Concord Medical Services Holdings Ltd (CCM) 2012 Q2 法說會逐字稿

Hello and thank you for standing by for Concord Medical's second quarter 2012 earnings conference call. At this time all participants are in 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 Tony Tian, Investor Relations Manager of Concord Medical. Mr. Tian, you may begin.

Thanks. Hello everyone, and welcome to Concord Medical's second 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 CEO 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. 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 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 second-quarter earnings conference call.

Concord Medical had solid growth during the second quarter of 2012. Total net revenues were CNY137m, a 10.2% increase from the same period of last year. Included in these results, revenues from our core network or lease and management services were CNY120m, a 15.3% increase from the second quarter of 2012.

New centers in our networks continue to improve their operating efficiency and provide support to our overall business.

Gross margin was 68.7% in Q2, a significant improvement from 58.4% in Q1. This performance demonstrates that our initiatives to reduce costs and improve operational efficiency instituted at the beginning of the year are having a significant effect.

On June 18 we announced the successful closing of the acquisition of 52% ownership in Chang'an Hospital, a leading non-public general hospital located in Xi'an, Shaanxi Province. The Company announced the signing of a definitive agreement in connection with the acquisition of 52% equity ownership in Chang'an Hospital on March 22, 2012. Since then, the Company has received all necessary government approvals, including new business license of Chang'an Hospital and completed all registration procedures, including Capital Verification Report, Share Ownership Report, and Businesses Registration Change Report. The financial results of Chang'an Hospital will be reflected in the consolidated financial statements of the Company in the third quarter.

In addition, we have made significant progress on other hospital projects, including the Guangzhou joint venture project. We recently obtained the approval of establishing a medical institution from the Ministry of Health of Guangdong Province. In early 2013, we plan to begin construction on a 400-bed cancer specialty hospital.

The ongoing healthcare reform in China will provide Concord Medical with 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, the successful closing of the acquisition of Chang'an Hospital, as well as the near-future establishment of the additional cancer specialty hospitals will enable CCM to become a leading hospital operation and management group.

Looking forward, we're confident in the growth of our overall business. As a leader in private healthcare services in China, we will take full advantage of the favorable regulatory environment by accelerating our effort in building cancer specialty hospitals under our own brand and improving the operational level and the efficiency of the existing centre network. We will continue to build Concord Medical into a leading cancer specialty hospital management group in Asia.

I want to express our appreciation again to investors and the analysts for all of your support. Thank you.

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 second quarter of 2012. By now I hope 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 CNY136.5m in second quarter of 2012, up 10.2% from the second quarter of 2011.

During the quarter, our treatment and the diagnostic business lines have seen strong growth in number of patient cases, especially for diagnostic equipment. During the quarter, the number of treatment and diagnostic patient cases were 8,820 and 52,833 respectively, representing increases of 2.5% and 25.7% for the second quarter of 2011.

We expect a strong growth momentum for diagnostic services 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 New Rural Cooperative Medical System, NRCMS. Second, people are becoming more health conscious and willing to pay out of pocket for high-end diagnostic services, such as PAP CT.

Our gross profit margin was 68.7% versus 58.4% in the first quarter of 2012 and 67.6% in the second quarter of 2011. This is a positive sign that our core network business, the lease and management business, is showing stronger earning power and our cost control measures instituted at the beginning of the year have taken effect.

Our SG&A expenses in the quarter were CNY37m compared to CNY28.6m in the second quarter of 2011. Also included in the operating expenses are CNY2.5m in web-based marketing related expenses. Excluding this expense, operating expenses accounted for 25.3% of total revenue compared to 23.3% in the first quarter. This reflects rising price levels in China such as rent, labor cost, professional services, etc. We are doing a line-by-line review of our cost structure and we will set up a target for expense reduction.

Net income in the quarter were CNY38.3m, growing 2.3% over second half of 2011. With projected double digit top line growth for 2012 and our cost control initiatives gradually taking effect, we expect to see bottom line growth remain strong for the year as well.

As Dr. Yang mentioned, we officially closed our Chang'an Hospital acquisition in June and we are very pleased to report that Chang'an Hospital demonstrate healthy growth during the first half of 2012. Total revenue for Chang'an Hospital was CNY185.5m, an increase of 57.8% over the first half of 2011. We expect this growth momentum will continue in the future as a basic medical insurance program covers larger population and Chang'an Hospital continues to build its specialty in cancer treatment as it has signed the strategic alliance with Fox Chase, a leading cancer treatment institution in the US.

Also in press release we have updated our guidance for second half of 2012 fiscal year as follows. Net revenues on the current network business of CNY220m to CNY240m and revenues of Chang'an Hospital of CNY190m to CNY210m, reflecting six months of financial results and network capital expenditures of CNY80m to CNY120m, primarily on purchasing new equipments for the new centers.

Before I open up for questions I would like to add a few words on our account receivable situation. Since the beginning of the year we have emphasized the importance of AR collection as a key performance measure for our operating team. We are very pleased to see the measures are taking effect. The AR days have decreased significantly from 201 days in Q1 to 159 days in Q2. We will continue strengthening our collection efforts in order to lower the DSO level for the remainder of the year.

Overall, we feel confident about our growth, and as evidenced by our improved business and the financial results.

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

(Operator Instructions). Your first question comes from the line of [Isabella Tsai] with Morgan Stanley.

Hello. Thank you for taking my question. This is Isabella on behalf of Bin Li of Morgan Stanley. Hello, Adam and Tony.

Hello.

Hi.

Hello. Yes. Can you hear me?

Hi, Isabelle. Yes, go ahead.

Okay. So my first question is regarding the improvement of your gross margin. And I'm -- you mentioned the cost control, the effectiveness and the higher revenue contribution from the new centers. Can you elaborate a little bit, give us a little bit more detail on those two things?

Sure. As you know, we have initiated the cost control measures since the beginning of the year and we're starting to see these measures taking effect. So what we have done is we've set up a very strict line-by-line cost targets for each of our centers in our network. And during the first half of the year we have seen that the operating costs related to the centers, including the consumables, the center-related direct expenses and center-related personnel and other expenses, the cost ratio has seen an improvement over the same period of last year.

And this -- also the improvement of our gross margin will come from two sides. On the one hand is our cost control measures, which means that we are going to maintain our cost ratio for each center and gradually lower [EBITDA]. And on the other hand, we're going to improve the revenue mix of our business, which means that we're trying to further enhance the performance of those new added centers. So by the first half of 2012, all of our 133 centers -- we have a total of 21 centers that opened less than a year. So these centers, we have seen very positive signs of our operation. For instance, the CyberKnife center based in Shanghai, which we have announced earlier this year, have seen very positive operating result.

But on the other hand, we have also a couple of centers still lagging behind, experiencing a longer than normal ramping up period. So once we improve the performance of those centers, we will see further improvement of our gross margin on the Group level. So the gross margin level for this quarter is the highest we have seen during the first -- during the last six quarters. So we expect that the gross margin level will maintain at this level, around this level for the remainder of the year.

Okay. Thank you.

I hope that's--

So -- hello.

Yes. Go ahead.

Yes. And so for the gross margin you said you're going to -- you expect to maintain this level. You mean at the 68.7% for the whole year?

Of course, for the whole year projection, probably we are going to see some volatility. But we expect that the gross margin will be around this level. Maybe a little bit lower, but not too much.

Okay. And -- okay. Thank you. And can I ask the second question or should I go back to the line?

I think you can go back to the line.

(Operator Instructions). Your next question comes from the line of Sean Wu with JPMorgan.

Hello.

Hi, Sean.

Hi there, Dr. Yang. Thank you for taking my question. Congratulations on a pretty solid quarter.

I have a question. Going back to your fiscal 2011 release, you mentioned because you're in the process of negotiating with the Chang'an Hospital for the transaction so you decide not to recognize certain service revenue with Chang'an Hospital. Now that this transaction has been closed, are you going to go back to reinstate something or you just say okay, that's part of the revenue where you no longer recognize? So this is some kind of agreement that you -- will you cancel going forward?

Okay. Let me first answer the question and then I will ask Dr. Yang to add on it. So between our cooperation with Chang'an Hospital prior to the signing of the acquisition, before closing the acquisition in the first half of the year, and we have -- there is a management agreement between Concord Medical and the Chang'an Hospital and we're entitled to receive some management fee and certain profit sharing of Chang'an Hospital. And then since that we are going -- we have closed the acquisition and we have now recognized those revenues since the beginning of the year. So for the first two quarters of this year you have seen that the management service revenue has -- compared to the last year there is a difference, and the difference mostly lies in that revenue related to Chang'an.

Then looking forward, we will not have a separate recognition of those revenues, since first of all we have -- we plan to consolidate the financial results of Chang'an Hospital since the second half of -- since the third quarter of 2012.

And secondly, we have not signed a new management agreement with Chang'an since last year, so that part of the revenue will now be recognized for us.

And I'll ask Dr. Yang to add on it, if you have any comments?

Yes, I hope that answers your question.

Can I just follow up with a related question? You have this fixed center also at the Chang'an Hospital, right?

Yes.

Hello. Okay, so --

Yes.

Before that you were -- it's leasing management. It's only for management there? And from here on, so of course you own 52% of Chang'an Hospital, so what will their accounting statement be like going forward?

So you are going to recognize the -- your profit as share, and also you will take 52% of the profit share given to the hospital. And how do you recognize like a [management structure]?

Yes. Those fixed equipments were invested by Concord Medical and has been operating for quite a while. So moving forward, we have signed a new -- we are going to treat those fixed equipment as a financial lease property. So that Chang'an Hospital will be paying us fixed sum of financial lease revenue for us, quarterly.

So there will be a very strict forward payment by quarter moving forward and we plan to recoup all the investments in the near future.

Okay, thanks. I'll get back into the queue now.

Okay, thank you very much.

(Operator Instructions). You do have a follow-up question from Isabella Tsai, with Morgan Stanley.

Hi Adam. Thank you for taking my question. My next question comes about the center closures in -- I noticed that you had closed two centers during the second q. And what was the reason behind closure and do you expect to close more new centers going forward?

Sure Isabella. So we have closed two centers and these two centers in fact have different circumstances. One center is purely contract expiration, so one of those centers has been in operation for almost 20 years. And the contract has just expired and we have -- we had a very successful cooperation with the hospital partner for the past 20 years and we decided to close the center, things -- because the hospital decided to move to the different direction. So that's contract expiration.

Another one is a relatively small center based in Beijing, and that center has been -- have showing a very poor financial result for quite a while. So we decided to close that center and we recouped the investment, plus a little bit of a gain. So we didn't incur any loss or any asset disposal loss in that case.

So moving forward we are going to -- so the centers that are in our networks, the average life for centers is still around seven years. And -- so these centers, most of them are going to operate normally and to really contribute to our revenue and our profit.

But there are also some centers that are seeing unsatisfactory financial results, so we either will take measures to turn those centers' performances around, or we will, in particular cases, when we decide to dispose of some of those centers. And the basis for those disposals will be our book value at that time.

Okay, thank you. So can I say -- what are the criteria for you to close a center? For like -- say -- if a center has been underperformed for so how long for you to decide you want to close it?

We do have a specific guideline, yes. But what we have done so far is we have ranked the centers' network by return on investment. So those centers that keep ranked at the bottom like 20, among the bottom 20, will be reviewed very carefully. And if we decide that those centers are seeing unsatisfactory results we may decide to close those centers. But these are very separate cases. We have not -- we don't have very specific plan to close any other center as the near future.

Okay, okay. Thank you. So, also regarding for the centers opening, and what's your plan for the number of centers you will be adding in the second half, or next year?

We have -- in the press release we have disclosed that we have 36 outstanding contracts. Those contracts are in different stages of being ready for open. So during the second half of the year we -- at this time we don't have a specific number of centers to be opened. But most likely we will open probably around 10 centers in the second half of the year. But that may change as we are moving forward, because opening up these centers -- of each center will require cooperation and partnership with our hospital partner as well. So there's a lot of factors that are beyond our own control.

Okay. And how about the number of centers will be open for next year? Do you have any plan yet?

Those 36 centers, you know, most likely will be opened within the next year, and so a safe estimate will be that these 36 centers will be added to our network before the end of next year. So quarter by quarter it's very hard to pinpoint the number of centers to be opened.

Okay, thank you. I will go back to the queue. Thank you.

All right, thank you.

Your next question is a follow-up question from Sean Wu, with JPMorgan.

Hello Adam, I think we were talking about this before. Like for your hospital pool to break-even you may need to have a revenue of about CNY300m. It looks like you will be -- the hospital will generate CNY300m this year. So what will be the EBITDA margin, the operating margin we should assume for the second half of the year, of your hospital operations?

So, you know the Chang'an Hospital has seen a very strong growth. The first half of the year is -- the total revenue is over CNY180m, and has been growing nearly 60% year over year.

So the -- it's definitely Chang'an Hospital will be profitable this year, so what will be the profit, the exact number? We assume -- it's a little bit early for us to discuss at this moment.

But the EBITDA margin and the -- so operating margin and the EBITDA margin, by all estimates the EBITDA margin will be probably between 15% to 18% and the operating margin will be about, let me see, about 12% also. So that's our own estimate, but these numbers are subject to audit. And we have a -- it will be better for us to discuss financial results of Chang'an Hospital at the end of this quarter.

So you --- I recall you were trying to add more beds to this hospital. How is this process going? Are we there yet, or we are still adding beds?

Clearly your growth year-over-year is less strong? That's because you have more beds, or just somehow you get more patients? And then how many of those patients are self-paying? Do they get reimbursed well?

Sure. Let me talk about the last part of the question first, and then I'll shift the question to Dr. Yang and he can give you some more color on that.

For the reimbursement system, now is more like a set -- it's more like a set -- I would say fixed reimbursement quota. The way it works is those patients will be -- there will be -- from the Government Insurance Bureau -- and what they do is they will have an estimate of the number of insurance patients that are going to visit each hospital on an annual basis. And then now most hospitals are going to receive those reimbursements ahead of the time.

So the reimbursement from social insurance programs, at least in Chang'an Hospital, is very smooth. So we have not seen a large amount of receivables from the insurance, so far this year.

But of course that policy may change rapidly, so we are going to monitor that carefully, and we discuss this with the hospital's management on a regular basis. But we monitor their financial results very closely.

As for the first part of the question, as for whether Chang'an Hospital plans to add more beds, let me turn the call over to Dr. Yang.

Yes, I was asking whether you have completed your second phase. I know like you were trying to expand the hospital beds. You were trying to say okay -- originally you would separate the -- come out of the oncology surgery -- oncology gamma validation center from the rest. So you have two phases. So have you finished -- completed the second phase? So how many total beds do you have now?

(Interpreted). Okay, so Sean, basically the current number of patient beds in Chang'an Hospital is 1,100, and this has been completed in the last year.

So Concord Medical has taken the maximum services on Chang'an Hospital to some time. Within the last three years the growth has been strong for each and every year. And for -- under the current number of patient beds, we expect continuing the strong growth next year too.

Okay, thanks.

(Operator Instructions). Your next question comes from the line of [Mateo Krause], a private investor.

Hi guys. Nice quarter.

Oh, thank you.

So I had a question on Chang'an Hospital but it got, for now, answered already. But I just wanted to thank you for doing the stock repurchasing. I think investing in stocks is a great investment at this time. I believe the stock is quite under-valued and I just wanted to thank you for your efforts on that and wish you luck for the next quarter.

Well, thank you for your support.

Thank you Matt.

(Operator Instructions). You do have a follow-up question from the line of Isabella Tsai with Morgan Stanley.

Adam, thanks for taking my question again, and I will follow up on the higher G&A expenses. And can you explain a little bit more for your increased expense on rental and headquarters? And what --

Yes.

-- SG&A level going forward?

Because -- as you know that the overall pricing environment in China is really on the uptick, so during this quarter our general and administrative expenses did see some growth.

This is more like -- this growth will be more like specific for this quarter, because for instance we have renewed our rent agreement for our headquarters here in Beijing. The price have seen substantial, significant increase over the previous term. And also that during this quarter we have included some web-based marketing expenses.

So we have set up a team to do remote medicine, as well as those online user -- Internet marketing tool for our services. So in this quarter we have incurred a total expense of about CNY2.5m. So we believe that this is an investment, very -- is going to bring us value in the near future, but it is still in the investment stage.

So moving forward it is -- we are going to first -- on a quarterly basis going to spend probably about the same amount on the web-based marketing expenses. And -- but, other than that, we do not expect to see substantial increase for the other items in our general and administrative expenses.

Okay, and thank you. And so, in that case, previously you said you expect the gross margin going to be gradually improve, and for the G&A expenses -- the higher G&A expenses will be lower. And so what's your operating margin expectation for this year?

We have done -- we have not really issued guidance on specific margin levels, because as you know the pricing level for -- in the -- for operating in China is really seeing a lot of changes. And mostly the inflation is reflecting in all aspects of our business, from our operations in each center, as well as to our headquarter related expenses.

Almost all expense items, such as rent or personnel, travel, all those have seen increases over the same period last year. So -- but on a -- so we -- to repeat, we will strengthen our cost control measures. So, but so far cost control measures are mostly related to the centers, so that is part of the reason we are seeing the gross margin stabilizing and improving.

So whether at the next stage we need to look at our general and administrative expenses, so if it goes up too fast probably we are going to look at those expense items also. So I hope that can give you more understanding about our expense picture.

Okay, thank you. Thank you for taking my question.

Yes, you're welcome. Thank you very much.

(Operator Instructions). There are no further questions at this time. We are now approaching the end of the conference call. I will now turn the call over to Concord Medical's Investor Relations Manager, Tony Tian, for his closing remarks.

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

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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