Concord Medical Services Holdings Limited (CCM) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2015 Concord Medical Services Holdings Limited Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today Thursday, November 19, 2015. I would now like to hand the conference over to your first speaker today, Mr. Bill Zima. Thank you. Please go ahead, sir.

Good day everyone, and welcome to Concord Medical’s third quarter 2015 earnings conference call. With us today are Dr. Jianyu Yang, Chairman and Chief Executive Officer of Concord Medical; Mr. Adam Sun, Chief Investment Officer of the Company; and Ms. [Xun Liu] Financial Controller. The Company’s results were released earlier today and are available on the Company’s investor relations website at ir.concordmedical.com as well as on the respective newswire services. Before we continue, please note that the discussion today will contain forward-looking statements made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties and as such our results may materially differ from the views expressed today. Further information regarding those and other risks and uncertainties is included in our registration statements and on Form 10-K and other documents filed with the SEC. Concord Medical does not assume any obligation to update any forward-looking statements except as required under applicable law. With that said, at this time I would now like to turn the call over to Dr. Yang. Please go ahead.

Hello, everyone. Welcome to the Concord Medical third quarter 2015 earnings conference call. During the third quarter of 2015 we continue to make steady progress with our financial results as indicated by 7.7% year-over-year growth in net revenue. Our net income decreased compared to the prior year period as the result of the expenses associated with our Concord Cancer Hospital that was acquired in April of 2015. As we are in the process of transforming its business and operations, we have received approval from Singapore Ministry of Health to provide cancer treatments and diagnosis services at this facility and we expect it will be able to generate profit for our business in 2016. In an effort to fortify our leadership position in cancer treatment and diagnosis in China, we continue to execute our operational strategy effectively during the third quarter of 2015. We are pleased with the steady progress in our network expansion and net revenue growth. After years of analysis and preparation we have began building high-end cancer specialty hospitals in Beijing, Shanghai and Guangzhou. In October, we received approval to change the name of our acquired Fortis Surgical Hospital in Singapore to the Concord Cancer Hospital which will provide world-class integrated cancer treatment and diagnosis services with chemotherapy and cancer surgery as its main services. Currently, we are purchasing equipments and going through the interior decoration. We will work closely with our strategic partner MD Anderson Cancer Center, MDACC for short at our hospitals in Beijing, Shanghai, Guangzhou and Singapore setting up specific departments, medical procedures, medical technologies, personal training and improving the overall patient experience at each new facility. By pursuing our strategic goals, we aim to provide Chinese patients world-class cancer care and diagnosis. According to the agreement that we signed earlier this year, MDACC will assist our hospitals with the development and implementation of clinical quality measures and guidelines as well as assist with ensuring patients safety procedures to comply with MDACC alliance member of quality standards. Additionally, we have also made tremendous progress in developing and constructing Class-2 hospitals. Datong Meizhong Jiahe Cancer Center, our first free-standing radiotherapy cancer center in Datong city of Shanxi Province is preparing for its upcoming grand opening and recruitment. We expect this cancer center will start treating patients in early 2016. Meanwhile, our business development [position] is making good progress with this effort to support the project, expand the network of Class-2 hospitals and gradually transform the established [cooperation] center to a free-standing Class-2 cancer hospital. As of now, we have signed about 10 investment agreements. We will implement our plans as scheduled. The foundation of the network will complement our three high-end hospitals located in Beijing, Shanghai and Guangzhou leveraging our resources and extensive experience in the industry, we will provide cancer diagnosis and radiotherapy services to domestic patients. Looking forward, we will continue to execute our hospital development strategies, expand our network of cancer centers, fully leverage our strategic panel shift with MDACC and solidify our leadership in cancer specialty medical management. During the second quarter 2015 earnings conference call, we announced that we’ll going to list our subsidiary Meizhong Jiahe Hospital Management Company on the New Third Board in China. We have formally submitted our application for listing through the New Third Board system, which is currently being evaluated. We have received the initial feedback and we will continue to update our investors about the progress. This concludes my comments. At this point, I would like to turn the call over to Mr. Adam Sun to review our financial performance.

[Audio Dip] to review our third quarter 2015 financial highlights. Our total net revenue increased by 7.7% to RMB154.3 million or $24.3 million in the third quarter of 2015. Our net revenue for the network business of RMB143.2 million in the third quarter of 2014. The total net revenue is composed of revenue on the network business of RMB148.5 million or $23.4 million and on the acquired Fortis Surgical Hospital or Concord Cancer Hospital of RMB5.8 million or $0.9 million. Gross profit was RMB61.9 million or $9.7 million, compared to RMB74.1 million in the third quarter of 2014. Our net income attributable to ordinary shareholders was RMB22.3 million or $3.5 million compared to RMB [Audio Dip] the net loss of Fortis Surgical Hospital or Concord Cancer Hospital of RMB13.2 million or $2.1 million. Our basic and diluted earnings per ADS for both RMB0.50 or $0.08 compared with RMB0.77 in the third quarter of 2014. Adjusted EBITDA non-GAAP was RMB48.8 million or $7.7 million compared to RMB88.2 million in the third quarter of 2014. Now let me talk about our financial results for the third quarter of 2015 by segment, network business. Total net revenue from the network business increased by 3.7% to RMB148.5 million or $23.4 million for RMB143.2 million in the third quarter of 2014. We are pleased to see increase which was a product of our improved product mix especially the increased contribution from the Cyber Knife centers in our network. During the quarter, Cyber Knife centers revenue accounted for the total revenue - the Cyber Knife centers accounted for 11.4% of our total revenue with year-over-year gross rate of 32.7%. In the network business we closed two radiotherapy centers in the third quarter of 2015. As of September 30, 2015, we operated a network of 127 centers in 53 cities in China and have entered into agreements to establish one additional center. Gross profit from the network business was RMB65 million or $10.2 million and the gross profit margin of the network business for the quarter was 43.8%, compared to 51.7% for the third quarter of 2014. The decrease in gross profit was mainly due to higher cost of revenue attributable to the increased high value medical consumable expenses and maintenance expenses for the network. Going forward we will make greater progress in our product mix and efficiency improvement to our existing centers and selectively transform the existing centers into free-standing self-owned centers in the areas we are [indiscernible] resources and high demand on patients. In the next year, we expect to see contribution from at least one free-standing center since our Datong center will start treating patients at the beginning of 2016. Now our Hospital Business. Our new Concord Cancer Hospital in Singapore is an important part of our overall strategy going forward. We acquired these private-owned 31 beds Fortis Surgical Hospital in April of this year and currently transforming it into a specialty cancer hospital. Net revenue from Hospital Business was RMB5.8 million or $0.9 million for the third quarter of 2015 of which inpatient revenue accounted for nearly 89% of total revenue and outpatient revenue and management revenue contributed 4% and 7% respectively. Gross profit margin of the Hospital Business was negative in the quarter as we are transforming the facility into a specialty cancer hospital. Once complete, the hospital will provide MD Anderson Standard Oncology treatment to cancer patients, including cancer patients from China and the rest of Asia. We expect we will complete the transformation by 2016. Looking at other recent initiatives. In September, we announced that we span off our current telemedicine business and jointly set our Beijing Allcure Medical Information Technology Limited with strategic investors. We injected our assets and staffs associated with the telemedicine business into Allcure and have brought in a professional management team. In August, we announced our intension to repurchase up to $20 million of our outstanding ADS with cash in open market transactions or by other means. In the third quarter, we repurchased 330,730 ADS for total value of $1.7 million. That concludes our prepared remarks today. Now, we would like to open up the call to our questions. Operator?

[Operator Instructions] Your first question comes from the line of Christina Yao from Morgan Stanley. Please ask your question.

Hi, this is Christina. I may ask you some questions on behalf of my analyst Isabella Zhao. My first question is how about the revenue contribution from Datong Meizhong Jiahe Cancer Hospital. Okay, I need to translate the question one-by-one.

Hi, Christina, so do you want to ask all the questions and then we can answer them one-by-one or do you want to go question-by-question.

I think question-by-question because there a lot of questions.

Okay.

We are now at the end of the construction period of Datong Meizhong Jiahe Hospital and we will soon start, we are now going through the recruitment for that hospital, so we estimate that this hospital will become operational in the first quarter of 2016. So we will disclose the progress, the performance of this hospital next year quarter-by-quarter. We plan to install three equipments to these hospitals so if you would like to estimate the revenue or something you could do that based on the three equipments and the performance of our cooperating centers. We are now talking to Local Healthcare Authorities in Datong city and planned to apply to join in the social security coverage. Thank you.

Okay, thank you. And my second question is you mentioned that Concord Cancer Hospital has received the approval from Singapore Ministry of Health to operate under a new name and we will provide oncology as its main service. So could you tell us any incremental revenue and net profit contribution from Concord Cancer Hospital?

First, we will have Mr. Adam Sun to explain the contribution of net revenue and net income from Singapore – from Concord Cancer Hospital and then I’d like to explain our future plan for this hospital.

For the past quarter, total revenue from the Singapore Cancer Hospital was from the Concord Cancer Hospital in Singapore was RMB5.8 million or $0.9 million. The reason for this relatively low revenue is because we are undergoing our transformation of the hospital – on the surgical hospital as the main business to oncology and currently we are also undergoing equipment procurement and also personal training. And the total loss, financial loss for the – on the hospital for the quarter was RMB13.2 million.

Now, I would like to explain to you the development plan for this Singapore Hospital, I mean the Concord Cancer Hospital with its new name. Firstly, I would like to begin with the background why we choose to acquire this hospital in Singapore. You may all know that we are now planning to construct three high-end hospitals in Beijing, Shanghai and Guangzhou. Actually it took us four years to finish the application, registration and land acquiring period and then next it will take us three years to complete the construction period, which I think is necessary timeframe needed in Mainland China to build a high-end cancer specialty hospital. And it’s a very complicated procedure, but during this long-term timeframe we have some patients who ask us whether they can – when we can receive MD Anderson Standard cancer treatment in China, especially we have a concern in medicine of chemotherapy. In Mainland China, the medicine is about five years later than the United States, so there is a huge gap between the level in the United States and in Mainland China. So based on this situation we will also refer some patients to the United States to – so that they can use the advanced medicine and advanced treatment method, but still there are some patients who would like to stay in Asia, which is much closer to their home, so we searched in Asian area and then at last we choose to acquire Fortis Surgical Hospital in Singapore. That is the background for the acquisition. And for the second stage I think it starts from March this year and it will last to the end of this year. For this period we are now doing all the preparational work with the support of MD Anderson. We hope that once complete this hospital we will be focused on chemotherapy providing the most advanced medicine for the patients. Gladly, we have got the approval from Ministry of Health of Singapore and got license to run this hospital as a oncology hospital to provide treatment services for patients and that is one of the only to this kind of license in Singapore. So we are now purchasing equipments, recruiting staff and experts so that we can do all the preparation for operation. So I hope that with the support of MDACC, we could do all the clinical quality measures and guidelines and so that we can comply with MDACC alliance member of quality standards and become one of the members of MDACC alliance. This is what we are going to do in the future and we think for – once it become operational, we hope that we can treat 1,000 patients per year. Thank you.

[Foreign Language]

For the past quarter you mean [indiscernible]. Yes, so the net revenue for the past quarter from the Singapore Cancer Hospital was RMB5.8 million or $0.9 million and the reason for this relatively low revenue is because currently as Dr. Yang said, we are undergoing our transformation stage and we will become fully operating the specialty cancer hospital at the beginning of next year.

Okay, thank you. And my third question is you mentioned that CMS Hospital Management Company will - were listed on New Third Board in China and you have submitted the listing application. So my question is why listing in China and how much money you are hoping to raise and what is the use for this proceeding and are you planning to delist in U.S. and the release in China?

At first I’d like to say currently we have no such plan to delist in the United States and to be listing in the Chinese market. Secondly, we are now seeking listing on the New Third Board of China, but we have no plan to raise money currently. And this subsidiary is 100% owned subsidiary of Concord Medical. Number three, this is the first time that we get close connection with the domestic capital market in China. We are trying to spin-off a small portion of the hospital management – center management business to seek listing on this market. And I said in the future there is – we could see some – this business has got the high value, we will then consider what we are going to do next based on that situation.

As you may have seen the subsidiary we are seek listing on New Third Board has caused Meizhong Jiahe Hospital Management Company. This brand name Meizhong Jiahe is for our Class-2 cancer hospital in China. This brand is targeting the patients who are covered by social security. So through the listing we also hope that we can raise small brand awareness and become more influential among our patients. Thank you.

Thank you. My last question is could you give us the revenue and net profit guidance for next year and how about the new hospital progress?

As to the forecast for new project, new hospitals we are now doing the forecast and we will disclose it in the future properly. And looking forward for the future growth I think besides the existing network we will see new contribution from our Class-2 hospital Meizhong Jiahe Hospital in Mainland China and also new contribution from Concord Cancer Hospital in Singapore. As mentioned, we hope that we could provide MD Anderson Standard treatment for patient from Asia especially from China and we could provide them better medical experience in Singapore.

Thank you. Yes, I have no questions. Thank you.

Thank you.

Thank you. End of Q&A

[Operator Instructions] And there are no questions at this time. 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.