Concord Medical Services Holdings Limited (CCM) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2014 Concord Medical Services Holdings Limited Earnings Conference Call. [Operator Instructions] And I must advise you, this call is being recorded today. Now I would like to hand the call over to your first speaker today, Mr. Bill Zima from ICR. Sir?

Hello, everyone, and welcome to Concord Medical's first 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; 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 under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995 and within 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 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 will now turn the call over to Concord Medical's Chairman and CEO, Dr. Yang. Dr. Yang, please go ahead.

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Ladies and gentlemen, welcome to Concord Medical's 2014 First Quarter Earnings Conference Call.

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We are very pleased to start off 2014 with very strong growth in both our network center and hospital business in the first quarter. Total revenue generated from the center business reached RMB 143 million, representing a 28% increase year-over-year. Our Chang'an Hospital business also experienced stable growth within a weak revenue of 19% year-over-year to RMB 110 million. The numbers of outpatients and inpatients increased noticeably year-over-year. Net income attributable to ordinary shareholders was RMB 26.7 million or USD 4.3 million, a 35.4% increase year-over-year, which is one of the best performing quarters in recent years.

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Based on the preceding factors, we reiterated comfort with our full year 2014 earnings guidance of net income attributable to the ordinary shareholders of between USD 20.3 million to USD 22.5 million, and a basic earnings per ADS of between USD 0.45 to USD 0.50. We also expect to start construction of 1 cancer hospital this year.

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In the past year, our Chinese government announced a series of policies and documents to encourage private and capital investment in the healthcare service industry, which provided us with important guidelines for the strategic development and marketing of our services. Concord Medical's development strategy is clear. We feel we will build a nationwide network of cancer specialty hospitals and cancer therapy centers and become a domestic leader in cancer technologies and therapy, as our core business.

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According to our strategy, Concord Medical intends to establish international level high-end cancer hospitals in Shanghai and Guangzhou, introducing the most advanced cancer technologies and therapy technology and management experience to provide Chinese cancer patients with the internationally-advanced cancer treatment services. Currently, Guangzhou and Shanghai projects are already in the process of architectural design. We have selected a world-class known hospital design firm as our partner, and in the whole design process, we will receive the support of MD Anderson Cancer Center.

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As you know, recently, we signed a strategic consulting agreement with the University of Texas and the Anderson Cancer Center from the beginning of hospital construction. MD Anderson will provide us with the valuable suggestions, which is the basis for our future application of internationally most successful technology and management experience. MD Anderson will be a strategic consultant for the Shanghai and Beijing cancer hospital projects we are planning. MD Anderson will provide the management and technical support in cancer-specialized hospital and provide a full range of consulting services in cancer hospital market, market orientation, the overall design, the department set up, medical protocols, and a personnel training. In construction phase, we will work with MD Anderson and China's local famous cancer hospital to research some specific high-risk cancer in China.

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Last, I want to talk about our Shanghai Concord Cancer Hospital. This hospital will be located in the Shanghai New Hongqiao International Medical Center. Shanghai New Hongqiao International Medical Center is located in Honggiao transportation hub. The medical center could cover 21 neighboring cities of Shanghai in about 1 hour ride by 2015, and a center-wide neighboring cities in about 3 hours ride and serving a population of 300 million in Jiangsu River Delta. Shanghai Concord Cancer Hospital is the only cancer hospital in this medical center. In this hospital, we plan to open 400 beds, introduced domestic and formally advanced treatment methods, treatment process and management, considering the international advanced cancer technologies and the treatment equipment, and adopt multidisciplinary cancer technologies and treatment methods.

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Now the required approval of the hospital setting has been entirely approved by the relevant government departments. We are determining the final design layout and other preparation work before we begin construction. The hospital is expected to start construction in the first half of 2015, with the total construction period expected to last for 3 years. When completed, the hospital will become a leading cancer hospital in China and even all of Asia.

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At the same time, we are actively promoting the development of our independent cancer radiation and the imaging center. Independent center will work with our existing network as the foundation and make full use of our local accumulation of wireless resources and will compliment to the existing local medical resources, all of which conforms to the national healthcare policy development direction. We believe independent centers have strong growth potential. Our related operational experiences will create another growth opportunity for Concord Medical in the future. We plan to internally examine and assess 1 or 2 independent center projects in the near future.

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Cancer has become a major challenge to the health of the Chinese people. According to the 2012 world cancer report recently released by the World Health Organization. In 2012, China had 3.07 million new cases of cancer patients and 2.2 million cases of death, accounting for 21.9% and a 26.8% of the global total, respectively. We will make full use of the government's policy and contribute to improving the level of cancer technologies and treatment in China, while also providing long-term stable returns for our shareholders.

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Finally, I want to once again thank the investors for supporting and caring the Chinese healthcare industry and Concord Medical. Welcome, everyone to communicate with us, and to provide us with the development of information on the latest trends of the industrial development of domestic and international markets. Thank you.

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

Thank you, Dr. Yang. Hello, everybody. We have issued the 2014 Q1 earnings release this morning. You can find the full release on all financial websites, as well as our IR website. In general, it was a very strong quarter, with both top and bottom line of the company demonstrating strong growth momentum. Following are some financial highlights for the quarter. Total net revenue, which consists of net revenues generated from the network business and hospital business was RMB 252.6 million, $40.6 million in the first quarter of 2014, a 23.9% increase from RMB 203.9 million in the first quarter of 2013. Gross profit in the first quarter of 2014 was RMB 85.7 million or $13.8 million, a 19.9% increase from RMB 71.5 million in the first quarter of 2013. Net income attributable to ordinary shareholders in the first quarter was RMB 26.7 million or $4.3 million, a 35.4% increase from RMB 19.7 million in the first quarter of 2013. Basic and diluted earnings per ADS in the first quarter of 2014 was RMB 0.59 or USD 0.10 compared with RMB 0.44 or USD 0.07 in the first quarter of 2013. Adjusted EBITDA in the first quarter of 2014 was RMB 97.1 million or $15.6 million, a 16% -- 16.1% increase from RMB 83.6 million in the first quarter of 2013. For this quarter, our key financial metrics is as following. Our gross margin in the quarter was 33.9% compared to 35.1% in the first quarter of last year, a negative trend of 114 basis points. The main reasons for this are higher compensation, consumables, and other operating expenses in the network business, and a higher compensation expenses for medical staff in Chang'an Hospital. We expect that the higher compensation expenses will have less impact in the sequential quarters. Selling expense as a percentage of total revenue was 8.6% in the quarter compared to 8.1% in the same quarter last year, a negative trend of 54 basis points. The main reason for this is marketing expenses relating to new centers. Our general and administrative expenses as a percentage of the revenue was 10.1% compared to 12.5% in the same quarter of last year, a positive trend of 237 basis points. This demonstrated our effective control of our general and administrative expenses and other management costs. As a result, the operating margin for the company for the quarter was 15.2% compared to 14.5% in the same quarter of last year, a positive trend of 70 basis points. Our net profit margin for the company was 10.6% compared to 9.7% in the same quarter of last year, a positive trend of 90 basis points. Based on the above financial highlights, you can see that Q1 was a very strong and profitable quarter for Concord Medical. Net income attributable to ordinary shareholders have grown by 35%, which demonstrated very positive growth momentum and that would carry over to the rest of the year and forward. The top line growth was driven by strong demand for our network services. Growth from Chang'an Hospital, as well as the contribution for new centers opened in 2013. For instance, the diagnostic centers in our network have seen the patient visits growing by 18% year-over-year. Total number of patients in Chang'an Hospital, both inpatient and outpatient, has grown by over 27% year-over-year. So our business has benefited greatly from the wider coverage of social insurances in China, the increasing health awareness among the general population, and the stronger acceptance of radiotherapy as an effective treatment of cancer, especially for early-stage cancer patients. So we have maintained our financial guidance for 2014 based on the current market condition and management forecast. Next, I would like to discuss briefly on the strength of our balance sheet. Following is some key highlights of our liquidity position at the end of the Q1. Our cash and restricted cash was totaling RMB 639 million or USD 103 million. The restricted cash with cash collateral for U.S. dollar loans. Also, we have investments in direct financing leases, both current and noncurrent portion, totaling RMB 311 million or $50 million. The financing leases are highly liquid with minimum counter-party risk. The leases of all government hospitals and fixed payment schedules averaging of 3 years. Combined, the total cash, restricted cash and the financing leases was RMB 950 million or USD 153 million. At the end of Q1, our total loan amount was RMB 1,105,000,000, including RMB 740 million in short-term loans and RMB 365 million in long-term loans. So at the end of the quarter, our net debt position is RMB 155 million or USD 25 million. Given our total assets of RMB 3.9 billion, and our net assets position of RMB 2.3 billion, our net debt leverage is very low, providing us with strong financial flexibility when planning for the CapEx of our future projects. Our EBITDA for the quarter was RMB 97 million and EBITDA for the trailing 12 months was RMB 409 million. During the quarter, we have drawn down on the IFC facility of USD 20 million convertible loans, which we'll use in the Guangzhou project. The company plans to draw down on the remaining USD 30 million loan, which is a 8-year term loan to finance our Shanghai project, and our plan freestanding radiotherapy centers. In conclusion, we are very pleased with the strong quarter, and we would focus on the implementation of our growth strategy. Now we would like to open up for questions. Thank you.

[Operator Instructions] The first question comes from the line of Bin Li from Morgan Stanley.

This is Yolanda Hu asking on behalf of Bin. I will proceed with my question. Well my first question is actually for Dr. Yang. Can give us more color on your strategic plan on cancer hospitals in Shanghai, Guangzhou? What kind of differentiated services you plan to provide? What's the market positioning and project strategy? And how many years do you think it would take the hospital to break even? And my second question is can you give us more color on the new radiotherapy centers, as in locations, and how many centers do you plan to add every year? And my last question which is what's your CapEx plan for this year and also next year given the constructions of the new hospitals?

Hi, could you translate your question to Chinese for Dr. Yang?

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We are now building our own cancer hospital in Guangzhou and Shanghai.

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Guangzhou and Shanghai are the core cities in south of China and east of China, and these 2 projects will be located in Guangzhou and Shanghai.

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There are many high-end patients in these areas without getting a satisfied treatment.

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The reasons are the -- not only the -- scarce medical results in China, but also there are big difference between Chinese cancer technology and the world advanced technology.

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Based on our partner research and now our 17-year history, when completed for this 2 projects, the market potential will be very large.

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Guangzhou project will be under construction next half of this year. The Shanghai one will be happen in the first half of next year.

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In these 3 years, so we will combine Chinese medical resource and the international medical resource to do some research, such as mouth cancer.

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We have confidence for this product to be the best hospital in China.

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So next question is about our independent centers. In our 17-year history, we are -- we were collaborating with public hospitals to establish cooperating centers in the hospital.

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This is our experience basis.

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Chinese government is promoting for the new policy to encourage private sector to enter the hospital industry, especially for some specialized hospitals.

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So you can see in Shanghai, we received the first independent imaging licensing for our Shanghai independent imaging center.

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We hope this kind of business model to expand to some other cities in China.

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Based upon the -- now the current demand in our current center cities, we will be building our independent radiotherapy centers.

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The target city will be the certainly dense population and relatively developed cities.

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In the future, we will have our brand of cancer hospitals in Beijing, Shanghai, Guangzhou. These are the core cities and also around these core cities, we will have our own independent radiotherapy and diagnostic imaging centers.

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At a most, we will show our current existing network advantage, advantages.

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Thank you.

And the CapEx plan?

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Just now, our CFO, Adam Sun, explained our capital structure.

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According to our -- the [indiscernible] from our board and we will use our own cash and also do some structured financing.

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We will gradually invest in next construction period and then complete it. Thank you.

[Operator Instructions] Next question is coming from the line of Peter Holzworth [ph] from [indiscernible].

This question is for Dr. Yang. I just want to ask quickly about the strategy in terms of the integration of the centers around the Shanghai region with the hospital. What is the strategy in terms of a referral system from your diagnostic centers to the hospitals to ensure a higher utilization? Is there any thought given to that?

So Peter, let me clarify. So your question is about how we plan to integrate the current centers around Shanghai with the planned hospitals so that we can have referral of patient, is that correct?

Yes.

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So in Guangzhou and Shanghai, too many patients in Guangzhou and Shanghai and with a very short supply, medical supply and according to our market research, our new hospitals' demand will be very large.

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There's no patient traffic allocation in Chinese cancer hospital. Just now we've added a more supply to satisfy more demand in market.

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In Guangzhou province, we will be signing agreements with our partner, Sun Yat-sen cancer hospital.

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We will be helped -- Chang'an Hospital for some more part of this patient treatment.

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So the -- now the average time on our line for the patients will 3 to 6 months in Chang'an Hospital.

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More strategic meaning there is in Shanghai New Hongqiao Cancer Hospital.

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This is the pilot area organized by Shanghai municipal government and the Minister of Health of China.

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And in China, the Healthcare Reform is lowering down the number of VIP beds. And in Shanghai, everybody can see these policies for the beginning.

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So now the public hospital is serving the mass market for normal people, and if the patients want to get the better service, they should go to the high-end hospital.

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So the demand of our patients will be very strong.

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There are synergies between our new hospitals in Guangzhou and Shanghai with our current existing centers. If the patients from our centers need this service, we will refer patients to our new hospitals.

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There are some positive ways in this recent model. If the patients in our new hospital needs these kind of service, we can refer the patients from the hospital to the centers in their hometown.

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So this shows our synergy for our high-quality resources, and also these help the -- our patients for medical treatment.

And if I may, a quick follow-up question regarding hospital margins. Now that you have a hospital, and you see the operations, are you expecting a similar type of profitability from your new hospitals that you have with your existing hospital? What should shareholders expect?

That's okay, Peter, let me try to answer your question. The positioning of our current hospital and our planned hospitals are very different. Our -- the current hospital, Chang'an Hospital, is a general hospital targeting the overall population. So the pricing and also is the access, the social insurance program. So in terms of the per patient yield, both for the inpatient and outpatient, is generally very low. So now, if you can see that the per patient in terms of the outpatient visits, per visit the treatment in China, the general hospital can charge -- only can charge a very low fee for their services and diagnosis. In the first quarter of this year, the per outpatient service part is only around RMB 150 or $25 million -- $25, that is the very low number. However, our planned cancer hospital both in Shanghai and in Guangzhou -- first, the operation and the medical protocol and also the personnel will be highly trained, and we are working together with MD Anderson right now to provide these services and in preparation for the opening. And also where the pricing will be completely market-driven, and it will be step up as a full profit specialty hospital, and we plan to target the self-paying patient, as well as the commercial insurance patient. Now in China, there is a very strong demand for high-end, for high-end high-quality medical services, both in terms of medical treatment, as well as the services the patient can receive in the hospital. And it has become a very prosperous business for a lot of companies to refer Chinese patients to receive medical treatment overseas in the U.S. or in other countries. So we will target these group of patients, as well as the other high-end population, as well as the expats groups in China. And as you know, our hospitals will be located in the economically-advanced cities, such as Shanghai, Guangzhou, and Beijing. So based on our preliminary market data, the ability to pay for these -- for the population in these cities are very strong. So in that regard, the -- both in terms of per patient yield, as well as the service charge, and also the profitability for our specialized hospitals will be much higher than our current hospital.

[Operator Instructions] There is currently no other questions. I would like to return the call back to the management.

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 continuous support. Operator?

Thank you. That does conclude our conference call for today. Thank you all for your participation. You may now disconnect your lines.