Concord Medical Services Holdings Ltd (CCM) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2014 Concord Medical Services Holding Ltd earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Tuesday, March 24, 2015. I would now like to hand the conference over to Mr. Bill Zima from ICR. Thank you, please go ahead.

Thank you, operator. Hello everyone, and welcome to Concord Medical's fourth quarter and full-year 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 on news wire services. Today you will hear from Dr. Jianyu Yang, Concord Medical's Chairman and Chief Executive Officer, Mr. Adam Sun, Chief Investment Officer. After their prepared remarks, Dr. Yang and Mr. Sun along with Mr. Kong Yap, the Company's Chief Financial Officer 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.

With that said, I will now turn the call over to Concord Medical's chairman and CEO, Dr. Jianyu Yang, Dr. Yang please go ahead.

(Interpreted). Hello, everyone, and welcome to Concord Medical's 2014 fourth-quarter and full-year earnings conference call. During 2014 our network of radiotherapy and diagnostic imaging centers continued to develop progressively, contributing to total net revenue of RMB606.9m, a 7.8% increase from RMB563.1m in 2013. At December 31, 2014 Concord Medical operated a network of 139 centers in 56 cities in China. Throughout the year our network business contributed steady cash flow to our growth. Adjusted EBITDA non-GAAP reached RMB348m in 2014 representing a 9.1% (sic - see press release "9.3%") increase from RMB318.9m in 2013.

In terms of hospital construction, we are focused on the execution of our established corporate strategy to gradually build Concord into a leading operator of specialized cancer hospitals in China. We achieved some important accomplishments in 2014. It is our multi-year plan to construct and operate one premium cancer hospital in each of three core cities Beijing, Shanghai and Guangzhou. The network will be supported by a number of freestanding Level 2 cancer hospitals as well as our current national network of radiotherapy and diagnostic imaging centers.

In the first half of 2014 we received the approval for building Shanghai Concord cancer hospital in Shanghai New Hongqiao Medical Center. After receiving approval, we engaged an internationally renowned architecture firm HDR and have completed the overall design and construction plan. We also consulted with many experts during the planning period particularly the medical and management teams at MD Anderson. Once complete, our new hospital in Shanghai will be an advanced platform for cutting-edge cancer treatment services emphasizing multiple disciplinary treatment, MDT, strong patient experience and a holistic approach to treatment methods.

Construction of our Shanghai hospital is to start in the second half of 2015 and the construction period is expected to be around three years. Once complete, this hospital will serve as the hub of Concord Medical's planned national network. Through extensive collaboration with MD Anderson, we will be able to provide international treatment standards and services to Chinese patients including the advanced MDT diagnosis and treatment.

In the first quarter of 2014, we received approval to build a freestanding Level 2 cancer hospital in Datong City, Shanxi Province. The Datong Meizhong Jiahe Cancer Center, or Datong Center as we call it for short, will provide advanced best-practice diagnostic and radiotherapy services in the region with 100 patient beds once construction is completed. This center will apply to join the local social insurance coverage. Datong Center is currently undergoing infrastructure construction and interior design and is expected to open during the third quarter of 2015. During, 2015 we plan to build five to 10 independent radiotherapy centers in key areas of China, gradually transforming our current centers and their cooperation with public hospital partners to freestanding centers.

In the fourth quarter of 2014, we announced divestment of Chang'an Hospital's -- of Chang'an Hospital's 22% equity. The transaction was closed at the end of this year and we have collected all proceeds from the transaction. As a general hospital, Chang'an Hospital differs with Concord's strategic direction in its efforts to develop specialized cancer hospitals. After the divestment of Chang'an Hospital, our financial position has been improved. It has been a pleasure to work with members of Chang'an Hospital since June 2012 and we are grateful for their contribution to Concord in terms of staff training and hospital management.

Concord is making good progress in its efforts to become a leading operator of cancer specialist hospitals and radiotherapy and diagnostic centers in China. We are capitalizing on our deep industry knowledge and talent resources accumulated in the radiotherapy and diagnostic sector for the past 18 years to achieve our corporate goal and extend our market position in the coming years.

We believe the overall level of domestic oncology treatment in China is far behind other Western countries in terms of early diagnosis rates, five-year survival rates as well as overall patient treatment -- patient treatment. We also believe this gap is becoming more significant. Concord is uniquely positioned to improve the overall level of domestic oncology treatment in China given our operating history and experience. We also benefit from our strategic partnership with MD Anderson in various oncology treatment areas. Experts from MD Anderson have made significant contributions to our current cancer hospitals particularly in the areas of hospital design, department settings and staffing as well as the operations of our Shanghai hospital.

Moving forward, we intend to reinforce our cooperation with MD Anderson and introduce MDT into China through Concord Medical's network. MDT represents the most advanced international cancer treatment techniques that will (technical difficulty) Chinese cancer patients. This comprehensive strategic partnership will be critical to Concord Medical's long-term development and growth. We expect to provide consistent updates on this cooperation to the markets regularly going forward.

Finally, we'd like to acknowledge the continued support to Concord and investments in China's healthcare industry by our investors. As always, we welcome your feedback and interaction and appreciate any industry development insights or market news. Once again, thank you.

At this point I will turn the call over to our Chief Investment Officer, Mr. Adam Sun to review our financial results.

Thank you, Dr. Yang. Welcome, everyone, to our call. First, I would like to review the highlights of our full-year financial results. Please note that all reported financial results exclude the financial contribution from Chang'an Hospital. This was because in December of 2014 we announced that the plan to sell 52% equity interest in Chang'an Hospital for a total consideration of RMB398m or $64.8m. This 100% cash transaction closed on December 31, 2014 and the financial result of Chang'an Hospital for Q4 and the full-year of 2014 is included under discontinued operations in our financial statements.

For 2014, total net revenues were RMB606.9m or $97.8m, representing a 7.8% increase from RMB563.1m in 2013. This increase was mainly due to the increased revenue contribution from our diagnostic equipment patients. Gross profit in 2014 was RMB332.3m or $53.6m, representing a 3.8% decrease from RMB345.5m in 2013.

Gross profit margin in 2014 was 54.8% compared to 61.3% in 2013. The gross margin was under some pressure due to the following reasons. First, the new equipment we added during the past years was depreciating at a comparatively shorter period so the depreciation expenses for each is higher. Secondly, consumable costs for the new equipment such as robotic surgeon and CyberKnife are higher on the per patient basis. Thirdly, the labor costs at the centers have gone up during the past years.

Adjusted EBITDA for the full-year was RMB348.6m or $56.2m in 2014, representing a 9.3% increase from RMB318.9m in 2013. Net income attributable to ordinary shareholders in 2014 was RMB124.7m or $20.1m, a 44.5% increase from RMB86.3m in 2013. The net profit margin in 2014 was 15.6% compared to 14.3% in 2013. Income tax expense in 2014 was RMB80.9m or $13m compared to RMB63.8m in 2013. The effective tax rate in 2014 was 46%.

Basic and diluted earnings per ADS in 2014 were RMB2.77 or $0.46 (sic - see press release "$0.45") and RMB2.76 or $0.45 respectively. The number of treatments and the diagnostic patient cases was 30,000 and 323,000 for the full-year representing a 6.5% decrease and 2% increase over 2013 respectively. The revenue breakdown between treatments and the diagnostic centers in 2014 was 60% and 40% respectively.

Now I would like to walk through the highlights of our Q4 results. For the fourth quarter the net revenue for our network business was RMB160.3m or $25.8m, an 8.3% decrease from RMB174.8m in the fourth quarter of 2013. This was primarily due to decreased treatments and diagnostic patient cases as a result of the closure of two centers due to contract expiration.

As of December 31, 2014, the Company operated a network of 139 centers in 56 cities in China and had entered into agreements to establish three additional centers.

Fourth quarter gross profit in the network business was RMB86.9m or $14m, representing a 26.6% decrease from RMB118.4m for the fourth quarter of 2013. The gross profit margin in the fourth quarter of 2014 was 54.3% compared to 67.8% for the fourth quarter of 2013. The lower gross margin was due to the same reason as I discussed earlier.

Both basic and diluted earnings per ADS for the fourth quarter of 2014 were RMB0.64 or $0.10. Each ADS represents three ordinary shares.

Adjusted EBITDA was RMB101.7m or $16.4m for the fourth quarter of 2014, representing a 14% increase from the fourth quarter of 2013.

Turning the attention to our balance sheet, accounts receivable was RMB265m or $42.7m as of December 31, 2014 compared to RMB272.3m as of December 31, 2013. The average period of sales outstanding for accounts receivable, also known as days sales outstanding was 159 days in 2014. Capital expenditure was RMB107.8m or $17.4m in 2014 compared to RMB159.8m in 2013.

As of December 31, 2014, the Company had cash and cash equivalents of RMB478.7m or $77.2m and restricted cash of RMB392.3m or $63.2m compared to RMB283m and RMB422.1m respectively as of December 31, 2013.

As of December 31, 2014 the Company had bank credit lines totaling RMB2.8b or $446.3m (sic. - see press release "$456.3m") of which RMB943.6m or $152.1m was utilized.

Looking ahead, we expect 2015 to be another year of important accomplishments for Concord Medical. We expect to open our first specialized cancer hospital in Datong in the third quarter of 2014 (sic - see press release "2015"). This will be a state-of-the-art oncology facility once complete. We also expect our hospitals in Guangzhou and Shanghai to also break ground in 2014 (sic - see press release "2015").

We intend to provide more discussion about our 2015 revenue situation and revenue growth on the -- in the first quarter 2015 conference call in May as we will have more detailed timing on how our specialized hospitals will contribute to our full-year financial performances for the coming year.

Thank you again for your attention. Now, we would like to open up to questions. Operator, please go ahead.

(Operator Instructions). Isabella Zhao, Morgan Stanley.

Thank you. (Spoken in Chinese) I will translate my question to English. My first few question is to Mr. Yang regarding the future growth strategy. Number one, I noticed the Company is doing the transition from third party centers to the self-owned operated centers, and I also notice we closed the two centers in 4Q. I want to get better color on the center expansion plan in 2015.

Also the more detail on the cooperation with MD Anderson.

And the last question is about the gross margin trend. We noticed the gross margin has declined significantly in 4Q. I want to get a sense what we should expect the gross margin to be in 2015. Thank you.

(Interpreted). First, thank you for your questions. It's actually covered a lot of issues we'd like to talk about. I will be answering on your first three questions and the last one, I will leave it to our CIO, Mr. Adam Sun.

First, I would like to say that everybody has noticed that in China a new round of healthcare reform has been carried out. We see a lot opportunities in this round of healthcare reform. The government is now encouraging private capital to invest in the healthcare sector.

In this healthcare reform we got opportunity -- we got the chance to open our self-owned, freestanding cancer center -- cancer treatment center in some key cities and we could register these freestanding centers at Level 2 hospitals.

This new develop of CCM is based on the current resources we have accumulated during the past 18 years, cooperating with our public hospital panel. We are glad to tell every investor that we -- during 2014 we have got all the government approval needed by the Datong Meizhong Jiahe cancer specialty hospital.

Our plan in 2015 is to open 5 to 10 freestanding, self-owned Level 2 cancer specialty hospitals, which will focus on radiotherapy. This new kind of business model has some similarity as we used to do in the cooperating centers but we are trying to build the hospitals to be advanced best-practice cancer specialty hospital.

The answer to the second question, we will deepen our collaboration with MD Anderson. We all know that MD Anderson is one of the best cancer hospitals in the United States. We have been talking to MD Anderson and cooperating with MD Anderson for about four years. We hope that we could introduce MD Anderson experience, their cutting edge technology in cancer treatment and their experience in hospital management into China -- into our hospitals.

Moving forward, we will collaborate with MD Anderson in terms of staff training, (inaudible) exchange, department staffing in the hospital design and probably some potential brand cooperation. We are now still talking with MD Anderson on some new cooperation to deepen our relationship. Hopefully, in the future, we could have some updates to share with you. We hope our comprehensive strategic partnership with MD Anderson will not only bring better treatment for cancer patients in China but also we can do something for the new healthcare reform in China.

We will build our self-owned premium cancer specialty hospitals in core cities in China; Beijing, Shanghai and Guangzhou. Beijing, Shanghai and Guangzhou are the core cities in China. They are not only the largest and most developed cities in China; they also have the most medical resources and the most patients. We will fully apply our cooperation outcome with MD Anderson in our three premium hospitals.

To be specific, both -- the Concord Hospital in Guangzhou has already break ground and we have completed the preliminary design with HDR for the Shanghai Concord Hospital and we expect Shanghai Concord Hospital to break ground in the second half of 2015. For the Beijing Concord Hospital, we actually have signed agreement with local government and this hospital will be located in the International Medical Center in Tongzhou district of Beijing. We hope that we could introduce best-practice international standard treatment to our patients and bring a good patient experience to them through our premium hospitals.

Now, please welcome our CIO to answer your number four question.

Okay. Thank you, Dr. Yang, and thank you, Isabella, for your question. Regarding the gross margin, I have explained in my prepared remarks that there are three major reasons for the gross margin, year over year. Number one is the increase in depreciation expenses and if you look at our financials you could see that this accounted for about 40% of our total cost of goods sold. And, as I explained in the -- previously, for the new centers we added in the past year, relatively speaking, the overall cooperation period is shorter so -- which resulted in the higher depreciation expenses during this (technical difficulty) you see on cooperation.

For instance, if the cooperation terms change from 10 years to 8 years, you are going to see a 20 -- 25% increase in depreciation expenses, year over year, so that explains part of the reason why our profit gross margin for 2014 was about 5% lower in 2014.

Another major contributor to the higher gross costs and lower gross margin is that some of the new equipment we added to our network in the past few years, they really incur a higher consumable cost on a per patient basis. For instance, for the robotic surgeon that we are currently operating in Shanghai Hospital, each blade -- the blade is one-time and a throw-away kind of equipment so that we have -- in order to promote the services (inaudible) we give the patient a discount on this a consumable which resulted in the lower per patient gross margin on the -- for each case. That's another reason, the higher consumable cost, especially for the higher consumable expense equipment such as robotic surgeon and the CyberKnife.

And another reason for this higher gross margin is, of course, the labor cost was going up over the board in the past few years and you see that in many, many other industries as well.

But on the other hand, if you look at overall EBITDA contribution margin for our network business, for 2000 -- the gross -- the EBITDA margin in terms of the EBITDA versus total revenue was -- stays about the same level and even (background noise) improvement in 2014. This shows that even as the gross margin is under pressure, our business is still contributing on a stable basis in terms of EBITDA and cash flow, which we are going to use to fund our future expansion.

Hope that answers your question, Isabella.

Thank you. That's all my questions. Thank you.

Thank you.

Philip Ehrmann, Manulife Asset Management.

Hello, good evening. My question is really to try and understand how the reduction of two diagnostic centers can result in such a material fall in revenues and earnings for that part of the business. You claim to have 139 centers in 56 cities, or thereabouts, and therefore I'm rather surprised that the ebb and flow, two out/three in sort of thing, can have such an impact so perhaps you can explain what's going on there, please.

Hi, Philip. And our total -- on the one hand, our total net revenue for the full year we still see an increase of about 8%. In 2014, the total net revenue was RMB607m versus RMB563m in 2013 so, on a year-over-year basis, (technical difficulty) 8% increase and -- which is pretty much in line with our overall increase to the previous year. And in 2014 we are seeing a decrease of 8% and partly that is contributed to the close of our centers, especially there is one large -- first, the centers we closed during the quarter was not all diagnostic centers. There's one treatment center which is located in a city in the southern part of China, and that center has been a very high contributing center in our network and we have been cooperating with that partner for the past 12 years and that contract expired at the end -- in the -- back in October, so that we see the full result of that impact for us. And then -- so that explains substantially the decrease we are seeing, quarter over quarter.

But, in general, we are still confident that we are going to see this -- the same stable growth of our revenue and we do not expect to see any -- there might be some quarter-over-quarter volatility but we'll try our best to manage the revenue so that you see we'll maintain a stable growth situation for our network business.

Can you just talk a little bit more about the process whereby a relationship you've had for 12 years, a material relationship, comes to an end? Interested to know what's replaced it; whether this was declining margins, less profitable, you walked away, they walked away; can you perhaps talk a little bit about that?

It's not -- as you know, each of our 139 centers is based on a contract between Concord Medical and our hospital partners. That specific center we talk about, we have a long-term contract and then at the end of the term the hospital prefers to take the contract internally and upgrade it. And the strategy we're adopting right now is to find a suitable location in the close-by city, in the close-by area, so that we can gradually convert these center into a freestanding center.

We have announced one such plan in Datong City, Shanxi Province, and in 2015 we have plans to build and start operate 5 to 10 such standalone centers. So it is a normal business relationship. We have some centers successfully renewed contracts. For instance, we have renewed a major contract (technical difficulty) and entered into another 15 years of cooperation. And we also have some centers that the hospitals prefer to take the operation internally.

Right, okay. Thank you.

All right. Thank you.

(Operator Instructions). There's no more question, at the moment. I would like to hand the call back to management for closing remarks.

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.

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

Editor: 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.