Concord Medical Services Holdings Limited — FY2019 Form 20-F
Period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone 2019 fourth-quarter filing. Financial statements are prepared under U.S. GAAP; reporting currency is RMB. U.S. dollar figures are convenience translations at RMB6.9618 per US$1.
Business context
Concord operates radiotherapy and diagnostic imaging centers in China and cancer hospitals in China and Singapore. At year-end, its network had 31 cooperative centers across 21 hospitals in 21 cities; hospital operations included Concord International Hospital in Singapore and cancer centers in Datong and Shanghai. The strategy is shifting from the cooperative-center network toward owned specialty cancer hospitals and a proton center.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | RMB198.4m (US$28.5m) | RMB190.9m |
| Gross profit (loss) | RMB(15.8)m; gross margin (8.0%) | RMB19.8m; gross margin 10.4% |
| Operating loss | RMB437.3m | RMB299.2m |
| Net loss | RMB352.1m (US$50.6m) | RMB259.3m |
| Net loss attributable to Concord Medical | RMB307.0m (US$44.1m) | RMB234.9m |
| Operating cash flow | RMB(195.3)m | RMB(38.6)m |
| Investing cash flow | RMB(1,071.5)m | RMB(1,000.4)m |
| Cash and cash equivalents at year-end | RMB74.3m (US$10.7m) | RMB404.7m |
Network revenue fell 12.0% to RMB121.5m, while hospital revenue rose 45.5% to RMB76.8m. Hospital operations remained loss-making at the gross-profit level: segment gross loss was RMB60.2m, versus a RMB44.4m gross profit for the network segment. Operating expenses were RMB421.5m, including RMB76.1m of long-lived asset impairment, compared with RMB319.0m and RMB5.4m, respectively, in 2018. The 2019 impairment primarily related to three low-performing cooperative centers and the Second Affiliated Hospital of Baotou Medical College, which was involved in litigation.
At December 31, 2019, total assets were RMB4.30bn and total liabilities were RMB2.41bn. Current assets of RMB282.5m were below current liabilities of RMB627.5m, resulting in net current liabilities of RMB345.0m (US$49.6m). Bank and other borrowings totaled RMB1.62bn, of which RMB285.5m was short-term and RMB42.9m was the current portion of long-term borrowings. Weighted-average rates were 7.73% on short-term and 11.49% on long-term borrowings. Consolidated total equity was negative RMB20.4m; contingently redeemable non-controlling interests of RMB1.91bn were presented as mezzanine equity.
The company reported a RMB752.4m net decrease in cash and restricted cash during 2019; restricted cash was nil at year-end, compared with RMB422.0m a year earlier. Capital expenditures were RMB675.3m in 2019. Investing outflows primarily reflected property and equipment spending and acquisitions. Purchase commitments for medical equipment were RMB622.6m, scheduled within one year.
Material changes and unusual items
- Revenue edged up 3.9%, but the company moved from gross profit to gross loss and net loss increased 35.8% year over year.
- Cash and cash equivalents declined substantially, operating cash use increased, and borrowings rose from RMB938.1m at year-end 2018 to RMB1.62bn at year-end 2019.
- The acquisition of Tianjin Jiatai and related entities was completed in November 2019. The company recognized a RMB31.9m remeasurement gain on previously held interests; acquired entities contributed only RMB0.4m of consolidated revenue after acquisition during 2019.
- A RMB39.0m income tax benefit helped offset the pre-tax loss. Other income included acquisition-related remeasurement gains; these items are not equivalent to recurring operating earnings.
- Adoption of lease accounting (ASC 842) in 2019 brought right-of-use assets and lease liabilities onto the balance sheet. The filing says the new standard added RMB529.8m of right-of-use assets at adoption.
Outlook, risks and contingencies
Management forecast 2020 capital expenditures of approximately RMB1.0bn–RMB1.1bn, mainly for construction and equipment at planned hospitals in Shanghai, Guangzhou and Beijing. Management said projected liquidity needs for at least the next 12 months could be met, citing RMB700m of CITIC investment, RMB557.4m of available PRC bank credit facilities and a RMB207m medical-equipment financing arrangement. The CITIC investment was agreed in February 2020 and received in March 2020; it diluted the group’s ownership in Meizhong Jiahe from 60% to 50.01%. The going-concern conclusion depends on these financing sources and forecasts: the filing reports substantial doubt was alleviated, while also describing recurring losses, negative operating cash flow and net current liabilities.
- COVID-19: The filing reports fewer patient treatments from late January through early March 2020 and lower revenue for January and March compared with the prior year. The extent of full-year effects was not reasonably estimable.
- Expansion and execution: Hospital and proton-center construction requires substantial capital, approvals and specialist recruitment; the company cited limited experience operating some planned services, including proton therapy.
- Regulatory and partner exposure: Equipment procurement quotas and licenses, medical-service pricing, permits, and interpretation of hospital cooperation arrangements may constrain operations. Revenue and receivables are concentrated among hospital partners; the top five contributed 34.6% of 2019 revenue, and the top ten accounted for 74.2% of network receivables.
- Funding and asset risks: Construction, purchase commitments, debt service, pledged assets and the recoverability of equipment deposits are significant. The filing recorded a RMB62.4m impairment provision on deposits for non-current assets in 2019.
- Other investor risks: Medical liability, limited insurance at cooperative centers, supplier concentration, foreign-exchange controls, China regulatory uncertainty, and limits on PCAOB inspection of the China-based auditor are disclosed. The auditor gave unqualified opinions on the financial statements and internal controls; management’s internal-control assessment excluded certain entities acquired in November 2019.
Most important facts for investors to verify
- Whether the CITIC proceeds, available credit facilities and equipment financing were completed, remain accessible, and have conditions or covenants that affect liquidity.
- How the company plans to fund the RMB1.0bn–RMB1.1bn 2020 capital-expenditure plan alongside debt maturities, purchase commitments and operating cash needs.
- Whether hospital growth can improve margins and cash generation, given the 2019 gross loss and continuing losses in the hospital segment.
- The terms and potential redemption or accretion effects of RMB1.91bn in contingently redeemable non-controlling interests.
- Collection status of aged and concentrated receivables, recoverability of supplier deposits, and progress on required medical-equipment licenses and hospital approvals.
- COVID-19 effects on patient volumes, collections, construction schedules and asset impairment beyond the early-2020 disclosures.