Concord Medical Services Holdings Ltd (CCM) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Concord Medical's first-quarter 2015 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, May 25, 2015.

I would now like to hand the conference over to your speaker of today, Mr. Bill Zima from ICR. Thank you, sir. Please go ahead.

Hello, everyone, and welcome to Concord Medical's first-quarter 2015 earnings conference call.

Concord Medical's earnings release was distributed earlier today, 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.

Before we continue, please note that the discussion today will contain forward-looking statements under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995 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 statements, 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 would now like to turn the call over to Concord Medical's Chairman and CEO. Dr. Yang, please go ahead.

(Interpreted). Ladies and gentlemen, welcome to Concord Medical's first-quarter 2015 earnings conference call.

Our radiotherapy and diagnostic imaging center business achieved healthy growth in the first quarter of 2015. This good start has laid a solid foundation for our full-year development plan.

Net revenues from network business were RMB150.7m, representing a 5.7% increase from the same quarter last year. Adjusted EBITDA non-GAAP was RMB68.8m.

We expect the network business to maintain steady growth for the remainder of 2015 and beyond, providing stable and sustainable cash inflow for our growth development. Our CIO Adam Sun will address our financial results in greater detail later in the call.

I'd now like to share with you strategic development plan for Concord Medical and our recent initiatives. In the past year, the Chinese government has launched a series of favorable policies to encourage private capital to invest in the healthcare industry. These policies provide clear guidelines to our growth strategy and will help move the industry forward.

Concord Medical's goal is to build a national network for cancer diagnostics and treatment, and to become a leading medical group in China with a focus on specialized cancer hospitals. Currently, we plan to construct premium cancer hospitals in three first tier cities, namely Beijing, Shanghai and Guangzhou. These hospitals will follow international standards and introduce to Chinese patients not only the most developed cancer treatment and diagnostic equipment, but also the advanced hospital management and medical procedures, as well as multi-disciplinary team diagnostics and treatment.

Once completed, these specialized hospitals will serve as the backbone of Concord's national hospital network and will provide differentiating cancer diagnostics and treatment service. We believe these high end hospitals will become the leading specialized cancer hospitals in China and the Asian region, providing patients international level treatment and diagnostic services.

We expect the Guangzhou hospital to break ground within this year and the Shanghai hospital to start construction in early 2016. We have engaged internationally renowned architecture agencies and confirmed the final design of both hospitals. We are now negotiating with various vendors on equipment purchase.

Concord Medical has reached a long-term strategic collaboration agreement with MD Anderson. Both parties will collaborate in many areas and build first class cancer hospitals based on a multi-disciplinary treatment model, with orientation on clinical research and expertise in sub-specialties. Through collaboration, we can optimize the patient experience and enhance hospitals' overall treatment standards.

This agreement is the first of its kind for MD Anderson in Asia, and is an exclusive collaboration at CCM's new cancer facilities in Beijing, Shanghai, Guangzhou and Singapore. The collaboration exclusivity will also cover most other provinces in China. MD Anderson will work closely with us on the Guangzhou project as well.

Concord Medical acquired the Fortis Surgical Hospital and closed the transaction in April this year. The acquisition is part of our high end cancer hospital development strategy. We plan to cooperate with MD Anderson at this hospital to provide patients with the most advanced clinical and treatment service, and satisfying growing medical demand of high end patients.

In particular, patients from China will receive diagnosis from doctors at MD Anderson in Singapore and adopt the most advanced medical process and medicine. It will become the first center that involves our cooperation with MD Anderson. Singapore Concord Cancer Hospital will be complementary with the hospitals we are currently building in Beijing, Shanghai and Guangzhou.

Our model of collaboration with MD Anderson breaks new ground in the healthcare industry in China. This is just the beginning and we still have a lot of work ahead of us. We need to capitalize on this opportunity and continue innovating.

I hope that in the coming years our hospitals in Shanghai, Beijing and Guangzhou become operational. Along with the addition of our Singapore hospital, CCM will become the largest cancer specialty hospital management group in China, providing Chinese patients with the latest treatment methods based on the most advanced healthcare developments in the United States.

Another important component of CCM's cancer hospital network is our freestanding radiotherapy cancer center and tier two hospital business model which we are expanding nationwide. Currently, our first freestanding cancer center in the Concord Medical network is under construction in Datong City, located in the Shanxi Province, and it's expected to be operational at the end of this year.

In the coming years, we plan to selectively transform our current centers within existing hospitals into freestanding self-owned centers. As healthcare reform is implemented in China, we will capitalize on the opportunity and rely on our technical advantages and experience to expand our freestanding radiotherapy cancer center network in areas in which we have existing resources and strong patient demand.

To conclude, CCM will continue to focus on cancer treatment and diagnosis and extend its exclusive strategic cooperation with MD Anderson, which represents the highest standard in cancer treatment and diagnosis. Cancer is now a major challenge to the health of the Chinese people.

According to the World Cancer Report 2012 released by WHO, new cancer patients in China reached 3.07m in 2012, with 2.2m deaths from cancer that same year, representing 21.9% and 26.8% of world's total volume. We have the opportunity and responsibility to make a contribution to the fight against cancer in China.

The healthcare market in China remains a promising industry, with many addressable opportunities and growing demand. We intend to capitalize on this growing opportunity and take full advantage of favorable government policy and support to contribute to overall cancer treatment and diagnosis, while also generating long-term stable returns for our shareholders at the same time.

Now, I'd like to turn over to Mr. Adam Sun to review the first-quarter financial results.

Thank you, Dr. Yang. Welcome, everyone, to our call.

For the first quarter of 2015, total net revenues were RMB150.7m or $24.3m, representing an annual increase of 5.7%, primarily due to an improvement in product mix, especially the increased contribution from PET-CT and Cyber Knife centers in our network. We are very pleased to see significant growth in the revenue contributed by both PET-CT and Cyber Knife, which achieved double-digit growth year over year during the quarter and they combined to account for over 30% of our total revenue.

As of March 31, 2015, we operated a total network of 132 centers in 54 cities in China, and had entered into agreements to establish another two centers in China.

Gross profit was RMB74.4m or $12m, representing a 4.3% decrease year over year, mainly due to higher cost of revenue attributable to the increased medical consumable expenses for the network. Gross margin was 49.4%, compared to 54.5% for the first quarter of 2014.

Operating income was RMB27m or $4.4m, compared to RMB35.4m in the first quarter of 2015.

Income tax benefit was RMB6.6m or $1.1m for the first quarter of 2015, compared to income tax expense of RMB11.7m in the first quarter of 2014. The benefit was mainly due to the reversal of withholding taxes related to the Company's overseas investment.

Net income attributable to ordinary shareholders was RMB28.5m or $4.6m for the first quarter, compared to RMB27.1m in the first quarter of 2014. The net profit margin was 18.9%, compared to 19% in the first quarter of 2014.

Both basic and diluted earnings per ADS for the first quarter of 2015 were RMB0.68 or $0.11.

Adjusted EBITDA was RMB68.8m or $11.1m for the first quarter of 2015.

During the first quarter of 2015, the Company handled 6,692 patients in treatment and 73,744 patient diagnostic cases, representing an annual decrease of 5% and 11%, respectively, mainly due to the closure of the seven centers we talked about earlier.

Turning to our balance sheet, capital expenditures for the quarter were RMB38.9m or $6.3m during the quarter, compared to RMB7.1m in the first quarter of 2014.

In this quarter, our cash position has improved. As of March 31, 2015, we had cash and cash equivalents of RMB572.9m or $92.4m and restricted cash, current portion of RMB316m or $51m, compared to RMB478.7m and RMB392.3m, respectively, as of December 31, 2015 (sic - see press release "2014").

As of March 31, 2015, we had bank credit lines totaling RMB2.8b or $456m, of which RMB881m were utilized.

Please pay attention to the fact that we have a total of RMB420m in restricted cash, both current and non-current portions. These are deposited into local banks as collateral for overseas loans on a 1 to 1 basis. So, if we subtract the cash collateralized loans on our balance sheet, our total loan position is around RMB460m or 52% of the total amount outstanding right now. So, we have maintained a very healthy and strong financial position that gives us more room for financing.

Total property, plant and equipment at the end of the quarter net valued at RMB727m or $117m, compared to RMB749m as of the end of the year.

In this quarter, our network developed in line with our expectations, achieved both topline and bottom line growth. We will make more effort in cost control and efficiency improvement in our existing centers and selectively transform existing centers into freestanding self-owned centers in the areas where we have existing resources and patient demand.

The first such facility, Datong Meizhong Jiahe Cancer Hospital, which is a freestanding 100 bed facility that is currently under construction. We expect this facility will be operational by the end of this year. Once complete, we expect each of such Datong facility will contribute annual revenue of RMB30m to RMB40m each year.

We are actively searching suitable locations around the country, mainly at the cities where we have current operation. We expect to start construction of another five such centers within the next 12 months.

As an important part of our overall strategy, we have acquired a Singapore hospital in this quarter. We intend to provide more discussion about our full-year revenue situation and profit growth later this year, when we have better and clearer understanding of how the Singapore facility will contribute to our full-year financial performances.

That concludes our prepared remarks. Thank you very much for your attention. Now we'd like to open up to your questions. Operator, please go ahead.

(Operator Instructions). Isabella Zhao, Morgan Stanley.

Thank you, Yang zong and Adam. Thanks for taking my question. I have two questions. I will translate my question into Chinese later on. The first question is regarding the future plan for the Singapore hospital, and can Mr. Yang give some more color, what kind of revenue and net profit contribution we should look at for 2015 and 2016 going forward.

And my second question is regarding the number of network centers. We noticed we closed the seven centers in the first quarter. I'm wondering what was the reason behind it. And looking for the rest of the year, how many centers we expect to add or close?

(Spoken in Chinese).

(Interpreted). Thank you for your question. I will answer the first question and we'll leave the second question to Adam Sun.

As I mentioned in my talk later -- sorry, as I mentioned in my talk, the Singapore hospital is an important complementary to our three premium hospitals in Shanghai, Beijing and Guangzhou. For our hospitals in Beijing, Shanghai and Guangzhou, we have consulted with MD Anderson during the whole process of construction. We expect the construction period for these three hospitals will be three years, so in the next three years we cannot meet the high end demand from Chinese patients.

But for the hospital in Singapore, it is already a fully operational hospital, so we are now doing the integration with this hospital under the suggestion and the consult of MD Anderson. We hope that in a few months we could use this hospital to serve Chinese patients.

We have been asked several times about the purpose of the acquisition. I would like now share with you our thoughts on this acquisition purpose and our future plan on that.

Firstly, I would like to compare on the original operation of this hospital with our future plan. In the past, surgical -- Fortis surgical hospitals, it's more like a real estate provider. It cooperates with several high end clinics in Singapore. These clinics in Singapore will give diagnosis to their patients, and once they find out that their patients need to do a surgical, they will send it to Fortis. But we are now transforming this hospital into a cancer specialty hospital with its own advantage in technology, with its own brand awareness.

Another difference is that Fortis will get more technical support. In the past, Fortis can only get technical support from other clinics which they have signed some cooperation agreement. Now, since we have signed exclusive collaboration with MD Anderson, at Fortis -- at this hospital, it can have the support from MD Anderson, no matter in the terms of technology and hospital management and service. The support will include the MDT model, the training of the doctors and also the medical procedures.

Another difference is that Fortis used to be [a classical] surgical hospital, but we will transform it into a cancer specialty hospital. And now we are targeting different patients. In the past, the target patients were patients from Singapore and areas near Singapore, but now the targeted patient group will be Chinese patients and some other Asian patients.

In recent years, the medical tourists have become hot in China. Chinese patients usually go to Hong Kong, the United States and Singapore. The reason for that is the domestic medical resource cannot meet the demand of Chinese patients. And also, another reason is there is a huge gap between the quality of the Chinese -- of the domestic hospitals and the overseas hospitals.

In particular, for cancer patients, we all know that the FDA has a very strict approval system for new medicines. It usually takes much longer time than other countries. For example, the medicine in China is about five years behind the level of the United States, so patients cannot find the most advanced medicine in the market. That's why they have to go overseas to receive the medical -- to do the medical tourism.

So we hope that the Singapore hospital can be an important complementary with our premium hospitals in Shanghai, Beijing and Guangzhou. We will consider to open clinics before the completion of the Beijing, Shanghai, Guangzhou hospitals, so that we can provide convenient service to Chinese patients and send patients to the Singapore hospital to be treated.

Actually, we have done a lot of calculation generally again on this hospital, but the detailed accurate number has not been fixed yet. I would suggest that you could look at the same on scale -- the same on cancer specialty hospitals in Singapore and in the United States in the same scale as your reference. And we also hope that we could do the integration as soon as possible and the hospital will become fully operational as we expected. Thank you for your questions.

Xie xie, Yang zong. Xie xie.

So, first of all, we closed seven centers, at least closed during the quarter. So these seven centers are in fact located in two hospitals. As you know, in some of our hospital partners we installed more than one equipment. So, basically, we closed the business relationship with two of our hospital partners.

First of all, one of the criteria we use to close a center is consistent underperformance compared to its peer equipment in our network. Second criteria usually we use is a lack of social insurance payments for the specific item of equipment for diagnosis. The third criteria we use is a long collection cycle. In fact, some -- among the centers we closed, one of the hospital partners has not paid us for quite a long time, so this center has been on a cash basis performance -- cash basis in terms of our revenue.

So we consider a close of a center as a last resort and we try -- we really try all kinds of measures to turn the performance around. And if the performance still cannot reach our target, we will decide to close, but it's a very careful process we adopt.

In all of our closed centers, it will not result in any capital loss for the Company. In other words, the sale price will not be lower than the book value of our equipment. So at the same time, we are going to settle all the outstanding bills with that hospital. So that some of these centers are on a cash basis only, so that when this outstanding collection is complete it will result in extraordinary income for us.

So to answer your question about whether we're going to close any other centers during the year, my answer is no at this moment, because most of our 132 centers now are performing to the standard and some of them have achieved extraordinary growth year over year.

(Interpreted). Let me add something to Adam's answer. I would like to emphasize that we are now transforming the current centers in our existing hospitals into freestanding self-owned centers.

As the healthcare reform implemented in China, we get the opportunity to establish our own freestanding self-owned cancer centers, which is registered as level two hospitals. Through these hospitals, we can gradually build up CCM's own brand; we could introduce the advanced experience and technologies from MD Anderson. So speaking of this strategy, I would like to consider it as an upgrading strategy of our existing network.

Looking forward, our strategy is to expand the network of our freestanding centers in areas which we have existing resources and patient demand. Thank you.

(Operator Instructions). Johnson Sun, GL Capital.

(Spoken in Chinese).

(Spoken in Chinese).

First let me translate the question into English. The question is about now the Asia and three new boards in China has become very hot, will CCM consider to go private and come back to China?

(Interpreted). Thank you for the question. We have been asked about this question many times. We did notice that some of our peers in the healthcare industry have got extraordinarily high valuation in Asia. But for CCM, our strategy is to provide cancer treatment and diagnosis for high end patients to meet the high end demand by taking advantage of advanced technology. So we need international collaborative partnerships. That's why we have to -- it's better for us to be listed on the international capital market.

We will continually pay close attention to the domestic capital market, but at the moment we didn't consider any -- we don't have the consideration to go private. Thank you.

Peter Halesworth, Hang Ren Investment.

Thank you, and also I'd just like to say I support the Chairman's view on maintaining Concord as an international company with an international strategy and not falling prey to the short-termism that seems to be pervasive among Chinese local investors.

My question is around financing and the Shanghai hospital, if perhaps you can outline what the anticipated cost is of the construction of the hospital and also break down the sources of funding for the hospital and what you expect the debt for the Company to be at in end of 2015 and also 2016. Thank you.

(Interpreted). Thank you for your question, for the Concord Cancer Hospital in Shanghai the registered capital is RMB500m. For the first phase construction, the construction cost is RMB1.2b to RMB1.5b. Except the RMB500m registered capital, the rest of the capital will be funded by local banks in Shanghai. They provide long-term loans with relatively low rates for us and we -- another good thing is we could pay back after the hospital becomes operational.

We have mentioned in our annual report that, firstly, CCM has strong cash position; secondly, CCM has healthy cash flow; and, thirdly, we have a sufficient credit line from the bank, but we only utilized a small portion of it. So with our own cash and bank loans, we are confident to fund our new project.

As for the ratio of the debt, I'll leave it to our CIO, Mr. Adam Sun.

Thank you. Hi, Peter. So as I have discussed in my prepared remarks, we have -- currently we have total credit lines from the local and international banks totaling RMB2.8b, and we only utilized about a third of it. And another thing I want to emphasize is that this RMB2.8b credit line doesn't include the long-term loans that we're currently in discussion with local banks to support our construction of the hospital. So in other words, we have a sufficient amount of potential credit lines to support the construction and do the project.

And also, I want to repeat again that currently our total loans outstanding is about RMB880m, but out of which about RMB460m or 52% of it are cash collateralized, which means that we need to deposit the same amount of RMB into the local bank and then the same bank will extend us a US dollar or other foreign exchange denominated loan on a 100% basis. So in other words, these are not loans in a pure sense, but rather then it is like a cash deposit turned into an IOU.

So if we subtract that portion of the loan which lowers our total outstanding to around RMB240m, which gives us a bank loans to total asset ratio of less than 20%, which is a very strong and healthy financial performance for us.

So to combine all the factors we have discussed, i.e., the stable and healthy cash flow from the current business, the strong support from the international and the local financial institutions and the (inaudible) bank loans we are going to utilize, we have full confidence that our construction projects will be safely and satisfactorily financed using both cash on hand and financing from the local institutions.

Thank you. Just a quick follow-up. So there isn't an estimated total liabilities for 2015 or end of 2016?

And secondly, for the new long-term loans, will that also involve collateralized cash arrangement or will they be more relaxed?

No, the long-term loans will not be cash collateralized, but based on the estimate and assessment of the banks regarding the potential profitability of the projects. So it will be a totally different arrangement. And as for the loan balance at the end of this year and last year, I would rather probably have more discussions on another occasion.

Thank you. I would now like to hand the conference back to the management team for closing remarks. Please continue.

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. Have a good day.

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.