singapore, Hong Kong and the Philippines. The company’s Singaporean operations have existed  since 2001.

Elliott: I pulled up the company’s results for the fiscal first quarter ended June 30, 2011. Looks like the firm grew its revenue by 22 percent from year-ago levels to USD13.5 million. The company increased its profit by 24 percent to USD10.5 million. Those are solid profit margins.

Yiannis: The company also has no debt on its balance sheet.

Elliott: China Cord Blood has grown its net income by an average annual rate of roughly 30 percent in recent years. Do you think the firm can keep up that blistering pace?

Yiannis: I expect this robust growth to continue because it’s coming from a low base. Chinese economic fundamentals also continue to improve. As household income increases, families will seek these services–especially with limits on the number of children a family can have.  

Elliott: Makes sense to me.

Yiannis: The stock price has declined substantially, but I expect it to recover once investors rediscover their risk appetite. Meanwhile, the company is well-managed and offers exposure to a key secular growth trend.

Elliott: The sovereign-debt crisis in Europe continues to weigh on global stock markets–a headwind that should continue until the EU offers a decisive solution to these challenges.

Yiannis: All too true. This stock is a bit of a speculative play, but it has the potential to take off once investors grow more aggressive.

Elliott: Works for me. I’m going to turn in and finish my research in the morning.

Yiannis: Ok. China Cord Blood Corp is a buy under USD4. I’ll see you in the office later this week.

Past Picks

August 2010: Vale (NYSE: VALE)–Buy < 36

September 2010: Teekay Tankers (NYSE: TNK)–Buy < 13.50

November 2010: True Blue (NYSE: TBI)–Buy < 17

February 2011: ProShares UltraShort 20+ Year Treasury (NYSE: TBT)–Buy < 42

May 2011: TAL International (NYSE: TAL)–Buy < 40

June 2011: iShares MSCI Italy Index (NYSE: EWI)–Buy < 20

July 2011: TransGlobe Energy Corp (NSDQ: TGA)–Buy < USD13.50

July 2011: Market Vectors Gulf States Index (NYSE: MES)–Buy < 23.50

August 2011: National Bank of Greece (NYSE: NBG)–Buy < USD1.45