Ting Jia - IR Jianyu Yang - Chairman and CEO Adam Sun - CFO

Yolanda Hu - Morgan Stanley Sean Wu - JPMorgan

Ladies and gentlemen, thank you for standing by, and welcome to Q2 2013 Concord Medical Services Holdings Limited Earnings Conference Call and Webcast. At this time all participants are in a listen-only mode. There’ll be a presentation followed by a question-and-answer session. (Operator Instructions). I must advice you that this conference is being recorded today, Tuesday, 13th of August, 2013. I would now like to hand the time over to Ting Jia from Concord Medical. Thank you. Please go ahead.

Hello everyone and welcome to Concord Medical's second quarter 2013 earnings conference call. Concord Medical's earnings release was distributed earlier today and you can find a copy on our website as well as our newswire services. Today, you will hear from Dr. Jianyu Yang, Concord Medical’s Chairman and Chief Executive Officer; and 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 made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, and within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlined in our public findings 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. I will now turn the call over to Concord Medical’s Chairman and CEO, Dr. Jianyu Yang.

Good morning everyone, welcome to Concord Medical's second quarter 2013 earnings conference call. We are pleased with Concord Medical's overall steady growth during the quarter. Total net revenue from both network business and hospital reached RMB254 million, representing an increase of 86% over the same quarter of last year. This is very good momentum, and provides us with a solid foundation to achieve our annual revenue and adjusted EBITDA forecast. Our network revenue was RMB146 million, an increase of 6.7% year-over-year and the revenue from our hospital reached RMB108 million, which was a 17.4% sequential quarterly improvement. Due to seasonality effect, revenues in all key operational metrics in the second quarter recorded significant improvements from our 2013 first quarter. We are also quite pleased to experience healthy cash flow in the second quarter. Our adjusted EBITDA grew 11% on a year-over-year basis, reaching RMB104 million in the second quarter. The Group's 140 centers were continuing to contribute stable cash flow and provides a strong support for our development. In the second half of 2013, we expect cash flow to continue growing at an annual growth rate of approximately 15%, and consequently expect full year 2013 adjusted EBITDA growth in the mid teen levels. The adjusted for the full year will be approximately RMB440 million or $71.8 million. Developing self-owned and independently operated high end quality hospitals is a major priority for our business in the years ahead. We have valuable advantages, that allow us to establish our own premier oncology hospitals. As the leader in China's cancer radiotherapy industry for 15 years, we have established a high end team of management and academic experts. We have also developed strategic partnerships, and collaborated with many international and renowned medical institutions for academic and personnel exchange programs. Additionally, we plan to establish one specialty oncology hospital in Beijing, Shanghai and Guangzhou respectively over the course of the next three to five years, combining with our national network of centers, and provide long term cancer treatment services. Guangzhou Huanan Concord hospital will be our self-owned broad, under collaboration with Sun Yat-Sen Cancer Hospital was completed, which is expected by 2015. The Guangzhou Huanan Concord hospital is designed to occupy land area of [55 acres], with four times available debt. At this new facility, we plan to install a proton therapy equipment. So far we have received all governmental approvals and have completed the land acquisition. The land formation work is in progress. We expect to complete the overall design and construction plan for hospital by the end of the year, and it will commence construction in early 2014. Construction at our operation of high end specialized hospital is consistent with the overall healthcare reform in China. Marks an important turning point of our business transformation, to a high end specialized management group, and prompts us to focus on providing cancer patients with the most advanced medical services. We are looking forward to it. In addition for the project in Guangzhou, our partners in other cities are also progressing. We will update investors about their progress in a timely manner, when we have relevant (inaudible) offer for you. Currently, we are maintained for telemedicine projects, [our new investments] have expansion. Among our 140 centers, 42 centers have been carrying out telemedicine services. The doctor-(inaudible) and doctor-patient exchange, in the patient platform, has become an important part of our business. Next, we want to make full use of telemedicine to collaborate with the world renowned hospitals for diagnosis, treatment, education, research, rehabilitation, or other aspects of collaboration. Finally, I want to once again thank all investors for your ongoing support for Concord Medical Group and China's healthcare industry. I will now hand the call to our CFO, Adam Sun to discuss second quarter financial results.

Thanks Dr. Yang. Hello everyone. First, I would like to review some highlights in the financial results of Q2 2013, then I will talk about some key financial metrics. In particular, accounts receivable, adjusted EBITDA and gross margin, finally, I will take you through our guidance. On the earnings released issued after market close yesterday, you could see that CCM's total revenue was RMB254 million, or $41 million, an increase of 86% over the same quarter in 2012, of which the network revenue was RMB146 million or $24 million, an increase of 6.7% over the same quarter of last year. China hospital's revenue was RMB108 million or $18 million, an increase of 17% over the first quarter. Since we closed the China hospital acquisition in the third quarter of 2012, no year-over-year comparison was available. Similar to the first quarter, the revenue increased in our network business was mainly driven by an increase in the number of patients treated in our centers. Especially the diagnostic centers, which reported patient growth of 60% compared to last year. Overall, patient traffic growth has been very strong in our treatment and diagnostic centers, as most of the radiotherapy and imaging services in our network centers are reimbursable, enabling Concord to benefit on the wider social welfare coverage network in China. Revenue from treatments and diagnostic centers represent 67% and 43% of total revenue respectively. Revenue of our diagnostic centers has increased RMB40 million on a year-over-year basis. We believe that contribution for our treatment centers will remain stable, while our diagnostic centers will see faster growth due to wider coverage of basic diagnostic services, such as MRI and CT and high end patients are more willing to pay out of pocket for services such as PET-CT. For China hospital, total medical revenue was RMB108 million or $18 million, of which outpatients, in-patients and pharmacy revenue accounted for 24%, 35% and 41% respectively. The gross margin was 16.9%, representing an improvement of 640 basis points over the first quarter. As we discussed during our first quarter conference call, gross margin was affected by seasonality factors. We believe that hospital gross margin will remain at mid-teen levels for the remaining two quarters of the year. Our accounts receivable at the end of the second quarter was RMB247 million, of which the AR of our network business was RMB209 million, representing DSO or days sales outstanding of 123 days as compared to 155 days for the first quarter. This is a major improvement in our AR situation. During the quarter, we have strengthened our collection efforts for all centers. We will remain collection at the same level for the rest of the year. As for the adjusted EBITDA, we believe it is the most effective metric, as it reflects the cash flow generated for our business. Adjusted EBITDA for the quarter was RMB104 million or $17 million, an increase of 11% from the same quarter last year. The EBITDA margin was 42.5% in the second quarter. For the full year, we expected our adjusted EBITDA growth to be in the mid-teen levels. I would like to add some color to the gross margin of our business, since our network and hospital business have different levels of gross margin, it makes sense to discuss the two businesses separately. The gross margin for our network business was 59.7% in the current quarter, which increased by more than 400 basis points on the first quarter. We have seen positive quarter for the gross margin of the network business, and we expect that the gross margin will stay at current levels for the remaining two quarters of the year. As for the gross margin of the hospital business, we also experienced a strong sequential improvement of 640 basis points over the first quarter. The whole year hospital gross margin will stay at mid-teen levels. As Dr. Yang mentioned, we plan to build and operate two to three high end specialty oncology hospitals over the next three to five years. Currently, the Guangzhou project is moving forward according to our plan. Finally, we would like to reiterate full year 2013 guidance forecast announced last quarter, of total estimated net revenue in the range of RMB930 million to RMB975 million, representing a 40% to 47% increase on 2012. Revenue from the company's network business and hospital business as a percent of total revenue are expected to be approximately 55% and 45% in 2013 respectively. Our full year 2013 adjusted EBITDA is expected to grow in the mid-teen level for the year, compared to 2012. This concludes our prepared remarks. Operator, we are now ready to take questions.

(Operator Instructions). And our first question comes from the line of Bin Li from Morgan Stanley. Please go ahead. Yolanda Hu - Morgan Stanley: Hi, this is Yolanda Hu in place of Bin. Thanks for taking my questions. Can you share with us the thoughts on the telemedicine and web business more? For example, what's your long term strategy, your investment plan, and what are your expectations for the incremental revenue contribution, as well as cost saving effects in the second half of next year? Can you quantify that? Thank you.

Hi Yolanda. I would answer the budget and the financial part of the question, and then, as for the business aspects of the question, I will ask Mr. Yang to answer it for you, and as you know, our telemedicine business is still in the development stage, and we are spending approximately -- in the past quarter, we have spent like RMB eight point something million for selling expense and about 2 million in general and administrative expenses, and we expect the same level of investment for the business, for the next two quarters, and at the end of the year, what we would do, is we will [step] specific budget and revenue guidance, revenue target for the business unit. So currently we are still in the expansion and the development stage, so we haven't really set a specific target in terms of the revenue and cost savings, for the telemedicine department yet. Hope that answers your question? And now I will turn over to Dr. Yang. Yolanda, do you mind to repeat your question in Chinese again, for the business aspect of the telemedicine business? Yolanda Hu - Morgan Stanley: [Foreign Language].

[Interpreted] Now Concord Medical expects to provide Chinese cancer patients with high quality service, and based on our cancer centers, we want to do this communication internally in our center first, and by enlarging our network scale, we want to, in large (inaudible) telemedicine across the whole country to the all centers, in the whole nation.

All right. Thank you. And our next question comes from the line of Sean Wu from JPMorgan. Please go ahead. Sean Wu - JPMorgan: Thank you very much for taking my question. Congratulations on your progress. I have a question about your hospital operations. Clearly, your gross margin has improved quite substantially from, like 7% from the first quarter to like 19% in the second quarter. So what should we think is stable in the gross margin? In (inaudible) target gross margin, we can see like -- your medicine gross margin is about 14%, and now like for many of the (inaudible) in private hospitals, you have 15% more CapEx. So at this point clearly, appears to be in line with that. But as you like, a private hospital, do you submit same kind of results in (inaudible) and then can you make more amount, especially [with saving] of high end oncology-radio, which are not in the -- on the investment list. I will just translate it to Chinese. [Foreign Language].

Mr. Yang will answer the second question, and Mr. Sun will answer your first question.

[Interpreted]. So in China hospital, we are a hospital for profit, and we can set the price on our own. But if the [value per chart] for the management is -- surpassed for the payment from the medical insurance, and the patient will pay the difference from the pocket. But if the charge can be covered by the medical insurance, and --

Yes, Sean let me explain in more detail, to add on top of Mr. Yang's comments. So for the -- as China hospital is a for profit hospital, so we have a sales pricing power within the range. For example, so for some of the medicines, we can charge higher than the government guidance plan, that is [right], and then those will be the self-payment items, and the patients will pay out of the pocket on their own. So that's -- so sometimes you can see some minor fluctuation in our gross margin or relating to the medicine expense. And to answer your first question about the general trend of the gross margin, and whether China hospital is going to have the gross margin trending up, as we are a special hospital, especially with the focus on oncology and some of the other (inaudible). So first, for the second quarter, our gross margin for the hospital is 16.9%, and for the first quarter of the year, is 10.5%, so we see an improvement of 640 basis points quarter-over-quarter. One of the main factors of this is seasonality, because our seasonal -- and if you look at the operating metric of the hospital, in terms of debt occupancy and the average stay of patients, and also the number of patients, in-patient, outpatient, you can see that the first quarter is usually the slowest quarter during the year. And so that's why -- and most of the expenses, especially relating to the inpatient, outpatient services are fixed costs. So that's why usually in the first quarter, you see lower gross margin. Then as cost (inaudible) capacity gets more fully utilized. So especially, in terms of outpatient services, you can see that the percentage of revenue for outpatients in the second quarter has increased significantly over the first quarter. So usually, the inpatient services has like a breakeven point, once we reach -- because really the capacity is there, and no matter how many patients and outpatients visit the hospital, we usually incur the same amount of expense. So in the same quarter, as the outpatient number increases, so we start to see -- the outpatient services starts to generate a healthy gross profit for us. So that is another reason why we see an improvement of gross margin in the hospital. So in terms of the long term trend, we believe that the China hospital's gross margin should stay around 15% to 20%, and now we will keep a close eye on the profitability, so you can use 15% to 17% as the average for the near future. Also, as China hospital centers is focused on departments -- the profitable departments such as oncology, such as orthopedics. So you will see that gross margin will improve. But that's usually -- it's a long term process. So hope that answers your question. Sean Wu - JPMorgan: And to follow it up, in terms of your gross margin rate, clearly, it clearly mentions that it carries a higher margin. In some -- so adjusted for yields, expand your service (inaudible). Should we expect to see higher gross margin for the service part? Then other, as you said, you can charge like a higher price and weaker prices. So shouldn't we see like a higher kind of gross margin than 14%? And a related question, that you compare the utilization is already -- maybe some sense for your inpatient (inaudible). So going forward though, how do we see like a growth in terms of sales revenue for this hospital? [Foreign Language].

[Interpreted]. In China, the hospital's trust accounting for the higher hospital revenue is not a reasonable situation. In the [centers], we expect to provide cancer patients with high quality services and making the (inaudible) high quality services as a major part of the revenue. I think this is the original future for our development. Not only for the cancer patients. China hospital (inaudible) for general hospital. We expect to build our hospital in the future as a hospital with cancer treatment as the characteristics.

Sean, to answer your second part of the question, where the growth for the hospital comes from. I think we see there are three besides what Dr. Yang has mentioned. We see three major areas where we can make improvements, and which will improve the profitability. The first initiative is to strengthen the specialty and focus of this hospital, to gradually transform it on a general hospital into a hospital with strong specialty and strong reputations among the patients. Now the key areas we are focusing on, include oncology, which is the historical strength of this hospital, as well as other departments such as orthopedics and cardiology. So by strengthening these specialties, we have improved the profitability of the hospitals. That's number one; number two is, for the hospital there is an important operational metric called throughput, which is shortening the length of stay of patients in the hospital, to accelerate the turnaround of the hospital beds, and now the average stay of the patients is about 10 days. I think you know, if we can improve it, we will open up more capacity to receive more patients, the improvement of throughout is another area where we can see an improvement. The third area is, it is related to the first part, which is to build up key department specialties. By doing that, we can improve per patient yield. But now, most of the inpatient and outpatients in hospitals, few spending and relatively small amount of money, and now by building up specialties, only by receiving more patients, with more complex medical situations, we can improve the per patient yield as well. Sean Wu - JPMorgan: Okay. Thanks you.

Thank you. Our next question comes from the line of [Yi Chen] from Brain Capital. Please go ahead.

Hi. Thanks for taking my question. So I just want to -- please give me more color on the latest development of your project in Beijing? Because I just see hospital named Beijing Sports and Medical Center in (inaudible). So is this hospital under operation, or its still under the design and the construction? I want to know more detail on this project.

Thank you. Our Beijing province, we have a joint operation, Sino-Japanese friendship hospital. This project has been ongoing, and we have disclosed the progress of the project since the IPO and now this project is still under construction and in progress and we will report the progress of this project to the investors at appropriate opportunity. I am not so sure about what idea -- which (inaudible) you talked, and we will check on that too.

One in Chinese. So when it can start financial contribution?

This one is under construction, so we don't see it be contributing to our revenue in the near future. As I mentioned, as we make progress, we will report to the investors.

Okay. Thanks.

Thank you. (Operator Instructions). Our next question comes from the line of [Wan Dai] from CICC. Please go ahead.

Hi. Thank you for taking my questions. Asking question on behalf of Xiang Qin. And my first question was related to our network business. Regarding that, the revenue ratio from our current center will be decreases by time. So with the proof that revenue from these segments will be slowing down in the future, so could you share with us the age structure of the current segments and do you have any targets, age composition for the future?

Do you mind repeating the question, I think your line is on and off?

Oh sorry. Regarding the revenue ratio that you can take from the current centers to be decreasing by time. So with the proof that revenue from this segments would be really down in the future, I mean, the network business, so could you share with us the age structure of the current centers and do you have any targets of age composition for the future, and can you hear me clearly?

I think the question relates to the revenue breakdown between our current and the new centers, is that correct?

Pardon? I mean, rate structure of the centers.

Let's talk about the general guideline, I mean, how we look at the network business and the hospital business. For our network business, it's still growing very stably. Year-over-year we have seen growth rates from the network business of between -- for the current quarter, it's very close to 7%, and we expect that the growth rate in the high single digits will be stable for the foreseeable future. And currently we have 140 centers in our network, and we plan to add another seven or eight in the second half of the year. So at the end of 2013, we expect to have close to 150 centers in our network. So this new center, (inaudible) network start contribute when they see there (inaudible) business. And the average length of our age remains (inaudible) for our centers, still like seven to eight years. So we don't expect any significant change in revenue contribution from the network.

Okay. So that means that age contribution of the current centers will remain stable?

Excuse me [Wen Dai], I think you are too close to your phone. Would you be able to move away from your phone, so that we can hear you clearly?

Okay. And I repeat my question, can you hear me clearly?

Yes.

It's better. Okay. I want to know that the current age composition of the centers that you have?

Yes. As I mentioned earlier the average remaining contract for our centers right now is seven to eight years, and then we are having like close to 10 centers this year. So our remaining contract average for centers will be stable for the next 8 to 10 years.

Okay, just one follow-up question. Do you have any plan to accelerate your expansion of the segment? For instance, are you planning to get more access to the (inaudible) of the hospital in the future?

Yeah. We have talked about opportunities. The whole group, we are looking at where this business opportunity is in the network business, because we believe that there is few abundant opportunities for the business. Now we are -- in our pipeline, we have potential contracts with both the tier-3 or tier-2 hospitals, as well as with the county level hospitals. But for the county level hospitals, on one hand, we look at it as a very big, untapped business opportunity, and on the other hand, there is still obstacles or difficulties to enter into the market, including the distance and the divide that's spread out, and also the lack of technical and management's challenge for this center, and that's why we believe that our business initiative, such as our tenant management business in this imitative will be very helpful for us to open up this -- open up more opportunities in this market segment, because we can use our tenant management network to reach out to hospitals in the small cities or in the remote areas. So as we make -- so we are looking at this opportunity very cautiously, and we believe that we have an advantage compared to our competitors, because we have this current network of telemedicine across the country already.

Thank you. The second question is about selling expense. I think accordingly, the expense related to the telemedicine and web business, the selling expense, do you witness -- or do you 60.8 million are for the second quarter, so which in fact that the marketing expense grew very fast. So could you share with us the reason behind it?

Yes. Because we opened -- for the first half of this year, we opened three centers, and then during the fourth quarter of 2012, we have opened altogether like nine centers, in order to promote the service of these centers, and we need to allocate a bigger budget for marketing and sales activities. But as we move forward, as these tenders enter into a more stable growth stage, so we can -- you can expect the selling expense as a percentage of the total revenue, will gradually [turning up].

Okay. Thank you. And my (inaudible), what is your CapEx guidance for this year and next year?

For this year, because we are still, as you know, we are now in the planning and the design stage for the Guangzhou project, and we are still working on the overall CapEx budget for this project. For this year, for the second half of 2013, I think most of the CapEx will still be relating to the network business, which stays at around like 30 million to 23 million per quarter, those are mainly for the maintenance, and in a regular CapEx for this center. And for next year for 2014, as we finalize overall budget for overall CapEx plan for the Guangzhou project, you have a better idea.

Okay. My question has been answered. Thank you so much.

Thank you.

Thank you. And that comes to the end of our question-and-answer session. We will hand it back over to the management for closing remarks. Thank you.

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 continued support.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.