Concord Medical Services Holdings Ltd (CCM) 2012 Q4 法說會逐字稿

Thank you for standing by, and welcome to Q4 2012 Concord Medical Services Holdings Limited earnings conference call. At this point in time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session, (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, 21st of March, 2013.

I would now like to hand the call over to your host for today, Ms. Vickie Zhao from Solebury Communications. Thank you, ma'am. Please go ahead.

Hello everyone, and welcome to Concord Medical's fourth 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 newswire services.

Today, we'll 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. 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 the 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) Ladies and gentlemen, welcome to CCM's 2012 fourth quarter and full-year earnings conference call.

The annual revenue of Network business is CNY475 million, with a 6% rise, compared with 2011. Chang'an Hospital's medical revenue in the [second half-year] of 2012 reached CNY197 million, with approximately 40% year-on-year increase. CCM has become a large medical group, with 136 radiotherapy and imaging centers and 1 private, general hospital.

In 2012, CCM made great progress in both our Network business and Hospital business. In 2012, we completed the acquisition of 52% equity of Chang'an Hospital and 19.98% ownership of MD Anderson Cancer Center Proton Therapy Center which established a solid foundation for our future development. Chang'an Hospital has become a well-known general hospital in northwest China and contributes a lot to improve the local healthcare level. The ownership acquisition of MD Anderson Cancer Center Proton Therapy Center will provide strong technical and brand support for the construction and operation of planned CCM cancer centers.

In 2013, we look to cast our attention and resources to the construction of freestanding cancer specialty hospitals. Concord Huanan Cancer Hospital, located in Guangzhou, will break ground at the second half of 2013 and expect to open for patients in 2016. Concord Medical will target the ever-growing group of middle class population, meeting their demands for a high-quality, differentiated healthcare services. This is a huge business opportunity for CCM.

We have developed detailed plans for the current Network business in 2013. We will focus on taking advantage of several government policies of healthcare reform, meeting demand for patients, and exploring new business models including [telemedicine] where we [mount] medical solutions.

In the beginning of 2012, our operation principle is cost control, so as to increase capital return. By the end of 2012, our costs have been controlled effectively. In the working plan and budget assessments in 2013, return on investment is a key indicator. Every region and center should follow the cost control policies strictly in an effort to increase the capital return.

The year of 2013 will see CCM's great leap. We have every confidence in it. Here, I'd like to extend our sincere gratitude for your support and [kindness] since the IPO.

Now, I'll give the floor to Mr. Adam Sun, our CFO, to introduce CCM's financial conditions.

Thank you, Dr. Yang. Welcome everyone. First of all, I would like to go through the highlights in our full-year financial results.

Total net revenues for the full year 2012 were CNY671.7 million, or $107.8 million, a 49.3% increase from 2011.

Gross profit for the full year 2012 was CNY334 million, or $53.6 million, a 14.8% increase from 2011.

Adjusted EBITDA was CNY376 million, or $60 million, an 18% increase from 2011.

Net income for the full year 2012 was [CNY127.7 million, or $20.5 million].

Both basic and diluted earnings per ADS for the full year 2012 were CNY2.82, or $0.45.

I would like to focus my discussion on the following topics. First, I would like to comment on the status of our Network business, which contributed CNY117 million in revenue during the quarter and CNY 474 million for the full year 2012, or 70% of our 2012 total net revenue.

We are very glad to see that the gross margin for our Network business has improved to 68% during the fourth quarter, which is the highest it has been since the fourth quarter of 2011. Throughout 2012, we emphasized a focus on improving our operational network efficiencies and cost controls, and we are very glad to see the benefits of this initiative taking effect. We expect that our efforts will allow gross margins for the Network business to stabilize at the current level.

As for the Hospital business, we are very happy to see that Chang'an Hospital grew its revenue by 40% in 2012, relative to 2011. The healthcare reform policies as well as the expansion of social welfare assistance have benefitted Chang'an Hospital greatly.

In 2013, we will focus on improving the throughput of the hospital by focusing on the following aspects. Number one, strengthen the focus on oncology-related departments. We have already taken some steps towards this objective, as seen by our strategic alliance with Fox Chase that we announced in July 2012.

Number two, improve bed utilization and enhance inpatient revenue by focusing on the length of inpatient stays, which now stands at over 10 days.

Number three, the per capita spending of our patients now is low. It's below CNY200. There is a large room for improvement in this regard, as well.

Next, I would like to draw your attention to our improved DSO, or days sales outstanding. During 2012, we strengthened our collection efforts and incorporated DSO as a key performance indicator, KPI, in our review process. At the end of the fourth quarter, DSO from the Network business were 132 days, compared to 156 days in the third quarter. We will keep working on improving our receivables level in 2013.

Our full-year adjusted EBITDA was CNY376 million, or $60 million, an 18% increase from 2011, and our EBITDA margin was 56%. Our current EBITDA per ADS is around $1.20. We believe that EBITDA is a key valuation ratio that our investors should pay close attention to.

We also will pay close attention to our cash flow situation which is based on the adjusted EBITDA number. Our EBITDA in 2012 reflected the strong cash generating capability of both our Network and Hospital businesses.

To the end, I would like to discuss our 2013 financial guidance. We expect that our Network business will grow between 10% and 15%, and Chang'an Hospital will grow by 15% to 25%. Combined, this translates into total net revenues of CNY900 million to CNY970 million, or 35% to 45% overall revenue growth over 2012. These forecasts are based on our current business analysis and are subject to change.

Now, I would like to open to questions. Operator?

Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)

Bin Li, Morgan Stanley.

Hi, this is [Yolanda], on behalf of Bin. Thanks for taking my questions. I have a question for Dr. Yang regarding your network expansion plans, like your new center opening scheduled for this year and next year. And, do you have any plans to sign more contracts with [lower tier hospitals, county-level hospitals]? So, what's the timeline? And, what's your expectations for the revenue contribution and margin level? Thank you.

Yolanda, do you mind if you'll repeat your questions in Chinese? We don't have (multiple speakers). Thank you.

(spoken in Chinese)

(interpreted) We have announced the plan about two years ago to expand the total number of our networks to around 200. So far, we are still working toward reaching that goal.

Since last year, there is some adjustment in the Chinese government's healthcare reform policies. So, the government is focusing more resource towards providing the supply of basic healthcare services to the population and open up the operation of specialty hospitals to private and international capital. And, our plan is to take advantage of these policy changes.

Also, at the same time though, we have noticed that the demand for either radiotherapy or diagnostic services among the county level hospitals has been growing, and we are paying close attention to this trend. So, based on our current network of radiotherapy and diagnostic centers as well as our collective resources and medical experts, we are planning on investing in some level of this county level hospitals. So, we are doing research internally to see what is the best approach for this investment.

Thank you.

Thank you very much. Sean Wu, J.P. Morgan.

Yes. Thank you very much for taking this question, Dr. Yang and Mr. Sun, [concerning operations in the quarter]. I have two quick questions. Number one is about your income statement. It appears you have [significantly lowered] your (inaudible) ratio, especially in regard to the G&A. So, how have you been so successful? And, should we consider this can be lower level of G&A that you can sustain in 2013?

I have another question for Dr. Yang. That's about whether you see any kind of a government policy, initiative that can help you make Chang'an Hospital more profitable? And, according to my calculations, you guided for revenue growth about a 10% to 15% growth for Chang'an Hospital revenue. Is there any upside to this? Are you figuring leaving too much room on the table? I'll stop here.

(spoken in Chinese)

OK, Sean. Thank you for the questions. Regarding your first question regarding to our G&A expenses, first, as you know, we have -- you see this decrease of G&A as a percentage of revenue. Obviously, there is a reason that we have consolidated the financial results of Chang'an Hospital into our income statement, so that the Chang'an Hospital's G&A expense is relatively a lower percentage of their operation. So, combined, this reduces the ratio of G&A.

And, also, since 2012, we have been focusing on controlling our operating expenses, including the SG&A expenses at the three headquarters in China. So, we are seeing that those measures taking effect in the year, as well.

So, looking forward to 2013, I think you should expect G&A, as a percentage of sales revenue, should be around 10%, I would say, roughly. And, this should be a very, I would say, close estimate at this moment. Obviously, we'll look at cost control as a key performance indicator, all over the Company at this moment. So, we'll keep strengthening our efforts to control various kinds of costs.

And, now, I will ask Mr. Yang to answer your second part of the question.

(interpreted) The current ongoing healthcare reform in China obviously is very favorable for social capital to invest and operate in the hospital sector, which can be demonstrated by our strong performance of our Chang'an Hospital.

And, to answer your question about our forecasts for the Chang'an Hospital's revenue in 2013, we expect that the total medical revenue to grow by 15% to 25%. The reason behind it is in 2011, its revenue has been growing by 40% and it has experienced a very fast growth. And, currently, the bed utilization rate for the 1,100 beds in Chang'an Hospital is pretty much saturated. So, based on these two factors, we believe that the percentage growth of 15% to 25% is a reasonable estimate.

And, also, while the Chang'an Hospital's revenue has reached a certain at this level, we are looking at plans to do a restructuring of the Chang'an Hospital's revenue because, as you know, Chang'an Hospital is a general hospital we acquired, and its profitability as a general hospital is lower than specialty hospitals. So, our goal is to build Chang'an Hospital into a hospital with large specialty and small generality, which means that it's a general hospital with a strong focus in cancer-related services. So, while we are adapting this revenue restructuring plan, so we are deemphasizing the growth of the top line at this moment.

Thank you.

Thank you very much. (Operator Instructions) Jessica Li, CICC.

Hi. This is [John] from CICC. I'm going to ask the question on behalf of Jessica. First of all, I would like to ask Jianyu Yang on the construction plan in the future. What kind of timeline we have besides the Guangzhou hospital that we're going to start building in 2013? What is the progress that you can maybe say a little bit more about, on the Beijing hospital? And, this is the first question, about the construction of hospitals.

And, the second question I would like to ask is with the acquisition that the Company has accomplished in 2013 with Anderson Cancer Center, I would like to have Jianyu Yang to share a little bit more on what the Company is going to use this platform later to develop the Company's business.

(spoken in Chinese)

(interpreted) In China, under the current regulatory system, to sell a private hospital especially a [Class 3] hospital takes a relatively long period of time. For instance, our specialty hospital in Guangzhou, the Concord Huanan Hospital, we [signed] the operation contract in fall 2010, and we finally got fully licensed in January of this year. So, it took almost -- more than two years. And, so, at this moment, we plan to start construction at the second half of 2013. So, as you can see, it's a long approval process.

And, also, we have plans to build specialty hospitals in Beijing and Shanghai, as well. Both plans are in progress, and there is no substantial disclosures at this moment.

MD Anderson Cancer Center is the number one cancer hospital in the US. And, its proton center has been in operation and is a very mature business and also has performed a lot of R&D work. So, by acquiring the ownership in MD Anderson Proton Center, we hope that we can accumulate management and technical experiences, especially relating to proton therapy so that --. We also hope that our planned specialty hospital in China will become a platform on which we can have deeper cooperation and partnership with MD Anderson Cancer Center.

Thank you very much. (Operator Instructions) As there are no further questions at this point in time, I'd like to hand the call back to your host for today, Ms. Vickie Zhao. Thank you. Please go ahead.

Thank you. Once again, thank you 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 very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by interpreters present on the live call. The interpreters were provided by the Company sponsoring this Event.