Concord Medical Services Holdings Ltd (CCM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Concord Medical Services Holdings Ltd. earnings call. My name is Modesta, and I will be your coordinator for today. At this time, all participants 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, Investor Relations Manager for Concord Medical. Please proceed, sir.

Hello, everyone, and welcome to Concord Medical's first quarter 2011 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, and Mr. Steve Sun, Co-Chairman and Chief Financial Officer. After their prepared remarks, Dr. Yang and Mr. Sun 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 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 non-audited 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 first quarter 2011 earnings conference call.

In the first quarter of 2011, Concord Medical delivered moderate growth, with approximately 15% increase in net revenues compared with the first quarter of 2010. As newly opened centers in the past two/three quarters are still in the ramp-up period, revenue contribution has not yet been fully recorded. This is one of the key reasons we saw comparatively moderate growth for this quarter. However, as we have seen pickup in March, we expect stronger business momentum in the coming months.

From operational expansion standpoint, during the normally slower first quarter, we added two new centers to our network. In addition, we entered into a strategic cooperation with an oncology hospital, which further underlines our strategy to establish a line of standalone facilities alongside our center network on hospital premises.

Concord Medical entered into a joint venture agreement with the Oncology Hospital of Zhongshan Medical University, one of the top cancer hospitals in China, to establish a hospital specializing in cancer diagnosis and treatment in Guangzhou. The establishment of this hospital, which we expect will serve as a hospital of choice for many cancer patients in the southern part of China, is a milestone in our standalone facilities strategy.

We believe that establishing standalone specialty hospitals will not only allow Concord Medical to introduce the most advanced cancer treatment into China efficiently, but also allow us to attract, employ the best doctors specializing cancer treatment, to provide the best service to cancer patients and to enhance Concord Medical's industry leadership and brand.

Lastly, we believe the Chinese Government's policy for encouraging private investment in China's healthcare sector will benefit the development of Concord Medical's cancer treatment centers and specialty hospitals. We are committed to serving China's growing cancer patients through our unique business model, cancer diagnosis, and treatment expertise, established industry reputation and leadership position.

In the long run, Concord Medical will seize market opportunities and continue to expand our center network through acquisitions and the strategy of establishing specialty hospitals. At the same time, Concord Medical will continue to enhance operational and financial efficiency and strengthen our brand awareness. We are confident that Concord Medical will continue to maintain industry leadership and contribute to China's healthcare industry.

I will now turn the call over to Mr. Steve Sun, our CFO, who will walk you through our operational and financial development.

Thank you, Dr. Yang, and hello, everyone, and thank you for joining us today.

As Dr. Yang pointed out earlier, our moderate growth in the first quarter 2011 can be primarily attributed to the ramp up process in the newly opened centers. With the pick up we have seen in March, we look forward to strong business momentum in the rest of the year and are looking forward we will continue to focus on enhancing and operational and financial efficiency, while investing in expansion.

Again, to reiterate Dr. Yang's earlier point, our expansion strategy includes extending our center network with partnering hospitals and establishing our standalone and branded hospitals.

On the standalone facility expansion front, in addition to the ongoing acquisition of Chang'An hospital during the first quarter of 2011, Concord Medical entered a joint venture agreement with Oncology Hospital of Zhongshan Medical University, one of the top oncology hospitals in China, to form a specialty hospital in Guangzhou for cancer diagnosis and treatment. Pursuant to the terms of the agreement, Concord Medical is expected to hold a 70% stake in the joint venture, which is expected to have 400 patient beds.

The [registered] capital for the joint venture is RMB160 million, we plan to invest RMB50 million to RMB100 million this year. We plan to offer advanced radiotherapy and chemotherapy, and other related cancer treatment services in this facility. This establishment further demonstrates our commitment to establishing a line of standalone hospitals that stand for excellence in cancer diagnosis and treatment in China.

Turning to CCICC, on January 6, 2011, we announced we have entered into an agreement to acquire 52% of the equity interest in Chang'An Hospital from certain shareholders of the hospital for aggregate consideration of approximately RMB200 million.

The purpose of this is to expand the development of CCICC by consolidating the full capacity of the hospital into CCICC. The acquisition is subject to satisfactory due diligence and the relevant government approval.

The acquisition process is currently experiencing a delay in completing the due diligence and the required government approval. We will keep you posted on further development.

As part of our marketing and education program, we have continued to actively build up our brand awareness and leadership in the radiotherapy and diagnostic imaging industry. One particular effort is online education and marketing. Our initial efforts were in areas of gamma knife treatment for trigeminal nerve disease, which generated impressive results.

During this past quarter, we received 1,008 patient referrals from our website, of which we treat 282 cases that were suitable for the treatment. This accounts for about 9% of patient volume by the Company's head gamma knife and over 71% of the Company's overall trigeminal nerve patient volume for this quarter.

In 2010, our online marketing effort resulted a total of 884 patient treatment cases and contributed over RMB5 million to our revenue. We were encouraged by this initial success and we will extend our online marketing effort to cover more diseases and include more types of equipment.

In February 2011, Concord Medical participated in the first final American conference on nuclear medicine jointly held by the Chinese Society of Nuclear Medicine and the Society of Nuclear Medicine. The conference gathered more than 200 Chinese and American nuclear medicine professionals in Beijing, with in-depth exchange and dialog on nuclear medicine. In addition, in March 2011, Concord Medical hosted the Company's sixth PET-CT seminar in [Guangzhou], which attracted many recognized professionals.

Now I will turn to highlights of our financial results for the first quarter of 2011. Concord Medical reported total net revenues of RMB87.4 million for the first quarter of 2011. This represents a 14.7% increase from the corresponding period in 2010. The increase is primarily due to an increase in patient cases from existing centers and the opening of new centers, as well as the income from the preliminary operation of CCICC.

Cost of revenues in the first quarter of 2011 was RMB32.7 million. This is a 21% increase from the corresponding period in 2010. The increase was primarily due to an increase in depreciation costs related to new equipment added in 2011.

Our gross profit margin in the first quarter of 2011 was 63%, as compared to 72% in the fourth quarter of 2010 and 65% in the first quarter of 2010. The lower gross profit margin was primarily due to an increase in depreciation and amortization costs as a result of business expansion.

Operating expenses, consisting of selling expenses and general and administrative expenses, were RMB20 million in the first quarter of 2011, as compared to RMB30 million in the fourth quarter of 2010 and RMB18 million in the corresponding period in 2010. The year-over-year increase was primarily due to an increase in professional expenses, office and travel expenses and operating expenses, as a result of expanded business size.

The Company's recorded operating income was RMB35 million in the first quarter of 2011, representing a 10% increase from the corresponding period in 2010. Operating income excluding share-based compensation expenses, which is a non-GAAP measure, was RMB37 million, a 9% increase from the corresponding period in 2010.

Our net income in the first quarter of 2011, was RMB23 million. This represents a 6% increase from the corresponding period in 2010. Both basic and diluted earnings per ADS for the first quarter of 2011 amounted to RMB0.48.

Non-GAAP net income in the first quarter of 2011 was RMB25 million, a 5% increase from the corresponding period in 2010. Both non-GAAP basic and diluted earnings per ADS in the first quarter of 2011 amounted to RMB0.53.

As of March 31, 2011, the Company had a bank credit line totaling RMB2.1 billion, of which RMB90 million was utilized.

With that I will move to guidance for the fiscal year 2011. Based on current market and operating conditions, estimated business expansion and a forecast of the patient volume, Concord Medical reiterates its fiscal year 2011 guidance. The Company expects to generate total net revenue in the 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 revenues arising as a result of the current pending acquisition of Chang'An Hospital, but includes the income from CCICC's preliminary operations.

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

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 the call to the questions. Operator?

(Operator Instructions). Sean Wu, Morgan Stanley.

I have a question. You said something about a cost of revenue that increased because of some depreciation cost related to new equipment in 2011. So as I recall, you added only two centers, so how come this new equipment cost you had such a big impact on your cost of revenue for this quarter?

Well, we had only two centers this quarter but we had 33 in last year, whole year, and only one in the first quarter of last year. So compared to first quarter of last year, there are 34 centers added.

So this may be the --

Those -- right.

So you're saying it's new equipment in 2011, so should it be new [too and] added after the first quarter of last year?

No, you see -- yes, (inaudible) we added 11 centers in the second quarter last year. So the depreciation costs will be added starting from that center -- that quarter, second quarter, but not in the first quarter of last year. So, the comparison for the first quarter of 2011 to first quarter of 2010, then we have a bunch of depreciation costs to be added.

Okay. I got you. And also for your days outstanding, you had 80 days versus 127 days for last quarter. Why is it so much longer? And should we expect this number to go down to more normal range for second quarter to about 120 days? Or are we going to see some increased numbers somewhere between 120 and 127?

Yes. The last quarter -- usually the fourth quarter and the first quarter is always in opposite direction.

In the fourth quarter we make a strong effort to make collections from the hospital to make sure we can close as much accounts as possible with the hospitals. So we do have expended effort in collection of receivables. But in the first quarter, because it's Chinese New Year, so it's more difficult to collect money during the first quarter, especially between January 1 'til one/two weeks after the Chinese New Year.

So that is the primary reason for the big increase in the first quarter comparing to the last quarter of last year in terms of the receivables collections. And also remember we have the highest revenue last quarter of 2010. That's RMB112 million in revenues. But this quarter we only have RMB87 million revenues. That's also another reason that changed the days -- turnover days.

But we believe that with time, starting on next quarter the situation was getting even better and better, and I don't have exact days for you, but all I want to say is that the days definitely will decrease.

Great. Final question for now, you said that the approval of the acquisition of the Chang'An Hospital has been delayed. So now how confident are you -- think you can acquire this hospital successfully? And does that affect the operation of the Concord centers you are now operating?

And also, what is the near-term financial impact on your financial results without incorporating results from that part of the hospital?

I don't know how we say how confident we are, but we do know this is a delay and primarily in [both] ground in due diligence process and also due for the government approval process. And I really cannot give you any clear guidance on how confident we are, but we are still working on -- to try to get closed as soon as possible. But, right now, the management do not have time guidance right now, because we're really depending on how fast the government can react on, and also how fast the [exiting] shareholders can resolve those issues.

And as for financial, because so far we haven't included any financials from the hospital operations into our Company's financials, and so far there's no impact. Of course, if we -- the sooner we include the hospital, the sooner we can consolidate the hospital's revenues, but we're working on it.

Okay. Thank you. Actually, the hospital may be still losing money, so actually if -- you are, at this moment, better off without incorporating the results, is this --?

That's definitely right. The CCICC part is for making money, making profit, but the hospital as a whole, usually you can estimate -- you can imagine that the hospital and the doctor scale, will be losing money at this stage. But it's going very fast, because our effort. So -- but we believe hospital alone, excluding CCICC, will lose money this year, rather than make money.

Okay, thank you.

You're welcome.

Philip Ehrmann with Jupiter Asset Management.

I would like you to talk a little bit about what seems to be fairly high fixed costs, which obviously, have been brought to our attention by the fact that revenues are slightly lower than you expected, given the seasonality, I suppose.

One thing maybe you can help us with to understand this, is to talk maybe about capacity utilization. And also, the process by which your stores, or units, achieve maturity, and how long we should expect that to take. As I say, the focus from my perspective has actually been the disappointment that fixed costs are so high, and revenues have fallen short. So if you could address that, I'd be grateful.

Sure, no problem. Well, basically, the center we established has a ramp up period. So usually, it takes about six months -- on average, six months, sometimes longer, so six to nine months for the center to a reach satisfactory level of operation.

So we are continuing to adding centers, and so the added property plant and equipment usually representing we're adding more equipment this quarter. But the equipment we added this quarter may not result any significant revenue for us yet, because usually, they start to generate deliver the revenues from the first month we add it. But it's small -- very small from beginning, and takes a few months, usually six months, sometimes even longer, to reach a significant level.

So that's what you see why we have lower revenues, but we still have a bigger increased property and plant and equipment. And also, because the Chinese New Year's effect, so the first quarter is always worst quarter of the year, every year. And that's another reason. The equipment's still there, but it's just very few patient come to see doctor, to do a treatment. So that's another reason.

And as for our utilization rate, on average, I would say our equipment's still in the range about 50% to 60% in utilization rate, basically depending on equipment. Certain equipment, like gamma knife and the PET-CT utilization rate's still very low.

I guess, we believe there are many years to go, before we can really fully utilize them [as seen], because although it's increasing very fast, but still, utilization rate's very low; [PET] gamma knife usually 10%/20%, and PET-CT usually 20%. MRI is -- utilization rate is high, usually 90%/80%, sometimes even higher than that, in terms of utilization rate.

And in terms of our growth of existing centers, usually, on average, our existing center would generate about 5% to 10% growth year over year, from the increased value of patients.

Right, okay. And with regards to fixed costs, is -- can you point to things that you've taken upfront for the balance of the year, or is it just a question of relatively low revenues, because of seasonality swelling the expense ratio?

Can you repeat the question, again? Sorry, I didn't quite catch it.

Well, it's, once again, trying to get a better picture, I suppose, on the shorter term of the high expense ratio, or fixed costs. I'm wondering whether it's solely because of seasonally weak revenues, or whether you have taken any additional costs, front-end loaded for the -- that would normally have been spread across the year, or might have been otherwise spread across the year? Are there any exceptional expenses we should be aware of?

No. Basically, usually what we do is, once the center opened, once the things start to generate revenue, we start to take the depreciation cost into the -- and we start to take the property, and also, we start to depreciate the property.

So I think for this particular quarter, it's definitely short-term effect. And with time, when the ramp up period is ended, and the machines increase the revenues, and they will go to normal. Other than that, we do not have any exceptions this year -- this quarter.

Right. I'm just trying to get around the fact that your expenses came in at 4.6%, whereas a year ago, we were 2.7%. I think most people had been guided, and you led people to understand, obviously, as a result of growth and other corporate efforts, that expenses would be closer to the 4% level, but I think most of us are surprised it's closer to 5% than to 4%.

Well, yes, when you have -- when we have fast growth, I think this phenomena you're going to continue to see. And when -- now when you add new machines, if we add a lot more machines they're going to temporarily lower -- increase the property over revenues. And once we stabilize, then you're going to see that resource will stabilize as well.

Right, okay. Thank you. That's it from me, for now.

Okay, thank you.

(Operator Instructions). Fan Zheng, Roth Capital Partners.

My first question is regarding the JV. So are you going to acquire the existing hospital, or you're going to establish a completely new hospital? And when do you expect to commence construction, if the answer is yes?

(interpreted) Yes, actually, this quarter the biggest news on the Company side is entering into the agreement with -- to establish this cancer specialty hospital in Guangzhou.

Actually, from this move, people can see two directions -- two meanings of our move. So the first significance is about the new policy milestone from last year. Last December -- early December, the Chinese Government State Council issued guidance -- guidelines on encouraging private investments into healthcare sector. And we're doing this to take advantage of that policy movement.

So, the second significance about the establishment of this hospital is that, in southern part of China it's basically centered around Guangzhou. And, historically, it was -- like more than 90% of the healthcare services were by the Government-owned hospitals, as everybody knows. And recently, the local government established the Central Development Special District, and within this district, they're aiming at developing healthcare. And so we -- our -- this move of ours is also trying to take advantage of this local trend.

So adding on the second significance, our hospital partner in this deal is the oncology hospital for Zhongshan Medical University. And this hospital is very famous; it has great reputation in China, and especially in the southern part of China, and has both -- excellence in both the academically and also in the social influence. So we chose to collaborate with this partner to establish this business.

So, the other thing is that why this hospital partner -- the oncology hospital of Zhongshan Medical University, why did they chose us, shows further that the capital strength, and also the brand and the reputation of Concord Medical is well recognized in China, and that's why they chose us to collaborate.

So before this agreement was made, we have been in discussion and negotiation with partner for about 1.5 years, and right now, we're in the process of obtaining the medical license for this cancer-specialty hospital. So right now, as of the moment, we already chose the exact location and address of the -- where we're going to build this facility and we are progressing towards that.

Another thing to add on this is that the nose cancer is among the most populated, frequent cancers in southern part of China. And so by establishing this cancer-specialty hospital, we plan on doing significant clinical research on how to cure this popular cancer in southern China.

On top of collaborating with the oncology hospital, Zhongshan, and we also in the process of applying for the license for proton beam system. We plan on establishing this cancer-specialty hospital as the most advanced and the leading cancer-specialty hospital in the entire southern part of China.

Thank you.

Just a follow-up question. So looking forward, should we expect to see higher operating expenses incurred by this formation of JV?

Usually the pre-opening -- the opening cost will be added to the total cost of project, rather than being put into the operating cost of the financial statement. So where we going to spend RMB50 million to RMB100 million for the Company -- for the joint venture, going to show up in the joint venture financial balance sheet as opening cost, rather than in the P&L as operating cost.

Okay, thank you. That's my question.

(Operator Instructions). It appears there are no further questions, which concludes our Q&A portion. I would now like to turn the call back over to Tony Tian 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.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation, you may now disconnect. 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 this Event.