Concord Medical Services Holdings Ltd (CCM) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Third Quarter 2010 Concord Medical Services Earnings Conference Call. My name is Gina and I will be your coordinator for today. At this time, all participants are in listen only mode. After the management's comments, there will a question-and-answer session towards today's call.

(Operator Instructions)

I would like to turn the presentation over to your host for today, Mr. Tony Tian, Investment Relations Manager of Concord Medical. Please go ahead.

Hello, everyone and welcome to Concord Medical's Third 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 Director, President and Chief Executive Officer and Mr. Steve Sun, Co-Chairman and Chief Financial Officer. After their prepared remarks, Dr. Yang and Steve will be available to answer your questions.

Before we continue, please note that the discussions today will contain forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Reform Act of 1995 and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements are subject to risks and uncertainties that may cause actual results to defer materially from our current expectations. Potential risks and uncertainties include, but are not limited, to those outlined in our public findings with the FCC. Concord Medical does not undertake any application 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 audited non-GAAP financial measures, our earnings release contains our reconciliation of the audited non-GAAP measures for the most directly comparable on audited GAAP measures.

As a reminder, this conference is being recorded. In addition, a web cast 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 again for joining us today for Concord Medical's Third Quarter 2010 Earnings Conference Call. We delivered solid top-line growth and business progress in the third quarter, despite the stronger than usual seasonal impact. This year, the [MidAutumn] Festival in September and the October Golden Week occurred in close proximity causing higher reductions in patient volume in late September than in previous years.

Steve will go over business updates with you in a moment. As we have seen in the past few quarters, the Chinese government continues to show great commitment on healthcare reform. Combining our strong momentum with the government's ongoing support of private investments into the healthcare industry and medical insurance reform, we're confident that Concord Medical is in a strong position to benefit from our fast growing market.

Before Steve moves on to explaining our operational and business progress for the third quarter of 2010, I would like to point out that Boxun Zhang, our Corporate Vice-President, left the company in October to pursue other interests. Boxun joined us about a year ago and it was a great asset to Concord Medical through our IPO and transition to a public company. We wish him the best in his future endeavors.

Thank you, Dr. Yang for the introduction, and hello, everyone. Thank you for joining us today. We achieved a strong result in the third quarter with a 30% a year over year top line increase due by revenue growth from both existing centers and the new centers. We are encouraged by merging improvements at our mature center and a shorter ramp up period in the new center, even though during the third quarter our market was affected by the strong progress in networking expenses.

Patient volume continues to grow robustly. The number of treatment and (inaudible) patients treated was more than 43,000 during the third quarter of 2010. The results of September 2010, Concord Medical had 111 centers across 41 cities in China. Concord Medical added 11 centers, two of which were acquired during the third quarter of 2010. More than nine organically added centers, four were based existing hospital partners and five were new hospital partners.

Going forward, we will continue to expand our already established network through both organic growth and acquisitions, with the forecast in enhancing existing center performance. As you may have (inaudible) of adding new centers this year, we have in place a healthy contract [plan] including a number of identified potential acquisitions targeting that gave us confidence in meeting our target of adding 34 to 39 centers in 2010 and our medium term goal of operating 200 centers by 2012.

In addition to building out our network of radiotherapy and operative imaging centers on the premises of (inaudible) hospitals, we strongly believe in the value of establishing ourselves and branded hospitals. As centers of excellence within our network, they will allow us to provide the most advanced cancer treatment, attract and deploy the best practices and build Concord Medical B2C and the B2B application while promoting advancement of a comprehensive treatment industry.

Last quarter, we announced a milestone in development of Concord Medical's first self-owned specialty hospital Chang'An CMS International Cancer Center, or CCICC. We established a joint venture with Chang'An Hospital to take our ownership of its cancer treatment facility. We started preliminary operations of CCICC in July and it's expected to start full operations early next year.

Last quarter, the Beijing Proton Medical Center, or CPMC, our second specialty cancer hospital, received the most crucial and difficult approval status for clinical facility. We continue to have confidence that BPMC, which will be the first Proton Beam facility licensed for clinical use in China, is on track to commence operations in 2012.

Alongside carrying out our day-to-day operations, Concord Medical is focused on educating the market about our services and solidifying our brand and reputation. With regular participation in industry conferences and the various research initiates such as mock essential clinical trials jointly established by (inaudible) of nuclear medicine and GE, Concord Medical is playing a more active role in industry developments.

In summary, we are pleased with and encouraged by Concord Medical's progress as we improve our existing centers and expand our nationwide network. We are increasingly well positioned for success in China's particle intensive treatment market. Now, I will highlight some key financial results for the third quarter of 2010.

Total revenue was RMB101 million for the third quarter of 2010, representing a 30% increase from the same period of 2009. This was primarily due to patient volume growth from established centers, as well as from new centers added through organic development and acquisitions in 2009 and in the first three quarters of 2010.

Gross profit margins in the third quarter of 2010 was 66% compared to 71% in the corresponding period in 2009. The decrease was mostly due to depreciation and amortization from business expenses such as adding new centers, acquisitions and our specialty cancer treatment hospitals.

Operating expenses consisting of sale expenses and general and administrative expenses was [RMB17million] in the third quarter of 2010. This is compared with the RMB10 million in the third quarter of 2009. The increase was largely due to the expanded treatment sites and additional post-IPO related professional expenses.

Operating interest is included RMB2.6 million in the share-based compensation a rate of 27% was allocated to sale expenses, with the remaining 73% to G&A expenses in Q3, 2010. Total share-based compensation expenses are expected to be around the RMB10 million in 2010.

Operating income was RMB50 million, representing an 8% increase from the corresponding period in 2009. Operating profit, excluding share-based compensation expenses, a non-GAAP measure was RMB52 million, a 14% increase from the corresponding period in 2009.

Foreign exchange lost was RMB3 million for the third quarter compared to the RMB97,000 in the corresponding period in 2009. This was primarily due to the appreciation of the RMB against the US dollar. Net income was RMB33 million, representing a 2% decrease on year-over-year. Both basic and diluted earnings per ADS for the third quarter of 2010 was RMB0.69.

Net income, excluding share-based compensation expenses, a non-GAAP measure was RMB36 million, a 5% increase from the corresponding period in 2009. Both basic and diluted earnings per ADS excluding share-based compensation expenses for the third quarter of 2010 was RMB0.74.

As of September 30, 2010, capital expenditure was RMB107.9 million, representing a 6.6% increase year-over-year. Total depreciation expenses were RMB21 million. In addition, amortization of acquired intangibles was RMB7.9 million. The Company expects amortization of acquired intangibles to be approximately RMB28.8 million in 2010, assuming no additional intangibles are acquired through potential acquisitions during the year.

As of September 2010, the Company had a bank credit line totaling RMB2.1 billion, of which RMB129.2 million was drawn as of September 30, 2010. Accounts receivable were RMB150 million as of September 2010 as compared to RMB111 million as of December 31, 2009. The average turnover days was 127 days as of September 30, 2010, as compared 119 days as of December 31, 2009.

With that, I will move to guidance for fiscal year 2010. Based on current market and operating condition, estimated season expenses and the forecasted phase in volumes, we are reiterating our estimated range of the total net revenues for 2010 is RMB367 million to RMB398 million, which will represent a 26% to 36% increase from 2009.

Our plan to add 34 to 39 radiotherapy and diagnostic imaging centers in 2010 remain in place. We also reiterate the rate of our expected total capital expenditure related to these new centers is RMB400 million RMB450 million. I do wish to emphasize that these forecasts reflect our current and preliminary view, which is subject to change. I will now open the call to questions. Operator.

(Operator Instructions)

Please stand-by for your first question. Your first question comes from the line of Sean Wu of Morgan Stanley. Please go ahead.

Hello, thanks very much for taking my question. I have question on your gross margin. You appear to have a year-over-year decline of gross margin, just because you have a lot of new spending into that, in this quarter? And then how do we see gross margin is trending from here? Up or down? And do you have any kind of standard of where it should go?

Thank you. Thank you, Sean. We believe our gross margin will remain in this area for the next few quarters. And we do have a draft from the second quarter and that's because as you remember that we have almost no center opened in the first quarter. And starting from -- so that has little impact on the second quarter. But starting from the third quarter, we are pretty much on the same pace as we expected in opening new centers and acquisitions. So we believe in the future we will keep -- in the near future, we will keep a constant -- I mean, a close gross margin for the next few quarters.

Thanks. Does this mean -- I have another question. You guided for simple addition of 34.9. I mean you've --

Right.

(inaudible question - microphone inaccessible)

Sam, can you repeat that question? Because the line is not connecting very well.

I'm sorry, pardon me. I'm using a cell phone.

Yes, you -- a little bit interrupted. Can you say it again? Can you repeat the question?

I mean, you provided a guidance of 34% [nine]. What you need is another 11, 12, 13 centers. Are those 11 -- four centers with -- from each stand under contract? Are there some other activities going on? Just some people are very positive on this development. So I [was hoping to get some more clarity] on this?

Oh, okay. Let me set it out, Patrick. You know we have -- we added one center the first quarter, 11, the second quarter, we had 11 this quarter. So we -- now we have 23 centers -- 23 centers opening, I mean, adding new 23 centers and so for the next -- for this quarter, for quarter four, your fourth quarter, we're going to have our plan, at least 11 place centers. That includes acquisitions and organic new centers. And we do have our pipeline of the 27 already signed contracts, of which some of them will be opened by fourth quarter and the rest will be opened by the next quarter. Yes. And in the first quarter of 2011 and go on. Does that answer your question?

Okay. Thanks a lot, Steve.

Okay.

(Operator Instructions)

And your next question comes from the line of [Dan Zing], Roth Capital Partners. Please go ahead.

Thank you for taking my questions. I have a couple of questions. The first is can you give us some color on the number of centers that are going to be added in 2011?

Okay. And for 2011, we -- we haven't -- we never gave a guidance on 2011 yet, but as I said, by 2012, we're going to have a 200-center operation and so far we had 111. So typically we're going to add about 300 -- 30-plus centers each year to meet our target.

Okay. Thank you. My second question is that when the management is thinking about buying centers versus acquiring centers, what is the main consideration?

Well, basically we use the same type of IRR analysis, when we study both acquisitions and openings. So we do the same financial analysis in terms of our financial return. And we also use the same criterion regarding our -- for the target, which is mostly three A-hospitals, with a decent size and decent [paste] and value and also the reputation in kinds of treatment. So we use the same criterion when we're looking to the new center and acquisitions.

Okay. Thank you. My last question is that regarding the expansion strategy, have you considering expanding into the -- what kind of hospitals is your main target and have you expanded into the tier two cities?

On our current strategy, actually, we focus more on hospitals rather than cities. We pretty much use all of our China, in our 41 cities, already. So we're pretty much in every province in China. And for us, the most important criterion is the size of the hospital rather than the size of the city. But we also look into the density of population of the city. And this -- the mix results, I mean, all of the population of the city and the size of the hospital that's very low, that's a hospital hopefully more important though.

We seldom go to third tier cities, but occasionally when we do find a good hospital in that third tier city, then we go there. Actually, certain of our centers in the third-tier cities actually do better than our second tier and even first tier cities. So hospital size is more important a criteria than city.

Okay. Thank you. That's my questions.

Thank you.

(Operator Instructions)

And you do have a question from [Andy Wu] with JMP Securities. Please go ahead. Andy, your line is open. Please check your mute.

Yes. Good evening, everyone. So I have a couple of questions. So, Steve, how many signed agreements are currently in the pipeline?

Signed? We have 25, 27 agreements that are signed and they're not open yet, centers.

27?

27, yes.

Okay. So how many new agreements were signed in the past quarter?

Well, we have, I think, around ten. I believe. I didn't count that, but you can do the math. In the last quarter we have 31 new centers, right? And we had 11. So we have 31 count, so we added 11 this year -- this quarter. So we do have a, net, we did add seven this quarter. So it will -- you want the net number.

Okay. So I can do the math. So the second question, regarding the patient pay. So when I compare the total patient case from this quarter versus the second quarter, it's actually a little bit down. But when you consider you opened 11 new centers in the second quarter and -- as well as in the third quarter, so can we say that the same store patient case is actually down?

No, actually, if you look at our -- I don't give the disclosure in the release, but if you look at the centers that have been indicative in -- for over one year, the pace environment grows in double-digits in our -- in higher double-digits. So the pace and value growth is strong for existing centers.

You see the difference is that we do -- we didn't add any new centers in the first quarter. We added 11 in the second quarter, which on average is the middle of the second quarter, right? So most of those quarters haven't played any role in the second quarter yet. And in the quarter we added in the second quarter, definitely haven't played much of a role in second quarter yet.

Okay. So lastly, can you just let us know what type of equipments you had in the -- in these new, the 11 new centers?

The ones we add in the third quarter. Okay.

Yes, in the third quarter.

We add four -- yes, we add four [Alina] accelerators, one head [gammarize], one body gammarize, one PEG CT, two MRIs and two other equipment. That's thermal therapy and some other equipment, yes.

All right. Thank you.

(spoken in foreign language). Okay. Thank you very much.

Ladies and gentlemen, you have a follow-up call from Sean Wu from Morgan Stanley. Please go ahead.

I think I'd like to know more about the process of your [Hungan] hospital. I know you've sort of [taken more], but what are the next steps you need to do make a better -- a cultural independent center under your umbrella? And also what's the -- what's missing of your low [injure] in the special, kind talks about the -- looks like the Chinese government is trying to take a more private money into the hospital services system.

Okay, Sean, for [CCICC], according to our agreement, our hospital partner should get -- should arrange for the hospital's license by the end of this year and we are watching their progress and right now, we are operating on a trial basis, which means we do a lot of pre-operating -- to prepare our -- for operations, like our trained doctors, look at all the areas in deciding operating plans, something like that. And that we -- why do we get a license? Because of existing operations.

So while we get a license, we can pretty much start up our operations very quick. And in terms of private government policy, private government investment, we noticed that starting from last year, the government started to issue policies that -- stating that they encouraged private investing in the hospital business, healthcare sector. And we do see that [census] getting stronger and stronger, although we haven't seen much detailed guidance yet and we expect that will come out soon.

But we do see that there are two -- I think there's one policy already made official, that for hospitals -- for for-profit hospitals, they will also enjoy a business tax-free. That's a new policy for for-profit hospitals. And they used to -- they used to have to pay 5% business tax. But starting from this year, they do not have to -- for-profit has to do that. Private does not have to pay business tax as well.

And another, we can call it policy, because it's coming from the statement by the Ministry of Health -- Minister of Health, is that they're going to allow the private hospital to enjoy the same insurance coverage as the public hospitals enjoy. I think that's two gestures the government has made so far. And the way -- we're definitely looking into more new policies that are supposed to come very soon.

That's very informative. Thank you.

Thank you.

(Operator Instructions)

We have a question. It's from the line of Andrew Hall with JPMorgan. Please go ahead.

Hi. Can you restate guidance that you mentioned and also the same question is just now you mentioned the insurance coverage, what is the second point? I will be grateful if you can repeat. Thanks.

In China, as you may know that most -- I mean, the dominant insurance policies are sponsored by the government. And so in the past, only government-owned hospitals. Although we believe this process may be slow because in China those insurance programs are organized by local government rather than the central government. So it will take a while for those local authorities to take steps to let private hospitals to enjoy those coverage. But we believe the trend will be that more and more private hospitals in more and more cities will start to enjoy some -- get the insurance coverage.

Okay thank you. My second question is can you repeat the guidance that you gave earlier.

Yes the guidance we gave for revenues is RMB367 million to RMB398 million.

Okay.

Which will be a 26% to 36% increase from 2009. This is the same guidance we gave last quarter. And also the new centers our guidance is we're going to add 34 to 39 centers this - for the whole year 2010 through robust organics and organic openings and acquisitions. And our guidance for CapEx for those new centers are RMB400 million to RMB450 million.

Okay thank you. Just now you mentioned -- yes please continue.

Hello.

Hello yes okay, just now you mentioned that private hospital will enjoy insurance coverage and apart from that point I remember you also mentioned another criteria that a private hospital will enjoy but I didn't quite catch that. Do you mind to repeat?

Oh that's business tax. In China all government owned hospitals are non-profit, not-for-profit hospitals. Non-profit hospitals, government owned hospitals do not pay any tax. We have two types of tax. One is business tax or self-tax. Another is income tax. But starting from this year for-profit hospitals, private hospitals usually are for-profit hospitals, they are also entitled free of those business taxes which is currently at 5% of the total sales.

Okay thank you.

Okay.

(Operator Instructions)

And your next question is from the line of [Xin Zhao], from [Cazenove]. Please go ahead.

Congratulations for a great quarter. Just a quick question, we know the Chang'an Hospital is making good progress. When would the revenue be expected to be included in the -- Concord in -- just wondering when would the revenue be included in the financial report?

Because Chang'an hospital, CCICC we will acquire 52% so we're going to consolidate the whole revenues of CCICC which we estimate will be between RMB6 million to RMB8 million for year 2011.

Right

And our costs we will consolidate our expenses there as well.

Certainly, roughly at what time you would expect that to happen.

Well we are targeting according to our original agreement with our hospital partners. They have to deliver the license by end of this year. So otherwise they're going to face severe penalties. So we do expect that as soon as we get the license we can start operations.

As a matter of fact very quickly because this hospital is already existing hospital and we separating the kinds of treatment apart so we should start very soon after the license. So if we get the license by the end of the year we can definitely start the operations early next year.

Thank you great.

Thank you

(Operator Instructions)

There are no other further questions in queue. I would like to turn it to Tony Tian to make a closing statement.

Thank you for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support.

Ladies and gentlemen that concludes your presentation you -- please disconnect and have a wonderful day.