Concord Medical Services Holdings Ltd (CCM) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2013 Concord Medical Services Holdings Limited earnings conference call and webcast. (Operator Instructions). I must advise you that this conference is being recorded today, Wednesday, November 13, 2013.

I would now like to hand the conference over to the Vice Manager of CCM Investor Relations Department, Mr. Ting Jia. Thank you. Please go ahead.

Hello, everyone. Welcome to Concord Medical's third 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 and 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 day, everyone. Welcome to Concord Medical's third quarter 2013 earnings conference call.

We were pleased with our overall operating and financial results for this quarter with steady growth coming from both our network business and hospital segments.

Overall, our total third quarter revenue reached RMB234m, representing an increase of 13.5% over the same quarter last year. Most of our core business units experienced double digit growth. Third quarter revenue from our diagnostic and imaging centers increased 14.6% over last year to RMB131m, while revenue from our hospital segment increased 12.2% to RMB103m.

Due to seasonality factors, we expect revenues and other various operational metrics at both our network and hospital segments to rise sequentially in the fourth quarter.

In the third quarter, we added one diagnostic and three treatment centers, bringing our total number to 144.

Through the first nine months of the year, eight new centers were opened, further establishing CCM as a firm leader in the cancer treatments and diagnostic industry in China. Among our new centers, we have added one CyberKnife center in Jinan state of Shandong Province, which is the second CyberKnife center in our network.

The average daily working hours of our first CyberKnife center continue through the entire night and through the early part of the following day, [optimizing] the number of patients we can treat. Going forward, we expect these centers to contribute significantly to our future revenue growth on a per patient use within our network business segment.

In the third quarter, Chang'an Hospital made good progress to establish a comprehensive medical quality control system. In the field of international exchange and collaboration, Chang'an Hospital continues to cooperate closely with Fox Chase Cancer Center.

Recently, the doctors from Fox Chase and Chang'an Hospital got together to provide consultation and diagnosis to patients voluntarily. This helps to improve Chang'an Hospital's influence in the industry, as well as to establish its oncology department as an important unit within Chang'an Hospital.

In the third quarter, we also made considerable progress with the construction of our oncology specialty hospital. Our Beijing Proton Center project received an important government approval after several years of efforts and obtained the business license from the Beijing Municipal Commission of Commerce. The next success for Beijing Proton Center project is to resume development of the first phase.

At our Guangzhou Concord Cancer Hospital project, all of the relevant government approvals and the land-use procedures have been completed, and just last week we obtained the level three hospital license for this project. We made notable progress in the third quarter with the hospital design and equipment selection.

We expect to begin construction in the first half of 2014, with the construction period expected to last three years. This hospital will cooperate with the Sun Yat-sen Cancer Hospital to provide the most advanced cancer treatment services in China, with international centers. We intend for this hospital to become a high-end priority cancer hospital that will be an important part of our planned hospital strategy, covering the centers of Beijing, Shanghai and Guangzhou.

I wanted to update you on our telemedicine project initiatives. First, our mobile application known as DoctorInPocket was offered to patients and doctors this July.

Additionally, our telemedicine platform known as [Direct Train to Experts], connects medical experts in first-tier cities like Beijing by virtual clinic to provide remote patients in underdeveloped regions of China with medical consultation and service.

Further, in order to more broadly promote [pastiki] clinical and medical use, we developed a mobile client application called Health Housekeeper, which provides patients with convenient reservation and payment functions.

In the middle of last month, we reported to you in a press release that the State Council issued several opinions to promote the development of the healthcare services industry in China. The opinions are designed to relax market access and strengthen the planning layout, which encourages the expansion of supply and stimulates consumer demand.

Policy measures include further opening up the field of medical services sector, delegation of the approval authority, relaxation of the limits in terms of number, size, layout and large medical equipment for private hospitals. To medical services companies such as Concord Medical, we believe these guidelines can beneficially impact our business in the years to come.

As a company operating for 16 years in the Chinese medical services sector, we believe that new government policies and guidelines will have a significant impact on our operations in the years to come. We are confident that with further reform to China's healthcare system, the government management of the system will be more systematic and transparent, resulting in a more effective and stronger function over time.

Private hospitals will not only complement public hospitals in the future, they will play a major role in China's medical and healthcare industries. We believe there will be further adjustments and improvements in government policy in China's healthcare sector.

Finally, we are grateful to your support to Concord Medical and your focus on the healthcare industry in China. At this point, I would like to turn the call over to our CFO, Mr. Adam Sun, to review our financial results for the 2013 third quarter.

Thank you, Dr. Yang. Hello, everyone. During the third quarter we have seen steady growth in both our network and hospital business. Let me go through some of the financial highlights with you first, and then we will open it up to your questions.

During the last quarter, our network revenue reached RMB131m, an increase of 14.6% over the same quarter of last year. The increase was mainly driven by improved per patient payments of our treatment centers, as well as strong growth in patient traffic in our diagnostic centers.

The average payment per patient of our treatment centers has improved by around 16% as high-yield centers such as IGRT and CyberKnife centers were added to our network during the first past quarters. Patient numbers in our diagnostic centers increased by 7%, reflecting the positive impact of wider coverage of universal health insurance in China.

Most of our diagnostic centers experienced increasing patient traffic during the quarter. During the last quarter, treatment and diagnostic centers contributed 59% and 41% of total network revenue, respectively.

During the third quarter, Chang'an Hospital's total revenue reached RMB103m, an increase of 12% from the same quarter of 2012, of which medical services revenue, including outpatient and inpatient revenue, accounted for 57% of total revenue.

Medicine revenue accounted for 43% of total revenue. Medical service revenue increased significantly by 20% over the same quarter last year, reflecting the strong momentum in both patient traffic and hospital throughput. The average stay of inpatient is under 10 days for the first time during the past year.

Currently, Chang'an Hospital receives patients with government insurance from most areas in the Shaanxi Province. We believe, as Chang'an Hospital continues to strengthen its reputation among patients as well as to reach out to more service areas, we will see further improvement in its operation performance.

For the current quarter, the gross margin of the Chang'an Hospital was 14%, compared to 16.9% in the second quarter of 2013. The decrease was mainly due to seasonality factors as fourth quarter usually is the busiest quarter during the year.

New business lines. In the third quarter, we have continued our investment in the new business lines, i.e., telemedicine and web-based marketing, including RMB4.2m in selling and RMB1.7m in general and administrative expenses. We are monitoring the performance of the units carefully.

EBITDA. During the third quarter, our adjusted EBITDA growth was flat compared to the same quarter in 2012. This is mainly due to higher than expected consumable expenses in the quarter as well as the expenses relating to the new business units. We expect that the EBITDA growth will revert to higher growth rate year over year in the fourth quarter and that the whole year EBITDA growth will be between 10% and 15% for 2013.

As for our Guangzhou projects, we are in the process to engage a designer for the project. During the quarter, we have also worked to finalize the equipment vendor. All these preparatory works will be completed soon, and our timeline remains unchanged that construction will commence during the first half of 2014.

With that we would like to open it up to your questions. Operator.

(Operator Instructions). Li Bin, Morgan Stanley.

Hi. Thank you for taking my question. This is Ian on behalf of Bin. I have a question on the gross margin. So, can you please provide some guidance on the gross margin for the fourth quarter of 2013 for both network and hospital business? (Spoken in Chinese).

Thank you for the question. As for the gross margin, as I discussed in our prepared remarks, the gross margin was affected by both the seasonality factor as well as some unexpected consumer expenses during the third quarter. So, we expect for the fourth quarter, the network business gross margin will trend higher and will be between the level of mid-50s to the mid-60s level, percentage wise. And the hospital -- and it is impacted by the seasonality factor even more obviously, because, in terms of the cost for the hospital operation, by our calculation, about one-third is fixed cost in terms of the service gross margin.

So in that way, as the revenue for the fourth quarter trends higher, the gross margin will improve accordingly. So, we expect the overall gross margin for our operation for the fourth quarter will be higher than the third quarter, will be in the range from the -- I would say between 40% to 45%, in that range.

Okay, thank you.

(Operator Instructions). Sean Wu, JPMorgan.

(Spoken in Chinese). Thank you very much for taking my questions, Jianyu and Mr. Sun. I have a question on your [peri-medicine] and web-based (inaudible). As you start with the [Candau] business plan last year, you have invested quite a bit, and clearly, your profitability was temporarily hurt by the investment. So I just wonder how much Candau sales are impacted, that allow new business is now affecting your business.

And, also, like when do you see this go, and when do we expect the conversion to your top line? And also, whether we will be seeing any kind of meaningful contribution to the profit very soon, on the positive side, of course.

(Interpreted). So we have two reasons to work on our telemedicine service in our business, and the very important reason is right now the telemedicine service, there have been very few in the market, and it is a highlight to combine IT service and medical service together.

We have a very advantageous foundation to do the telemedicine service, and right now we have 144 centers, and we have been working on the expert exchanging communication for a long time. Oh, yes, this is again our advantage for our business.

And I think in the market there are a lot of enterprises working on the telemedicine, to pursue the profit model. But comparing with them, we have more advantages for this business. And right now, we are trying to do the telemedicine business model to get revenue from it. And by -- based on these platforms of the communications between centers.

And even though we are investing more for the telemedicine service than the revenue from it, but we believe we can get the growth point from this model in the future. Thank you, Sean.

Okay, great. I have another question about your center business. Clearly, this quarter, your center business performs much better than I think in previous quarters. Your sales growth was like about 18%, which is single digits for a couple other quarters. So, can you tell me a little bit why that line was so strong in this quarter?

And a related question, of course, you added four centers this quarter; three for treatment and one for diagnostic. So, can you be more specific where those centers are being added, as with [network]? In other words, whether those centers will be very quickly profitable to you any time soon? (Spoken in Chinese).

Okay, Sean. Let me answer the question. So, first, as for the growth rate of our network business, we have seen the network revenue grow by stronger -- by a higher rate compared to the second quarter. I think one of the -- as I mentioned in our prepared remarks, it is driven by both the increased traffic in our diagnostic centers, as well as the improved per patient yield by our treatment centers.

In terms of the diagnostic centers, we are still seeing strong growth in both the conventional diagnostic services such as the MRI and CTs, and with patients that are benefiting from the wider coverage of the government-sponsored social healthcare health insurance in China right now. So, more and more patients are visiting their local hospitals to receive these conventional diagnostic services.

And also, in terms of the high-end diagnostic services in our networks such as the PET CT centers, we are seeing a stronger demand from the high-earning population as they are becoming more health conscious and willing to pay out of pocket to receive high-end physical tests. So, that is one of the drivers for our revenue growth in the network business, namely, the higher traffic in the diagnostic centers.

In terms of the treatment centers, although the patient numbers in our treatment centers are seeing a year-over-year declining because there are some centers with expiring contracts and closed during the course of the year, but we are seeing a very strong improvement in per patient yield and per patient service charge. So, especially the contributions on the new CyberKnife centers -- as you know, we opened the first CyberKnife center in our network last year, and we opened another one in the second quarter of this year.

So the CyberKnife centers, first, it is a more accurate way of mediation service, and secondly, it has less side effects to the patient. So, the patients are willing to pay more, and in the two cities that we above operating our CyberKnife centers, in Shanghai and in Jinan. The social insurance coverage is relatively small for the CyberKnife service, but we are still seeing a very strong demand from the patients.

So, they have contributed significantly to our total revenue as well as improved our per patient service charge, per patient yield, for our treatment centers. So we believe that this pattern will continue in the future, as we are seeing more traffic in our diagnostic centers and we are seeing per patient yield improvements in our treatment centers.

As you mentioned, we have added four centers in this quarter, which include three treatment centers and one diagnostic center. So the treatment centers are located within different areas in China, and I think there are two in the northeast area and one in southern China, and that diagnostic center is also in central China. So, these added centers have strengthened our position as a leader in the cancer treatment and diagnostics industry in China.

Okay. Thank you very much.

Okay. Thank you, Sean.

(Operator Instructions). There is no further question at this time, and I would like to hand the call back to the management for closing remarks.

Operator, there's no questions anymore?

Yes, there is no question at the moment.

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.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect. Goodbye.

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.