Concord Medical Services Holdings Limited — FY2018 Form 20-F
Reporting period: Year ended December 31, 2018; this is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by Ernst & Young Hua Ming LLP, which issued an unqualified opinion.
Business context and reporting period
Concord Medical operates radiotherapy and diagnostic imaging centers in China and hospitals in China and Singapore. Its legacy network business partners with hospitals and generally earns a contracted share of center revenue; its hospital business includes company-operated cancer facilities. At year-end, the network comprised 31 cooperative centers in 21 hospitals across 21 cities and 14 provinces and administrative regions.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | RMB190.9 million (US$27.8 million) | RMB331.0 million |
| Gross profit / margin | RMB19.8 million / 10.4% | RMB98.0 million / 29.6% |
| Operating loss | RMB299.2 million | RMB211.9 million |
| Net loss | RMB259.3 million | RMB285.7 million |
| Net loss attributable to Concord Medical | RMB234.9 million | RMB284.3 million |
| Loss per ADS, basic and diluted | US$1.20 | US$0.?? |
| Operating cash flow | RMB(38.6) million | RMB26.7 million |
| Investing cash flow | RMB(1,000.4) million | RMB(313.0) million |
| Financing cash flow | RMB1,203.0 million | RMB189.9 million |
The filing reports FY2017 loss per ADS of US$6.56 in its selected financial data; the US$0.?? entry above is not a clear value in the comparable detailed EPS presentation and should not be relied on. FY2018 loss per ADS was US$1.20.
- At December 31, 2018, cash and cash equivalents were RMB404.7 million (US$58.9 million), with an additional RMB422.0 million (US$61.4 million) of restricted cash unavailable for general liquidity. Current assets were RMB1,228.7 million and current liabilities RMB870.3 million, giving net current assets of RMB358.4 million.
- Bank and other borrowings totaled RMB938.1 million: RMB396.5 million short-term and RMB541.6 million long-term, including RMB44.1 million due within one year. The company also reported RMB1,720.4 million of contingently redeemable noncontrolling interest as mezzanine equity, not as ordinary equity or bank debt.
- Total assets were RMB4,585.4 million; total equity was RMB553.5 million. Capital expenditure was RMB870.7 million in 2018.
- No special dividends were declared in 2016, 2017 or 2018.
Material changes versus the prior comparable period
- Revenue fell 42.3%. Network revenue declined 53.9% to RMB138.1 million, chiefly from center closures and lower profit-sharing rates as agreements aged. Hospital revenue rose 66.9% to RMB52.8 million as operating hospitals grew and Shanghai Meizhong Jiahe Cancer Center was consolidated in Q4.
- Gross margin contracted to 10.4% from 29.6%; the hospital segment generated a gross loss of RMB39.0 million, while the network segment generated gross profit of RMB58.8 million.
- Operating expenses increased 3.0% to RMB319.0 million despite lower selling costs. General and administrative expense rose 22.8% to RMB291.9 million, including increased hospital-project consulting costs and bad-debt allowance.
- Net loss narrowed to RMB259.3 million from RMB285.7 million, but operating loss widened. FY2018 results included RMB36.5 million of foreign-exchange gains, RMB48.0 million gain on disposal of an equity-method investment, and other investment-related income; these helped offset operating weakness.
- The company regained control of Guofu Huimei and consolidated Beijing Century Friendship, Beijing Proton Medical Center and Shanghai Meizhong Jiahe Cancer Center beginning in Q4 2018. The related acquisition accounting added RMB165.2 million of goodwill and RMB454.0 million of intangible assets. A RMB1.5 billion strategic investment in subsidiary Meizhong Jiahe was recorded as contingently redeemable noncontrolling interest.
- Patient cases in the network declined: treatment cases fell from 16,300 to 11,111 and diagnostic cases from 217,991 to 147,158. The company closed 13 cooperative centers during 2018.
Outlook, commentary, risks and unusual items
- Management estimated 2019 capital expenditure of approximately RMB1.8–1.9 billion, mainly for construction and medical-equipment procurement for projects in Shanghai, Guangzhou and Beijing. Management stated that available cash and anticipated operating cash flow should cover expected needs for at least 12 months; however, 2018 operating cash flow was negative and the disclosed investment program is substantial.
- Major construction projects include Beijing Proton Medical Center and cancer hospitals in Shanghai and Guangzhou. Their completion, licensing, staffing, patient demand and ability to reach profitable utilization remain uncertain. The filing describes construction timelines as estimates, not firm opening guidance.
- The company depends on hospital partners for clinical staffing, patient collections and contracted revenue transfers. The top five hospital partners represented 35.0% of 2018 revenue, and the top ten represented 58.2% of network accounts receivable. Procurement quotas, required medical permits, regulated fees and possible changes to cooperation-agreement rules could constrain operations or expansion.
- Liquidity and funding risks include restricted cash, debt maturities, pledged land-use rights and construction assets, and significant purchase commitments. Contractual obligations totaled RMB1,723.5 million, including RMB660.8 million of equipment purchase obligations due within one year. The filing separately reports restricted-cash-secured short-term borrowings of RMB396.5 million.
- The ZR Guofu arrangement carries a 15% annual premium on its RMB521.4 million contribution and a contractual repurchase obligation after four years from November 2016; specified shares, construction in progress and land-use rights were pledged as security. The filing’s accounting also reflects redeemable-investor rights connected to a potential failure to complete a qualified IPO by June 30, 2024.
- Management reported effective disclosure controls and internal control over financial reporting, and the auditor gave an unqualified internal-control opinion. Management’s assessment did not include acquired entities whose year-end assets were RMB950.0 million and whose included 2018 revenue was RMB4.8 million.
- Other risks include foreign-exchange movements, dependence on a limited number of medical-equipment suppliers, medical liability and insurance limitations, competition and alternative cancer treatments, and evolving PRC regulation. The company reported no material litigation and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Confirm the 2018 revenue decline, network-center closures and subsequent renewal or termination status of agreements accounting for a material share of revenue.
- Assess whether the RMB1.8–1.9 billion 2019 capital-spending plan, purchase commitments and construction schedule are supportable by unrestricted liquidity, operating cash flow and committed financing.
- Review the terms, redemption triggers, premium and pledged collateral for the RMB1.5 billion subsidiary investment and the separate ZR Guofu repurchase arrangement.
- Track construction progress, required equipment procurement licenses, permits, staffing and patient volumes at the proton and cancer-hospital projects.
- Reconcile the annual report’s EPS disclosures and distinguish unrestricted cash from restricted deposits; the filing’s selected financial data gives FY2017 loss per ADS of US$6.56, while the detailed presentation does not show a clear matching comparable value.
- Evaluate acquisition valuations, new goodwill and intangible assets, related-party balances, tax uncertainties and the acquired entities excluded from management’s internal-control assessment.