Concord Medical Services Holdings Ltd (CCM) 2012 Q1 法說會逐字稿

Hello and thank you for standing by for Concord Medical's first quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today's conference, Mr. Tony Tian, Investor Relations Manager of Concord Medical. Mr. Tian, please go ahead.

Hello, everyone, and welcome to Concord Medical's first-quarter 2012 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 Chairman and Chief Executive Officer; and Mr. Adam Sun, 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 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. Financial 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 now turn the call over to Concord Medical's Chairman and CEO Dr. Jianyu Yang.

(Interpreted). First of all, I would like to welcome everyone to our 2012 first quarter earnings conference call.

Concord Medical has made solid progress in the first quarter of 2012. Total net revenues were CNY106.7m and $16.9m, a 22.1% increase from the first quarter 2011. Net income in the first quarter of 2012 was CNY25m and $4.0m, a 9.2% increase from the first quarter 2011. This is the first time Concord Medical realized first quarter revenue of over CNY100m. This is a significant achievement as we were able to achieve this despite having fewer days in the first quarter due to the spring festival and the highly competitive markets. We are very proud of our achievement which will help pave the way to accomplishing our 2012 fiscal year business objectives. I would like to thank our operations team for hard work.

Our focus, for the remainder of 2012, is to continue our current strategy on one hand to improve the cost control and operational efficiency of our existing centers and, on the other hand, to improve the operations of newly opened centers which have been in operation for less than a year and help those centers reach their investment targets.

Many investors have enquired us about the status of our acquisition of Chang'an Hospital. I'm happy to share that all government approval processes are progressing as planned. We will have a Board Meeting in the near future to discuss the final step to close the transaction. We expect to complete acquisition within the first half of 2012 and consolidate financial results of Chang'an Hospital beginning at the third quarter of 2012.

Chang'an Hospital has made great progress in information systems infrastructure. The China's Ministry of Health organized reviews of Electronic Medical Record, EMR, capabilities among hospitals and Chang'an Hospital was ranked number one [twice]. In May, Chang'an Hospital was accredited with Stage 6 of EMR capabilities by US Healthcare Information and Management Systems Society, HIMSS.

We will hold an Investor Analyst Day in Chang'an Hospital on May 31, 2012. That event will be an opportunity for management to showcase the hospital as well as provide an updated strategic and operating outlook for the Company. So far, we've seen enthusiastic responses from the investors and we look forward to communicating with the investment community at Chang'an Hospital at the end of May.

In this quarter, we established a Tele-radiotherapy Business Department in collaboration with Jinwei Medical Services Inc, a leading telemedicine company in China. We will utilize excellent resources of medical professionals in large cities and hospitals to build up core healthcare services for partner hospitals, doctors and patients, which includes remote diagnosis, training and two-way referrals.

The ongoing healthcare reform in China will provide Concord Medical significant development opportunities. By 2015, it is projected that the number of private hospitals will increase to approximately 20% of the total number of hospitals in China according to China's Ministry of Health. We plan to take advantage of this growing trend and build several cancer specialty hospitals with a focus on radiotherapy. These projects are moving forward according to plan. We expect to obtain the license of at least one cancer specialty hospital in 2012 and begin construction as soon as possible.

As a leading healthcare service provider in China, Concord Medical offers high quality radiotherapy and diagnostic imaging services to patients and hospital partners and has developed a solid reputation in the market. With the aging Chinese population, accelerating urbanization, serious environmental pollution, including rising concerns over food safety, cancer has increasingly become a major threat to the health of the Chinese population. As an enterprise with social responsibility, Concord Medical is committed to contributing to China's cancer treatment and prevention process.

Thank you for your continued support to us. I will now turn the call over to Adam Sun, our CFO, who will walk you through our financials.

Thank you, Dr. Yang, and hello, everyone. And thank you for joining us today. Let's look at some key financial results for the first quarter of 2012. By now, I hope that everyone has seen the 6K that was filed by the Company, which contains the full financials, and so I will just go through some of the key highlights and then open the call to questions.

Net revenues were CNY106.7m in 1Q '12, up 22.1% on 1Q 2011. As Dr. Yang mentioned, this marks the first time we achieved revenue over CNY100m in the first quarter of any year. During the quarter, our treatment and diagnostic business lines have seen strong growth in number of patient cases, especially for diagnostic equipment. During the quarter, we have received 7,860 patient cases and 44,527 patient cases for the treatment and diagnostic equipment. Revenue from the diagnostics accounted for 31% of the total revenue of the quarter.

Specifically, numbers of patients cases from PET-CT and MRI increased by 63% and 41%, respectively, over 1Q 2011. We expect the strong growth momentum to be sustainable during the remainder of the year as first, basic diagnostic services, such as MRI and CT, are covered by government insurance programs such as NRCMS. And, secondly, people are becoming more health-conscious and willing to pay out of pocket for the high-end diagnostic services such as PET-CT.

Our gross profit margin was 58.4% versus 62.6% in 1Q 2011. Let me give you some more color on the gross margin change. First, diagnostics, our fastest-growing business line, usually have higher cost of revenue compared to treatment, due to higher per patient consumable and film expenses.

And, secondly, we have seen uneven center growth during the quarter. Among the centers open less than a year, performance levels vary from center to center. We will review the performance of each of the new centers, and our operation department is working on turnaround plans for the underperforming centers.

Our operating expenses consists of selling expenses and general and administrative expenses and were CNY24.9m as compared to CNY19.9m in 1Q 2011. Operating expenses accounted for 23% of total revenue, approximately the same level compared to 1Q 2011. This indicates that our cost control initiatives have generated desired results.

During the quarter, we spend CNY2.5m in web-based marketing expenses. Web-based marketing is a cost-efficient way to expand our reach to patients and further lower our selling expenses. We expect overall cost result will improve during the remainder of the year.

Our net income was CNY25m, growing 9.2% over 1Q 2011. This projected double-digit top-line growth for 2012 and our cost control initiatives gradually taking effect, we will see bottom-line growth remain strong for the year, as well.

Before I open up for questions, I will add a few words on our accounts receivable situation. As you can see, our AR level has increased slightly from 4Q 2011. There are seasonality factors. However, we are strengthening our collection efforts in order to lower the DSO levels significantly for the remainder of the year. Our working capital level has improved during the quarter, which is a positive plan.

Overall, we feel confident about our gross prospect and we have reaffirmed our business and financial guidance for 2012.

Now we would like to open the call to questions. Operator?

Thank you. Ladies and gentlemen, the question and answer session of this conference call will start in a moment. (Operator Instructions). In order to be fair to all callers who wish to ask a question, we will take one question at a time from each caller. If you have more than one question, please request to join the question queue again after your first question has been addressed.

And now your first question comes from the line of Chris Lui from Morgan Stanley. Please ask your question.

Hi. Thanks for taking my question. Can you talk about different drivers of your revenue line; the managed hospitals and lease costs? And also can you talk about your strategies in 2012 on cost controls and also on your AR, accounts receivable days, how you're going to lower it? Thanks.

All right, Chris. Let me take the question first and then I will pass to Dr. Yang for his comments.

First of all, looking forward to the remainder of 2012, we believe that the flowing factors are going to drive our revenue growth. First, the new centers. (Technical difficulty) as we gradually improve the overall performances. The new centers in our network contributed about 11% of our total lease and management revenue in the first quarter. Among this quarter, the performance level is very uneven, as I mentioned before. There are about seven to eight centers due to various reasons, such as geographical management and expertise reasons, that have performed far below our investment projection.

But our key job right now is to improve the revenue contribution of these underperforming centers, as I mentioned in the prepared remarks. As these new centers deliver better results, you will see our revenue growth maintain a strong momentum as we have witnessed in the [third] quarter. And also enhancing the performance of these new centers, we (background noise) improve our gross margin, as well.

On center level, these underperforming centers have low or even negative (background noise) to the fact that our gross margin of 58% in the first quarter is below our historical levels. If the revenue contribution from these new centers reverts to mean, we will see quantifiable impact on gross margin gradually.

The lower gross margin is also attributable to the fact that we are seeing faster growth in diagnostic services, which has a lower gross margin due to higher drug consumables and film costs on per patient cases basis.

Looking forward to 2012, we believe that our growth strategy is composed of the following factors. First, we will continue to pursue the strategy to open oncology hospitals so as to transform Concord Medical into a leading hospital management company. Acquisition of Chang'an Hospital is the first step towards that goal.

And, secondly, we will extend our current network business while focusing on improving the operating efficiency of the existing and new centers to ensure healthy top-line growth by gradually improving the profitability of our [center] business.

And secondly -- and thirdly, finally, we're implementing new business initiatives such as tele-radiotherapy and web-based marketing to further improve our offering leverage and efficiency.

Now I'll pass the call to Dr. Yang and he's going to talk about our strategy regarding the hospital business.

(Interpreted). I'd like to add two points to what Adam said earlier. One, we have maintained solid growth the last two years and the growth is normal under the market circumstances. You probably have noticed that the profit growth has not been exactly in line with the top-line growth. And this actually, we're not a unique company. This has been a problem with most of the Chinese companies in the last year. One thing the price inflation in China has been pretty substantial. So, within our Company, we have been trying our best to improve our operation and management level and to lower the cost, operation cost, and so make sure our profit growth will soon catch up with the top-line growth.

All right. Thank you. The next question comes from the line of Sean Wu from JPMorgan. Please ask the question.

Hello, (spoken in Chinese). Congratulations on a great quarter I think this quarter. And seasonally, normally, your first quarter is a weak quarter. But, this quarter appears you have done very well. So, I just have very quick question about your current new line of business. It's this tele-radiotherapy. So, can you explain a bit more about why China, we need these kind of services? And how do you plan to monetize such services?

(interpreted) So, first of all, the tele-medicine or the tele-radiotherapy has a lot of -- there's a lot of demand in China right now. As a country with such a large area and population, actually, the distribution of medical resources is not so even. So, there's a lot of demand and shortages of the expertise and resources from the smaller hospitals in smaller cities.

As you can see, our current 130 centers are distributed mostly in large cities and in areas that have a dense population. So, within our centers network, there's a great synergy and inter-collaboration ongoing.

As the tele-medicine has received a lot of attention in China or worldwide, actually we, Concord Medical, our business model fits the tele-medicine, tele-radiotherapy the most because, as you know, the -- once patients get diagnosed and the information of their diagnosis can be transferred over the Internet between different locations and doctors and patients don't have to see each other in person to go -- move forward with the treatment processes. So, in that sense, what we do actually fits the tele-medicine pretty well.

As you see here, there's so much demand on the tele-medicine or the remote diagnosis. So, Concord Medical has started the preparation work about a year ago. In the first stage, we saw -- we've seen so much demand within our center network between the centers. And so, we've worked on that. And at the same time, we also see much more demand from the hospitals outside our center network who are -- who contacted us. And they're eager to join us, join our possible and kind of collaboration for this tele-medicine, tele-radiotherapy.

So, the tele-radiotherapy has enabled some of the centers in our network to offer additional services for the other centers. And so, tele-radiotherapy will be a new business model in the field. And we very much look forward to the success on this new model. Thank you.

Thank you. Your next question comes from the line of Yale Jen from Roth Capital. Please ask your question.

Thank you for taking the question, [this evening]. My question is that you have the diagnostics portion growth rather fastly this -- so far and do you anticipate that growth will be faster compared to the treatment and how -- what kind of impact that might have on the gross margin if that's the case? Thanks.

Okay. Yes, let me answer this question. The question is about our revenue mix. And I think this quarter, we have noticed actual growth in our diagnostic business line. As the reason, as I mentioned in the prepared remarks, is that the diagnostic relatively -- there are two drivers for the higher demand for diagnostic services in China.

On the one hand, the low- to mid-end diagnostic services, such as MRI or CT, are gradually becoming coverable under the government-sponsored insurance program, such as the new rural area cooperative insurance program. So, this opened up a lot of demand that's been depressed before. So, we are seeing very strong growth, almost 40% year-over-year patient cases growth in our MRI line.

And for the PET-CT lines, I think the driver behind it is a little bit different but basically in the same line, which is people are becoming more health conscious. And for PET-CTs, mostly, we see the demand coming from the high-income population who are willing to pay a little bit more out of their pocket to do a thorough physical test for themselves or for their family members.

So, we believe that this will be the pattern moving forward as the demand for the diagnostic services are going to be more availably met because, relatively speaking, the prerequisites for a diagnostic center is relatively faster to accomplish than treatment centers such as [Liniac] or gamma knife.

And on the other hand, there is the issue of license for gamma knife which has been suspended for the past two years already. So, we have seen a lot of centers ready but without licenses yet.

So, moving forward for the remainder of 2012 and looking forward, we believe that we're still going to see faster growth on the per-patient cases as well as on the revenue side from the diagnostic business line.

And from the kind of impact it has on gross margin, because on a center-by-center basis, if we compare the gross margin of a diagnostic center, especially a PET-CT center, it has the highest operating cost ratio amount or equipments because of the per-patient needs to be -- have the drug, the consumables as well as the films or sometimes multiple films for patients. So, all this will have some kind of a downward pressure I think on our gross margin.

So, whether that's going to -- so, how -- what kind of impact, offsetting impact our cost-control initiatives have, it remains to be seen. But, we believe that the -- if we all have -- it'll have some kind of impact upon gross margin, but it basically will be offset by the faster revenue growth as well.

Hope that answers your question.

Okay. Great. Thanks, Adam. And congrats on the good quarter.

Thank you. (Operator Instructions). We have a follow-up question from the line of Yale Jen from Roth Capital. Please ask the question.

Thanks for taking the follow-up question. Just could you give a little bit more color in terms of the building up or getting the license for the next hospital this year? I know that possibly two sides to contemplate. But, overall, is there any more color you can give us? Thanks.

So, Tony, why don't you translate the question, and I'll let Dr. Yang answer it.

Sorry, Yale, do you mind repeating the question again? The line is not that clear, so --

Okay. No problem. I -- for the year, you anticipate to getting potentially advanced licensing, getting the licensing for the second hospital. So, could you give us a little bit more color in terms of that development for the remaining of the year?

(Interpreted) So, a year ago, we announced that we were establishing a joint venture with the Sun Yat-Sen University Cancer Center to build a new cancer specialty hospital. And that project has been ongoing. And we expect to make some substantial progress by the end of this year.

Okay. Great. Thanks a lot. Appreciate it.

Thank you. Next, a follow-up question from the line of Sean Wu from JPMorgan. Please ask your question.

Hello. You guys mentioned that you are on track to close the hospital acquisition by the end of June. And so, can you give us some rough idea? You do provide sales guidance for that. What is the operating margin, like gross margin and the net margin we can expect from your hospital operations this year and the potentially, like, when the hospital's fully ramped up? Like, what is the expected margins for hospital services?

Sure, Sean. Let me try to answer that question. And we -- as you know, the acquisition of Chang'an hospital is moving forward, as we said. And we'll start the financial consolidation from third quarter of this year, as we mentioned before.

As for the operating margin as well as the net margin of the hospital business, first of all, it will be obviously different from our current line of business. So, as for the specific ratios, I think we are -- it is a little bit early I think for us to really give an exact number at this moment.

But, gradually, generally speaking, let me give you some grasp or ballpark and which you can use to analyze potential -- our potential hospital business. The average net profit margin for public hospitals in China is about 5%. And this is a number you can find I think on all sorts of sources, all kinds of data sources.

On the other hand, the average net margin for specialty hospitals in China is between -- is about 15% to 20%. And we have seen that number before. So, we believe that the Chang'an hospital's margin probably will be higher than -- obviously will be higher than public hospitals' net margin. But, the 15% is kind of like the top limit I think you can use in your models.

So, but, one thing I can say at this moment is Chang'an hospital has (inaudible) substantial capital expenditures in the past two years. It just opened its second space of its operation. And it has increased its number of beds to about 1,100. So, we've seen a very healthy growth momentum of the hospital business so far this year.

And so, we will see -- we feel pretty comfortable about the guidance number we have given at the beginning of the year which is the hospitals to build between CNY190m to CNY210m in the (technical difficulty) second half of the year, if I remember it correctly. So, that is still our target, and we feel very comfortable that the hospital will deliver that kind of results for the year.

So, as we move forward, and as we integrate more closely with the financial department and operating department of the hospital, we will be able to give you more detailed and more reliable guidance as for the ratio and the operating margins. Hope that is helpful to you, Sean.

Thank you.

Thank you.

Thank you. (Operator Instructions). All right. We're now approaching the end of today's conference call. I will now turn the call over to Concord Medical's Investor Relations Manager Mr. Tony Tian for his closing remarks.

Once again, thank you very much for joining us today. Please don't hesitate to contact us if you have any further questions. Thank you for your continued support.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect. Good day.

All right. Thank you.

Thank you.

Portions of this transcript that are noted Interpreted were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.