Concord Medical Services Holdings Ltd (CCM) 2011 Q3 法說會逐字稿

Thank you for standing by and welcome to the Concord Medical Services Holding Third Quarter 2011 Earnings Conference Call. At this time, all participants are in a listen only mode. There will be a presentation following by a question & answer session. (Operator Instructions). Please be advised that this conference is being recorded today, November 16, 2011. I would now like to hand the conference over to your speaker today, Tony Tian, Investor Relations Manager of Concord Medical. Thank you. Please go ahead.

Thank you, Mary Ann. Thank you for joining us today. We issued our earnings release earlier today. You can find a copy of the release on our website or through the new services. Today you will hear from Dr. Jianyu Yang, Concord Medical Director, President and Chief Executive Officer, and Mr. Adam Sun, acting Chief Financial Officer. After their remarks, Dr. Yang and Mr. Sun will answer your questions.

Let me remind you that our comments today will include forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995, and within the meaning of Section 21E of the Securities 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 filings with the S.E.C. The company does not assume any obligation to update any forward-looking statement except as required by law.

Our earnings release and remarks today also include unaudited, non-GAAP financial measures. Please see our earnings release for reconciliation of the unaudited, non-GAAP measures through the most directly comparable, unaudited non-GAAP measures. Your are reminded that such non-GAAP measures should not be viewed in isolation or as an alternative to the equivalent GAAP measure and that non-GAAP measures are not uniformly defined by all companies, including those in the medical industry.

As a reminder, this conference is being recorded. In addition, the webcast archive of this conference call will also be available on Concord Medical's website. It is my pleasure to introduce Concord Medical's Director, President and CEO, Dr. Jianyu Yang. Dr. Yang, please.

(interpeted) Thank you everyone, for joining our conference call today. We delivered a strong third quarter with solid financial growth in both revenue and net income, that was mainly due to higher patient volume as existing centers and the centers added in September 30 last year, plus the contribution from the Chang'an Concord Medical Services Holding, Ltd. International Cancer Center. We remain committed to executing our long-term strategy to develop new radio therapies and diagnostic imaging centers with hospital partners, to increase utilization and efficiencies at our existing centers, to establish new cancer specialty hospitals and stand-alone centers, and to pursue prudent acquisitions.

We are pleased that our strategies and operations continued to perform well in the third quarter. Our revenue outlook of R&D, $480 million to $520 million, for the year remains unchanged, given our solid growth in the first three third quarters of 2011 and our anticipated volume growth of the new centers we expect to have in the fourth quarter.

As for the Chang'an hospital acquisition, we are still conducting due diligence reviews. Our plan remains unchanged, that is to endeavor to complete the acquisition by the end of 2011. In July, our Board declared a special dividend of $0.18 per ADS to reward our shareholders and to signify Concord Medical's growth and the financial performance since its IPO in 2009. The dividend was paid on September 30, 2011 to shareholders of record at the close of business on August, 31, 2011.

At the end of September our Board approved a share repurchase program of up to $20 million of our outstanding ADS to show our commitment to creating long-term value for shareholders. Through November 11, we have purchased 140,623 ADSs, representing 421,869 ordinary shares in the open market.

We are confident in the development of our business. With the aging of the Chinese population problems such as the environmental pollution and food safety from rapid urbanization, the incidences of all types of cancer is increasing. According to the latest statistic by the Ministry of Health, the incidents of cancer in China was 12 cases in every 100,000 people in 2010, and that annually new cancer incidents is over 2.2 million cases, causing 1.6 million deaths.

Concord Medical will continue to leverage its national network of radiotherapy and diagnostic imaging centers, first class technological resources, training for medical professionals, abundant management experience and strong medical team to further contribute to China's cancer radiotherapies and diagnostic imaging industry.

Concord Medical is poised to enter the next stage of its growth. We will review and adjust our business strategy based on the current market conditions and emphasize maximizing shareholder value as the focus and core of our work.

We will stress sustainability in our development, improved management of our centers, and strive to achieve our fundamental objectives to become a healthcare institution that operates high-end, oncology specialty hospitals that are also identified by our own brand; at the same time we are committed to rewarding our shareholders for their support and trust through various ways such as our recent special dividend and share repurchase program.

Finally, I would like to introduce the new member of our management team, acting CFO, Adam Sun. Adam has abundant experience in capital markets and he will focus on financial management, M&A, and communications with capital markets. I would like to extend my warm welcome to him on behalf of the Concord Medical management team. Next, Adam will cover our financials.

Thank you, Dr. Yang. I am really pleased to join the strong entrepreneurial team in Concord Medical as a frontrunner in China's healthcare industry. Concord Medical's primary financial goal is to create substantial added value for the shareholders in the coming years and my job is to help the Company continue to achieve that goal.

Next, let's look at some key financial results for the third quarter. Net revenues were RMB124.7 million in Q3-2011, up 23.4% from Q3-2010, primarily from the increase in patient cases in our existing centers, especially diagnostic cases, as well as the contributions from new centers since September 30 of last year.

Our gross profit margin was 66.%, versus 66.2% in Q3-2010. The higher gross profit margin was primarily due to higher net revenues, which more than offset high consumables and equipment maintenance chares in support of higher revenues, as a result of effective cost control.

Our operating expenses, including SG&A, were RMB25.0 million in Q3-2011, up 44.8% from Q3-2010, primarily due to increases in office and travel expenses relating new centers and selling expenses in support of higher revenues. Sequentially, SG&A expenses were lower in third quarter than the second quarter of this year. We believe we have good control of our operating expenses and those should remain fairly consistent as a percentage of revenue.

Our operating income was RMB57.9 million in the third quarter of 2011, up 16.7% from Q3-2010. Our non-GAAP operating income, excluding share-based compensation expenses, was RMB60.2 million in Q3-2011, up 16.3% from Q3-2010.

Income tax expense was RMB16.6 million. The effective tax rate for Q3-2011 was 30.3%, compared with 27% Q3-2010, due to a higher statutory tax rate. Net income was RMB38.3 million, up 14.7% from Q3-2010.

Basic and diluted earnings per ADS for Q3-2011 were RMB0.81 or $0.13, compared with $0.10 for Q3-2010. Non-GAAP basic and diluted earnings per ADS were RMB0.86 or $0.13 in Q3-2011 compared with $0.11 for Q3-2010.

Adjusted EBITDA, which is a non-GAAP measure, was RMB93 million for the third quarter 2011, up 14.4% for the third quarter of 2010. During the third quarter, our total CapEx was RMB95.4 million, or $14.8 million, compared with RMB107.9 million, or $16.1 million in last year's third quarter.

Account receivable was RMB242.8 million, or $38.1 million as of September 30, compared with RMB228.8 million, or $35.4 million as of June 30 this year. Base sales outstanding, BSO, was 170 days in the third quarter 2011, up sequentially from 149 days in the second quarter of 2011.

Based on the current market and operating conditions, planned business expansion and expected patient volume, we are maintaining our prior revenue outlook for the year 2011 of between RMB480 million to RMB520 million.

During the first nine months of 2011 our total net revenue was RMB336 million, or about 70% of the low end of the range for our year 2011 outlook. The fourth quarter usually is the most productive quarter of the year, according to our experience so we are pretty confident that we can achieve our current 2011 target.

Achieving our revenue outlook, of course, depends on several factors that are discussed in our earnings release and our Safe Harbor statement. Looking at our liquidity and our cash resources as of September 30, 2011, we had cash of RMB388.1 million and available capacity in our bank credit line of about RMB2.0 billion, so we have very good cash flexibility, should we need it.

Maintaining the stable growth of the existing centers and improving the performance of new centers, emphasizing return on investments as the key, company-wide performance objective rather than, for example, focusing on revenue growth of the medical centers' key performance indicator; improving the effectiveness, efficiency and returns on the use of capital, and maintaining a healthy and stable operating cash flow as the company continues to grow.

Lastly, we will update you on the latest progress on Chang'an Hospital acquisition as we move forward and go close to the year end. Next, it is your turn. We will be very happy to answer your questions. Operator, please call for questions.

(Operator Instructions)

Our first questions comes from the line of Bin Li of Morgan Stanley.

Hello, everyone. Thanks for taking my questions. So, a couple of questions. First one is, you mentioned that in this quarter the sales growth was 23%--it's very healthy--and it's because of the increasing patient cases at existing centers, and also addition of new centers. Now, can you give us a breakdown to give us an idea of organic growth versus contribution from the new centers so we understand of that 23% what is organic growth and what's the new patient--new centers?

Sure, Bin, hi. Do you have a second part of the question, or?

I'll ask my follow-up questions later, if you can go ahead.

Sure. You know, first of all, for the number of patients--the number of patient cases increased is 35.5% in a year over year, and we see a very healthy diagnostics--especially the growth in the number of patient cases comes especially from the diagnostics because we are seeing like 42.6% of diagnostic cases. As for the breakdown between organic growth and the new centers, you know our analysis that the centers that are operating longer than a year are growing their revenue by about 10% year over year, third quarter over third quarter, and new centers--the centers that operated since last September 30--accounted for about 10% of our total revenue. I hope that give you an idea about the breakdown between organic growth and new center growth.

Sure, thanks. And you mentioned about the case number has increased about 35.5%. Now what's the pricing--because case number is the volume gross--what's the pricing for these cases?

Price wise we are seeing a very stable picture. Basically we're not seeing very substantial price volatility on either side, and I think the revenue--basically the product mix, because we are seeing faster growth on the side. It explains the percentage of revenue change.

Okay. I got it. It's the revenue mix that explains why the overall sales growth is below the volume growth. Okay.

Correct.

And, a follow-up question. Now, can you tell us your expectation for new centers for Q4 and for next year--is there an update on that--and also I think earlier this year you quoted that the difficulties in hospitals cash flow position put some pressure on new center openings. Are you still seeing that, i.e. the hospital cash flow situation--still pretty bad right now?

Okay. You know, to answer the first part of your questions, as for the number of new centers to be opened in Q4 and in 2012, you know--as you may know that we have not provided specific items on new center openings since Q2. You know, the reason for that is some of--because there are a lot of reasons that are beyond really our control because, for instance, some of the vendors are held back by the completion of facilities and other reasons for the delays include environmental assessments, which is a very sensitive issue after the Japanese nuclear disaster, also the readiness of the cobalt-60 unit, and also the hiring of qualified doctors and oncologists for our centers.

So we are working on all of these issues with the regional managers as well as our hospital partners, and so it is a little bit hard for us to really pinpoint the exact number of centers opening for each quarter, but, on the other hand we feel very comfortable with our contract pipeline and currently we have a total of 36 new contracts outstanding and they are in various stages of readiness.

So, looking forward, we feel that a number of new centers opened may vary from quarter to quarter and we may very likely see more centers opening in the fourth quarter of this year. Hopefully that will give you some better understanding about the future issues of our new centers.

As for the situation with the hospital departments, and the current credit tightening we are seeing, so that kind of affects the capital budget for the state-owned hospitals which, in fact, makes CCM more attractive and popular with them because we can really provide them with very badly needed capital and equipment. So, as for the financial difficulties of our hospital partners, we are now seeing directly the impact but we are going to monitor that very closely.

Okay. Your next question comes from the line of Fan Zheng of ROTH Capital Partners. Please limit yourself to three questions and then you can enter the queue again. Mr. Zheng, please go ahead.

Hi, good morning. Good evening. Thanks for taking my question. My first question is can you give us more details on the Chang'an hospital acquisition, like what tasks are you working on at the moment and what questions are under discussion at the moment?

(interpreted) So, I'd like to translate real quick for Dr. Yang. Basically the Chang'an hospital acquisition- the current contracting for the second step of the bigger picture--we previously completed the first step, which was the acquisition of the Chang'an CMS International Cancer Center, which that was already completed last year. So, the current project is we're trying to acquire the [Hoh Chan] Hospital and to build it into a general hospital but with a heavy focus on cancer treatment and diagnostics. So, currently we're still conducting due diligence on it.

So, I would like to talk about the progress in two (inaudible). Two aspects--the first aspect is the due diligence. This is both on the financial due diligence and also legal due diligence. So, the second aspect is regarding Concord Medical being a foreign listed--US listed company--so we are foreign investment, and for foreign investment to acquire a hospital in China we need to go through certain government approvals and we're working on that. We've got to have clear results by the end of this year, 2011. Thank you.

Okay. Thank you. That's helpful. My second question is about operating cash flow--what does operating cash flow and free cash flow look like for the last quarter, Mr. Sun.

I'm sorry, Fan. Would you please repeat that again. The line is not that clear.

Oh, sure. What is the operating cash flow and free cash flow look like for the last quarter?

As you know, we don't really disclose our financials. We only disclose the income statement and the balance sheet, so without an unaudited cash flow statement. We can only give you a calculation of our cash flow from operations. Just to remind you, this is only a management approximation and so the operating--by estimating our operating cash flow, what we do is we use the non-GAAP net income and then minus the change in the non-cash items of working capital items. So, basically that comes to about RMB160 million in the third quarter of this year, and then our CapEx for this quarter is RMB95.4 million, so basically that gives us an estimate/approximation of free cash flow of about RMB70 million.

Okay. Thank you. That's my questions. Thanks.

Thank you.

Your next question comes from the line of Paul Nouri of Noble Equity Funds.

The overall performance of the company looks great, and I think the one issue that investors worry about is their accounts receivable, and I know that you've explained that the hospitals are taking longer to pay but can you give us a timetable for when accounts receivables will stop increasing or at least when DSOs will stop increasing.

Yes. You are right. We pay a lot of attention to collections so I do know our collection efforts really take a lot of coordinated efforts between our management team and our hospital partners. The current account receivables--the DSO stays about 170 days, which is about 20 days more than at the end of second quarter, so what we're looking at right now is at the fourth quarter of the year usually we intensify the collection efforts and we assign a very specific goal for each of our regional and also vendor directives to reduce the number--to enforce more intensified collection efforts.

So, what we're looking at right now is--my own projection--we are looking at DSOs sales at about, I would say we're going to see even and stable change for the DSO, and we want to--our goal is to reduce it to maintain it at this level and then most likely we will see it go back to the mid year level maybe by the second quarter of next year.

Go back to?

I hope that answered your question.

Yes, to go back to 170 days by the second quarter?

I would say probably between 150 to 170.

So this is kind of the normal level of DSOs we can expect going forward?

I would say 150 will be mostly the ideal situation because you know the collection cycle yearly--like quarter-wise we will reaffirm the balance with our hospital partners and the hospital has to go through the internal process, and then we will-- it really varies from hospital to hospital.

So, if you look at it on a normal pace it will be about 120 days, and on top of that there are some larger accounts which takes a little bit longer for collection and may--some hospitals may settle with us like half--every six months and some every three months. I would say 150 days would be a very ideal situation, so the level of DSO, I would stay, would be stable between 150 to 170 days. I would say this is like we're getting very close to the top of the [wrench].

So can we assume that it's not an issue of the hospitals saying, we don't want to pay this much for the services that you're providing. It's just an issue of --you've agreed upon a price but they put off the payment?

No, it's mostly--it's really involved, because as I mentioned before, we--I would say, on an operating level we have not enough emphasized strong enough about collection and fast settlement with the hospitals. So, on the regional level they would rather maintain a very cordial relationship with the hospital--with the hospital partners, and not really pushing them very hard.

So, what we are trying to do right now is first of all, to really emphasize the important of fast and on-time collections, and secondly we will incorporate, in some degree, into the collection and the level of accounts receivable--into the key performance indicator or KPIs on the regional and the center level.

I would say that the [riding census] and a clear indicator, we will solve the issue, and payment--the only exception that we can talk about is in some hospitals where in their part of the markets where you see the patients start--the payment mechanism kind of changed, so the patients only pay the deductible and then the hospital to collect from the government insurance program. You know, if that happens that will delay our collection as well so it is still a very small percentage of our hospital affected by that but we will monitor that very closely.

Okay. I appreciate the clarification. Thank you.

Sure.

(Operator Instructions).

Your next question comes from the line of Bin Li of Morgan Stanley. Your line is open. Okay, that question has been withdrawn. You have a follow-up question from the line of Bin Li of Morgan Stanley.

Sorry, I apologize. My line was disconnected. I just wanted to ask you a follow-up question on the acquisition of the Chang'an hospitals because this is clearly investors' interest on this and people are eager to see that you make this transaction. My question is to Yang Jo, you know, you talk about the two components that need to be completed--one is the due diligence and the other is getting approvals from the government.

Now, if I understand this correctly, due diligence is more of whether you will finish or not, it's not a question of weather, but for the second part, the government approval--is there is any risk that government will not give you the approval after reviewing your application? So, let me just ask this question in Chinese.

So, Dr. Yang would like to answer the question.

(interpeted) The second aspect first. So, with respect to the government approval, actually you thought it is up to the government. Actually it's a part--we're applying a license and the government approval and a part of it is trying to convert this hospital from a non-profit organization back to a for-profit organization. This actually be accomplished. It's not a deciding factor and so this is the second aspect. And, the first aspect about due diligence--for this one, we're conducting the due diligence on the financial side and also on the legal side.

On the legal side it's about the shareholders' structure. So, as a private company--a private hospital for around ten years--there are still a lot of imperfections with the hospital so we have made certain requests on certain aspects based on the due diligence to the hospital, and these requests are in the process of being fulfilled. So, after the due diligence is done and at the end we are going to submit the results to our Board of Directors, and based on the due diligence results, and also based on whether the right compensation is mutually acceptable, we will make our final decision on the project.

Okay. And, the follow-up question is--Adam, you talk about your balance sheet and cash level. Is it adequate to fund this transaction as well as the working capital needs, as well as for the expansion of new centers?

Sure. Let me try to explain to you. So, currently our cash position is RMB388 million, as you can see. And so what we're looking for--our cash CapEx needs are basically the opening of new centers, the potential acquisition of Chang'an Hospital and working capital. So, basically--to finance these different projects--for the new centers, basically what we are looking at right now--as you may know this, we have a very strong credit line and are currently available so the total is about RMB2 billion, of which we only used about RMB85 million, or a very small percentage of that.

According to our--based on the credit agreement with our bank, we can finance up to 70% of the new equipment purchases, so moving forward we feel very comfortable about the opening of the new centers--the financing needs for the new, open centers. And for the centers in the pipeline already, the majority of them have the deposit paid down already so the financing demand is kind of limited. So, the only thing they're focusing on right now is towards the acquisition of Chang'an Hospital.

And, without going into specific valuation details, I would say that by putting all of these factors together we feel very confident about using the combination of our cash on hand, credit line and also the operating cash flow generated from our operation--put all of these together and we feel very confident about the availability of our cash resources.

Okay. Great. And one more housekeeping item, if I may. Why is your tax rate a little bit higher this quarter? And what is the outlook for next quarter?

Our state tax rate--because we are seeing the phasing out of our preferred tax treatment, now our state tax rate is 24% instead of 22% for last year, and what we're looking at right now is we're working very actively to see if we can gain some government tax treatment for new, high tech enterprises. We are actively applying for that and hopefully we can see some results, but other than that--but this phasing out is coming to an end so it will stop at 25%, as you may know.

Okay. Thank you very much.

You're welcome.

(Operator Instructions)

There are no further questions at this time. I would now like to hand the conference over to Adam Sun, Chief Financial Officer, for closing remarks. Sir.

Okay. I would like to take this opportunity to thank everyone for attending our conference today and also for your continued support of Concord Medical. We are committed to become a leader in China's healthcare industry and maximizing shareholder value. You are always welcome to contact everyone here with any questions and suggestions. Tony.

We have come to the end of the call. The webcast replay will be available at our website, at concordmedical.com. Please contact us anytime if you have more questions. Until we meet again, we wish you good health, safety and happiness from Concord Medical in Beijing. Goodbye for now.

That does conclude today's Concord Medical Services Holdings Third Quarter 2011 conference call. Thank you for participating. You may now disconnect.

Thank you.

Thank you.

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.