Concord Medical Services Holdings Ltd (CCM) 2014 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Q2 2014 Concord Medical Services Holdings Limited Earnings Call. 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, the 14 of August, 2014.

I would now like to hand the conference over to your speaker for today, Mr. Bill Zima. Please go ahead sir.

Hello everyone and welcome to Concord Medical's second quarter 2014 earnings conference call. Concord Medical's earnings release was distributed earlier and you can find a copy on the company's 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 Investment Officer. After their prepared remarks, Dr. Yang and Mr. Sun will be available to answer your questions. Mr. Kong Yap, Concord's new Chief Financial Officer is also on the call today.

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 the company's 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 call is being recorded. In addition, a webcast of this conference call will also be available on Concord Medical's website.

With that said, I would now like to turn the call over to Concord Medical's Chairman and CEO. Dr. Yang. Please go ahead.

(interpreted) Hello everyone. Welcome to Concord Medical's 2014 second quarter earnings conference call.

Our second quarter results demonstrate how we continued a stable growth in our business since the beginning of the year. Total revenue generated from the network business grew to RMB161 million or $25.9 million, representing a 10.4% increase year-over-year our higher pricing centers such as PET-CT centers and CyberKnife centers are increasingly becoming major growth drivers to total revenue. This success is a result of rising patient awareness and the willingness to pay for higher level services and treatment.

In the second quarter, PET-CT centers accounted for 7% of the network business growth and our CyberKnife centers accounted for 15%. Importantly, overall management cost control for this segment of our business has improved significantly and our SG&A expenses as a percent of total revenue has fallen to 16% this quarter from 22% in the same period last year.

Shifting to our hospital segment, in the second quarter, Chang'an Hospital performance has also increased significantly with revenue increasing to RMB124.5 million or $20.1 million, up 14.8% from same period last year and up 13.6% sequentially from the first quarter of this year.

Net income attributable to ordinary shareholders in the second quarter of 2014 was RMB35 million or $5.6 million, a 20.4% increase from the same period last year. Basic and diluted earnings per ADS increased to $0.13 from $0.11 last year.

Given our strong performance this quarter, we'll reiterate Concord with our full year guidance forecast of earnings in the range of $0.45 to $0.50 per ADS, or $20.3 million to $22.5 million in net income attributable to ordinary shareholders.

Second quarter relates with progress in the design and construction for Concord Medical Hospitals. We've engaged the world-class architecture firms for the design of our Shanghai and Guangzhou Hospitals and we finalized the overall design plan in the near future. Our new facilities are actually to benefit from our close cooperative relationship with MD Anderson.

During the design and the construction process, MD Anderson's full range consultant services provide us great value and a strong performance.

Last week, our hospital design plan discussion meeting was held in Beijing with participants that included and MD Anderson's management and design team, architecture firms and domestic hospital experts. At this meeting, we received many valuable suggestions. Taking these suggestions into consideration, the overall design will be determined in the near future and the construction will start on [one] specialty cancer hospital during this year. Developing sales volume and independently-operated high-end cancer hospitals is a major priority for our growth strategy in the years ahead. We are very encouraged with our progress and accomplishments to date.

Recently national authorities and local government issued a series of healthcare reform policies to encourage private capital to enter the healthcare industry, which we believe will beneficially impact our business and our growth strategy. One important area of concern (inaudible - microphone inaccessible) relates to doctor shortages at hospitals.

We are very pleased to see that several cities including Beijing and Shanghai introduced multi-location practice policies which allows doctors to work in different hospitals at the same time. At Concord, we intend to make full use of the national policy to plan for future hospital doctor recruitment and [work] training to improve the quality of our hospital services.

Finally, we are very pleased to introduce our new Chief Financial Officer, Mr. Yaw Kong Yap. Mr. Yap has been working in the company for many years and he is an expert in financial management, internal control and international business. I think you all know Mr. Yap very well.

In the redistribution management team position Mr. Adam Jigang Sun was appointed as Chief Investment Officer. He will play an even more important role for the investment and development of the major businesses in the future. At the same time, Mr. Adam Jigang Sun, will continue to be responsible for Investor Relations of the company and keep good communications with investors.

Let's welcome Mr. Yap to give a speech.

Thank you Dr. Yang and thank you, [Jia Chin]. Good morning and good evening everyone. I am Kong Yap. First of all, I would like to thank you all for joining us today for our 2014 second quarter earnings release conference call.

As Dr. Yang has mentioned, we are very pleased with our strong financial and operating performance. I also share the excitements for impressive progress we have made since the beginning of the year for our network business, hospital business, the constructions of our specialty cancer hospitals and the free-standing radiotherapy centers. I am very confident that our management continued to ride on this momentum to deliver the strong performance for the coming months and we are looking forward to sharing with you more updates of these business developments in the future. Thank you.

(interpreted) At this point, I would like to turn the call over to Mr. Adam Sun to review our financial results for the second quarter of 2014.

Thank you, Dr. Yang. Hello everybody. We have issued the 2014 second quarter earnings release this morning. You can find the full release on our financial website as well as our IR website. As Dr. Yang said, we are pleased with the quarterly results, following some financial highlights for the quarter.

Total net revenue which consists of net revenues generated from the network business and hospital business was RMB285.3 million or $46 million in the second quarter of 2014, a 12.3% increase from RMB254 million in the second quarter of 2013.

Gross profit in the second quarter of 2014 was RMB110.1 million or $17.7 million, a 4.7% increase from RMB95.2 million in the second quarter of 2013. Net income attributable to ordinary shareholders in the second quarter of 2014 was RMB35 million or $5.6 million a 20.4% increase from RMB29.1 million in the second quarter of 2013.

Basic and diluted earnings per ADS in the second quarter were RMB0.78 or $0.13 compared with RMB0.65 in the second quarter of 2013. Adjusted EBITDA in the second quarter of 2014 was RMB122.1 million or $19.7 million, a 17.1% from RMB104.3 million in the second quarter of 2013.

For this quarter our key financial metrics is as follows. The gross margin for the business in this quarter was 38.58% compared to 41.4% in the second quarter of 2013. A negative trend of 282 basis points, of which the gross margin for the network business was 57.2% compared to 59.7% in the same quarter of last year, a negative trend of 250 basis points, mainly due to higher compensation, consumable and depreciation expenses.

The gross margin for the hospital business was 14.5% compared to 16.9% in the same quarter of last year, a negative trend of 240 basis points due to higher compensation expenses for medical staff as well as higher medical and consumable costs.

Our selling expenses as a percentage of revenue was 7.2% in this quarter compared to 10.1% in the same quarter of last year, a positive trend of 285 basis points mainly due to the lower marketing and selling expenses related to our telemedicine business. Our general and administrative expenses as a percent of revenue was 8.7% in this quarter compared to 12% in the same quarter last year, a positive trend of 323 basis points mainly due to lower travel, entertainment and rental expenses.

So overall, our operating margin for this quarter was 22.6% compared to 19.4% in the same quarter of last year, a positive trend of 326 basis points. Our net profit margin for this quarter was 12.3% compared to 11.4% in the same quarter of last year, a positive trend of 82 basis points.

So, our second quarter results follow through as a strong performance of the first quarter, even our gross margin remains under pressure due to higher cost such as compensation, depreciation and consumable expenses.

Our bottom-line was helped by our cost control measures during the quarter. As for our liquidity position, the total cash on hand of the company at the end of second quarter is RMB319 million, an increase of RMB97 million compared to the end of first quarter.

About financing lease position, the company also has financing lease position of RMB126 million in the current quarter and RMB163 million in the non-current quarter. The financing leases are highly liquid with minimum counterparty risk, the lessees are all government hospitals and they all have fixed payment schedules averaging for three years. In other words, we will receive another RMB290 million from hospitals during the next two to three years.

EBITDA. The EBITDA for the quarter was RMB122 million, an increase of 17% over the same quarter of last year, a very healthy and strong growth in our cash flow. The trailing 12 months EBITDA was RMB443 million.

The company's signed IFC loan facility agreement in May 2013 and we have drawn down on the [fee] loan of $20 million in February 2014 for our Guangzhou Hospital construction project. Currently we're working with IFC to draw down the rest of $30 million in long term [loan] for our hospital project as well.

In conclusion, we are very pleased with the strong quarter and we will focus on the implementation of our growth strategy.

Now, we would like to open up for questions. Thank you.

(Operator Instructions). Your first question comes from the line of Isabella Zhao from Morgan Stanley. Please go ahead.

(spoken in Chinese). I will translate my question into English later.

I have two questions. The first question is regarding the operating expense ratio. I noticed that there is a big drop in this quarter and I'm wondering the reason behind it and what [we] should look like in the second half of the year.

And my next question is for Dr. Yang. And can you give us a rough timeline for the construction and the starting of operation for Shanghai and the Beijing hospital and also I remember you mentioned also plan to get out all radiotherapy centers and can you me -- can you give us more color on that? Thank you very much.

All right, Isabella, let me try to answer your questions first, and then I'll hand it over to Dr. Yang.

So, as for the operating expenses as Dr. Yang mentioned in his speech as a percentage of revenue, we have seen a very big improvement of this quarter. The total operating expenses as a percentage of revenue was 16% compared to 22% over the same quarter of last year and of which close to [selling] and the general and administrative expenses have seen improvements of around 300 basis points in both categories.

I think the main reason there are two folds. On the one hand, we have initiated the cost control measures since last year and gradually as we streamlined our management system and strengthened cost control and make cost control measures key KPI for our centers and all the major divisions internally, so we are finally seeing all these measures taking effect. So that's we're seeing good improvements in our general and administrative expenses, as we see both travel, entertainment and rental expenses showing improvements in this quarter.

And secondly, in terms of our selling expenses, so we have seen lower marketing in selling expenses, especially related to our telemedicine business, and as we've discussed in the previous quarters, we have invested very substantially into the new business units and currently we are in conducting an internal business review to determine the strategy for this unit and as the review is going to close, we'll be able to share the result of that review and also the new strategy for the telemedical business pretty soon with the investors.

With that, I would like to turn it over to Dr. Yang.

(interpreted) So in our strategy, we are planning to build three core cancer hospitals in Beijing, Shanghai and Guangzhou.

In Beijing, we chose the Beijing International Medical Center as our dome to build our hospital and which is located in Tongzhou District. Right now, the whole project is still in the process of the pre-construction period, and when completed we will be prepare completely.

In Guangzhou, we have acquired the land and still in the process of [cleaning] land and in pre-preparation work. Now we are hiring the two famous design groups to work on this project. We expect that its construction period will be three years.

The Shanghai project will be located in Shanghai New Hongqiao International Medical Center. So these hospital will be the only cancer specialized hospital in this part of [zone].

In this project, we've already made decision to choose the American architecture design firm and domestic local design firm. About the plan, medical planning and [micro] process will be provided by MD Anderson's completely.

We expect to build a specialized hospital in Shanghai which will be the same as our [market] specialized hospital standards. The expected construction period will be within three years.

Another point is what you've said about the independent radiotherapy center. We are foreseeing to do some research and exploration point. We'll take advantage of our -- advantages to expand these projects with the local resources. We are discussing several projects in the local area and next quarter we hope there is one product will be decided.

Thank you, Isabella. Next question, please.

Our next question comes from the line of Sean Wu from JP Morgan. Please go ahead.

(spoken in Chinese) The first question is about the decision between building hospital on the [long haul] like going out and buy some hospitals, of course if you wanted to like proton center maybe you have to build something from scratch, otherwise, wouldn't it make a more sense to buy hospitals and then convert and apply your technology knowhow.

And number two, a question about your decision to make dividend payout and a quite larger one recently, I know like you want to reward the investor. The thing about that you cannot look at investors two ways one is to buyback share; two, if you are seeing the stock price cheap, another way of course to give people dividend and many people don't make dividend, because they have to pay tax.

This of course is $0.30 per share, I think, is also quite a bit of money and right now you carry probably a billion cash and certainly investment in about $400 million, $500 million of long, short term debt, you are not exactly cash rich if you are going to build three hospitals from scratch. I presume you will need a lot of cash. So why you think this is a prudent time to payout this large amount of cash and how are you going to finance your hospital build up in the future? Thank you.

(interpreted) Recently healthcare market in China is very hot. Many institutions is acquiring projects in China. And we are seeing this happening.

Several years ago, we tried this and the negotiated with the several projects and finally we decided to build our own. There are several reasons, first, we are building cancer specialized hospital under the [affordable] target is very favorable for us.

We want to build our own hospitals which will be having centralized international standards and but current hospitals in China their construction and all situations are not qualified for us. There are huge gaps between American hospitals department setup that will be in China. That's the reason why we -- from the very beginning, we are using the American architecture firm and MD Anderson to build with us together.

Now in China healthcare reform system direction - China's healthcare reform, the direction is very clear to encourage private customers into this market but the policy for public hospitals is not very clear and we are talking about this with our lawyers and the target is very certain for us. So, it's hard for us to combine hospitals, different hospitals, different culture in our acquiring target in the future.

Because of we have very strong cash flow in our business, so by the Board of Directors, we hope that when we have strong cash flow, we will keep that return to our shareholders. Although we are building our own cancer hospitals and we need cash but we are -- we will be focusing on oncology hospitals and we will [trial] back to gather cash for our projects.

So, we will -- we expect to combine our cash flow with our not very high debt to satisfy our several projects. Thank you, Sean.

Thank you. Our next question comes from the line of [Peter Holzworth] from Hanran Investments].

Hi, gentlemen. Thank you for the call and also congratulations on the effective cost control. I have a question about the number of cases. It seems like there was flat growth year-on-year in the number of patient cases and also diagnostic cases as well. Could you talk a little bit about what contributed to that and also if you have a utilization rate on the diagnostic centers, I appreciate knowing that. And then I have a quick follow-up. Thank you.

Hi. And as you can see from our quarter earnings release, the case is treated within our network is basically flat, both in the treatment and diagnostic cases. First, it is an improvement over the same quarter -- over sequentially because I remember in the first quarter, you see that the treatment cases, there was a small decline.

So this quarter, we're seeing a flat growth. The reason for this is there is two-fold. On the one hand, in terms of our treatment centers, the utilization rate is pretty high and some of our treatment centers even operating basically around the clock. So, there is limited room for increasing in terms of the number of treatment patients.

So in the diagnostic centers, we are still seeing a growth of although a small one. And the reason for that is in this quarter we are focusing more upon the high paying cases, including PET-CT and which is showing very positive impact on both our revenue growth as well as our profitability.

So, in terms of the diagnostic centers and their utilization rate, we haven't done exact number, but my general impression is it is very high in the 60% to 70% area.

And you said you have another follow-up question, Peter.

Yes. Just on the Chang'an Hospital and the revenue streams, it looks like medicine revenue was the highest amount of revenue. And I was just wondering we've heard that part of the healthcare reform will eventually be the removal of pharmacies from hospitals, I was just wondering how if and when that does come, how would you handle it in this hospital and also your planned new hospitals? Thank you.

So first of all, for the Chang'an Hospital medicine attributed about 45% of the total revenue in the past quarter which is about the same from the previous two quarters and in fact it is lowest one. And yes, you are right the government is implementing the policy to encourage hospitals, especially government hospitals to reduce their reliance on pharmaceutical sales.

So they have set up very specific resource for the government hospitals, I think for a level-three hospitals percentage of revenue from medicine sales is capped, I think, at 35% or 40% ,I can't remember the exact number.

So, in Chang'an Hospital, we are also trying very hard to improve the revenue mix, but it is very challenging task, the reason for that is number one Chang'an Hospital is a private hospital needs to compete in the market with the government hospitals, so it is a very competitive market as you can see. And secondly, Chang'an Hospital, it is a general hospital so we've been trying to implement a new strategy and focusing more upon cancer sales -- I mean cancer treatments, but it takes a very long time, a lot of work for us to implement that.

So with that, I think I believe that we'll keep working on this issue and improving the revenue mix of our Chang'an Hospital but it is a long process.

So in terms of our future hospitals, the revenue mix and the potential patients and also the targeting market will be totally different. So the hospitals we are planning in Beijing, Shanghai and Guangzhou as the CEO has mentioned will be premier cancer specialty hospitals targeting the high net worth population as well as the commercial insurance population which will have totally different payability and affordability for the treatment.

So we in fact we will not depend at all upon [pharmaceutical] sales in our premier hospitals but we will charge a market rate for the services of our doctors and also for the more high end and high quality treatment and services in our hospitals.

Thank you. And just a quick follow up, what would be the share of revenue from medicine in the new hospitals in Shanghai, Guangdong and Beijing? Thank you.

We are basically -- we are not in our financial forecast, we are not focusing at all upon a [marked] markup for the pharmaceutical sales. So our revenue or our profitability will come, I would say, [majority] close to 100% from the treatment and the services we charge for our -- to our patients.

Understand, very clear. Thank you very much and congratulations again.

Thank you.

Our last question will come from the line of [Huang Dai] from CICC. Please go ahead.

(spoken in Chinese) Let me translate my questions to English. I just want to ask a very simple question and that is, what the percentage of the network business is from the telemedicine and web businesses. And would you please give more colors, those businesses such as the margins, the gross and the future trends? Thank you.

(interpreted) The combination of healthcare IT is the road many healthcare companies is pursuing right now. For this we built a specialized team and that we also accumulated three years of experience. We want to combine our current network with network of technologies and treatment and to make a better telemedicine network.

Currently, these treatments have not been calculated independently and we are putting investments on it, mainly serving for our account business. In the future, it is probably for us to extend -- expand these business outside of our [group].

From our account accumulation, we want to serve more patients with these advanced IT services. We will notify everybody in time. Thank you.

Okay. I have no further questions. Thank you.

All right. At this time, I now hand the call back to the management for final remarks.

Thank you for everyone. This concludes the presentation. You may now disconnect.

Thank you, sir. With that, we conclude our conference call for today. You may all 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.