Concord Medical Services Holdings Ltd annual report, Q4 FY2021

Business context and reporting period

Concord Medical Services Holdings Limited’s Form 20-F reports the fiscal year ended December 31, 2021; it is an annual report, not a standalone Q4 filing. The company provides oncology services through self-owned hospitals and clinics and a network business that supplies, leases and supports medical equipment and related solutions in China. At year-end, it operated seven self-owned hospitals and clinics, an internet hospital, and 16 cooperative centers. Financial statements are prepared under U.S. GAAP and reported in RMB.

Financial performance and liquidity

Revenue grew 117.8%, but cost of revenue rose faster, producing a gross loss. Network revenue increased to RMB324.5 million, largely from medical-equipment sales and newly launched cloud solutions; hospital revenue rose to RMB161.2 million. The hospital segment recorded a RMB127.5 million gross loss, reflecting Guangzhou Hospital’s start-up costs and low early utilization. Network gross profit increased to RMB70.6 million, while its margin fell to 21.8% from 54.5% as lower-margin medical solutions became a larger share of sales. The company-attributable net loss narrowed to RMB271.4 million from RMB310.0 million, despite the increase in consolidated net loss.

Year-end cash and cash equivalents were RMB157.4 million, down from RMB334.3 million; current assets were RMB584.5 million and current liabilities RMB804.5 million, leaving net current liabilities of RMB220.0 million. Total bank and other borrowings were RMB2.478 billion, including RMB136.5 million short-term and RMB162.8 million current maturities of long-term debt. Total assets were RMB6.230 billion; total liabilities were RMB3.486 billion. The balance sheet also included RMB3.681 billion of contingently redeemable noncontrolling interests classified as mezzanine equity. Parent-company shareholders’ deficit was RMB1.370 billion.

Material changes versus prior year

• Revenue more than doubled, principally because medical-solutions revenue rose to RMB217.4 million from RMB26.1 million.
• Cost of revenue increased to RMB542.5 million from RMB209.9 million, turning a modest gross profit into a gross loss.
• Operating expenses increased to RMB401.4 million from RMB329.1 million; no long-lived-asset impairment was recorded in 2021, compared with RMB8.5 million in 2020.
• Operating cash outflow worsened by RMB129.5 million. Financing activities generated RMB642.4 million, including RMB400.0 million from contingently redeemable noncontrolling interests and new borrowing.
• Cooperative-center treatment and diagnostic case counts declined, while cases at self-owned hospitals and clinics increased. The company closed 11 cooperative centers in 2021.

Outlook, risks and unusual items

Management’s stated priorities include improving operational efficiency and reducing costs, developing cloud and internet-hospital services, and seeking additional equity financing for hospital operations. It estimated 2022 capital expenditures of approximately RMB248.8 million, mainly for hospital construction and medical equipment in Shanghai, Guangzhou and Beijing. Shanghai Hospital was expected to begin operating in 2024. No quantified revenue or earnings guidance was provided.

The company reported recurring losses, negative operating cash flow, net current liabilities and an accumulated deficit of RMB3.277 billion. Management said a February 2022 related-party failed sales-leaseback financing and planned financing and operational measures alleviated substantial doubt about continuing as a going concern. However, the auditor’s report highlights substantial doubt and states that the financial statements contain no adjustments that might be required if the company cannot continue as a going concern. The filing describes the RMB110 million financing inconsistently: one disclosure says RMB65 million had been received by the report date, while another says the amount had been received.

Key risks include delayed or capital-intensive hospital and proton-center projects; low utilization and losses at new facilities; COVID-19 disruptions; dependence on hospital partners and concentrated customers; regulatory licensing, equipment quotas and price controls; and significant debt service needs. As of the report date, Beijing Proton Medical Center construction was delayed amid COVID-19 and a shareholder dispute; litigation was pending. Shanghai and other facilities had experienced temporary COVID-related closures. The internet hospital did not hold an ICP license. The auditor was a China-based firm subject to the PCAOB’s 2021 determination that it could not be fully inspected, creating potential U.S. trading and delisting risk under the HFCAA. Management also reported ineffective disclosure controls and internal control over financial reporting due to a material weakness: insufficient accounting staff and expertise in U.S. GAAP and SEC reporting.

Important facts for investors to verify

• Whether the reported RMB110 million related-party financing was fully funded, and the terms, repayment schedule and collateral.
• Whether operating cash burn, current liabilities and debt maturities can be met without further financing.
• Progress, remaining cost, licensing and expected opening dates for Beijing Proton Medical Center and Shanghai Hospital; actual utilization and losses at Guangzhou Hospital.
• Whether the medical-solutions revenue surge is repeatable and whether it can deliver sustainable margins and cash collection.
• Collection of concentrated hospital-partner receivables, which rose to RMB120.6 million for the network business; top five partners accounted for 52.0% of network accounts receivable.
• Resolution of the internal-control material weakness, ICP licensing, pending Beijing Proton Medical Center litigation, and auditor-inspection and U.S. listing risks.