Concord Medical Services Holdings Ltd (CCM) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Q2 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, Tuesday, August 13, 2013.

I would now like to hand the time over to Mr. Ting Jia from Concord Medical. Thank you. Please go ahead.

Hello, everyone, and welcome to Concord Medical's second-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, 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. 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 statement 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). Good morning, everyone. Welcome to Concord Medical's second-quarter 2013 earnings conference call. We are pleased with Concord Medical's overall steady growth during the quarter. Total net revenue from both the network business and hospital reached CNY254m, representing an increase of 86% over the same quarter last year. This is very good momentum and provides us with a solid foundation to achieve our annual revenue and adjusted EBITDA forecast.

Our network revenue was CNY146m, an increase of 6.7% year over year and the revenue from our hospital reached CNY108m which was a 17.4% sequential quarterly improvement.

Due to seasonality effect, revenues in all key operational metrics in the second quarter recorded a significant improvement from our 2013 first quarter.

We are also quite pleased to experience healthy cash flow in the second quarter. Our adjusted EBITDA grew 11% on a year-over-year basis reaching CNY104m in the second quarter. The Group's 140 centers will continue to contribute stable cash flow and provide strong support for our development.

In the second half of 2013, we expect cash flow to continue growing at an annual growth rate of approximately 15% and consequently expect the full-year 2013 adjusted EBITDA growth in the mid-teen levels. The adjusted EBITDA for the full year will be approximately CNY440m or $71.8m.

Developing self-owned and independently operated high-end oncology hospitals is a major priority for our business in the years ahead. We have valuable advantages that allow us to establish our own premier oncology hospitals. As a leader in China's cancer radiotherapy industry for 15 years, we've established a high-end team of management and academic experts. We have also developed strategic partnerships and collaborated with many international and renowned medical institutions for academic and personnel exchange programs.

Additionally, we plan to establish one specialty oncology hospital in Beijing, Shanghai and Guangzhou respectively over the course of the next three to five years combining with our national network of centers and provide advanced cancer treatment services.

Guangzhou Huanan Concord Hospital will be our self-owned brand under collaboration with the Sun Yat-Sen Cancer Hospital once completed which is expected by 2015. The Guangzhou Huanan Concord Hospital is designed to occupy land area of 50 Chinese acres with 400 available beds. At this new facility, we plan to install a proton-therapy equipment.

So far, we have received all government approvals and completed the land acquisition. The land formation work is in progress. We expect to complete the overall design and construction plan for hospital by the end of the year and to commence construction in early 2014.

The construction and operation of high-end specialized hospitals is consistent with the overall healthcare reform in China, marks an important starting point of our business transformation to a high-end specialized hospital management group and prompts us to focus on providing cancer patients with the most advanced medical services. We are looking forward to it.

In addition to the project in Guangzhou, our projects in other cities are also progressing. We will update investors about their progress in a timely manner when we have relevant updates for you.

Currently, we are maintaining for Telemedicine projects R&D investment and expansion. Among our 140 centers, 42 centers have been carrying out Telemedicine services. The doctor-doctor and doctor-patient exchange and the communication platform has become an important part of our business. Next, we want to make full use of Telemedicine to collaborate with the world-renowned hospitals for diagnosis, treatment, education, research, rehabilitation or other aspects of cooperation.

Finally, I would like to once again thank all the investors for your ongoing support for Concord Medical Group and China's healthcare industry.

I will now hand the call to our CFO, Adam Sun, to discuss second-quarter financial results.

Thanks, Dr. Yang. Hello, everyone. First, I would like to review some highlights in the financial results of Q2 2013. Then I will talk about some key financial metrics, in particular, accounts receivables, adjusted EBITDA and the gross margin. Finally, I will take you through our guidance.

On the earning release issued after the market closed yesterday, you can see that CCM's total revenue was CNY254m or $41m, an increase of 86% over the same quarter in 2012, of which, the network revenue was CNY146m or $24m, an increase of 6.7% over the same quarter of last year.

Chang'an Hospital's revenue was CNY108m or $18m, an increase of 17% over the first quarter. Since we closed the Chang'an Hospital acquisition in the third quarter of 2012, no year-over-year comparison was available.

Similar to the first quarter, the revenue increase in our network business was mainly driven by an increase in the number of patients treated in our centers, especially the diagnostic centers which reported patient growth of 60% compared to last year.

Overall, patient traffic growth has been very strong in our treatment and diagnostic centers, as most of the radiotherapy and imaging services in our network centers are reimbursable, enabling Concord to benefit from the wider social welfare coverage network in China.

Revenue from treatment and diagnostic centers represent 57% and 43% of total revenue respectively. Revenue of our diagnostic centers has increased CNY14m on a year-over-year basis.

We believe that contribution from our treatment centers will remain stable while our diagnostic centers will see faster growth due to wider coverage 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, total medical revenue was CNY108m or $18m dollar, of which outpatient, inpatient and pharmacy revenue accounted for 24%, 35% and 41% respectively. The gross margin was 16.9% representing an improvement of 640 basis points over the first quarter.

As we discussed during our first-quarter conference call, gross margin was affected by seasonality factors. We believe that hospital gross margin will remain at mid-teen levels for the remaining two quarters of the year.

Our accounts receivable at the end of the second quarter was CNY247m, of which the AR for network business was CNY209m representing DSO, or day sales outstanding, of 123 days as compared to 155 days for the first quarter. This is a major improvement in our AR situation. During the quarter, we have strengthened our collection efforts for all centers. We will remain collection at the same level for the rest of the year.

As for the adjusted EBITDA, we believe it is the most effective metric as it reflects the cash flow generated from our business. Adjusted EBITDA for the quarter was CNY104m or $17m, an increase of 11% from the same quarter last year. The EBITDA margin was 42.5% in the second quarter. For the full year, we expected our adjusted EBITDA growth to be in the mid-teen levels.

I would like to add some color to the gross margin of our business. Since our network and hospital businesses have different levels of gross margin, it makes sense to discuss the two businesses separately.

The gross margin for our network business was 59.7% in the current quarter which increased by more than 400 basis points from the first quarter. We have seen positive trends for the gross margin of the network business. And we expect that the gross margin will stay at current levels for the remaining two quarters of the year.

As for the gross margin of the hospital business, we also experienced a strong sequential improvement of 640 basis points over the first quarter. The whole-year hospital gross margin will stay at mid-teen levels.

As Dr. Yang mentioned, we plan to build and operate two to three high-end specialty oncology hospitals in China over the next three to five years. Currently, the Guangzhou project is moving forward according to our plan.

Finally, we would like to reiterate full-year 2013 guidance forecast announced last quarter of total estimated net revenue in the range of CNY930m to CNY975m, representing a 40% to 47% increase on 2012. Revenue from the Company's network business and hospital business as percent of total revenue are expected to be approximately 55% and 45% in 2013 respectively. Our full-year 2013 adjusted EBITDA is expected to grow in the mid-teen level for the year compared to 2012.

This concludes our prepared remarks. Operator, we're now ready to take questions.

Thank you. We will now begin the question and answer session. (Operator Instructions). And our first question comes from the line of Bin Li from Morgan Stanley. Please go ahead.

Hi. This is Yolanda Hu on behalf of Bin. Thanks for taking my questions. Can you share with us your thoughts on the Telemedicine and the web business more? For example, what's your long-term strategy, your investment plan and what are your expectations on the incremental revenue contribution as well as cost-saving effect in the second half, also in next year? Can you quantify that? Thank you.

Hi, Yolanda.

Yes.

Yes. I would answer the budget and the financial part of the question. And as for the business aspect of the question, I will ask Mr. Yang to answer it for you.

Okay.

As you know, our Telemedicine business is still in the development stage. And we are spending approximately -- in the past quarter, we have spent CNY8 point something million for selling expense and about CNY2m in general and administrative expenses. And we expect that the same level of investment for the business for the next two quarters.

And at the end of the year, what we would do is we will set up a specific budget and revenue guidance, revenue target, for the business unit. So currently we are still in the expansion and development stage. So we haven't really set up a specific target in terms of the revenue and cost savings for the Telemedicine department yet. I hope that answers your question. And --

Yes.

Now I'll turn over to Dr. Yang. Yolanda, do you mind if you repeat your question in Chinese again, for the business aspect of the Telemedicine business?

(Spoken in Chinese).

(Interpreted) Now, Concord Medical expects to provide the Chinese cancer patients with a high-quality service. And based on our Company centers, we want to do this communication internally in our centers first. And by enlarging our network scale, we want to enlarge this telemedicine across the whole country to the all centers in the whole nation.

Right. Thank you. And our next question comes from the line of Sean Wu from JPMorgan. Please go ahead.

Hello. Yes. Thank you very much for taking my question. Congratulations on your progress. I have a question about your hospital operation. Clearly, your gross margin has improved quite substantially from 7% in first quarter to 19% in the second quarter. So what should we think as a stable gross margin?

And in breaking down this gross margin, we can say your medicine gross margin is about 14% and now for many of the drugs sold in the private hospitals you have 15% markup so this 14%, clearly, appears to be in line with that. But as you like a private hospital, do you subject to the same kind of (inaudible) price control and can you make more money actually by selling the high-end oncology drug which are not in the essential drug list?

I'll just translate it in Chinese. (Spoken in Chinese).

Dr. Yang will answer the second question and Mr. Sun will answer your first question.

(Interpreted). So as our Chang'an hospital, we are a hospital for profit. And we can set a price on our own. But if the charge for the medicine surpasses the payment from the insurance, medical insurance, the patients will pay the difference from out of their pocket. But if the charge can be covered by the medical insurance and --

Yes. Sean, let me explain it in more details to add on top to Yang's comments. So for the us, Chang'an Hospital is a for profit hospital, so we have a self-pricing power within the range. So if some of the (inaudible) -- so for some of the medicines, we can charge higher than the government guidance plan, guidance price. And then those will be the self-payment items. And the patients will pay out of pocket on their own. So that's -- so sometimes you can see some minor fluctuation in our gross margins relating to our -- to the medicine expense.

And to answer your first question about the general trend of the gross margin and whether Chang'an Hospital is going to have the gross margin trending up as we are special hospital, especially with focus on oncology and some of the other departments.

So first, for the second quarter our gross margin for the hospital is 16.9%. And for the first quarter of the year it's 10.5%. So we see an improvement of 640 basis points quarter over quarter.

One of the main factors of this is seasonality. Because, as you know, and if you look at the operating metric of the hospital in terms of bed occupancy and the average stay of patients, and also the number of patients, the inpatients, outpatients, you'll see that the first quarter is usually the slowest quarter during the year. And so that's why.

And most of the expenses, especially relating to the inpatient/outpatient services are fixed cost. So that's why usually in the first quarter you see a lower gross margin. And then as the hospital's capacity gets more fully utilized, so especially in terms of outpatient services, you can see that the percentage of revenue of for outpatients in the second quarter has increased significantly over the first quarter.

So usually the inpatient services has a breakeven point. Once we reach -- because, clearly, the capacity is there and no matter how many inpatients and outpatients visit the hospital, we usually incur the same amount of expense. So, in the second quarter as the outpatient number increases, so we start to see -- to get -- the outpatient service starts to generate a healthy gross profit for us. So that is another reason why see an improvement of our gross margin in the hospital.

So in terms of the long term trend we believe that the Chang'an Hospital's gross margin should stay around 15% to 20%. And now we will keep a close eye on the profitability of the business. And so you can use I would say 15% to 17% as the average for the near future.

And also as Chang'an Hospital strengthens its focus on departments and the profitable departments such as oncology, such as orthopedics so you will see that gross margin will improve. But that usually is a long term process. So I hope that answers your question.

Can I follow it up a little bit? In terms of your gross margin clearly it appears your medicines carry much higher margins in some -- so I guess if you can expand your services in this sense, should we expect to see higher gross margin for the service part?

And another matter, as you said you can charge a higher price than retail prices which -- should we see a higher gross margin than 14%? And really the question your -- compare the utilization's already 90%-some for your inpatient services. So going forward how do we see a growth in terms of sales and revenue for this hospital?

[Spoken in Chinese].

(Interpreted). In China, the Hospital Trust accounting for the higher part of the revenue is not a reasonable situation. In the future we expect to provide cancer patients with high quality services and making high quality services as the major part of the revenue. I think this is the reasonable future for our development not only for the cancer patients.

Chang'an Hospital right now is a general hospital. We expect to build Chang'an Hospital in the future as a hospital with cancer treatment as the characteristic.

And, Sean, to answer your second part of the question where the growth for the hospital comes from I think we have three -- we see there are three, besides what Dr. Yang's mentioned, we see three major areas we can make improvements and which will improve the profitability.

The first initiative is to strengthen the specialty and focus of this hospital to gradually transform it from a general hospital into a hospital with strong specialty and strong reputation among the patients. Now the key areas we are focusing on include oncology, which is a historical strength of this hospital as well as other departments such as orthopedics and cardiology. So by strengthening these specialties we improve the profitability of the hospital. That's number one.

Number two is for the hospital there is the important operational metric called throughput which is by shortening the length of stay of patients in the hospital to accelerate the turnaround of the hospital beds. And now the average stay of a patient is about 10 days. I think if we can improve it, it will open up more capacity to receive more patients, that an improvement of throughput is another area where we can see an improvement.

And the third area is we -- I stress it is related to the first part that is to build up key departments and specialties. By doing that, we can improve the per-patient yield. But now most of the inpatient and outpatient in hospitals are still spending a relatively small amount of money. And now by building up specialties by only -- by receiving more patients with more complex medical situations we can improve the per-patient yield as well.

Okay, thank you. Sounds fair enough.

Thank you.

Thank you.

Thank you.

And our next question comes from the line of Eagle Chen from Brean Capital. Please go ahead.

Hi, thanks for taking my question. So I just want to -- please give me more color on the latest development of your project in Beijing, because I just see a hospital named Beijing Proton Medical Center on website. Is this hospital in operation or it's still under the design and construction? I want to know more detail on this project.

Our operator -- thank you. In our Beijing project we have a joint operation with Sino-Japanese Friendship Hospital. This project has been ongoing and we have disclosed it, the progress of the project since the IPO. And now this project is still in the -- under construction and in progress. And we will report the progress of this project to the investors at an appropriate opportunity.

And I am not so sure about which -- the website you have been -- which website you talk -- and we'll check on that too.

Your home page in Chinese, so when it can start financial contribution.

This one is still under construction, so we don't see it be contributing to our revenue in the near future. As I mentioned as we have -- we made progress we will report to the investors.

Okay. Thanks.

Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of [Wen Dai] from CICC. Please go ahead.

Hi. Thank you for taking my questions, asking questions on behalf of Chang Jing. And my first question is related to our network business. Regarding that the revenue ratio from our current center will be decreased by time, so we suppose that the revenue from this settlement will be slowing down in the future. So could you share with us the age structure of the current centers and do you have any targets, age composition for the future?

Do you mind repeating your question I think your line is up and on and off.

Sorry, sorry. So regarding the revenue ratio that we can take from the current centers will be decreasing by time. So we suppose that revenue from this segment will be slowing down in the future, I mean the network business. So do you have -- could you share with us the age structure of the current centers? And do you have any targets, age composition for the future. And can you hear me clearly?

Yes, (multiple speakers), yes. I think the question relates to the revenue breakdown between our current and the new centers, is that correct?

Pardon? I mean the age structure of the centers.

For our -- let's talk about the general guideline how we look at the network business and for the hospital business. For our network business it is still growing very stably. Year over year we are seeing a growth rate from the network business of between -- for the current quarter is close to 7%. And we expect that this -- the growth rate in the high single digits will be stable for the foreseeable future.

And currently we have 140 centers in our network and we plan to add another seven or eight in the second half of the year. So at the end of 2013 we expect to have close to 150 centers in our network. So these new centers, new add -- centers added to our network start to contribute so we may see a higher revenue growth from the network business.

And the length of our age remaining (technical difficulty) our centers are still seven to eight years, so we don't expect any significant change in (technical difficulty) revenue contribution from the network.

Okay, so that means that the age composition of the current centers must be very stable.

I still missed that.

Excuse me, Wen Dai, I think you are too close to your phone. Would you be able to move away from your phone so that we can hear you properly?

Okay, may I repeat my question? Can you hear me clearly?

Yes, now it's much better.

It's better, okay. I want to know that the current age composition of the centers that you have.

Yes, as I mentioned earlier the average remaining contract for our centers right now is seven to eight years, and then we are adding close to 10 centers this year. So the remaining contract our average for centers will be stable for the next eight to 10 years.

Okay. Just one follow-up question, and do you have any plan to accelerate your expansion of the segment. For instance are you planning to get more exact to the country level hospital in the future?

Yes, we have talked about opportunities. Our -- the whole Group we are looking at various business opportunities in the network business because we believe that there are still abundant opportunities for the business. And now we are -- in our pipeline we have potential contracts with both the Tier 3 or Tier 2 hospitals as well as with the county level hospitals.

But for the county level hospitals, on the one hand, we look at it as a very big untapped business opportunity, and on the other hand, there are still obstacles or difficulties to enter into that market including the distance and the wide spread out and also the lack of technical and management talent for these centers.

And that's why we believe that our business initiative such as our Telemedicine business initiate will be very helpful for us to open up more opportunities in this market segment because we can use our telemedicine network to reach out to hospitals in the small cities or in the remote areas.

So as we make -- so we are looking at these opportunities very cautiously. And we believe we have an advantage compared to our competitors, because we have this current network of telemedicine across the country already

Okay, thank you. And the second question is about the selling expense. And I think quarterly the expense related to the Telemedicine and that web business the selling expense will still $60.8m for the second quarter, so which implies that the marketing expense grew very fast, so could you share with us the reasons behind this.

Yes. Because we opened, for the first half of this year, we opened three centers and then during the course of 2013 we have opened altogether nine centers. In order to promote the service of these centers and we need to allocate a bigger budget for marketing and sales activities.

But as we move forward as these centers enter into a more stable growth stage so we can -- you can expect that the selling expense as a percentage of the total revenue will gradually trend down.

Okay, thank you. And my final question will be very simple, and what is your CapEx guidance for this year and next year?

For this year because we are still, as you know that we are now in the planning and design stage for the Guangzhou project and we are still working on the overall CapEx budget for this project. And for this year, for the second half of 2013 I think most of the CapEx will still be relating to the network business which stays at around $20m to $23m per quarter, those are mainly for the maintenance and regular CapEx for these centers. And for next year for 2014 as we finalize the overall budget for the overall CapEx plan for the Guangzhou project you'll have a better idea.

Okay, my question has been very well answered. Thank you so much.

Thank you.

Thank you.

Thank you. And that comes to the end of our question and answer session. We'll hand it back over to the management for closing remarks. 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. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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.