Concord Medical Services Holdings Ltd (CCM) 2009 Q4 法說會逐字稿

Hello, and thank you for standing by for Concord Medical's fourth quarter and full year 2009 earnings conference call. At this time, all participants are in a listen only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time. A reminder to all participants; in case of any unexpected disconnection, please use any of the alternate numbers to redial into the call, as some connection issues are being experienced with undersea cables following the earthquake in Taiwan on March 4th. I would now like to turn the meeting over to your host for today's conference, Stephanie Song of Concord Medical. You may proceed.

Hello, everyone, and welcome to Concord Medical's fourth quarter and full year 2009 earnings conference call. Concord Medical's earnings release was distributed earlier today and you can find a copy on our website, as well as on Newswire Services. Today you will hear from Jianyu Yang, Concord Medical's Director, President, Chief Executive Officer, Steve Sun, Co-Chairman and Chief Financial Officer, and Boxun Zhang, Corporate Vice President. After the prepared remarks, Jianyu, Steve and Boxun will be available to answer your questions.

Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995 and within the meaning of section 21e of the Securities and Exchange Act of 1934, as amended. Forward-looking statements are subject to risk and uncertainties that may cause actual result to differ materially from our current expectations.

Potential risk and uncertainties include, but are not limited to, those outlined in our public filings with the SEC. Concord Medical does not undertake any obligation to update any forward-looking statement except as required under applicable law. Both our earnings release and remarks made during this call include discussions of certain unaudited non-GAAP financial measures. Our earnings release contains a reconciliation of unaudited non-GAAP measures to the most directly comparable unaudited GAAP measures. As a reminder, this conference is being recorded. In addition, a webcast of this conference call will also be available on Concord Medical's website.

I will now turn the call over to Concord Medical's Director, President and CEO, Dr. Jianyu Yang.

(interpreted) Hello, everyone, and thank you for joining us today. This is Concord Medical's first public earnings announcement and we're all very excited to be here. I'd like to thank you for all supporting us through our listing on the New York Stock Exchange in December last year, which was a significant milestone in our journey to becoming a world-class radiotherapy and diagnostic imaging service provider.

The purpose of our US listing was not only to gain access to the global capital markets, but also to enhance our operations and corporate governance to prepare for long term growth. The cancer treatment market in China is vastly underserved and fast growing. As a leader in this market, we're all very committed to providing the most effective treatment and high quality patient service to our patients and provide international investors with the opportunity to participate in the growth of the Chinese healthcare sector.

Since opening our first radiotherapy center in 1997, we have established Concord Medical as a clear leader in cancer diagnosis and radiotherapy treatment in China with our extensive network of centers and an effective system for co-managing the centers with our hospital partners.

Our success was built by unparalleled management team consisting of seasoned neurologists, physicians and business leaders who understand the ins and outs of this industry and have the ability to turn our vision into reality. With 30 years in operations, established leadership, a robust expansion plan, a fast growing market and supportive government policies, we are confident that Concord Medical is on track to achieve even greater success in the long run.

Before moving on to the details of our business and financial results, I'd like to warmly welcome Dr. Cai Hongbin to concord Medical's board as an independent member and the replacing [Mr. Wy Hung Ku] as a member of the audit committee. As a national renowned [Islamic] leader and business advisor, Dr. Cai brings in-depth knowledge of economies and corporate finance to our Board.

On behalf of the Board, I thank Mr. Ku for his valuable contributions to the audit committee during his tenure on the committee. This changing our Board composition demonstrate our commitment observing best practice in corporate practice as a newly listed company. I'll now invite Mr. Steve Sun, Co-Chairman and CFO of Concord Medical to explain our operational progress for the fourth quarter of 2009 and full year 2009 in detail.

Thank you, Dr. Yang, and hello, everyone. It is indeed very exciting to speak with you today. Since Concord Medical is new to the investment community, please allow me to quickly summarize our business model for those who might be unfamiliar with it. We operate the largest network of radiotherapy and diagnostic imaging centers in China, by both revenue and total number of centers in operation. We generally enter into long term contracts with top tier hospitals to operate these centers on site.

Under these contracts we install equipment, such as (inaudible), head and body [galvanized] systems, (inaudible) scanners and MRI scanners at the centers, manage the centers' daily operations and provide clinical training for doctors assigned to the centers. In turn, we receive a percentage of each center's profit under a specified profit sharing scheme.

As announced in our earning release earlier, in 2009 we achieve a total matched revenues of RMB292 million, which is a 70% increase from 2008, and net income of RMB125 million, which is 58% increase from 2008. These increases demonstrates Concord Medical's effectiveness in growing our business profitably.

In the past year we opened 16 new centers, bringing the total number of centers in operation to 88 as of December 31, 2009. We are currently present in 36 cities in China, most of which are large metropolitan cities or provincial capital across the country. We plan to bring the total number of centers to at least 200 by 2012. This plan is based on growing market demand, supportive government policy, as well as our strong capital position.

As you may know, cancer is the leading cause of death in China, and the cancer treatment market is one of China's fast-growing healthcare segments. China's people increasingly understand the importance of early detection and high quality treatment of cancer. While costs associated with the cancer diagnose and treatment are still relatively high for average income levels in China, rising income and the improving healthcare insurance carried especially in rural areas expected to make cancer care more affordable.

And in addition to making improvements in the public healthcare system, the Chinese government has also been encouraging private sector to step in. On February 23, 2010 several government agencies, including the Ministry of Health and the (inaudible) development and the reform commission jointly issued a policy statement that reiterate that Chinese government commitment to medical reform and the encouragement of private investment in the healthcare sector in order to enhance the scope and quality of medical service in China.

This really is a recent -- served to clarify that public hospitals [cost] benefit from cooperating with the private sector operators, such as us. This policy is also expected to lead to more opportunities for us to expand our network of centers and to set up self-owned specialty cancer treatment hospitals through both organic growth and acquisitions.

To complement our primary business model and to take advantage of the tremendous opportunities in the radiotherapy and the diagnostic imaging market, we also plan to develop our own specialty cancer treatment hospitals. The first one we plan to open is called Chang'an CMS International Cancer Center, which I will refer to as CCICC. CCICC is located in [Xiang], one of the most important cities in northeast -- northwesterly region of China. And we expect it to be -- all to begin operating in June this year.

The second specialty hospital is Beijing Proton Medical Center, which will be the first proton beam facility licensed for clinical use in China. These specialty cancer treatment hospitals will allow us to attract and employ more doctors of the highest caliber in China. They will be the centers of excellence within our network, with the best doctors providing the most advanced cancer treatment.

These centers will significantly strengthen Concord Medical's reputation amongst potential patients and the referring doctors and will expand our reputation from being the largest operator of radiotherapy and diagnostic imaging centers to being the leading provider of advanced cancer therapy and diagnosis in China.

In addition to operating the largest network of radiotherapy and diagnostic imaging centers, Concord Medical is also a significant contributor to cancer research and academia in China. As a demonstration of our extensive effort, our research work accounted for roughly 10% of radiosurgery research presented at the International Stereotactic Radiosurgery Society, so-called ISRS, 2009 Congress held in Korea in June 2009. The ISRS Congress is one of the most influential international knowledge exchange platforms for medical practitioners and the healthcare professional in the radiosurgery field.

Also, in September 2009 we created a medical advisory board consisting of ten of China's top academics and the policymakers in the field of neurosurgery, radiotherapy and the diagnostic imaging. The committee's senior level advice and the supervisions has helped us tremendously in advancing our research and the service offering. We also hold a record of [PET CT] reading seminars in Beijing and [Keijing]. Participants are medical professionals in our network and they are also some of the most respect professionals in China's cancer diagnostic field.

In addition, we have our ongoing program for increasing the awareness of trigeminal nerve related illness and the [gamma knife] treatment that's a viable treatment for this illness. Our effort on this front spans multiple media platforms and have directly resulted in patient referrals and the successful treatment for a portion of these patients. Our commitment to providing first-class education to the cancer treatment community in China, combined with the quality of our services, has established Concord Medical as the authority voice in the industry, which is not common for a private sector company in China.

To conclude, both growing consumer demand and positive environment are very favorable to private sector medical services companies like Concord Medical. Combining external factors with our leading capability and a solid capital position, which Boxun will go over shortly, we are confident that we are on track to achieving our extension plan. Boxun, go ahead.

Thank you, Steve, and hello to everyone on the call. As you have seen, we deliver both strong operational and the financial performance in the fourth quarter and the fiscal year 2009. As we prepare for further expansion, we are treating profitable growth as top priority. Concord Medical has a track record of achieving both strong top and the bottom line growth. Looking forward, we will continue to improve operational efficiency and enhance financial measurement of the Company to support our extension strategy.

Before we move on for fourth quarter and the fiscal year 2009 results, please make a note of our revenue recognition policy. Lease and management service revenue are the core business segments of our total net revenue. We book lease and management service revenue by aggregating profit attributable to the Company from each center in our network. This recognition model reflect the deduction of three key item from each center's gross revenue.

First, each center's operating cost, including costs of medical consumable item and a compensation for medical staff. Second, the portion of each center's operating profit attributable to the hospital partners. And third, Concord Medical's business tax. As a result, our cost of revenue typically includes the depreciation of our medical equipment, amortization of acquired intangibles, and the operating cost at the corporate level.

Now, I will highlight some financial result for the fourth quarter of 2009. Total net revenue in the fourth quarter of 2009 were RMB87 million, a 24% increase from the corresponding period in 2008 primarily due to an increase in the number of patient cases from existing center and the opening of new center.

Net revenue from lease and management service in the fourth quarter of 2009 were RMB75 million, representing 87% of total net revenue and a 24% increase from the corresponding period in 2008. The average charge rate for patient cases remains stable in the Q4 2009.

The gross profit margin in the fourth quarter of '09 was 71% as compared to 75% in the corresponding period in 2008. The gross margin in Q4 '08 was higher because there was a higher proportion of revenue derived from the sales of equipment, which was in noncore business and had a higher margin. Gross profit margin remains relatively stable Q-on-Q. Our Q3 '09 gross margin was 71%.

Our (inaudible) expenses, consisting of selling and the marketing expenses and the G&A expenses, were RMB13 million in the fourth quarter of 2009. This is compared with RMB10 million in the third quarter of 2009 and a RMB9 million in the fourth quarter of 2008.

The sequential increase was mainly due to two things. First, the increase in salary and the employee benefit related to business extension. And the second, the RMB1 million share-based compensation expenses related to certain options granted in the end of November 2009.

Operating expenses consist of RMB1 million share-based compensation expenses, of which 26% was allocated to selling expenses and the remaining 74% to G&A expenses in the fourth quarter of 2009. We didn't incur [SG&A] expenses in the third quarter of 2009 and the corresponding period in 2008, the total share of compensation expenses are expected to be around RMB11 million in the year 2010, with similar allocation as in 2009.

Operating income was RMB49 million, representing a 10% increase from the corresponding period in 2008 and a 5% increase from the previous quarter. Operating profit, excluding share-based compensation charge, was RMB49 million, a 13% increase from the corresponding period in 2008. The net income was RMB36 million, representing 8% decrease from the Q4 2008, primarily due to a RMB8 million onetime gain incurred in the fourth quarter of 2008.

Both basic and diluted earning per ADS for the fourth quarter of 2009 amounted to RMB0.69. Now let me quickly update you on how our recent NYSE listing affect our balance sheet and the share count. The Company offered 12 million ADS, representing 36 million ordinary share and the risk gross proceed of $132 million. Upon completion of the IPO, 41 million preferred share that were classify as (inaudible) as of September 30, 2009, were automatically convert on a one-for-one basis into 41 million ordinary shares.

The conversion significantly enhanced our shareholder equity. We had a RMB2.2 billion of total shareholder equity as of December 31, 2009. Each of our ADS represent three ordinary share and as the total number of ordinary shares would be equivalent to 49.2 million ADS if fully converted.

As of December 31, 2009, the Company had a total fixed asset valued at RMB585 million. Cash and the cash equivalent were RMB1 billion. Capital expenditure for the fourth quarter of 2009 were RMB95 million. Total depreciation expenses in the fourth quarter of '09 were RMB17 million. In addition, the amortization of acquired intangibles were RMB6 million. The Company expects the amortization of acquired intangibles to be around RMB27 million in 2010, assuming no additional intangibles are acquired through the potential acquisition in year 2010.

As of December 31, 2009, we had a bank credit facility totaling RMB2.1 billion, while total debt, including both short term and the long term borrowing, was RMB150 million. This low leverage ratio not only allow us to comfortably fulfill our financial obligation, but also leave room for additional borrowing, if necessary.

Account receivable decrease by 7% Q-on-Q to RMB111 million as of December 31, 2009. This is compared with RMB119 million as of September 30, 2009. Days sales outstanding, or DSO, decreased to 120 days in the fourth quarter of '09 compared to 128 days in the previous quarter.

Now I will go through some of the result from fiscal year 2009. The total net revenue in 2009 were RMB292 million, which represent a 70% of increase from 2008. The increase was primarily due to same center sales growth driven by an increase in the number of patient cases and the opening of the new centers.

I would like to note that since the acquisition of China Medstar was complete in July 2008, only five months of China Medstar financial results were consolidated by the Company in '08. However, China Medstar entire 12 month financial results were booked by the Company in 2009.

The gross profit margin in 2009 was 70% compared to 74% in 2008. The decrease was primarily due to two reasons. The first was the increase of number of new centers in the operation, which typically have a higher operating cost during their ramp-up period. the second is the increase of -- in the number of the new centers that offer diagnostic imaging services, which generally have a lower gross margin compare with the radiotherapy treatment services.

The selling [senses] in 2009 were RMB8 million, representing a 40% increase from 2008, which was largely due to higher compensation expenses associated with an increase in headcount and an increase in marketing and other expenses related to the increased business development effort.

Selling expenses as a percentage of total net revenue decreased to 2.6% in 2009 from 3.2% in 2008, mainly due to the economy of scale. The G&A expenses in 2009 were RMB30 million, representing a 58% increase from 2008, primarily due to two reasons. The first is the higher compensation expenses associated with the increase in headcount and the travel related expenses to support ongoing business expansion. The second is the increase in auditing expenses and share-based expenses -- share-based compensation charge.

The general and the administrative expenses as a percentage of the total net revenue decreased to 10% in 2009 from 11% in 2008, mainly due to the economy of scale as well. The operating profit in 2009 was RMB167 million, which represent a 64% increase from 2008. In 2009, operating profit, excluding the share-based compensation expenses, was RMB168 million, representing a 59% increase from 2008. The share-based compensation expenses, which were allocated to the related operating expenses items, were RMB1 million in 2009 compared to RMB4 million in the year 2008.

The net income in 2009 was RMB125 million, which was a 58% increase from 2008. Both basic and diluted earnings per ADS for 2009 amounted to RMB1.86. For fiscal year 2009, net income, excluding share-based compensation expenses, was RMB126 million. This reflects a 51% increase from the previous year. Both basic and the diluted earning per ADS, excluding SBC expenses, were RMB1.92.

With that, I will turn to the guidance for the year 2010. In line with our expansion plan and based on the current operating and the business condition, for the fiscal year 2010 Concord Medical currently expects our total net revenue to be in an estimate range of RMB360 million to RMB390 million. This would represent a 23% to 33% increase from 2009.

The Company intends to open 30 to 35 radiotherapy and diagnostic imaging center in fiscal year 2010. The total capital expenditure related to opening this new center are expect to be in the range of RMB350 million to RMB400 million. And also, following our December 2009 IPO, there will be certain new expenses items in addition to our historical operating expenses items.

The share-based compensation expenses are expect to be RMB11 million in 2010 compared to RMB1 million in 2009. In addition, the professional fee associated with being a major list company such as auditor fee and the legal expenses, et cetera, are expected to be in the range of RMB18 million to RMB20 million. I do wish to emphasize that this forecast reflects our current and the preliminary view which is subject to change. I will now open the call to the question. Operator?

(Operator Instructions)

And our first question comes from the line of Bin Li of Morgan Stanley. Bin, you may proceed.

Thanks. Hi, everyone. Thanks for taking my call. My question is on your outlook for the expansion for new centers. I think you mentioned that you will add about 30 to 35 centers this year. And can you tell us what's the progress right now? I think you've mentioned you've sign up about 27 contracts already. But can you tell us so far this quarter how many you have -- you have completed in terms of installation machines in those centers? And is the center opening is going to be backend loaded or not?

Hi. This is Boxun. Let me take this question. We currently project to open 30 to 35 new centers in 2010. It is based on our conservative estimation without considering any potential acquisition. We are very confident to achieve this target. As you mentioned, as of this moment, we already signed 27 contract and we also reviewed the -- all the potential centers we are going to open in the 2010.

And we basically evaluated the key item for the new center opening, including the approval process from the government, the [machine room building] progress and the center director hiring and so on. So we believe that the -- those 30 to 35 new centers is well constructed and is ready to open in the year. And I think that in the interim of the allocation of the new centers, we believe 30% of the new center will be opened in the first half of 2010 and the rest, 70% of the new centers, will be opened in the second half of the year 2010.

And our next question comes from the line of [Zow Zhang] of [Star Hall Group]. Zow, you may proceed.

Good morning, Chairman Yang and Concord Medical team. Congratulations for a great quarter and great progress you guys made since the IPO. I just have a quick question regarding the healthcare reform in China and its impact to Concord. As we know, the two -- [the dual] congressional meeting was just held in China last week. And just like here in United States, healthcare reform is one of the major, major thing in this congressional meeting.

And since the operational environment in China, the policy changes have great impact to many companies. We just -- as investors, we just hope to hear what's its impact to Concord and your view on the healthcare reform in China. (Spoken in foreign language)

(Spoken in foreign language)

Dr. Yang will speak in Chinese and I will translate for him.

(Interpreted) Healthcare reform is currently, well, the very important things happening in China right now. and it will affect all companies related to healthcare in certain ways. Currently, the emphasis of the healthcare is on the public hospital transform or reform and doesn't have a very direct impact upon us.

Because CMS is providing the services to the public hospitals and thus it will have a indirect impact upon us. We have been looking very closely to the healthcare reform and originally the Chinese government intend to have the medical reform plan come out into the -- come out by end of 2009. But in the end, it postpone to the end of February. And so some hospitals, originally they want to wait for the healthcare reform to be more definite, then they will consider of buying -- of having the big medical equipment. But right now, so this will have an impact upon signing up the contract with us.

Originally the new healthcare -- the medical -- the policy statement come out in February 2010, it found that it doesn't have -- it doesn't have any negative impact upon our development. At a same time, the government emphasized the private investment into the healthcare sector and thus -- so and the hospitals, the big hospitals, the private hospitals, they -- the healthcare reform emphasized that healthcare -- sorry, the healthcare reform further emphasized the private investment to come into the healthcare sector and this will further support the plan for us to have more investment opportunities in the future.

On the healthcare reform, I reiterate the importance of the private investment into the healthcare sector. And this will provide us with more opportunities to set up centers in the private hospitals in the future. Thank you.

(Operator Instructions)

And our next question comes from the line of Bin Li of Morgan Stanley. Bin, you may proceed.

Thanks for taking my follow-up questions. Just have a couple of questions on the financials, if I could. One is I notice your AR days are decreasing at the end of the year versus last year. Can you tell us what have you done in order to improve this accounts receivable days?

And also, I noticed that you mentioned at the conference call that your gross margin was better primarily due to -- due to the sale of equipment, which is the business I believe you had which had higher margin. Can you explain that business to us? And how big is that portion of the business? And going forward, should we still project that or model that in our forecast?

Yes, okay. For the AR management, we take great attention on this front. Our AR [Tower] day used to be over 180 days and essentially after we acquired the Medstar we emphasized the Group control on our cash flow management. And during the past several months we actually talked to our hospital partner and smooth the invoice bidding process and the account reconciliation process with our hospital partner. So we can see very significant process during the past several months.

You can see our revenue top line is increasing and our AR balance is reducing. We will continue to closely monitor our account receivable balance in the future. And our interim target is to try to bring down the AR balance to around 100 days of DSO.

In terms of the gross margin, we mention that the -- our gross margin in the Q4 2008 was higher. Was mainly due to we have a sales of the equipment, which has probably around RMB3 million or RMB4 million revenue contribution in that quarter. That was the noncore business and we occasionally find some opportunity to sell the equipment to some hospitals. But this not the regular business that we haven't done.

And in the future, we don't really have a plan to increase this equipment sales portion. And for your modeling purpose, you probably only can assume, like, RMB1 million booked in the -- RMB1 million or RMB2 million revenue income booked in the -- in our top line.

(Operator Instructions)

And our next question comes from the line of Zow Zhang of Star Hall Group. Zow, you may proceed.

Thank you for taking my follow-up question. We see that company intends to open 30 to 35 new radiotherapy and diagnostic image center this year. Seems like it would take some capital expenditures to do all these expansions. Could you explain how soon could these 30 to 35 new imaging center provide positive contributions to the bottom line and top line? Thank you.

Yes. I think the -- we have a very unique business model. And we -- our key investment in this center are the medical equipment. We basically purchase it from the big name supplier such as GE and Simmons and so on. And after we installed the equipment into the center, we start the operation immediately. And the good thing is at a center level, the majority cost in the center are the variable costs, such as the medical, consumable, utility expenses.

So we generally can have the very quick ramp-up, which is around six months for the -- to reach the desired level of the operation. So in the year 2010 we have this 30 to 35 new center to be operational in the year. And we believe this new center can contribute the top line about a RMB20 million to RMB45 million in this year.

And our next question comes from the line of [Leon Chick] of JPMorgan. Leon, you may proceed.

Hi. It's Leon. I just want a couple of questions. Oh, actually just one question. Could you give us a little bit more color on perhaps operating or net profit targets or guidance for 2010? Thanks.

Yes, I think for the operating expenses, currently the Company only provides the top line guidance. But we can share some of the preliminary view with you. And for the operating expenses, our regular operating expenses as percentage of the revenue was around 13% in the year 2009. And we targeted to marginally bring it to 12% in the year 2010. However, we have additional expenses items, such as just like what I mention earlier, the professional charge, which is around RMB18 million and also the share-based compensation charge, which is RMB11 million. So that will be on top of the -- our regular expenses in the year 2010. So that is our projection on the operating margin side.

And also, on the gross margin, for the existing center we want to maintain a similar level as what we have in the year 2009. And for the new center to be open in the year 2010, they are under the ramp-up period, so they generally have, like, a 3% to 5% lower margin than the mature center. And additionally, in the year 2010 we plan to open our first joint venture hospital. And because the accounting treatment for the revenue and the cost is different from our lease and management business model, so we basically consolidate all the revenue and the cost items in the hospital. So the normal margin, gross margin for this part of business is around 45 gross -- 45% of the gross margin. Hope this answer your question.

(Operator Instructions)

And our next question comes from the line of Bin Li of Morgan Stanley. Bin, you may proceed.

Thanks for taking my follow-up questions. I have a question on the progress of your hospital which you just mentioned. Can you tell us where you are now? And I know you've mentioned you target to open midyear. I thought earlier -- your earlier comment was that hospital may open first half of the year. And is there a delay for that opening and what is your revenue outlook for hospital -- ?

For our joint venture hospital, CCICC, the construction and preparation work has been very smooth. The building is ready for the operation. However, the only holdback item is the business license process. And as this need to go through the government application process, it's very hard to control. So on the conservative perspective, we assume the hospital operation will start from the June 2010. And we expect the six month operation will bring us around RMB12 million revenue income in the year.

And looking forward, this joint venture hospital equipped with the best equipment and the best doctors, so they provided the excellent service in the region. And it can -- after the hospital reached the full run rate, it can generate about more than RMB100 million top line contribution.

We are now approaching the end of the conference call. I will now turn the call over to Concord Medical Corporate Vice President for his closing remarks. You may proceed.

Once again, thank you for joining us today. Please do not hesitate to contact us if you have any further question. Thank you for your continued support.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.