Business context and reporting period
Concord Medical Services Holdings Limited’s Form 20-F is an annual report for the fiscal year ended December 31, 2014, prepared under U.S. GAAP. It does not provide standalone fourth-quarter results; the figures below are for the full year unless otherwise noted. The company operates radiotherapy and diagnostic imaging centers in China, mainly through long-term arrangements with hospitals. At year-end it reported 139 centers in 80 hospitals across 56 cities and 25 provinces and administrative regions.
Financial and operating performance
Unless stated otherwise, amounts are in RMB millions; U.S. dollar figures are translations provided for convenience.
- Revenue: RMB606.9 million (US$97.8 million), up 7.8% from RMB563.1 million in 2013. Lease and management services contributed RMB511.6 million. Management attributed growth mainly to diagnostic equipment patients.
- Profit and margins: Gross profit was RMB332.3 million, down 3.8%; gross margin fell to 54.8% from 61.3%, chiefly due to higher depreciation at new centers. Operating income rose to RMB183.6 million from RMB156.3 million. Continuing-operations net income was RMB94.8 million, versus RMB80.4 million. Total net income was RMB120.3 million, including RMB25.5 million from discontinued operations; net income attributable to ordinary shareholders was RMB124.7 million. Basic and diluted EPS were RMB0.92 per share (RMB2.76 per ADS).
- Cash flow: Operating cash flow was RMB490.4 million, versus RMB259.0 million in 2013. Investing activities generated RMB287.1 million, primarily reflecting the disposal of Chang’an Hospital and WHT. Financing activities used RMB579.1 million, including RMB453.6 million of dividends paid and debt repayments. Cash increased RMB195.6 million to RMB478.7 million.
- Liquidity and debt: Current assets were RMB1,463.7 million and current liabilities RMB769.8 million; management reported net current assets of RMB693.9 million. Bank borrowings totaled RMB903.8 million: RMB322.1 million short-term and RMB581.7 million long-term, including the current portion. Restricted cash was RMB502.2 million, so not all reported cash was freely available. The company said cash and expected operating cash flow should cover needs for at least 12 months.
- Other metrics: Total assets declined to RMB2,959.3 million from RMB4,093.6 million, reflecting, among other items, the hospital disposal. Net property, plant and equipment fell to RMB749.7 million from RMB1,492.6 million. Capital expenditures were RMB109.9 million in 2014.
Material changes versus the prior year
- Revenue growth was slower than in 2013, while higher depreciation reduced gross profit and gross margin. Operating expenses fell 21.4% to RMB148.7 million, mainly due to lower selling and general and administrative expenses.
- Interest expense rose 45.0% to RMB53.5 million, which the company attributed mainly to higher bank borrowing during the year. Income tax expense increased 26.6% to RMB80.9 million.
- Treatment patient cases fell 6.5% year over year, while diagnostic patient cases rose 2.0%. The company added six centers and closed 11; the filing reports 142 centers at December 31, 2013 in its operating review and 139 at December 31, 2014.
- In December 2014, the company sold its 52% interests in Chang’an Hospital and WHT for RMB397.9 million, recording a RMB38.5 million disposal gain. These operations were classified as discontinued operations; the company stated it would not record their income in 2015.
- Two special cash dividends were paid in 2014, totaling approximately US$73.1 million. Management said it expects to retain most, if not all, future available funds and earnings for operations and expansion.
Outlook, risks and unusual items
- Outlook: No formal revenue or earnings guidance is provided. Management estimated 2015 capital expenditures of RMB300–500 million, mainly for network expansion, free-standing centers and specialty cancer hospitals, and expected available cash and operating cash flow to meet needs for at least 12 months.
- Expansion and execution: Planned cancer hospitals, including proton therapy projects, require substantial investment and entail construction, licensing, staffing, patient-acquisition and operating-ramp risks. The company had limited experience operating its own specialty hospitals.
- Regulatory exposure: Medical equipment procurement, permits, pricing and hospital arrangements are regulated in China. Six units of equipment reportedly lacked a procurement license or permit at year-end; those centers generated about 3.4% of 2014 revenue. The filing also identifies 13 units operating under older permits or authorizations, with uncertainty about future regulatory treatment.
- Concentration and collections: The top five hospital partners generated 22.5% of revenue. Net accounts receivable were RMB265.0 million; average network receivable turnover was 159 days. The top ten partners represented 38.7% of network accounts receivable.
- Other key risks: Dependence on hospital partners and their medical staff; restricted equipment procurement quotas; potential government reductions in medical-service prices or reimbursement; competition and technology shifts; Renminbi and interest-rate exposure; and uncertainty over PRC laws, foreign-exchange controls and taxes. The company also noted that it does not carry product-liability or business-interruption insurance for its network centers.
- Unusual items and governance: The IFC’s US$20 million loan includes conversion and other embedded features accounted for as a derivative; the derivative liability was RMB33.7 million at year-end. In January 2015, shareholders approved a dual-class structure; the planned Class B exchange would give the controlling shareholders approximately 93.7% of voting rights. The company acquired Fortis Surgical Hospital in April 2015, after the reporting period.
Important facts for investors to verify
- Reconcile full-year earnings growth with continuing-operations results, discontinued-operation income and the disposal gain; do not treat reported total net income as recurring earnings.
- Confirm the availability and restrictions on cash, debt maturities, collateral, covenants and the funding plan for the stated 2015 capital-expenditure range.
- Track hospital receivable aging and collections, concentration by partner, and the status of equipment procurement permits and renewals.
- Monitor construction costs, approvals, staffing, patient volumes and funding for planned specialty hospitals and free-standing centers.
- Assess the effect of the dual-class voting structure, post-year-end Singapore acquisition and future dividend policy on minority shareholders.
The financial statements received an unqualified audit opinion, and the auditor reported effective internal control over financial reporting as of December 31, 2014.