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Mitchell
S. Nussbaum
New
York, NY 10154-1895
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Direct
Main
Fax
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212.407.4990
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VIA
EDGAR
August
31, 2010
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Tia
Jenkins
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Securities
and Exchange Commission
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100
F. Street, N.E.
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Washington,
D.C. 20549
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Re:
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China
Cord Blood Corporation
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Form
20-F for the Year Ended March 31, 2010
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Filed
July 16, 2010
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File
No. 001-34541
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Dear Ms.
Jenkins:
China
Cord Blood Corporation, a Cayman Islands corporation (the “Company”), hereby
provides responses to comments issued on August 19, 2010 regarding the Company’s
Annual Report on Form 20-F for the fiscal year ended March 31, 2010 (the “Annual
Report”) and addressed to the Company’s Chief Financial Officer, Mr. Albert Chen
(the “Staff’s Letter”).
In order
to facilitate your review we have responded to each of the comments set forth in
the Staff’s Letter on a point-by-point basis. The numbered paragraphs set
forth below respond to the Staff’s comments and correspond to the numbered
paragraphs in the Staff’s Letter and all page references are to the Annual
Report.
[remainder of page intentionally left
blank]
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Tia
Jenkins
August
31, 2010
Page
2
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Form 20-F for the Year Ended
March 31, 2010
Operating and Financial
Review and Prospects, page 62
Average Revenue per
Subscriber, page 65
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1.
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We note you collect an
insurance premium from each subscriber and forward it to an independent
third party health insurance provider. Please revise to disclose, to the
extent material, the net amount recorded in the statement of operations
related to the insurance arrangements and a description of your accounting
policy with respect to these insurance
arrangements.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that the entire amount of insurance
premium from each subscriber is collected on behalf of and remitted to the
independent third party insurance provider. There was no commission or fee
retained by the Company as part of the arrangement. The Company has applied the
guidance set forth in ASC 605-45-45 and determined that the insurance premiums
collected from subscribers should not be reported as the Company’s
revenue. Under the arrangement, the insurance service provider is the
primary obligor responsible for providing insurance services for the
subscribers. Moreover, there is a separate policy document between the
insurance service provider and the subscribers which states that claims should
be directly addressed to the insurer. As a result, the insurance premiums
received from the subscribers and remitted to the insurance service providers
are excluded from the statement of operations.
We
propose to revise the disclosure in the second paragraph under “Average Revenue
per Subscriber” on page 65 as follows:
“In addition to processing
fees and storage fees,Aside
from the processing fee, the subscriber is obligated to make an annual payment
of RMB 620. This annual payment consists of a storage fee of RMB500
and an insurance premium of RMB120 annually collected
from each subscriber120. The
entire amount of the insurance premium is subsequently forwarded to an
independent third party health insurance provider for and on behalf of such subscriber
to cover potential hospitalization costs of the newborn. The subscriber cannot elect not to pay the
annual insurance premium. We do not assume any credit
risk in respect of the collection of such insurance premium and have no
obligations to our subscribers under the insurance policies. See Note 12 to our
consolidated financial statements included elsewhere in this report. Since we
are not the primary obligor for the provision of insurance services, the portion of annual
payments representing insurance premium is presented net of the
amountreceived
and paid to the insurance carrier are not included in our
consolidated statementstatements
of operations.”
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Tia
Jenkins
August
31, 2010
Page
3
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2.
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We note that you collect an
insurance premium of RMB120 annually from each subscriber to cover
potential hospitalization costs of the newborn. Please revise to disclose
whether the subscriber can elect not to pay the insurance premium and why
a subscriber would continue to pay the insurance premium in years after
the birth of his or her
newborn.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that when the subscriber signs up for the
subscription services, the subscriber is contracted to pay the processing fee
and a gross storage fee of RMB620 per annum which includes the medical insurance
premium. The option of not participating in the medical insurance is not
available. The continual payment of the insurance premium by the subscriber will
entitle the subscriber’s baby to certain medical insurance coverage, including
the reimbursement of certain out-patient or in-patient expenses and the
reimbursement of the cost of umbilical cord blood stem cells transplant to treat
leukemia, lymphoma, multiple myeloma, aplastic anemia, etc.
We
propose to revise the disclosure in the second paragraph under “Average Revenue
per Subscriber” on page 65 as described above in the response to comment
1.
Duration of Subscription
Services, page 66
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3.
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We note in the last bullet that
you have not experienced early termination by a significant number of your
subscribers in the past. Please explain to us and revise to disclose when
you consider a subscription to be terminated and tell us the number of
early terminations experienced in each of the past three years. In other
words, clarify if a subscription is considered terminated upon the
elapsing of a certain timeframe in which the storage fee has not been paid
or upon some other event.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that, under the subscription agreement, a
subscriber may elect to terminate the cord blood storage services of the
agreement by providing a termination request to the Company and the subscriber
will then be released from the contractual obligation upon settling all the
remaining amounts payable by the subscriber to the Company. The Company and the
subscriber who wants to terminate the subscription service will also enter into
a termination agreement. Otherwise the subscriber remains contractually obliged
to pay the annual storage fees to the Company. In the past three years,
the Company has not received any early termination requests from subscribers and
no subscription was therefore considered terminated.
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Tia
Jenkins
August
31, 2010
Page
4
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We
propose to revise the disclosure under the heading “Duration of Subscription
Services” on page 66 as follows:
“Our
subscribers are not subject to any penalties if they terminate subscription
contracts prior to the end of 18 years. A subscriber may elect to terminate the
subscription services by providing a termination request and the subscriber will then be
released from the contractual obligation upon settling all outstanding amounts
payable to us and entering into a termination agreement with
us. Although we have not experienced any early termination by a significant number
ofrequests
from our subscribers in the past, there is no guarantee that all
subscribers will fulfill their contractcontractual
obligations by continuing to pay storage fees on an annual basis for a
period of 18 years.”
Critical Accounting
Policies, page 70
Allowance for Doubtful
Receivables, page 73.
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4.
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Please revise to describe the
extent you use specific identification of accounts receivable in
establishing your allowance for doubtful receivables and contrast that
with the extent you establish your allowance based on a general
reserve.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that the Company primarily develops the
allowance for doubtful receivables based on an analysis of its historical
collection data and the aging of the outstanding amounts. A reserve is
then established by applying the appropriate percentage (based on historical
collection experience) to the balances of each aging category. The Company
reviews the reserve percentages on a regular basis and compares them against the
updated actual collection experience to ensure that an adequate allowance has
been made.
In
addition to the reserves established based on the aging of the outstanding
amounts, the Company takes into account available specific information of
individual subscribers, including the specific credit risk for specific
customers and other information available to the Company concerning the
subscribers’ creditworthiness, to determine if additional provision has to be
made on specific receivable balances.
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Tia
Jenkins
August
31, 2010
Page
5
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We
propose to revise the disclosure under the heading “Allowance for Doubtful
Receivables” on page 73 as follows:
“Allowance
for Doubtful Receivables
Most of
our subscribers choose to pay their storage fees annually rather than in one
lump sum. In addition, some subscribers elect to pay their initial processing
fee in annual installments. We analyze the adequacy of allowance for doubtful
receivables quarterly on a case by case basis
by taking into account specific facts, such as the subscriber’s creditworthiness
and historical payment history and records. An allowance for doubtful
receivables is made when collection of the amount is no longer probable. The
specific amount to be made in the allowance is based on the historical write-off
experience, our assessment of recoverability of individual receivable and
general economic conditionsby taking into account historical collection
data and the aging of the outstanding amounts. A reserve is then
established by applying the appropriate percentage (based on historical
collection experience) to the balances of each aging category. We review the
reserve percentages on a regular basis and compare them against the updated
actual collection experience to ensure that an adequate allowance has been
made.
In addition to the reserves
established based on the aging of the outstanding amounts, we take into account
available specific information of individual subscribers, including the specific
credit risk for specific customers and other information available to us
concerning the subscribers’ creditworthiness, to determine if additional
provision has to be made on specific receivable balances.
Allowance
for doubtful receivables was RMB17.2 million ($2.5 million) as of March 31,
2010, compared to RMB8.4 million as of March 31, 2009. We believe that the
allowance is adequate. It is possible, however, that the accuracy of the
management’s estimation process could be impacted by unforeseen
circumstances.”
Revenues, page
78
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5.
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We note that the total units
stored by your subscribers increased from 84,060 on March 31, 2009 to
129,312 on March 31, 2010, and you experienced 45,252 new
subscribers. Thus, it appears to us that the number of new
subscribers is presented net of early terminations. Disclose the amount of
early terminations for each period, or confirm that there were no early
terminations. Please revise to clarify wherever you present a number
representing activity during the year or a balance as of the end of the
year whether these amounts are presented net of any other items and
quantify and describe these
items.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that there were no early terminations as
noted in the response to comment 3 above.
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Tia
Jenkins
August
31, 2010
Page
6
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We
propose to revise the disclosure under the heading “Year Ended March 31, 2010
Compared to Year Ended March 31, 2009 – Revenues” on page 78 by amending the
third sentence as follows:
“As of
March 31, 2010, total units stored by our subscribers increased to 129,312,
compared to 84,060 on March 31, 2009.2009 and
no early termination was recorded for the two years ended March 31,
2010.”
Consolidated financial
statements, page F-1
Consolidated statements of
operations, page F-9,
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6.
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We note that you do not include
accretion to redeemable ordinary shares redemption value in presenting net
income attributable to China Cord Blood Corporation shareholders. Please
amend your 20-F to include this accretion in your net income attributable
to China Cord Blood Corporation shareholders pursuant to SAB Topic
6:B.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that the redeemable shares issued by the
Company were redeemable ordinary shares.
Under ASC-480-10-S99-21,
the two class method was used to calculate the earnings per
share for each
class of ordinary shares (i.e. redeemable and non-redeemable). The
accretion to redeemable ordinary shares to their redemption value was reflected in
the earnings per
share calculation
under the two-class method rather than reported as a reduction of income
available/attributable to ordinary shareholders. The Company believes that
such income statement presentation is consistent with ASC-480-10-S99-21 which
states, in part, “increases and decreases in the carrying amount of a redeemable
common stock should not affect income available to common
stockholders”.
Note 2 Summary of
significant accounting policies, page F-17
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7.
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We note Option Three of payment
method on page 66 provides payment of the processing fee by installment
for 18 years and you recognize processing fees as revenue upon successful
completion of processing services that the cord blood unit meets all the
required attributes for storage. We also note that you waive the penalty
charges to subscribers for early termination. Please tell us and disclose
in an amended Form 20-F how you considered the collectability of such
installments to be reasonably assured given the long period over which
installment payments are to be made, the lack of penalty charged for early
termination, and your limited operating history. In your response, provide
us with a processing fees accounts receivable aging
analysis.
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Tia
Jenkins
August
31, 2010
Page
7
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COMPANY
RESPONSE: The Company respectfully advises the Staff that the
processing services involve testing and preserving the new born’s umbilical cord
blood stem cells. Pursuant to the subscription agreement, the Company is
contractually entitled to receive the processing fee from the subscriber once
the testing and processing of the cord blood unit are completed. The Company
will have the contractual right to collect and the subscriber will have the
contractual obligation to pay the processing fee in full immediately in the case
of early termination. In addition, the ability of the subscribers to early
terminate the subscription service without penalty will not impair the Company’s
contractual right to collect the said processing fee once the processing service
is completed. Should the subscriber choose early termination, the Company has
the contractual right to claim the remaining unpaid processing fee, if
any.
The cord
blood unit has potential uses in life saving treatments for the new born.
Each customer has taken time (normally a few months) to contemplate for the
subscription of such services. Once they have signed up for our services,
and the new born’s umbilical cord blood stem cells have been preserved within
the Company’s facilities, there is even less incentive for subscribers to
dishonor the subscription agreement in which case the cord blood units will no
longer be available for use by the new born in future medical
treatments.
The
Company further advises that it has introduced Payment Option Three since 2005.
As of March 31, 2010, approximately 1.0% of the processing fees accounts
receivable, or approximately RMB0.4 million, were related to subscribers
choosing Payment Option Three with payments aged over two years. Based on
the satisfactory past settlement history from subscribers who elected this
payment option, collectability is considered reasonably assured.
Among the current
processing fees accounts receivable for Payment Option Three subscribers
approximately 84.8% or RMB35.9 million will be collected within one year. Such
amount represents processing fees which were due and subject to payment within
one year but also processing fees which will be subject to collection in the
coming 12 months. As a significant portion of the amounts are to
be collected within one year, processing fees accounts receivable
between 1 and 2 years and over 2 years are significantly less. As of March 31,
2010, Payment Option Three current processing fees account receivable between 1
and 2 years and over 2 years were approximately 14.2%, or RMB6.0 million, and
1.0%, or RMB0.4 million, respectively. At
March 31, 2010, the allowance for the current
processing fees accounts
receivable from customers who have elected Payment Option Three was RMB3.3
million.
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Tia
Jenkins
August
31, 2010
Page
8
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We
propose to add the following disclosure under the heading “Critical
accounting policies - revenue recognition” after the
description of the payment of processing fees options on page 72:
“Under
the subscription contract, the Group is contractually entitled to receive the
processing fee from the subscriber once the testing and processing of the cord
blood unit are completed. We will have the contractual right to collect,
and the subscriber will have the contractual obligation to pay, the processing
fee in full immediately in the case of early termination. The ability of
the subscriber to early terminate the subscription service without penalty will
not impair our contractual right to collect the said processing fee or any
remaining unpaid processing fee once the processing service is completed.
In addition, Payment Option Three has been in place for years and has a
satisfactory collection history. We believe collectability is reasonably
assured.”
Note 3 Accounts receivable,
net, page F-26
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8.
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Please reconcile for us the
number of new subscribers who elect Option Three to the increase in
accounts receivable for processing fees. In this regard, we calculate the
increase in combined current and non-current processing fee accounts
receivable to be RMB90,578 thousand. Dividing this amount by the RMB5
thousand processing fee yields an estimated number of new subscribers to
be approximately 18,116, which differs from the 24,934 new subscribers
reported on page 66 (calculated as 55.1% of the total 45,252 new
subscribers).
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that a subscriber who elects Payment
Option Three is required to pay RMB1,100 as the initial installment once the
processing of the umbilical cord blood stem cells has been completed. As such,
one additional Payment Option Three subscriber will increase account receivable
by only RMB3,900, which is equal to RMB5,000 minus RMB1,100. On that basis
the calculation reflected in the Staff’s comment can be revised as RMB90,578
thousand divided by RMB3.9 thousand, which yields the predictive number of new
subscribers of 23,225, which is in line with the number of new subscribers
reported on page 66, considering the increase in combined current and
non-current processing fee accounts receivable of RMB 90,578 thousand was net of
the payments received during the period from the existing
subscribers.
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Tia
Jenkins
August
31, 2010
Page
9
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Note 4
Inventories
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9.
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We note on page 41 that the
number of successful matches for donated units were 13, 21, and 20 for
each of the past three respective fiscal years. We further note that you
charge a fee of RMB15 thousand for providing one or more matching units in
a cord blood transplant. It appears that you would need to match
approximately 1,976 units in order to recover the RMB29,637 thousand that
is capitalized as inventories for donated umbilical cord blood processing
costs. Based on your historical experience of providing matches, please
explain to us why you believe the amount of inventory is recoverable. In
your response, provide us with your projections of matching fees used to
evaluate the recoverability of inventory and the basis for your
projections. In addition, tell us the useful life of the donated
cord blood.
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COMPANY
RESPONSE:
The
Company respectfully advises the Staff that the numbers of successful matches
mentioned on page 41 are solely referring to the donated units used in stem
cells transplants. For the three years ended March 31, 2008, 2009 and 2010,
there were additional 18, 43 and 57 donated units, respectively, used in various
supplementary therapies. The Company also charges a matching fee of RMB15,000
for the provision of donated units for use in such supplementary therapies.
Therefore, the Company received matching fees for a total of 31, 64 and 77
donated units in the years ended March 31, 2008, 2009 and 2010, respectively,
with year-on-year growth by 106% in 2009 and 20% in 2010.
The
carrying amount of the donated units is compared against the matching fees
derived from their estimated future usages in order to determine whether any
provision is necessary. Based on medical research and relevant information
available, the estimated life of a donated unit is at least 25 years and the
weighted average remaining useful life of the Company’s donated units was
approximately 19 years as of March 31, 2010.
Based on
the historical increase in the number of cord blood matching inquiries and the
number of successful matches of donated units, the Company estimated that the
number of successful matches will increase by 7% to 10% per annum during the
projection period with the assumption that each successful match generates a
matching fee of RMB15,000, which is the existing standard fee of matching
services. Taking into account the historical growth rate of donated units
used, the Company considers that the growth rate used in the projection
represents a moderate estimation and is achievable. Based on the
projections, the Company estimates that the carrying amount of the donated units
will be recovered in 13 years, which is considered to be a reasonable period as
compared with the period before the expiration of the donated units’ and their
estimated remaining useful life. As a result, no provision is considered
necessary.
We
propose to add the following disclosure on page 40 following disclosure relating
to the number of successful matches: “For the years ended March 31, 2008, 2009,
2010 the number of successful matches found for cord blood transplants among the
cord blood units donated by the public and stored at our facilities
were 13, 21 and 20 respectively. In addition, during the years ended March 31,
2008, 2009 and 2010 there were 18, 43 and 57 donated units, respectively, used
in supplementary therapies.”
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Tia
Jenkins
August
31, 2010
Page
10
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Note 27 Pro forma net income
per share information, page F-47
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10.
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Please revise to remove the pro
forma net income per share information. Pro forma earnings per share
reflecting the conversion of redeemable ordinary shares should not be
presented in financial statements issued subsequent to the
transaction.
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COMPANY
RESPONSE:
We
propose to amend the disclosure on pages F-47 to F-48 to reflect the Staff’s
comment.
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* * * * * * * * * * *
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Tia
Jenkins
August
31, 2010
Page
11
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Your
prompt attention to the matters discussed herein would be greatly
appreciated. Should you have any questions concerning any of the foregoing
please contact me by telephone at 212-407-4159.
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Sincerely,
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/s/
Mitchell Nussbaum
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Mitchell
Nussbaum
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Partner
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Loeb
& Loeb LLP
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cc:
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Albert
Chen, China Cord Blood Corporation
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Virginia
Tam, JonesDay
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Harry
Yu, KPMG
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