Concord Medical Services Holdings Ltd (CCM) 2010 Q1 法說會逐字稿

Hello and thank you for standing by Concord Medical's First Quarter 2010 Earnings Conference Call. At this time all participants are in listen-only mode. After management's prepared remarks there will be a question-and-answer session. Today's conference is being recorded.

(Operator Instructions)

I would now like to turn the meeting over to your host for today's conference, Stephanie Song of Concord Medical.

Hello, everyone, and welcome to Concord Medical's first quarter 2010 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 Dr. Jianyu Yang, Concord Medical's Director, President and Chief Executive Officer, Mr. Steve Sun, Co-Chairman and Chief Financial Officer, and Mr. Boxun Zhang, Corporate Vice President. After their prepared remarks Dr. Yang, Steve and Boxun will be available to answer 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 21-E of the Securities and Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations.

Potential risks 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 statements 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 the unaudited non-GAAP matters 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 turn the call over to Concord Medical's Co-Chairman and Chief Financial Officer, Mr. Steve Sun.

Hello, everyone, and thank you for joining us today at our second earnings conference call since our IPO in December 2009. Since we are still relatively new to the investment community, let me briefly recap our business for those who may be tuning in for the first time.

Concord Medical operates a large network of radiotherapy and diagnostic imaging centers in China, in terms of both revenue and the 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 linear accelerators, head and body gamma knife, PET-CT and MRI scanners at the centers, manage the centers' daily operations and provide clinical training to doctors assigned to the centers.

In turn, we receive a percentage of each center's profit under a specified profit sharing scheme. Since opening our first radiotherapy center in 1997, we have built an intensive network of 89 centers across 37 cities in China as of March 31, 2010. Our success can be attributed to three factors.

First, we have established an effective system for co-managing the centers with our hospital partners, which we built over time. Second, we have built a solid reputation as a reliable business partner. And third, we have a management team that is deep in knowledge and strong in execution. We believe these three advantages, combined with increasing consumer demand and the favorable policies, will allow us to further extend our business success in the long run.

Overall, we are very encouraged by the market environment. China is seeing increasing consumer demand for world-class cancer treatment and there continues to be encouraging signs on the regulatory front as well. In fact, on May 7, 2010 the Chinese State Council issued a statement reiterating its intention to enhance the scope and the quality of health care services by attracting more private investment to the sector.

So with the leading center network in the country, we are confident that our strategy of expanding both organically and through acquisitions will increase the efficient of existing centers, positions Concord Medical to benefit from these favorable trends. I will now invite Boxun to explain our operational progress and our financial performance for the first quarter of 2010 in detail.

Thank you, Steve, and hello everyone. Thank you for joining us today. Picking up on Steve's point, we delivered a great quarter this past year despite the seasonality on our industry.

As you all know, the Chinese New Year holiday falls in the first quarter and typically during the holiday break, patient volume significantly decreases while the business and activities such as new centers development are pushed back. Despite this, we achieved a 37% revenue growth year-over-year and opened one new center. We also achieved how the top-line growth in our organic business.

As of March 31, 2010 Concord Medical had 89 centers across 37 cities in China. In April we added four additional centers through the acquisition of Tianjin Kangmeng Radiology Equipment Management. Going forward, we will continue to expand our center network through both organic growth and acquisitions.

And currently we have entered into an agreement to establish 38 centers in 2010. And in the second quarter, on top of the four acquired centers we plan to open eight to 10 centers through the organic development. We are also actively looking at additional acquisition targets. Furthermore, our plan to develop two self-owned specialty cancer hospitals is also on track.

I am pleased to report that the China CMS International Cancer Center, our self-owned specialty hospital has entered the final stage of preparation and is on track to commence operations in June. The other specialty cancer hospital under development is the Beijing Proton Medical Center. And it will be the first proton beam facility slatted for this clinical use in China. And it is on track to open in early 2012.

The significant of establishing of our self-owned and branded hospitals is the three forward. First, these specialty hospitals will allow us to attract and employ the best doctors specializing in the cancer treatment. And second, these hospitals will be the center of excellence within our network as they will provide the most advanced cancer treatment and advanced service to promote the industry advancement. Last, these hospitals will also considerably be with CMS be to see brand and enhance our already strong B2B reputation.

In conclusion, we are excited that things are moving as planned on all fronts. Our centers network expansion plan remains in place and we are making continuous improvement in our existing centers. As the market is also strong, we are confident that the Company is on track to achieve great success in the years to come.

Turning to our financial results, Concord Medical delivered great results for the first quarter of 2010. We are pleased with our performance despite the seasonality factor. Our net income was affected by the professional charges related to being a public company and shared-based compensation expenses, both of which are accrued or amortized throughout the year due to the straight lined measures. As our top-line growth resumes to the normal level in the remaining three quarters, these expenses will decline as the percentage of the revenue from the Q1 level.

Going forward, we remain committed to managing for profitable growth by continuing to enhance operational and financial efficiencies while supporting our network expansion with our strong financial resources. As a newly listed Company we are also committed to fulfilling the requirements of Sarbanes-Oxley Section 404 and we are in the process of reviewing our internal control mechanism accordingly.

Now I will highlight some financial results for the first quarter of 2010, first, a quick reminder of the revenue recognition. The majority of our revenue comes from lease and management services booked by the aggregating profit attributable to us from each center and these revenues are recognized net of the center level operating costs, profits attributable to our hospital partner and Concord Medical's business tack.

The total net revenues in the first quarter were RMB76 million, representing a 37% increase from the corresponding period in 2009, due to centers sales growth and the opening of new centers. The net revenues from lease and management services in Q1 2010 were RMB72 million, representing 94% of the total net revenues and a 51% increase from Q1 2009 level. Charges for treatment and diagnostic services across all the medical equipment did not incur significant change during the first quarter.

The gross profit margin in the first quarter of 2010 was 65%, compared to 68% in the corresponding period in 2009. The slight decline was mainly due to the new centers opened in the second half of the year 2009, new being in their run period.

The operating expenses consisting of selling expenses and G&A expenses were RMB18 million in the first quarter of 2010. This is compared with RMB13 million in the previous quarter and RMB7 million in Q1 2009. The increase in operating expenses was mainly due to additional accrued expenses associated with the post IPO attendant of RMB6 million, largely consisting of legal and auditing fees and share-based compensation charges which are amortized throughout the year using the straight lined measures.

The operating expenses also consist of RMB3 million share-based compensation expenses of which 27% was allocated to selling expenses, and the remaining 73% to G&A expenses in Q1 2010. The total share-based compensation expenses are still expected to be in the range of RMB11 million in the year 2010, which with similar allocation structure between the selling expenses and the G&A expenses.

The operating income was RMB32 million, flat year-over-year. The operating income excluding share-based compensation expenses was RMB34 million, an 11% increase from the corresponding period in the year 2009.

The net income excluding share-based compensation expenses, which is a non-GAAP measure, was RMB24 million in the Q1 2010, representing an 11% increase from the corresponding period in 2009. Both basic and diluted earnings per ADS excluding share-based compensation expenses amounted to RMB0.49 for the first quarter of 2010.

As of March 31, 2010, the Company had total fixed assets valued at RMB1,292 million and cash of RMB994 million.

The capital expenditure for Q1 2010 was RMB81 million. The total depreciation expenses in Q1 2010 were RMB17 million. In addition, the amortization of acquired intangibles was RMB7 million. We expect the amortization of acquired intangibles to be around RMB27 million in year 2010, assuming no additional intangibles are acquired through the potential acquisitions during the year.

As of March 31, 2010 the Company's bank credit facility totaled RMB2.1 billion. Around RMB190 million of the facility has been drawn down in the short-term and the long-term borrowing.

The accounts receivable was RMB113 million at the end of the first quarter of 2010, similar to the balance of RMB111 million as of December 31, 2009. With that, I will turn to our updated guidance for the fiscal year 2010.

Taking into consideration of the projected contributions from the recent acquisition of the four centers, we are raising the estimated range of the total net revenue for 2010 to RMB367 million to RMB398 million, which would represent a 26% to 36% of an increase from the year 2009. Also as a result of the acquisition, we currently plan to open 34 to 39 radiotherapy and diagnostic imaging centers in 2010, and as the effective capital expenditure related to these centers opening to be in the range of RMB400 million to RMB450 million.

I do wish to emphasize that this forecast reflects our current and the preliminary view, which is subject to the further change. I will now open the call to the questions. Operator?

(Operator Instructions). Your first question comes from the line of Sean Wu with Morgan Stanley. Please proceed.

Hello. (spoken in Chinese) Thank you very much for taking my call and the questions and congratulations on the great quarter. I just have a very quick question, in terms of per center revenue, how to compare this quarter to the quarter last year and also the quarter before this, like the fourth quarter of last year.

Okay. In terms of the center, per center revenue I don't have the very detailed data on my hands, but a year-over-year comparison is for the, our existing centers, we still maintain a very good growth pattern from the last year. And I believe the rest of the patient volume growth I see our existing centers year-over-year still in the range of the 10% to 15%.

And if you compare the percent of revenue contribution versus the last quarter, I would say because, as we mentioned earlier, the first quarter is always the slow quarter of the year because there is a Chinese New Year and the patients normally do not go to the hospital during this time. And as a result, the percent of revenue will be lower than the previous quarter due to the seasonality factor.

Am I allowed to ask another question, or should I just jump into the queue?

You can continue.

Okay. I have a question on this. Yes, you probably open 34 to 39 centers and then now you would have five, so basically you need to actually add much quicker, at a much quicker for the next three quarters. One thing I look as have you above from you guys, you said you would have 30 centers already under contract. How are those centers being converted into new centers? And will you get any of other centers from the pipeline into the contracting stage?

Yes. Actually we are making very good progress on the new center openings. We opened one center in the first quarter. If I look at the, our historical pattern, you will see that in those new centers openings in the first quarter it is normally very small. And based on our current estimations, in the second quarter of this year we are opening eight to 10 centers through the organic growth.

And on top of that, we will acquire another fourth center from the recent acquisition of Kangmeng. So, roughly, we are opening 12 to 14 centers in the second quarter and we believe our new center openings in the third quarter and the fourth quarter will be over 10 centers in each quarter as well. And the pipeline centers of 30 contracts as of March 31, 2010 is the contracted centers and we are most -- the majority of those centers will be converted to the new centers in the year 2010.

Maybe only one or two centers will be opening in the next year. And in addition to that, we are still actively in talks with several other hospitals and very likely we can conclude a new contract in the near future as well.

That is very good to know. Do you have any centers with contracts expiring and are you doing anything to renew those contracts?

Yes. Based on our current statistics we have three centers to be expired within this year, and actually these three centers, it is only three centers going to be expiring in the next three years. For these expiring centers we are currently in talks with our hospital partner to renew the centers. Basically, we set up a new center to replace the expiring center because those equipments in the expiring centers are already reached to their end of the life of the useful life. And basically we see very good progress on that. For example, one of the hospitals already renewed the contract with us and the other two we are working on that as well.

Thank you very much. I will get back into the queue now.

Okay.

(Operator Instructions) Your next question comes from the line of Leon Chik with JPMorgan. Please proceed.

Hi. Congratulations on your results. It's Leon. I just wanted to ask you, first question is like for the two centers you added this year, what kind of equipment is it? And also, can you give us some guidance on what kind of centers will be added, the 10 to 12 in the second quarter, what, roughly what type of equipment is that going to be? And then, finally, just what is changed in the second quarter that it is going to make it go much faster than the first quarter? Thanks.

Yes. For the acquisition stations, CMS acquired the 100% of equity interest in Tianjin Kangmeng which made one PET-CT, one linear accelerator, one head gamma knife and the one use CT, so a total of four equipments in Hebei Province. And we expect these four centers will contribute about RMB7 million to RMB8 million revenue in the rest of the three quarters in 2010.

And we also expect these centers will bring about RMB15 million revenue for the next year and onward. And the remaining contract life of these four centers is eight to nine years. That is about the Kangmeng.

And for the new centers opening in the Q2, we expect the linear accelerator will take the lead, probably in the three to four equipment from the linear accelerator, and through body gamma knife, and MRI and head gamma knife, and also the CT or ECT will be one for each, and for the PET-CT when we have one or two equipment to be added in the quarter.

And in terms of the catalyst for the further growth in the second quarter, I will say we currently are still in talks with some potential target companies for the cooperation of either the exit level or either the, on the purchase level. So maybe in the next month we will see some very good progress on that. But the, mostly likely those in a good contribution will be in the third quarter from the acquisitions or other stuff.

Okay. Could you tell us what the -- you had it that you had two equipment in the first quarter. Was any added in the first quarter, just one. What was that?

It is also a linear accelerator.

Okay, thanks.

(Operator Instructions). Your next question comes from the line of Sean Wu with Morgan Stanley. Please proceed.

I have a question and, Steve, I just have a follow-up question. I saw your G&A expenses jump quite a bit, come up the last year, the first quarter. I guess it was some component with the, you coming, being a public company. Can you tell like us whether the 70% is going to be an ongoing expense ratio, or you will see the figure to come down a bit in the future?

Well, as I mentioned earlier that in the Q1 we already started to accrue or amortize certain public company related expenses and share-based compensation. And in the Q1 we had roughly around RMB6 million expenses. It is not ordinary from our historical operations.

And we also used the straight line to amortize and accrue those expenses. So in the -- look at the rest several quarters in the, in year 2010, the expenses level will be relatively stable in the dollar amounts. But as you know, we -- our top-line will grow significantly in the next quarter also, so the expenses as a percentage of revenue will be declining. The rough estimations from us is in Q1 our operating expenses as a percentage of revenue is around 23%, and in Q2 we believe this percentage will be down to below 20%.

Okay, I got it. Hello?

Yes.

Go ahead.

Okay. That's fine. So I just -- you will actually be -- are you going to start consolidating results from Changhang Hospital starting the rest through? You say you are going to own [Chakkatoos], comments the operation now. That is a private hospital. How much can you going to expect from that hospital and how will the consolidation of the results affect your expense ratios?

The revenue contribution from the Changhang Hospital will most likely to be in the late June or early third quarter. But we plan to open this hospital in the early June and in the second half of this year you will see the most revenue contributions from this hospital.

From our preliminary estimations, the revenue from Changhang Hospital will be around RMB10 million to RMB15 million in the rest of the year. And because the hospital operations they normally have a higher top-line, but lower margins, so we are going to report the, our segment information to distinguish our core business from this hospital operation. So the material will pick out the two types of the margins of the businesses as well.

Thanks. That is very helpful.

(Operator Instructions). Your next question comes from the line of Leon Chik with JPMorgan. Please proceed.

Again, hi. It's is me again. Actually, I just want to follow up my previous question. I just wanted to see what, other than the acquisition, what was that change that happened in the second quarter that made the contracts come fast? What do you think will be the change that makes the second quarter contracts come much faster than the first quarter because you didn't sign very many in the first quarter and you are expecting quite a lot in the second? Why weren't any contracts signed in the first quarter? Thanks.

Well, it is -- the -- in China, Chinese holidays that were, Chinese New Year holiday is very important since like the whole country operations becomes slow during this season. And so, in the second quarter we basically catch up the business activity in all fronts, and so we did see accumulate certain contracts and signing in the second quarter.

And in terms of the further catalyst for the growth, some of the centers we are currently building is in the final preparation stage. And most likely they can be finished before the end of June. So, as a result, we can earlier recognize certain centers around in the second quarter. And we will try to be more aggressive on the timeline and we will keep you guys updated.

Okay, fine. And just a small matter, can we just expect the same employee option expense like for every quarter from now on? Should we just use the same number? Thanks.

Yes. It's because we use the straight line to amortize equally in each quarter. Currently it is around RMB2.6 million, if I remember correctly, RMB2.6 million per quarter.

Thank you.

(Operator Instructions). Your next question comes from the line of Leon Chik with JPMorgan. Please proceed.

Hi, it's me. Could you give us some information on like any progress or any news on potential regulation change between private operators and non, not-for-profit hospitals? I understood that there were some deregulations that could make it easier for private participation, but there was some pending details. Has anything developed since this news can out in February? Thanks.

Okay. I will have this question to, direct this question to Dr. Yang, the Company CEO

(interpreted) Since the first preliminaries have passed from our first earning release in Q4 2009, we found that the policy issued by the State Council have been much clearer and more and more definite. In May 7, 2010 the State Council issued a statement regarding to encourage the private capital to be invested in the private sector.

Particularly in the statement, it points out that the government is encouraging private capital to be injected into the medical field to provide better care for the patients. And also, the policy has become more specific, especially in the areas showing in terms of encouraging more talents into the medical field and also to build more infrastructure and all the policies have been more specific than all the opinions issued before.

This policy being issued, MOH, IntraHealth of China, is also beginning to quicken this fact, quicken its pace into encouraging the private capital to be more and more active in the medical field. The MOH, especially we can see a very definite trend that MOH is not only encouraging the private companies to acquire large equipment and provide services to the hospitals, but also it specifically points out that it wants to encourage the private capital, establish its own hospitals.

Being the largest service provider of China, CMS has received a lot of invitations from pilot cities who, which are part of the trial cities in the health care reform to encourage CMS to go to their cities and set up corporation centers. We will selectively choose our targets and set up our corporation centers based on geographical demographics or the local cities, and we are ready and we very happy to be able to be part of the health care reform.

This is a long awaited policy to be able to come on to the table. We will actively grab this opportunity. Yes, thank you.

Okay, thank you. I just have a quick follow-on. Did you -- was there any opportunities arising as a result of many hospitals constructing new hospitals or new wings during the past year, and these hospitals perhaps didn't have enough money to put equipment in these new, like new spaces? Was that anything that is going to be a trend in the second half that new hospitals are requiring equipment that they can afford? Can you comment on that?

Well, to save time I will give you the follow-up answer. We do see such kind of opportunity coming up in China. As you know, a lot of Chinese Government owned hospitals are trying to extend their facilities to accommodate more patients. But as they normally, if they held capital, they normally just to build the bigger building and insert more beds.

But it is for the capital reserve for the large medical equipment is still very limited. So this provides us a very good opportunity. And currently with this health care reform and the lot of hospitals coming to us and either finding the opportunity to cooperate on the exit level or on the center level. So we are currently trying to develop these different strategies for different types of the hospitals. And in the second half of this year we may see more opportunity coming in the field and we are still very optimistic about this front.

Okay, thank you.

Okay, welcome.

Your next question comes from the line of Zow Zhang with Starhall Group. Please proceed.

Hello. Congratulations for the great quarter. I just have a question for Dr. Yang. As we observed that right now is an interesting time that both US and China are doing the health care reform at the same time. And, interestingly, the two countries are kind of heading towards different directions in their policies, in their legislation. So we would hope to understand what is your understanding of policy directions?

(interpreted) You are right. It is an interesting period. Both US and China are currently experiencing, trying health care reform. There are fundamental differences between the US health care reform direction and China health care reform direction.

From Dr. Yang's understanding, Obama's policy is to discourage the capital spending of the medical health care, or of the medical companies. So this decreased the opportunities of those US companies, but however in China, the direction is completely opposite.

Since China opened its gates 30 years ago, many sectors are beginning to open its gates to the overseas investments and/or the private investors. However, medical field is still remains within the hands of the government, but we see that gradually the government is opening is opening its gates.

A lot of foreign investors they came to China and we invited them to visit our centers. They are very surprised to see the long queues and the huge crowds queuing for a visit to the doctors.

With the rapid economic development of China, more and more patients or more and more people are more aware of their health. And also, the China population is experiencing very serious aging problems. Especially cancer becomes the first, fastest growing and also the number one cause of death in China.

So the Chinese Government, or the MOH, they are encouraging various forms of investments including the private capital to be able to cooperate with the hospitals or to set up their own hospitals to increase the supply of medical health services to the large population. So the government regulation provides a very good or very strong encouragement and support to CMS development. Thank you.

Your next question comes from the line of Sean Wu with Morgan Stanley. Please proceed.

Hi. This is actually Bin Li from Morgan Stanley. (spoken in Chinese) How are you?

We are fine.

Yes. I have a couple of questions and apologize if those questions might be asked. First, can you tell us what is the traffic volume increase and also the pricing trend for your centers?

Well, as for the -- on the patient volume, we provide the data in our earnings release. And for the radiotherapy treatment cases it is an increase of about 17% year-over-year, and for the diagnostic imaging treatment cases it increased by around 100% year-over-year. This is mainly due to we have -- we added about seven MRI equipments in the year 2009 and they demonstrated strong growth in the past several quarters. And we achieved the certain level of mature in the Q1 2010.

What is the organic traffic volume increase at the existing centers, not the new centers?

Yes. Sean also asked this question. I don't have the exact data, but it should be in the range of 10% to 15% in the Q1.

Okay. And then, perhaps if I can ask a big picture question to Mr. Yang, there is a buzz that people -- there is a concern amongst some investors saying the Chinese Government might be slowing down purchases of equipment and other investment in health care in this year because the budget for this year is not increasing as much as last year. I just wanted to ask, from your Company's perspective, have you experienced anything, any impact that you are seeing on whether on the positive side or negative side?

Well, I will take the question first. We currently heard that in the markets there is some government budgeters trying to take control of the large equipment purchases, not just for the medical, but also the equipment in the other industries. But from our understanding, the purpose of this new requirement or the new, potential new policy is not to limit the demand in the market, but to actually use the centralized purchase channels to avoid corruption and the better budget control.

So far this year we haven't seen any immediate impact on the, our business. And people may wonder the process will take a longer time given the use, the centralized purchase channels. But so far we are okay with the, our current hospital partners.

(interpreted) Actually, the policy is not saying to decrease the budget for the large equipment purchases, but to strengthen the management or strengthen the quota control. So this is actually a further reiterate of Chinese Government's point that it is going to spend more money on the basic infrastructure building, but to limit or to strengthen the control of the more higher advanced or large equipment. So this actually encourages us or provides a better opportunity for us to provide this kind of services to the hospitals.

Great, thanks.

Your next question comes from the line of [Frank Taiska]. Please proceed.

Good morning, thank you for the update. I was wondering, actually, I have two questions. Now that the Chinese New Year has passed and we are more than halfway into the second quarter, do you see an increase in patient participation at your hospitals and clinics? And the second part of the question is, what are your intentions for opening up your own self-owned and self-operated hospitals and clinics? Thank you.

I will take the first part of the question and have Dr. Yang to answer the second question. In terms of the second quarter outlook, our revenue growth is certainly on track to, back to the normal levels. I believe we will see about around 35% of the top-line growth year-over-year, or maybe 25% top-line growth Q-on-Q. So, on the second question I will have Dr. Yang to address that.

(interpreted) The specialty kinds of hospitals we are currently constructing is actually an extension of the existing centers network of what we currently have. For example, in our development history previously we can set up only one center in a hospital, but rather we found that the center is very profitable and the hospital did want to install more centers within the hospital. So within one hospital we can have multiple equipments.

So our strategic development go is to establish satellite centers within important geographic locations to serve as the center of excellence within our network. Firstly, this will allow us to provide even more higher advanced or better care to the patients within this platform.

Also, in China there is a lack of really highly advanced cancer treatment hospitals with the satellite cities we have chosen. We hope that by using this platform we will be able to provide branded services to the cancer patients.

Also, we will continue and reinforce our medical health care research within this platform. And also from our internal calculations, we find the rate of return or the payback period for the special cancer hospitals is also very good. Thank you.

Your next question comes from the line of [Jin Yale] with Maxim. Please proceed.

Thank you for taking my question and good evening. I am a little bit new to the story so these two questions are I would be interested to know. The first one is that going forward do you anticipate new centers or to be built from hospitals that have more sort of rudimentary radiology treatments? Or you do anticipate that some of your growth will come from hospitals that already have rather well established radiation therapy there.

Well, we believe the growth will come from the both sides that you mentioned earlier. From our historical period, our new CMS growth is normally comes from the new buildup centers from our existing hospital partners' side. And during the last two years, after the centers demonstrated a very good track record on the centers operations, we introduced the management, market oriented management team in the centers.

So a lot of hospitals who already have certain centers, but running not as efficient as the CMS does, they come to us and for the cooperation opportunity. And currently, within our 88 centers in, sorry, 89 centers as of March 31, 2010, we have three centers we only provide service, but we don't own the equipment and that is one good example. And, in addition, a lot of the hospital partners, existing hospital partners, they are also trying to order more equipment and have us to manage for that. So that is the -- we see the growth will definitely come from the existing partners and also the new business partners.

Yes, if a little bit of follow-up on that line of questioning is that given radiation therapy in cancer is a good profit center for many hospitals, so what will be the sort of rationale or logic for them to say "outsource" to us versus they want to run it by themselves, then keep all the profits they can generate?

Firstly, as Dr. Yang mentioned, a lot of large government-owned hospitals they don't have the enough capital for the large medical equipment purchases. And CMS provides this type of service with no financial risk to them. We don't require a minimum financial retainer from this cooperation.

And, secondly, the radiation technology is quite new in China, like only 15% of the patients receiving these radiation treatments in China compare with more than 50% of the patients receive the radiation treatment in the overseas countries.

So the current hospital partners do not really have experience in managing those large medical centers. They don't know how to set up the appropriate treatment protocol and also they don't have the market experience. And CMS has been operating since the long time ago and we have built up a very strong market base and also the knowledge about our patient, the market.

So we have our hospital partners to manage those centers profitably and efficiently. So that is one of the key reasons that you have that partners want us to help them. And also, the oncologists in this area is very rare in China, especially the experience, the talent, the people is very hard to find.

So as a bucket of services we also have our hospital partners to recruit and train the doctors and the nurses to help them to continuously update their knowledge and to set up the best useful protocol for the treatment among their patients. So that is the three major reasons for the hospital partners to choose us to provide these kinds of cooperation services.

On the 89 centers you currently operate, what percentage of those centers are in the sort of tier one or tier three if you call, in other words, the highest level of hospital among the three tiers hospitals in China?

Well, we have a list of 89 centers of operation in the 37 cities in China. And those cities, including the tier one cities like Beijing, and Shanghai and Guangzhou. And also we have the centers opened in the second tier cities such as the provincial capitals, including Chengdu, and Xian and so on. But we also have the centers in the tier three cities such as Wuxi.

And the common denominator, the common character of those centers are the -- we normally cooperate with the top tier hospitals of, in the region, and these hospitals have a good reputation and a very good patient flow. And also the -- and at the -- even for the small cities they also have the population over one million people. So this provides us the very good competitive advantage.

And we do not particularly prefer to operate in the tier one cities. And we only -- we look at the competition, and also the patient volume and the financial return. If those criteria can be met through our analysis, we are okay to open in anywhere in China.

Okay, and the last question is that in terms of sort of facility you offer and the type of therapy treatments come from these equipments, what is the overall insurance coverage. I know that is varying among different individuals, but overall do you have any comments in terms of this question, in terms of insurance coverage?

Well, it is a very, very significant. It depends on what kind of a treatment they receive and where they receive these treatments. But, for example, take maybe the body gamma knife, for example. The -- it depends on where you receive these treatments. The insurance reimbursement can be in the range of 40% to 90%.

And for the radiotherapy, for the head gamma knife, body gamma knife, linear accelerator, MRI and the CT scans, they normally have the 50% to 90% of the reimbursement rate. And for the PET-CT, this is a very new technology in China and currently only very few cities provide some sort of insurance coverage. And based on our analysis or statistics, we believe around 50% to 60% of our patients receive certain sort of the reimbursements from the government.

Okay, great. Thanks a lot and appreciate all the answers.

Okay.

We are now approaching the end of the conference call. I will now turn the call over to Mr. Zhang, Vice President of CCM for closing remarks.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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 the Event.