Possible China Scam May be Exploiting Babies

There are scams all over the place. From the spam everyone gets in their email folders, scam attempts will never stop happening. In the stock market, small Chinese companies are sometimes regarded as fraudulent. For example, when companies have sudden increases in revenues and cash flows, many skeptics are quick to point fingers and place blame.

In the healthcare sector, one type of company is starting to raise some eyebrows. Cord blood banks are institutions that save blood from umbilical cords, which contains vast amount of unadulterated pluripotent stem cells. While the underlying idea seems innocent and good natured, biotechnology has progressed to the point where pure stem cells are not required to get the desired results. A new technique has been developed which can essentially reprogram existing cells in any individual into custom stem cells.

While scientific discovery doesn't necessarily render cord blood banks useless, it seems unlikely that they will have sustainable revenue growth if they do not diversify their services. Keeping this in mind, investors may want to take a look at China Cord Blood Corp CO. A small-cap Chinese company, its only product offering is cord blood storage and ancillary services.

To determine the company's efficacy, it helps to understand its accounting. The first thing that you may notice is that the company has only started to garner revenues in 2009. Before that, it either posted losses or gained supplemental income. Unfortunately, the details are very vague and it is tough to exactly determine the source of the other income. In 2009, it apparently garnered revenues of $262 million; in 2010, it gained revenues of $340 million. If the company gained tons of contracts in a year-long period, that is certainly impressive. Of course, when the company reported these large revenues, about half of the proceeds went to the sales, general, and administrative expense item. This may or may not translate to extremely large salaries for the employees.

The abnormal activity is confirmed in the statement of cash flows. For some reason, working capital became extremely active as well, being decreased significantly by receivables. For a cord blood bank, it is difficult to think of who would owe it money. The company also appears to have ramped up capital expenditures, perhaps opening up new properties. Lastly, it has issued significant amounts of debt and equity capital, which helped bolster its cash inflows.

the company's balance sheet is pretty interesting, considering it jumped from about $200 million to about $1.5 billion in two years. The cash, PP&E, and receivables account increased drastically. If the company's operations improved significantly in such a short period of time, kudos to the shareholders. For the time being, it seems like the company is running a fishy operation.

From the scientific concept to the company's finances, China Cord Blood may be an interesting short opportunity for investors. Ignoring the fact that it is a Chinese company, which sometimes has a negative stigma in the stock market, the company's operational performance seems to good to be true. Moreover, it appears as if the employees received huge paydays as soon as the money started flowing in. Investors should learn more about how the company claims to make money and what happened in 2009 to make an informed decision.