Concord Medical Services Holdings Limited (CCM) Q1 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Concord Medical’s First Quarter 2015 Earnings Conference 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, Thursday, May 21, 2015. I would now like to hand the conference over to your speaker host 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 U.S. 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.

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 the solid foundation for our full year development plans. Net revenues from network business were RMB150.7 million, representing a 5.7% increase from the same quarter last year. Adjusted EBITDA non-GAAP was RMB68.8 million. 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 developments. Our CIO, Mr. Adam Sun will address our financial results in greater detail later in the call. And now, I would like to share with you strategic development plans for Concord Medical and our recent initiatives. In the past year, the Chinese government has launched a series of favorable policies to encourage private capitals to invest in the healthcare industry. These policies provide clear cut lines to our growth strategy and will have moved the industry forward. Concord Medical’s goal is to be a national network for cancer diagnosis and treatment and to become a leading medical group in China with a focus on specialized cancer hospitals. Currently, we have planned 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 multidisciplinary team diagnosis and treatment. Once complete, these specialized hospitals will serve as the backbone of the Concord national hospital network and will provide differentiated cancer diagnosis 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 agency 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 multidisciplinary treatment model with orientation on clinical research and expertise in subspecialties. Through collaboration, we can optimize the patient experience and enhance our hospitals overall treatment standards. This agreement is the first of its kind for MD Anderson in Asia and is an exclusive collaboration as advanced new cancer facilities in Beijing, Shanghai, Guangzhou and Singapore. The collaboration exclusivity will also cover most other provinces in China. MD Anderson will collaborate with us on the Guangzhou project as well. Concord Medical acquired – they 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 were received 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 motto 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 becomes operational, along with the addition of our Singapore hospitals, 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 this cancer hospital network is our freestanding radiotherapy cancer center and Tier 2 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 is 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 centers 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 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 3.07 million in 2012, with 2.2 million 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 the 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 would like to turn it 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 RMB150.7 million or $24.3 million representing an annual increase of 5.7%, primarily due to improvements 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 have entered into agreements to establish another two centers in China. Gross profit was RMB74.4 million or $12 million, representing a 4.3% decrease year-over-year, mainly due to higher costs of revenue attributable to 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 RMB27 million or $4.4 million, compared to RMB35.4 million in the first quarter of 2015. Income tax benefit was RMB6.6 million or $1.1 million for the first quarter of 2015 compared to income tax expense of RMB11.7 million 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 RMB28.5 million or $4.6 million for the first quarter, compared to RMB27.1 million 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 the diluted earnings per ADS for the first quarter of 2015 was RMB0.68 or $0.11. Adjusted EBITDA was RMB68.8 million or $11.1 million for the first quarter of 2015. During the first quarter of 2015, the company handled 6,692 patients in treatment and 73,744 patients in 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 RMB38.9 million or $6.3 million during the quarter compared to RMB7.1 million in the first quarter of last year. In this quarter, our cash position has improved. As of March 31, 2015, we had cash and cash equivalents of RMB572.9 million or $92 million and the restricted cash, current portion of RMB316 million or $51 million compared to RMB478.7 million and RMB392.3 million respectively as of December 31, 2015. As of March 31, 2015 we have bank credit lines, totaling RMB2.8 billion or $456 million, of which RMB881 million were utilized. Please pay attention to the fact that we have total of RMB420 million in restricted cash, both current and non-current portions. These are deposited into local banks as collateral for overseas loans on a one-to-one basis. So, if we subtract the cash collaterized loans on our balance sheet, our total loan position is around RMB460 million, or 52% of the total amount outstanding right now. So, we have maintained a very healthy and strong financial position and give us more room for financing. Total property, plant and equipment at the end of March – at the end of the quarter, net values of RMB727 million or $117 million compared to RMB749 million as of the end of the year. In this quarter, our network developed in line with our expectations, achieved both top line and bottom line growth. We will make more efforts in cost controls and efficiency improvements in our existing centers and selectively transform the existing centers into freestanding 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 RMB30 million to RMB40 million 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 sub-centers within the next 12 months. The important part of our overall strategy we have acquired the Singapore Hospital in this quarter. We intend to provide more discussions about our full year revenue situation and profit growth later this year when we have better and clearer understanding on 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, I would like to open up to questions. Operator, please go ahead.

Certainly, sir. [Operator Instructions] Your first question comes from the line of Isabella Zhao from Morgan Stanley. Please ask your question.

Thank you. Thanks for taking my questions. I have two questions. I will translate my question into Chinese later on. The first question is regarding the future plans for the Singapore Hospital and can Mr. Yang give us more color on what kind of revenue and the net profit contribution we should look at for 2015 and ‘16 going forward? And my second question is regarding the number of network centers, we noticed we closed seven centers in the first quarter. I am wondering what’s the reason behind it? And then looking for the rest of the year, how many centers we expect to add or close?

Thank you for your question. I will answer the first question and we will leave the second question to Adam Sun. As I mentioned in my talk later – sorry, as I mentioned in my talk Singapore Hospital is an important complementary to our growth premium hospitals in Shanghai, Beijing and Guangzhou. For our hospitals in Beijing, Shanghai and Guangzhou we have consulted with MD Anderson [indiscernible] construction. But we expect the very – the construction period for the three hospitals will be 3 years. So in the next 3 years, we can also meet the high end demand from Chinese patients. But for the hospitals [ph] in Singapore, it is already a fully operational hospital. So we are now doing the integration with this hospital. And there was a suggestion and the consult of MD Anderson. We hope that in a few months, we could use these hospitals to serve Chinese patients. We have been asked for several times about the purpose of the acquisition. I would like now to 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 Hospital is more like a real estate provider it cooperates with several high-end clinicals in Singapore. These clinicals 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 their – from other clinicals which they have signed some cooperation with. 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 their hospital management and service. This support will include the MDT model, the training of the doctors and also the medical procedures. Another difference is that the Fortis was used to be a vertical – 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 the areas near Singapore. But now, the targeted patient group will be Chinese patients and some other Asian patients. [Indiscernible] have become more hard in China. Chinese patients do like they go to Hong Kong, the United States and Singapore. The reason for that is the domestic medical results cannot meet the demand of Chinese patients. And also, another reason is we do – 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 CFDA have 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 5 years behind the level of the United States. So patients cannot find the most advanced medicines in the market, that’s why we have to go overseas to do this medical tourism. So we hope that the Singapore hospital can be 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 hospitals to be treated. Actually, we have done a lot of calculations [indiscernible] on this hospital. But the detailed accurate number has not been fixed yet. I would suggest that you could look at the same scale, the same cancer specialty hospitals in Singapore and in the United States in the same scale as we referenced. And we also hope that we could do the integration as soon as possible, and the hospital will be completely operational as we expected. Thank you for your question.

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 used to close the center is consistent underperformance compared to its peer equipment in our network. Second criteria we use is the lack of social insurance payments for the specific item of treatment or diagnosis. The third criteria we use is a long collection cycle. In fact some – among the centers we closed one of the hospital partner has been not paying us for quite a long time. So this center has been on a cash basis – from cash basis in terms of our revenue. So we consider a close of our center as a last result. And we tried – we really tried all kinds of measures to turn the performance around. And if the performance is still under – if you cannot reach our targets, we will decide to close. But it’s a very careful process we adopt. So [indiscernible] of our closed centers, it will not result in any capital loss for the company. In other words, the sales 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 our hospital. So that same – some of these centers are of cash basis only, so that once this outstanding collection is complete, it will result in an extraordinary income for us. So to answer the question about, whether we didn’t closed any other centers during the year, my answer is no at this moment, because most of our 132 centers now are performing up to the standard and some of them have achieved extraordinary growth year-over-year.

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 is implemented in China, we get the opportunity to establish our own freestanding self-owned cancer center, which is registered as level two hospitals. Through these hospitals we can gradually build up our own brand, we could introduce the advanced experience and technologies from MD Anderson. So think of this strategy, I would like to consider it as an upgraded strategy of our existing network. Looking forward, our strategy is to expand the network of our freestanding centers in areas which we have existing sources and patient demand. Thank you.

Thank you. [Operator Instructions] Your next question comes from the line of Johnson Sun from GL Capital. Please ask your question.

[Foreign Language]

Please, first let me translate the question into English. The question is about now the Asia and [indiscernible] both in China has become very hard. We will [indiscernible] and come back to China. Thank you for this question, Mr. Sun. We have been asked about this question for many times.

We did notice that some of our peers in the healthcare industry have got extraordinary high valuation in Asia. But for CCM our strategy is to provide cancer treatment and diagnosis for our 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 markets. We will continually pay close attention to the domestic capital markets. But at the moment, we didn’t consider any – we don’t have the consideration to go private. Thank you.

Thank you. Our last question comes from the line of Peter Halesworth from Heng Ren Investments. Please ask your question.

Thank you. And also I would 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-term as and that seems to be pervasive among Chinese local investors. My question is around the – around financing in the Shanghai hospital, if perhaps you can outline what the anticipated cost is of the construction of the hospital and also breakdown the sources of funding for the hospital and what you expect the debt for the company to be at – in the end of 2015 and also 2016? Thank you.

The second question for the Concord cancer hospital in Shanghai, the registered capital is RMB500 million. For the first phase construction, the construction cost is RMB1.2 billion to RMB1.5 billion. Except the RMB 500 million of registered capital, the rest of the capital will be funded by local banks in Shanghai will provide long-term loans with relatively low rates for us and we – another good thing is we could pay back after the hospital become operational. We have mentioned in our annual report that firstly Datong has strong cash position, secondly Datong has healthy cash flow, and thirdly we have a sufficient credit line from the bank, but we only utilize a small portion of it. So based on our own cash and bank loans, we are confident to fund our new projects. And for the ratio of the debt, I will leave it to our CIO, Mr. Adam Sun.

Thank you. Hi, Peter. So as I have discussed during my prepared remarks, we have – currently we have total credit lines from the local and international banks closing RMB2.8 billion and we only utilized about a third of it. And another thing I want to emphasize is that this RMB2.8 billion credit line doesn’t include the long-term loans that we are currently in discussion with the local banks to support our construction of the hospitals. So in other words, we have sufficient amount of potential credit lines to support the construction and to the project. And also, I want to repeat again that currently our total loans outstanding is about RMB880 million, but out of which about RMB460 million or 52% of them 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 by U.S. dollar or other foreign exchange denominated loans on the 100% basis. In other words, these are not loans in a pure sense, but rather than it is like a current deposit turned into an LOU. So if we subtract that portion of the loan, which lowers our total loan outstanding to around RMB440 million, which gives us bank loans to total assets ratio of less than 20%, so 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 and the 100% [ph] 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 now be cash collateralized, but mainly based on the estimates and the assessments of the banks regarding the potential profitability of the project. 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.