Concord Medical Services Holdings Ltd (CCM) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by; welcome to the Q3 2014 Concord Medical Services Holdings Limited's earnings conference call. (Operator Instructions).

I must advise you that this conference is being recorded today, Tuesday, November 18, 2014. I would now like to hand the conference over to your host today, Ms. Fang Liu, IR Manager at Concord. Thank you, ma'am, please go ahead.

Thank you, operator. Hello, everyone, and welcome to Concord Medical's third-quarter 2014 earnings conference call.

Concord Medical's earning release was distributed earlier today and you can find a copy on our website, as well as our 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.

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 expectation. 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 call 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) Hello, everyone, and welcome to Concord Medical's third-quarter 2014 earnings conference call.

During the third quarter, our business maintained strong growth momentum. Total net revenue reached RMB265.7 million, an increase of 13.6% from the same quarter of 2013.

Net revenue generated from the network business was RMB143.2 million, representing solid year-over-year growth, thanks to our ever-improving premium radiotherapy and diagnostic services and wide recognition from our customers and patients alike.

Since the beginning of this year, we have been optimizing revenue and profit growth of our network business by enhancing the average pricing for single customers. This helps to ensure healthy overall growth and sustainability of our network business, even as our total network of centers in operation remains unchanged.

Net revenue from Chang'an Hospital also improved in the reporting quarter.

Our business growth this year is mainly attributed to the following achievements. Number one, our existing radiotherapy and diagnostic imaging centers continue to experience a high facility utilization rate.

Number two, Concord Medical's cooperating hospitals are benefiting from the Government's new policy supporting primary care medical institutions, resulting in steady growth of outpatient and inpatient numbers.

Finally, we have increased marketing efforts to self-paying patients, strengthening the [good] influence of our centers in respective local markets. Self-paying patients including CyberKnife and PET-CT patients contributed over 30% to our network revenue in the third quarter. We expect their contribution to continue to increase as social health awareness improves.

We are also very pleased to receive great support from the US-based [MDM assist] team as this relates to the design and preparation process of our Guangzhou and Shanghai hospitals. We anticipate these two new projects will break ground at the end of this year and the first half of next year respectively, laying a solid foundation for our future development.

Late last month, we announced to the market that we have received relevant government approvals to establish a free-standing radiotherapy cancer center, Datong Meizhong Jiahe Cancer Center in Datong city, Shanxi Province.

The Datong Center is a 100%-owned subsidiary of Concord Medical. Once completed it will be the first free-standing cancer specialty hospital in the Concord Medical network.

As an important milestone in our corporate strategy, the Datong Center presents a great opportunity for our efforts to build independent cancer specialty hospitals. We will take advantage of the medical and operational team in place, as well as the local marketing network, to provide the best treatment and services available to our patients.

In the coming years, we aim to selectively convert some existing centers in operation to free-standing cancer specialty hospitals. We will seize the opportunity presented by healthcare reform in China and capitalize on our advanced techniques and extensive experience to expand our hospitals and radiotherapy and diagnostic centers to meet the growing needs of patients for high-end medical service.

In conclusion the healthcare industry is a rising industry in China. As an industry leader, we are encouraged by our prospects and our social responsible obligations.

We intend to seek industry opportunities; take advantage of the government policy and financial support; and make full use of existing resources and experience in radiotherapy and diagnostics, to provide the most-advanced treatments and the most-attentive services available to patients nationwide.

As we fulfill this plan, we will also provide stable returns to our shareholders over the long term.

At this point, I would like to turn the call over to our Chief Investment Officer, Mr. Adam Sun, to review our financial results for the third quarter of 2014.

Thank you, Dr. Yang. Hello, everybody. First, I would like to review some highlights in the financial results of Q3 2014. Then I will talk about some key financial metrics, in particular accounts receivable, adjusted EBITDA, and the gross margin.

From the early release issued after market closed yesterday, you can see that CCM's total revenue was RMB266 million, or $43 million, an increase of 13.6% over the same quarter in 2013.

Of which, the network revenue was RMB143 million, or $24 million (sic - see press release, "$23.3 million"), an increase of 9.2% over the same quarter of last year.

China hospitals' revenue was RMB122.5 million, or $20 million, an increase of 19% over the same quarter of last year.

Similar to the last quarter, the revenue increase in our network business was mainly driven by improvements of patient mix treated in our centers, especially the increasing number of self-paying patients, such as CyberKnife and PET-CT, which reported patient growth of 18.6%, and 6.1% respectively, compared to last year.

Overall, patient traffic growth has been very strong in our treatment and the diagnostic centers, especially those providing high-end services. This demonstrates that the demand for high-end, high-quality services in the Chinese market is growing very strong.

Revenue from treatment and diagnostic centers represented 53% and 47% of total revenue respectively. The largest contributors in terms of equipment are linear accelerators, PET-CT, and MRI centers, which accounted for 25%, 24%, and 18%, or our total network revenue respectively.

We believe the contribution of our treatment centers will remain stable, while our diagnostic centers will see faster growth due to wider social insurance coverage of basic diagnostic services, such as MRI and CET, and high-end patient are more willing to pay out of pocket for services such as PET-CT scanning.

Our accounts receivable at the end of third quarter was RMB305 million, of which the ARs from network business was RMB258.1 million, or $42.1 million, representing a DSO of 173 days, as compared to 156 days for the second quarter. The DSO has minor increases, mainly due to seasonality, factors and we expect the collection will pick up during the remaining two months of the year.

As for the adjusted EBITDA, the most effective metric, as it reflects the cash flow generated by our business. For the quarter it was RMB111 million, or $18 million, a 9.4% increase on the same quarter last year. The EBITDA margin was 41.7%, compared to 42.8% in the second quarter.

The gross margin for our network business was 50.7% for the third quarter, as compared with 56% for the third quarter of 2013. The lower gross margin was primarily due to higher medical consumable expenses during the quarter.

Our gross margin of the network business was impacted by volatility in the consumable crisis as well as by seasonality factors. We expect the whole year gross margin of the network business will remain in the range of the moving average for the [trailing] 12 months.

During the quarter we have announced plans to open and operate a specialty cancer hospital, Datong Meizhong Jiahe Cancer Center, in Datong, Shanxi Province. The total investment for the Datong Center will be around RMB15 million with equipment accounting for around 60% of the total investment. The center is expected to open in mid-2015.

This concludes our prepared remarks. Operator, we are now ready to take some questions.

(Operator Instructions). Bin Li, Morgan Stanley.

This is Yolanda calling on behalf of Bin. My first question is on Chang'an Hospital. So it's been a while since you've acquired a majority stake of this hospital and the revenue growth has been growing quite healthily. So do you have any plans for the future development of this hospital?

The second question is on the cancer center that you will set up in Datong. Can you give us more color, like why you choose to build a center in a city like Datong? And do you plan to open more in other regions? How many centers do you expect in, say, one to two years? Thank you.

Okay Yolanda, thank you for your questions. Let me answer the first question regarding Chang'an Hospital and Dr. Yang will answer the question on the Datong Center.

As for the Chang'an Hospital, in this quarter the revenue remained -- growth remained on track.

But being a general hospital, Chang'an Hospital's revenue growth and profitability improvement, we think, are facing a lot of constraining factors.

In Q3 the average outpatient charge per person, as we calculate it, is around RMB185 and the average inpatient charge per patient is around RMB4,600. Both are lower than the city's average and also much lower than that in Beijing or Shanghai for such first tier cities.

Currently, the healthcare reform in China is progressing quickly under these new [perspectives]. We think that the Chinese growth in the future also facing many constraining factors, such as the introduction of patient referral systems and the ever-stricter social insurance reimbursement control.

In general, we believe there are still a lot of work that can be done and we hope that some of the work we've been doing in the past three years, such as introducing international institutions and bringing more academic exchange programs between Chang'an Hospital and institutions, such as Fox Chase, we are seeing more impacts of these initiatives and we will make more efforts in the future.

Now, I would like to turn over to Dr. Yang.

(interpreted) Let me give you some instruction on our Datong project.

I think this Datong project represents that we are seizing the opportunity bring by the Chinese healthcare reform. Under the circumstances, according to the reform policy, the government encourages private capital into the medical section, especially encourage private capital to establish [cancer] -- to establish specialty hospitals.

The central government also authorized local government to give approval to private capital to established tier 2 hospitals. We -- it only takes us three months to get the government's approval, so you can say it's very quick.

Secondly, to establish self-owned, independent cancer specialty hospitals has always been our dream and our strategy from many years ago. During the 17-year market presence, we have accumulated a lot of technological and software resources. We hope that we can take fully advantage of our own platform to build our own brand.

Certainly, we have a great advantage in this city. We have been operating one center in Datong City, so we have got a lot of experience and we have good reputation and recognition about local customs, local patients. We could leverage those advantages in this city.

Datong city is actually the industrial hub of Shanxi province. But, at the same time, it's actually lack of local medical resources, so the staff from local government is actually very happy to give us this approval to establish a cancer specialty hospital, so that local patients, local people, could go to our hospital after it's operational and they don't have to travel to other cities to get treatment.

So in the coming years, because we have this supportive policy, we plan to selectively transform our current centers within existing hospitals into freestanding stand-alone centers.

As to the city, we would consider those cities in which we have existing resources, in which we have already operating the cooperating centers and establish similar cancer-specialty hospitals.

In the future, we hope that CCM will be an operator of specialty-cancer hospitals and operate the network of cancer radiotherapy and diagnostic centers.

In center cities, I mean Beijing, Shanghai and Guangzhou, we will build three premium, our high-end cancer-specialty hospitals. For those other cities in which we have already established a center or we have -- in which we already have existing resources, we will establish cancer-specialty hospitals, like the Datong Meizhong Jiahe.

So, in the future, we will operate a huge network of cancer treatment and diagnosis.

Thank you.

Next question please.

(Operator Instructions). Jack Hu, Deutsche Bank Research.

(interpreted) The question is about Chang'an Hospital. Because the CIO has just talked about the Chang'an Hospital, the growth and the operational situation, we can notice that the average outpatient charge per person and the average inpatient charge per person is actually considerably lower than Beijing and Shanghai level. So could you give us some explanation about that? And what will the Company do to improve the situation?

(interpreted) We actually acquired Chang'an Hospital two and a half year ago. At that time, Chang'an Hospital is not a new hospital, it had already got a three to eight-year history.

Chang'an Hospital has been a general hospital, but we are always trying to convert it into a general hospital with a focus of a very strong oncology department.

However, because of the Chang'an Hospital is not very competitive (technical difficulty), especially in terms of technology, so it has a lack of ability to give treatment to those patients who have very serious disease. So that is why it has such low outpatient and inpatient charge.

The second point I would like to mention is that Chang'an Hospital is covered by the local social insurance system, so it's targeting patients, the common people around that area, including low income group in that area.

After the acquisition, we have tried to make improvements on its technology, its brand awareness. And also, we have been cooperating with a lot of international medical institutions, for example Fox Chase.

Chang'an Hospital is a large tier 3 hospital, so this conversion will be very slow, but we have always been trying to improve on that. Thank you.

Next question please.

Is there any further question?

(Operator Instructions). We don't have any more questions. I'll hand the call back to the management, please.

Once again, thank you for joining us today. Please don't hesitate to contact us if you have 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 marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.