Concord Medical Services Holdings Ltd (CCM) 2010 Q4 法說會逐字稿

-- are in listen-only mode. Later we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Tony Tian. Please proceed.

Hello, everyone, and welcome to Concord Medical's fourth quarter and fiscal year 2010 earnings conference call. Concord Medical's earnings release was distributed earlier today and you can find a copy on your website, 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 and Mr. Steve Sun, Co-Chairman and Chief Financial Officer. After their prepared remarks, Dr. Yang and Steve and 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 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 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 fourth quarter and fiscal year 2010 earnings conference call. This is our first full year earnings report since our IPO and listing on the NYSE in December 2009, which was underwritten by Morgan Stanley, JPMorgan and CICC.

We delivered a year of solid financial and operational growth in 2010. In this year we saw a 33% year-over-year growth in revenues as we continued to grow our existing center network. In 2010 we brought the total number of centers in our network to 119 by adding 33 centers. We are encouraged by the progress we have made today on our center network expansion and are committed to meeting our target of operating 200 centers by the end of 2012. In addition, we will also focus more resources on expanding our network of standalone facilities and expect breakthrough in 2011.

In December 2010 the Chinese government unveiled more details and guidelines for promoting private investment in China's healthcare sector. Of these specific guidelines published by the Chinese government we found four of them most relevant to our business.

First, priority is given to private investors for creating new healthcare institutions. Second, medical insurance coverage has been extended to include qualified nonpublic institutions. Third, talent transfer between private and public hospitals is being encouraged. Fourth, the threshold for foreign investors to establish healthcare institutions has been lowered with the aim to gradually eliminate the limit on foreign ownership.

As a result, we are further encouraged by the government commitment to the ongoing healthcare reform in China and the support to private investment in the healthcare sector. Combining these increasingly favorable macroeconomic conditions with our effective marketing and execution efforts, we are confident that Concord Medical is well on its way to achieve greater success. I will now turn the call over to Steve, our CFO, who will walk you through our operational and financial developments.

Thank you, Dr. Yang, and hello, everyone, and thank you for joining us today. As Dr. Yang pointed out earlier, Concord Medical reported a year of solid financial and operational growth in 2010. We were encouraged by a healthy top-line growth despite a drop in patient volumes in the first week of October caused in part by the Golden Week holiday.

Our operating and net margins were affected by costs and expenses associated with being a public company. However, we anticipate that this impact will diminish over time as our business increases in scale. Looking forward, we will focus on continuing to enhance operational and the financial efficiency while further expanding our center network.

(technical difficulty)

Please proceed from the CFO part.

As Dr. Yang pointed out earlier, Concord Medical reported a year of solid financial and operational growth in 2010. We were encouraged by healthy top-line growth despite a drop in patient volumes in the first week of October caused in part by the Golden Week holiday.

Our operating and net margins were affected by costs and expenses associated with being a public company. However, we anticipate that this impact will diminish over time as our business increases in scale. Looking forward, we will focus on continuing to enhance operational and financial efficiency while further expanding our center network.

In addition to expanding our center network, Concord Medical strongly believes in the value of establishing our self-owned and branded hospitals. The significance of establishing our self-owned and branded hospitals is three-fold.

First, the specialty hospitals will allow us to attract and employ the best doctors specializing in cancer treatment. Second, these hospitals will be centers of excellence within our network as they will provide the most advanced cancer treatment and advanced services to promote industry advancements. Last, these hospitals will also considerably use Concord Medical's B2C brand and enhance our already strong B2B reputation. As Dr. Yang pointed out earlier, we will focus on well executing this specialty hospital strategy.

As part of Concord Medical's self-owned and branded hospital strategy the Company is developing its first self-owned specialty hospital called Chang'An CMS International Cancer Center, also known as CCICC. And with our trial, 2010, Concord Medical announced a -- entered into a joint venture agreement with the Chang-An Hospital and commenced preliminary operations of CCICC in a (inaudible) of obtaining a clinical license for CCICC. As of today, CCICC has not received such license yet.

On July, January -- on January 6, 2011 Concord Medical announced that it entered into agreement to acquire a total of 52% of the equity interest in Chang-An Hospital from certain shareholders of the hospital for aggregate consideration of approximately RMB200 million, which is subject to satisfactory due diligence and (inaudible) approval. The acquisition is intended to expand the development of CCICC by consolidating the full capacity of the hospital into CCICC. CCICC will then become a cancer specialty hospital with a focus on cancer diagnosis and treatment service.

In addition to building our self-owned and branded hospitals, Concord Medical has continued to actively build our brand awareness and leadership in radiotherapy and diagnostic imaging industry. During the fourth quarter of 2010 Concord Medical and GE Medical, our long-term partner, launched China's largest PAP CT focused multicenter clinical research project. This underscores the Company's commitment to developing the PAP CT sector in China through enhancing standardization of clinical applications and accommodating talent.

In addition, in November 2010 Concord Medical hosted the Company's fifth PAP CT seminar in Yangshuo, which attracted many recognized professionals. Furthermore, we have the ongoing program for increasing awareness of trigeminal nerve related units through a dedicated website. Since the launch of this trigeminal nerve unit's online pro platform, Concord Medical has successfully expanded our patent reach.

During the fourth quarter of 2010 we received 2,199 patient referrals from this sector if which we treated 273. This accounts for about 9% of patient volume at the Company's [head gamma knife] and over 70% of the Company's overall trigeminal nerve patient volume for the quarter.

In fulfilling the requirement of Sarbanes-Oxley Section 404, we continued to work with our third party consultant, PWC. During the second quarter of 2010 we completed two rounds of the improvement process and we are making progress according to schedule. Now I will turn to highlight of some financial results for the fourth quarter of 2010.

Concord Medical reported total net revenues of RMB112.9 million in the fourth quarter of 2010, representing a 30.1% increase from the corresponding period in 2009. The increase was primarily due to an increase in patient cases from existing centers and the opening of new centers, as well as income from preliminary operation of CCICC.

Our gross profit margin in the fourth quarter of 2010 was 72.2%, compared with 66.2% in the third quarter of 2010 and 71.2% in the corresponding period in 2009. The higher gross margin in the third quarter -- in the fourth quarter of 2010 was mostly due to a decrease in depreciation and amortization from business expansion.

Our operating expenses, which consist of selling expenses and general and administrative expenses, were RMB30.1 million in the fourth quarter of 2010. This is compared with RMB17.3 million in the previous quarter. The quarter-over-quarter increase was mainly due to a government grant in the previous quarter which we did not receive in the fourth quarter of 2010, increases in office and travel expenses and operating expenses related to the preliminary operation of CCICC. The year-over-year increase was primarily due to increases in professional expenses associated with being a public company, increases in headcount, office and travel expenses, share-based compensation charges, and operating expenses related to the preliminary operation of CCICC.

The Company recorded RMB51.4 million of operating income in the fourth quarter of 2010, representing a 6.3% increase from the same period of 2009. Operating income, excluding share-based compensation expenses, which is a non-GAAP measure, was RMB53.2 million. This represented a 7.7% increase from the same period of 2009.

Our net income for the fourth quarter of 2010 was RMB43.7 million, which represented a 21.8% increase from the same period of 2009. Both basic and diluted earnings per ADS for the fourth quarter of 2010 were RMB0.87. In the fourth quarter of 2010 our net income, excluding share-based compensation expenses, which is non-GAAP measured, was RMB45.5 million. This is a 23.3% increase from the same period of 2009. Both basic and diluted earnings per ADS, excluding share-based compensation expenses for the fourth quarter of 2010, was RMB0.91.

As of December 31, 2010, the Company had total fixed assets valued at RMB925.3 million, cash and cash equivalents of RMB535.8 million and restricted cash of RMB117.7 million. As of December 31, 2010, the Company had bank credit lines totaling RMB2.2 billion, of which RMB241.1 million were utilized. Now I will turn to details of our fiscal year 2010 results.

The Company's total net revenues in fiscal 2010 were 390 -- RMB389.5 million. This is a 33.2% increase from fiscal year 2009. The increase was primarily due to an increase in patient cases from existing centers and the opening of new centers, as well as income from preliminary operations of CCICC.

For fiscal year 2010 our gross profit margin was 68.5%, compared with 70.1% in 2009. This increase -- this decrease was primarily due to higher operating costs associated with having a bigger number of new centers in their ramp-up periods.

Our selling expenses for fiscal year 2010 were RMB17.2 million, representing a 123.5% increase from RMB7.7 million in fiscal year 2009. Selling expenses as a percentage of total net revenues increased to 4.4% in fiscal year 2010 from 2.6% in fiscal year 2009. This increase was primarily due to increases in headcount, and marketing and other expenses to support increased business development efforts.

Our general and administrative expenses of fiscal year 2010 were RMB70 million, representing a 134.8% increase from RMB29.8 million in fiscal year 2009. General and administrative expenses as a percentage of total net revenues increased to 18% in fiscal year 2010 from 10.2% in fiscal year 2009. This was primarily due to increases in professional expenses associated with being a public company, share-based compensation charges, headcount, office and travel expenses and operating expenses related to the preliminary operation of CCICC.

Share-based compensation expenses, which were allocated to related operating expense items, were RMB9.6 million in fiscal year 2010, compared to RMB1 million in fiscal year 2009. Our operating income for fiscal year 2010 was RMB179.7 million, a 7.3% increase from RMB167.4 million in fiscal year 2009. Operating income excluding share-based compensation expenses, which is a non-GAAP measure, in fiscal year 2010 was RMB189.3 million, representing a 12% increase from fiscal year 2009.

Income tax expense for fiscal year 2010 was RMB43.9 million, compared to an income tax expense of RMB36.4 million in fiscal year 2009. The effective tax rate for fiscal year 2010 was 25.1% as compared to 22.6% in fiscal year 2009. Our net income for fiscal year 2010 was RMB130.9 million, representing a 4.9% increase from RMB124.8 million in fiscal year 2009. Both basic and diluted earnings per ADS for fiscal year 2010 amounted to RMB2.66.

Net income excluding share-based compensation expenses, which is non-GAAP measured, in fiscal year 2010 was RMB140.5 million, reflecting an 11.7% increase from RMB125.8 million in fiscal year 2009. Both basic and diluted earnings per ADS excluding share-based compensation expenses in fiscal year 2010 were RMB2.86.

Our fiscal year 2010 capital expenditures were RMB345.2 million, compared to RMB228.7 million in fiscal year 2009. The increase was primarily due to the opening of new centers. And adjusted EBITDA, which is the non-GAAP measure, was RMB295.4 million in fiscal year 2010, representing a 19.8% increase from RMB246.6 million in fiscal year 2009.

With that, I will move to guidance for fiscal year 2011. Based on current market and operating conditions, estimated business expansion and forecasted patient volume, Concord Medical expects to generate total net revenues in an estimated range of RMB480 million to RMB520 million in 2011. This represents a 23% to 33% increase from 2010. This estimated range excludes any potential future revenue as a result of the currently pending acquisition of Chang'An Hospital, but includes income from CCICC's preliminary operations.

We would like to point out that unanticipated delays in the closing of Chang'An Hospital's acquisition, any failure to obtain CCICC's clinical license and other uncertainties may result in CCICC not achieving its anticipated contributor, contribution to the Company, which in turn could have a material adverse effect on our business, financial condition and results of operations in 2011 and future periods.

The Company intends to open 25 to 30 new radiotherapy and diagnostic imaging centers, excluding any potential major acquisitions, in 2011. The Company expects total capital expenditures related to these new centers to be in the range of RMB300 million to RMB360 million. This forecast reflects Concord Medical's current and preliminary view, which is subject to change. I will now open to -- open the call to the questions. Operator?

Thank you.

(Operator Instructions)

And our first question comes from the line of Ingrid Yin, representing Brean Murray. Please proceed.

Hi. Good evening, everyone. Congratulations on a great quarter. My first question is regarding the guidance for 2011. So you talked about the guidance, exclude any potential revenue from the hospital, but include income from preliminary operation. Can you elaborate what is included in this preliminary operation?

Okay. In July we make announcement we acquired CCICC facility and started preliminary operations. And in the same time our partner (inaudible) to apply on behalf of us for a Scan Light clinical license for CCICC. Before CCICC secured the license all the revenues, all the fees were received by the Chang'An Hospital on behalf of the CCICC. And then the hospital will deduct on the expenses that occurred for CCICC and the balance will become the -- will be payable to CCICC. So basically on our financial statement we only showed the net income from CCICC as our top line, rather than the whole revenue from CCICC.

I see, great. And the next question is about the CapEx spending for 2011. So you talked about the -- it would in the range of RMB300 million to RMB360 million. That only includes the CapEx for cancer centers. If we consider the CapEx for CCICC and potentially the Beijing Proton Medical Center, how much the total CapEx will be?

Okay. We estimate our average cost for center is about RMB12 million, RMB10 million to RMB12 million. That's why how we gave this guidance for CapEx, RMB300 million to RMB360 million. Basically that is projecting 25 to 30 centers.

And for Chang'An Hospital we have announced that for the 32% we do to pay RMB200 million for Chang'An's acquisition. And for Beijing Proton linear center, depending on the pace we estimate we will spend this year alone we will spend RMB60 million to RMB100 million for Beijing Proton linear center. And the CapEx we spend for new centers we can secure 70% of bank financing. And for proton linear equipment we can secure at least 50% bank financing.

Okay, great. Thank you. Those are my questions.

Thank you.

(Operator Instructions)

And our next question comes from the line of Sean Wu representing Morgan Stanley. Please proceed.

Well, this is Sean Wu. I'm losing my voice, so I will just be quick. I have a quick question on your topline growth, your great performance if you will. I second Ingrid's comment on your financial performance. So I think this is more of a view. Your top-line growth is 30%, so me I have [you] tried to break it down which parties, okay I make it growth, which part is the growth from your new acquisitions.

We did not give -- provided the exact, the guidance for this year, but for the year 2010 I would say around 10% growth is from -- roughly 10% is from our existing centers growth and about 20%, I mean a little less than 20% is from the new centers and also we got about less than RMB8 million from CCICC's operations.

Okay. I have another quick question. Probably this is what you are talking about. On your others line for the revenue, it jumps from RMB3 million in third quarter to RMB10 million in the fourth quarter. This is the acquisition from CCICC or it's something else?

Yes. That's for other income line.

No. For other line below the revenue.

Yes, revenues right? Yes. That is exactly there is RMB7 million, RMB7.8 million is from CCICC.

So that's like you class this in other the mainly you were listing all of the --

Yes. Sean?

Yes, yes.

Can you open side open up a little bit? I cannot --

That theme. This is for CCICC, so that's good and I think I'm fine with this. Thanks.

Okay. Basically the RMB7.8 million is listed on in other on under our financial statement right now. And then there, well we have a small sales and also we have some listed only this model which income will be listed here as others.

And our next question comes from the line of [Sean Henry] representing ROTH Capital Please proceed.

Thank you, a couple questions. First of all, in the acquisition of the Chang'An Hospital there really speaks of subject to satisfactory due diligence. Could you give any color on what the timeline will be for you to complete your due diligence and any updates on the progress of that to date?

Well, right now we have been doing legal due diligence right now and been doing the due diligence.

And our attorneys are go over things, the legal documents right now and we hope we can get this closed in the second quarter, but the Shang-An Hospital's legal structure and due to the -- due to a private history -- it has been a private hospital so it's quite complicated. So we hope we can close it second quarter, but really it's not a guarantee and it's really hard to give you more accurate estimate, Scott.

Okay. And thank you. I appreciate that color. And additionally you opened 33 centers last year, it looks like 25 to 30 this year. Do you think that is a good growth rate for you, it sounds like roughly around 30 a year when we think about long-term the number of centers per year? Is that a good, steady trend or should we expect acceleration or deceleration long-term?

Well, I think that's a good trend, given our current busy resources and our effort. I think to 25, 30 centers per year is very -- I think it is a good estimate.

Okay.

And this is includes any additional major acquisitions of course, so more at least in the usual is already counted into this 24, 25 to 30. Any major acquisitions like a ten center class they are not included here. So as the usual front 25, 30 is very good and we believe we will continue to work on this range.

Okay. Thank you for answering the questions. I appreciate the color.

Thank you.

(Operator Instructions)

And our next question comes from the line of [Sam Zhang] representing ROTH Capital Partners. Please proceed.

Thank for taking my questions. My question is regarding the new center additions. The press release said that Concord Medical added ten centers and the close of two centers. Can you give us the breakdown of the ten centers? What are exactly those centers? And give us some details on the closing of two centers. Thank you.

I not sure you -- the -- I am not sure I have the ten centers of breakdown you want me to breakdown based on --

How many LACs and each one a bit.

Okay. Let me give you the two centers closed first. The centers we closed -- we have three centers expiring last year, the fourth quarter last year. And the two were just closed based on the term and the one we extended to another year. Both two centers -- all three centers to mature are, I'm sorry. The ones center closed are [Sigro] Hospital. Another one is Ministry Hospital. And the one where we extended for one year is the Sigro Hospital.

And among the ten centers we opened they are six Ministry Hospitals and there are four Sigro hospitals, an amount which six are through a small acquisition and four through new opening. And other breakdown I can tell you is among the ten centers, three are [taxi] keys which are our forecast and they are one MRI, one CT and the rest are radiotherapy centers.

Okay. Thank you. My second question is that when do you expect to finish the due diligence on the China Hospital under the optimistic scenario and under the worst scenario?

Well, the optimistic approach is the second quarter, as I just told Scott Henry. And I think the worst situation -- I think we do have a chance -- we may not be even close and be not close and because it is a due diligence not such by factory. There is -- I think that will be a worst, but I think mostly we can -- mostly we hope we can close this quarter, I mean second quarter and then if not we try to close the third quarter.

Okay. Thank you. That's my questions.

Thank you.

And our next question comes from the line of Leon Chik representing JPMorgan. Please proceed.

Yes. Hi, it's Leon here. That's that. Just wanted to just double check the -- that you just mentioned that the difference in other income is RMB3.2 million to RMB10.0 million. That's mostly the CICCC revenue, and can you just say that this -- what's the difference between the RMB5.7 million management service to the RMB9.99 million in 2010? What the main reason for the increase?

The management service?

Yes. The management service, what's the reason for that increase?

RMB9.99 million over RMB5.7 million?

Yes, correct,

That's we have one particular service only contract which can only be closed in -- I mean our contract only closing account and in the fourth quarter.

So that in -- yes?

And that's --

So the whole year's revenue is in one quarter? Is that correct?

Yes. I think for one particular hospital, yes. We had one contract that closed only in the fourth quarter.

Okay.

And we also have one center that they always ask us to do a cash basis preferred, a cash base accounting, so that's another one. So whenever we receive a lump sum that for that hospital and we record our revenue.

And that's going to happen next year as well, right? It's going -- it does not -- the contract still for many years?

For that account, yes, for these accounts, yes. I mean these two accounts have year. We have been working with the hospitals to try to get a quicker closing of our account, but so far we haven't been successful. Another one is on tax basis. That I think will stay there because that's recorded by the auditor.

Okay. And on the RMB3.255 million others, how much of that was from the hospital revenue, service revenues, yes?

Again, I think the first quarter we booked a very small amount.

Okay.

Yes, very small. So most of the RMB10.8 million comes from the second quarter, I mean the fourth quarter.

And just a couple of season questions. What's the -- we -- isn't seasonally the fourth quarter for selling expense to be very high because it's the difference between RRMB8.55 million and RMB3.51 million in the third quarter?

You mean the gross margin? What do you mean? What --?

The selling increase in selling expense in the fourth quarter.

Oh, again, by the year end sometimes we have this more activities near year end. And the -- you know this year the Chinese New Year is February 4th and it was kind of early and so a lot of activities happened before the year end.

And finally my last question, the interest income, is that the same thing, also the fourth quarter is just the massive adjustment, the RMB1.2 million in the third quarter compared to the RMB4.6 million in the fourth quarter? Is it also an adjustment?

Did you say interest expense or --?

Oh no, interest income. The -- it was [1.283] third quarter, then [4.672] fourth quarter.

I think that a form -- my understanding -- oh, okay. What we said is we transferred certain US dollars from our US dollar account to an RMB account. And those costs increased in terms of interest income for the fourth quarter. During the late third quarter and in the early fourth quarter we successfully transferred a certain amount of US dollars, our overseas US dollars into our RMB account.

Okay. Is that going to happen every year or is that just one-off?

In China there are very strict rules for you to transfer US dollar into RMB, so we try to do that whenever it's possible, whenever the policy allows. So we always use it at the maximum allowance. And it happened because we added a lot of centers in the second quarter, third quarter, so it gave us a chance to do this. And this is not that you can always do. Basically, the Chinese government will allow you transfer dollar to RMB only when you add new equipment and then you start an application for the money transfer.

Okay, thank you. That's mine. Thanks.

With no further questions in the queue I would now like to turn the call back over to Tony Tian for closing remarks. You may proceed.

Once again, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great 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.

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