Concord Medical Services Holdings Ltd (CCM) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2013 Concord Medical Services Holdings Limited earnings conference call and webcast. At this 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, Wednesday, May 22, 2013. I would now like to hand the conference over to your host today, Miss Vickie Zhao from Solebury Communications. Thank you. Please go ahead.

Hello, everyone, and welcome to Concord Medical's first quarter 2013 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 we will hear from Dr. Jianyu Yang, Concord Medical's Chairman and Chief Executive Officer, and Mr. Adam Sun, Chief Financial Officer. After the 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. The general 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). Welcome to Concord Medical's first quarter 2013 earnings conference call. In the first quarter, the Company's overall performance is stable. Total net revenue including the network business and the Chang'an Hospital reached CNY203m, an increase of 91% over the same period last year. These results represent good momentum and provide a solid foundation to achieve our full-year target. Our network business revenue reached CNY111m, an increase of 4.6% over the same period last year. Chang'an Hospital revenue reached CNY92.3m. Due to seasonality influence the first quarter of the year is the slowest period of the whole year. We expect that revenues and other various operational indicators in the second and third quarter will rise sequentially.

Over the next three years due to ageing demographics, environmental pollution, food safety and other issues, cancer is expected to enter a period of high incidence in China. Seeing these trends and having accumulated 16 years of experience in cancer radiotherapy, Concord Medical plans to construct our own independent cancer hospital in two to three key cities in China. In partnership with internationally famous medical institutions, we will provide Chinese cancer patients, especially high end patients, with state-of-the-art differentiated services. Meanwhile, the steady stream of patients will be [convoyed] from our centers across the country to CCM's cancer hospitals.

We plan to start the design and construction of our Guangzhou Hospital during the second half of 2013 and this project is expected to be completed in two to three years. After opening Guangzhou, [Tongzhou] cancer hospital will provide high end cancer treatment and diagnostic services. We plan to use the most advanced radiotherapy and other treatment methods to treat local patients. Concord Medical now is negotiating to build and operate high end cancer hospitals in other cities and regions as well. As more information becomes available, we will promptly disclose the progress of this project to our investors.

Now I want to focus on Concord Medical's Internet, mobile and telemedicine services. Concord Medical has more than 16 years of experience in cancer treatment and diagnosis and has a wealth of [F1] doctors and hospital resources. Now new technology and applications are having a strong impact for the medical industry, especially the mobile Internet, which has become an important source of information in the course of medical treatment to most patients.

The potential for Concord is huge. Based on these trends and the wealth of information from the offline resources of hospitals and doctors, we can do online marketing and promotion very successfully and at a very low cost to increase the number of patients in the centers of our network business. At the same time, the telemedicine project will use a state-of-the-art communications network and connect the doctor resources in different locations to implement imaging diagnosis and offsite group consulting.

At present, we have covered 40 hospitals around the whole country and preliminarily established a telemedicine network.

The above new business provides strong support and supplements Concord Medical's existing business. We will continue to invest in this new business but also will establish a clear revenue target and the number of patients and the financial breakeven schedule for each new business unit to achieve self-sufficiency as soon as possible.

In conclusion, we have established a clear growth strategy for the overall business development of Concord Medical and have an experienced management team capable of executing this plan. We are confident of our corporate strategy with CCM cancer specialty hospitals, a geographical nexus in centers throughout the country as support network.

Next Mr. Adam Sun, the CFO of CCM, will discuss the first quarter financial results.

Thanks, Dr. Yang. Hello, everyone. First, I would like to discuss some of the highlights in the financial results of Q1 2013. Then I will talk about our web and telemedicine business. Finally I will provide some color on the equity investment income of our MD Anderson Proton Center ownership.

From the earnings release issued after market close yesterday, you can see that CCM's total revenue was CNY204m or $33m, an increase of 91% over the same quarter in 2012, of which the network revenue was CNY112m or $18m, an increase of 5% over the same quarter of last year. Chang'an Hospital's revenue was CNY92m or $15m. Since we consolidated the financial results of Chang'an Hospital in the third quarter of 2012, no year-over-year comparison for Chang'an was available.

In the first quarter, revenue from treatment and diagnostic centers represented 58% and 42% of our total network revenue respectively. The revenue increase in our network business was mainly driven by the increase in the number of patients treated in our centers, especially in the diagnostic centers which reported patient growth of 60% compared to the same quarter last year. Our diagnostic centers have seen around 50% year-over-year growth in terms of patient numbers for the past three quarters. We believe that our treatment centers' contribution will remain stable while our diagnostic centers will see faster growth due to wider coverage and government insurance programs of basic diagnostic services such as MRI and CT and high end patients are more willing to pay out of pocket for services such as PET-CT.

For Chang'an Hospital, the total medical revenue was CNY92m or $15m of which outpatient, inpatient and pharmacy revenue were 20%, 37% and 43% respectively. While the gross margin for the quarter was lower sequentially, this is mainly due to seasonality factors. The first quarter is usually the slowest quarter during the year due to holidays. We believe that the hospital gross margin will revert to mid-teen levels for the rest of the year.

As Dr. Yang discussed earlier, we have invested in our telemedicine and web-based business units during the quarter as more and more people begin to seek health-related information online or on their smartphones using mobile Internet. We are taking initiatives to reach out to these current and potential clients through our web marketing tools. Telemedicine is based on remote data transmission and storage technology by which doctors from different hospitals can consult and issue diagnosis based on transmitted data.

The leverage of both online and offline resources will gradually generate incremental revenues for our network business. During the first quarter we have invested over CNY6m in the new business units. We expect that we will maintain the level of investment for the remainder of 2013.

Finally, I will discuss briefly our MD Anderson Proton Center investment. As an investor in the management company of the Proton Center, CCM, through our US subsidiary, is entitled to receive management fee from the center based on a certain percentage of net revenue. We also recognize our share of the Proton Center income based on 19.98% of ownership under equity method of investment. In total we recognized $682,000 in equity investment income and management fee in the first quarter of 2013. Currently the Company is in discussion with its tax advisors to design a tax strategy that will optimize the tax rate level of the investment income. If implemented the tax structure will lower the overall effective tax rate of the Company as well as it stands at 33% for the first quarter.

Also we announced the signing of IFC loan agreement on May 15. The loan is composed of an eight-year loan of $30m and a five-year convertible loan of $20m. The Company will use the loan for the development of new radiotherapy centers over the next three years at county level and the development of oncology hospitals in Beijing and Guangzhou. The disbursement of the IFC loan is subject to various conditions. We welcome IFC as our strategic partner and the IFC loan will provide long-term low-cost financing for our future development.

Thanks and we would like to open up for questions. Operator?

Thank you. (Operator Instructions). Your first question comes from the line of [Isabella Hau] from Morgan Stanley. Please ask your question.

Hello. Thanks for taking my questions. My questions are going to be towards more for the financial side. The first question is about the gross margin. I notice both the network and hospital growth margin has declined in this quarter compared to last quarter, also on a year-over-year basis. I just want to get more color of the reason behind the increased cost of goods sold. Also if we can get some outlook for the gross margin in 2013, that would be great.

And my next question is regarding the selling and G&A expenses. Also the reason behind the increase and what we are looking for in this year. Thank you.

Sure, Isabella. Thank you very much. So as for the gross margin and in the first quarter our network gross margin was 55.4% or 3% lower than the same quarter of 2012. The main reason for this is in this quarter we are seeing more compensation-related expenses because we are expanding our number of centers and also the compensation level on a per employee basis has been rising since last year, as you know. And also that, as you know, the seasonality is also a factor in this because as we discussed earlier the first quarter usually we see lower percentage of revenue in both our network and also in hospitals as well compared to the rest of the year. So that with lower revenue compared to the other quarters but the majority part of our cost with the network is the depreciation expenses. So that usually we see a relatively lower gross margin sequentially for the first quarter as well. This is also the pattern you see for the previous years. So we believe that for the network business the gross margin will revert to a higher level and you will see an improvement for the rest of the year.

For the hospital the gross margin for the first year is around 10% compared to 13% and 16% I remember for the last two quarters of 2012. Seasonality is a big factor and also the depreciation expense for Chang'an Hospital also increased because in the earnings release you can see that the total CapEx for Chang'an Hospital was around CNY10m and they depreciate over a relatively shorter period of time because most of the CapEx is in computer or office equipment. So we believe that seasonality obviously is another factor. So we believe over the whole year the hospital gross margin will revert to the mid-teen level, around 15% I believe is a very -- we are confident to reach that level, to achieve that level.

For the SG&A, one factor we discussed earlier is we invested a total of about CNY6m in the new business units and we will -- because we see the importance of these new business units to the overall business. So we will maintain that level of investment for the remainder of the year. And also in the first quarter we have incurred a higher than last year in promotion and marketing expenses relating to the newly-opened centers.

Okay. And just one follow-up question, how much investment do you plan for this year for the new web business, the new unit? How much in total?

We will maintain at about the same level as for the first quarter, like between CNY5m to CNY6m per quarter.

Okay. And if I may, I want to ask you another question regarding the guidance. You maintain your guidance for 38 and 45 year-over-year growth for top line but from what I heard and I sense the gross margin will be a little bit under pressure and also the expenses will increase because of investment for the new units. So should we see -- how should we look at the bottom line growth in this year and should we see flat or a decline?

The Company only issued the revenue guidance and we need to -- usually it is our practice not to issue any guidance on the bottom line. But in general we think that the revenue -- we are very comfortable about reaching the whole year revenue target.

Okay. And one more question is can you give us a little bit more color about the IFC loan and does the Company have any specific plan how to use the fund and the timeline of building a number of centers for the next three years? Thank you.

Sure, thank you. You know we signed this loan agreement on May 15. It has been a very long process for us to work with IFC. We started to initiate the loan-related work earlier last year so it took us almost a year to sign this agreement and we've gone through very strict financial business and legal due diligence and process. As you know, IFC is a very reputable institution and they have a special focus on health and other related areas. So their investment in CCM is -- I think it's -- that shows their dedication to the healthcare in China.

So as for the loan, the total $50m loan is composed of eight-year component of $30m and a five-year convertible loan of $20m. We plan to use this loan for the construction of 50 new radiotherapy centers over the next three years as well as to use the loan for the construction of Beijing and Guangzhou specialty hospitals. So the disbursement is subject to various conditions. And we expect loan disbursement in second half of the year if we meet all the preconditions.

Okay. For the 50 centers you want to build, do you have any plans for the number of the centers for next year or the year after?

So it's going to cover a three-year period. So if we're talking about 50 loan -- 50 centers, if everything goes by planning we can add probably about 15 or so next year.

Okay. Okay, yes. Okay. Thank you. That's all my questions.

Thank you.

Thank you for your questions. The next question comes from the line of Jessica Li from CICC. Please ask your question.

Hi. This is John Yung from CICC and I'm asking questions on behalf of Jessica. The first question is more for Yang Jianyu. I simply want to have Yang Jianyu to elaborate a little bit on the new business, the new medical project and probably to share with us the insights to the project in three to five years and what kind of contribution it's going to bring to the company. And this is the first question.

And my second question will be more from a financial point of view. I would like to see that for the hospital segment, for the gross margin it's a little bit lower in the first quarter. So I understand that we already talked about the guidance earlier. But can the management also share with us what kind of measurements it's going to make sure that we will be able to bring up the gross margin in the future quarters?

(Spoken in Chinese).

(Interpreted). As you know, we're now operating over 130 centers around the nation. During the past 16 years we have accumulated lots of resources. One of them has a very strong academic reputation. And as you may know, every year Concord Medical is to convene annual academic conferences where radiotherapy experts around the country will gather to discuss the latest development in this industry.

Based on the latest development of technology, our centers from different cities can more easily consult and work together. For instance, we can easily transmit the images of CT or MRI from one city to the other so that experts from different hospitals can really consult on different cases together. In this process we find that a lot of the small- to medium-sized hospitals have a strong demand in this regard, that is to reach out to experts and doctors in large and major hospitals in major cities so that they can consult on that with difficult cases.

So based on this industry trend, we build up a special dedicated team to work on the telemedicine projects so that on the one hand we can expand the influence of our CCM network and also we can enhance overall level of radiotherapy in China.

And also we see a big demand from the patient side because a lot of patients, after they receive -- before or after they receive radiotherapy treatment, they would like to consult with their doctors using the Internet or the mobile so that we -- our plan is to build a platform on the Internet and also through the mobile platform so that the doctors and patients can easily communicate with each other. So that's why last year we also built a special team to set up this Internet platform.

So we hope that our platform in the future, more and more doctors and patients can establish this one-on-one communication. And also in this process we will be able to accumulate very rich data relating to various kinds of illness so that more patients can benefit from this database.

Okay. Thank you.

And as for the second question for the improvement of the gross margin, and first, as we discussed earlier, seasonality is one of the factors relating to the relatively low gross margin in the first year. But also Chang'an Hospital right now is focusing on building its specialty departments, such as oncology-related departments, so that they can enhance the per-patient yield, both on an inpatient and outpatient basis. As you may remember, last year Chang'an Hospital and Fox Chase has signed a partnership agreement through which the experts and doctors from Fox Chase will help Chang'an Hospital to build up its oncology department.

And so to build specialty and also to improve the patient's experience will be two key measures for Chang'an Hospital to enhance its performance and also that's going to lead to higher profit margin and profitability for the rest of the year.

Thank you, Yang Jianyu. Thank you, Adam.

Thank you.

Thank you for your questions. Your next question comes from the line of Sean Wu from JPMorgan. Please ask your question.

Hello. Yes. I have just a couple of very simple questions. Number one is about your guidance for the centers. You mentioned you added one center and had 11 centers under agreement. I checked out your last year's first quarter. At that time you had 30 centers under agreement and you ended up adding 12 centers or so. So my first question would be among the 11 centers, how many you can be sure will become your centers? And do you have any workaround between radiotherapy centers and diagnostic centers? That's my first question.

Sean, so for the 11 centers we mentioned in the earnings release, those are the centers that we have a definite timeline or that's expected to open during the rest of 2013. So this is not just the whole of our pipeline, but you can understand is as number of centers we expect to open during 2013.

But you used the same kind of wording for last year, right? I'm just curious what has --.

Yes. We're trying to be more, I would say, accurate, give investors a better estimate about the numbers of centers we're going to add for the rest of the year. So if we are talking about the pipeline, we'll use a different term in the future.

And for the 11 centers that we discussed earlier, about -- I don't have exact recount right here, but I think it has more treatment centers than diagnostic centers. That's what I remember. So you can estimate as like 60% to be treatment and 40% to be diagnostics.

Okay. And for my second question, to ask about your line of minority interest, last year you appeared to have a part of minority interest of CNY0.8m and this year you had minus CNY0.6m. It implies your minority shareholders share in your loss. But if you -- we calculate your operations of the hospital it appears you are making the operating profit of CNY5.1m. Do you have any, let's say, non-operating expenses associated with hospital operations? What is the net profit you can -- you need to share with for the minority people?

And also like the Chang'an Hospital is not your only associate company. How many other investments you are recording and count equity investment, like what changes from last year to this year? Why they appear to incur like a loss rather than gain compared to last year?

Yes. For the minority interest line, our income statement is aggregate number in which we include all the minority interest in our investee companies. So obviously Chang'an Hospital is one of them. And Chang'an Hospital on a standalone basis is profitable for the first quarter and you can deduct that number from the gross margin as well as from the operating expense number we have disclosed.

But also we have other project companies through which we have quite the projects and it is under construction, but we're incurring operating-related expenses. And also those are the major reasons why on aggregate basis we are seeing minor loss of about CNY600,000. And in general you should see a positive number on that line. And I believe that will be the case for the rest of the year.

Okay. Thank you.

Thank you.

Thank you for your questions. Next question comes from the line of Li Yu from Goldman Sachs. Please ask your question.

Yes. This question is concerning your telemedicine segment. I would like to get a more detailed understanding of this business. So you mentioned that with the development of mobile connections that this will drive the growth of telemedicine. So could you tell us what exactly is the profit model for the telemedicine and how much are the long-distance diagnostics via the new type of mobile medias? Can you share some light on that? It would be great. Thank you.

Sure. We talk about the overall mobile, Internet and telemedicine as new business units. We put them together. But they are separate operations from each other.

For the mobile business unit, what we do is we have developed smartphone which you can download it in the app store for iPhone and also for the Android phones. The business model for that is for patients that can ask simple and -- first, they can do self assessment of their health conditions. Secondly, they can submit questions to the online doctors which can provide them with easy-to-implement answers on some of the health-related questions.

So this is the model that you have seen. There are similar companies like this that have this online mobile app-based health company -- health platform companies. So the business model will be for each question that is submitted, the patient will be required to pay a small fee, like CNY20 to CNY30, depending on the complexity of the question and also on the status of the doctor that answers this question.

So this is a new business model and we have a limited -- we have limited downloads so far since it went online during the first quarter. So we expect to have more promotion of that app as it becomes more developed. So this is for the mobile business.

And for the telemedicine, what we do is we build up this network covering -- now it covers about 40 hospitals in -- around the country. So basically when a hospital in one area needs to submit a diagnostic report to -- for the consultation or for the joint discussion about this case, from a different -- from doctors of a different hospital, usually the hospital will be able to charge an extra fee from the patient. So it's more like on a case-by-base basis consulting fee. So that's the business model we'll build for what we have in mind for the telemedicine network.

(Interpreted). Yes. For the Internet service and also for the telemedicine, it has become very hot topics recently. And for us, for reasons that we make this investment in these two areas is, first, based on the market demand. And the demand comes from two sides. On the one hand, the doctors for our centers, they would like to have the support from our centers in big cities like Beijing and Shanghai. And also we see this demand from the patient as well.

And also for our -- for our specialty of radiotherapy and diagnostics, those are the areas that are best suited for telemedicine because the other departments that really you need face-to-face meeting between the doctor and patient. But in radiotherapy and diagnostics, it can be purely based on transmitted image and planning so that we believe this is a special area for us to develop this new telemedicine business.

And also our 130 centers around the country, each of them has a very strong influence over this neighboring area, so that in every city, every hospital, we will have a group of doctors who they can influence and impact, both online and offline. Based on the feedback we have received so far, it is very positive. And we are now looking to explore this new opportunity in this area.

Thank you.

(Operator Instructions). We appear to have no further questions at this time. I would like to hand the call back to Miss Vickie Zhao for closing remarks.

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

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 an interpreter present on the live call.  The interpreter was provided by the Company sponsoring this Event.