CCM 泰和诚医疗

Operator

(Operator instructions) Your first question comes from the line of Isabella Zhao from Morgan Stanley. Please ask your question.

Isabella Zhao

Hello. Thanks for taking my questions. My question is going to be towards more for the financial side. The first question is about the gross margin. I noticed both the networks and hospital gross margin has declines in this quarter compared to last quarter, also, on a year-over-year basis. I just want to get more color of the reason behind the inquiries, cost of goods sold. Also, if we can get some outlook for the gross margin in 2013, could it be good? And my next question is regarding the selling and G&A expenses, and also the reason behind the inquiries and whether we’re going to look in for in this year. Thank you.

Adam Sun

Sure, Isabella. Thank you very much. So as for the gross margin and in the first quarter, our network gross margin was 55.4% or 3% lower than the same quarter of 2012. The main reason for this is in this quarter, we have seen more compensation-related expenses because we are expanding our number of vendors and also the compensation level on the per-employee basis has been rising since last year, as you may know. And also that, as you know, the seasonality is also a factor in this, because as we discussed earlier, the first quarter, yearly we see a lower percentage of revenue in both our network and also in hospital as well compared to the rest of the year. So that with lower revenue compared to the other quarters, but the majority part of our cost with network is the depreciation expenses so that, yearly, we see a relatively lower gross margin, sequentially for the first quarter as well. This is also a pattern you see for the previous years. So we believe that for the network business, the gross margin will rework to a higher level and you’ll see an improvement for the rest of the year. For the hospital, the gross margin for the first year is around 10% compared to 13% and 16%, I remember, for the last two quarters of 2012. And seasonality is a bigger factor and also the depreciation expense for China hospital also increased, because in the earnings release, you can see that the total CapEx for China hospital was around RMB10 million, and they depreciated over a relatively shorter period of time, because most of the CapEx is in computer or office equipments. So we believe that seasonality, obviously, is another factor. So we believe for the whole year, the hospital gross margin will rework to the mid-teen level, around 15%, I believe, is very – we are confident about to reach that level, to achieve that level.

Isabella Zhao

Okay.

Adam Sun

For the SG&A and manufacturer, we discussed earlier, is we invested a total of about RMB6 million in the new business units and we will – because we see the importance of this new business unit to the overall business, so we’ll maintain that level of investment for the remainder of the year. And also, in the first quarter, we have incurred higher than last year in the promotion, the marketing expenses relating to the newly opened centers.

Isabella Zhao

Okay. And just one follow-up question. How much investment did you plan for this year, for the new Web business, the new unit, how much in total?

Adam Sun

We’ll maintain about the same level for the first quarter, right between RMB5 million to RMB6 million per quarter.

Isabella Zhao

Okay. And if I may, I will ask you another question regarding the guidance. You maintained your guidance for 38 and 45 year-over-year growth for top line. Either from what I heard and I sensed, the gross margin will be a little bit under pressure and also the expenses will increase because of the investment for a new unit. So how should we look at the bottom line growth in this year, and should we see flat or a year over decline?

Adam Sun

The company only issue the revenue guidance. You already know it is our practice not to issue any guidance on the bottom line. Yeah.

Isabella Zhao

Okay.

Adam Sun

But in general, we think that the revenue, we are very comfortable about reaching the whole year revenue target.

Isabella Zhao

Okay. And one more question is, can you give us a little bit more color about the IFC loan? And does the company has any specific plan how to use the fund and the timeline of building a number of the centers for the next three years. Thank you.

Adam Sun

Sure, thank you. We signed this loan agreement on May the 15th. It has been a very long process for us to work with IFC. We started the loan related work in earlier last year. So it took us almost a year to sign this agreement and have gone some very strict financial business and legal utilities and products [ph]. As you know, IFC is a very reputable institution and they have a special focus on health and other related areas. So their investment in CCM, I think, shows their dedication to healthcare in China. So as for the loan, the total of $50 million loan is composed of eight-year component of $30 million and a five-year convertible loan of $20 million. We plan to use this loan for the construction of 50 new radiotherapy centers over the next three years, as well as to use the loan for the construction of Beijing and Guangzhou specialty hospitals. So the disbursement is subject to various conditions and we expect the loan disbursement in the second half of the year, if we meet all the pre-conditions.

Isabella Zhao

Okay. For the 50 centers you want to build, do you have any plans for like a number of centers for next year or the year after?

Adam Sun

So it’s going to cover a three-year period. So yearly, if we’re talking about 50 centers, if everything goes by plan, we can add probably about 15 or so next year.

Isabella Zhao

Okay. Okay, yeah, thank you. That’s all my question.

Adam Sun

All right, thank you.

Operator

Thank you for your questions. The next question comes from the line of Jessica Li from CICC. Please ask your question.

John Yung

Hi. This is John Yung from CICC and I’m asking the question on behalf of Jessica. The first question is more for Yang Jian. I simply want to have Yang Jian to elaborate a little bit more on the new business, the medical project, and probably to share with us the insights to the project in three to five years, and what kind of contribution it’s going to bring to the company. This is the first question. And my second question will be more a financial point of view. I would like to see that for our hospital segment, for the gross margin, it’s a little bit lower in the first quarter. So I understand that we already talked about the guidance, but can the management also share with us what kind of measurements it’s going to take to make sure that we will be able to bring the gross margin in the future quarters? [Foreign Language – Chinese] Thank you.

Jianyu Yang

[Interpreted] As you know, we are now operating over 130 centers around the nation. During the past 16 years, we have accumulated lots of resources. One of them is a very strong academic reputation, and as you may know, every year, Concord Medical is to convene annual academic conference where radiotherapy experts around the country will gather and to discuss the latest development in this industry. Based on the latest development of technology, our centers from different cities can more easily consult and work together. For instance, we can easily transmit the images of CT or MRI from one city to the other so that experts from different hospitals can really consult on different cases together. In this process, we find that a lot of small-to-medium-sized hospitals have a strong demand in this regard, that is to reach out to experts and doctors in large and the major hospitals in major cities so that they can consult on them with difficult cases. So based on this industry trend, we build up a special, a dedicated team to work on the telemedicine projects so that, on the one hand, we can expect the influence of our CCM network and also we can enhance the overall level of radiotherapy in China. And also, we see a big demand from the patient side, because a lot of patients after they receive radiotherapy treatment, they would like to consult with their doctors using the Internet or the mobile. Our plan is to build a platform on the Internet and also through the mobile platform so that the doctors and patients can easily communicate with each other. So that’s why, you know, last year, but also build a special team to set up this Internet platform. So we hope that our platform in the future, more and more doctors and patients can establish this one-on-one communication. And also in this process we will be able to accumulate very rich data relating to various kinds of illness so that more patients can benefit from this database. Okay, thank you.

Adam Sun

And as for the second question, for the improvement of the gross margin. And first, as we discussed earlier, seasonality is one of the factors relating to the relatively low gross margin in the first year. But also, China hospital right now is focusing on building this specialty department, such as oncology-related department so that they can enhance the per-patient yield both on the inpatient and outpatient basis. As you may remember, last year, China hospital and Fox Chase has found a partnership agreement, through the experts and doctors from Fox Chase will help China hospital to build up its oncology department. And so, to build specialty and also to improve the patient experience will be two key measures for China hospital to enhance its performance, and also that’s going to lead to higher profit margin and profitability for the rest of the year.

John Yung

[Foreign Language – Chinese]

Adam Sun

Thank you.

Operator

Thank you for your questions. Your next question comes from the line of Sean Wu from JPMorgan. Please ask your question.

Sean Wu

Well, yeah, I have just a couple of questions [ph]. Number one, it’s about your guidance about the centers. You mentioned you added one center and had 11 centers like under agreement. I checked out your last year’s press release first quarter, at that time, you have 30 centers under agreement and then you ended up like adding 12 centers or so. So my first question would be, among the 11 centers, how many you can be sure will become your centers, and do you have any kind of breakdown between radiotherapy centers and the diagnostic centers? That’s my first question.

Adam Sun

So, Sean, for the 11 centers we mentioned in the earnings release, those are the centers that we have at definite timeline or that’s expected to open during the rest of 2013. So this is not the whole of our pipeline, but this is – you can understand it as number of centers we expect to open during 2013.

Sean Wu

But you used the same kind of wording last year, right? I’m just curious what is –

Adam Sun

Yeah, we’re trying to be more, I would say, accurate, give investors a better estimate about the number of centers we are going to add for the rest of the year. So if we are talking about the pipeline, we’ll use a different term in the future. And for the 11 centers that we discussed earlier, I don’t have the exact recount right here, but I think we have more treatment centers than diagnostic centers. That’s what I remember. So you can estimate like 60% to be treatment and 40% to be diagnostics.

Sean Wu

Okay. And for my second question, that’s about your line of minority interest. Last year, you appeared to have like a positive minority interest of 0.8 million. And this year, you have like minus of 0.6 million. It’s implied like human asset with [ph] shareholders sharing your loss. If we concentrate on your operations, your hospital appears you’re making an operating profit of 501 million. Do you have any kind of like non-operating expenses associated with hospital operations? What is like the net profit you need to share with for the [inaudible]? And also, in particular, like the China hospital, your only associated company, how many other investments you are recording in terms of equity investment, and like what had changed from the assets this year? Do they appear to incur loss rather than gain compared to last year?

Adam Sun

The minority interest line or our income statement is an aggregate number in which we include all the minority interest in our investee companies. So obviously China hospital is one of them. And China hospital on a standalone basis is profitable for the first quarter and you can deduct that number from the gross margin as well as from the operating expense numbers we have disclosed. But also, we have other like project companies through which we have acquired the project and it is under construction, by the way, incurring operating related expenses. And also, those are the major reasons why on an aggregate basis, we have seen minor loss of about RMB600,000. And in general, you should see a positive number on that line, and I believe that will be the case for the rest of the year.

Sean Wu

Okay, thank you.

Adam Sun

Thank you.

Operator

Thank you for your questions. Next question comes from the line of Li Yu from Goldman Sachs. Please ask your question.

Li Yu

Yeah, this question is concerning your telemedicine segment. I want to get a more detailed understanding of this business. So you mentioned that with the development of mobile connections that this will drive the growth of telemedicine. So could you tell us what exactly is the profit model for the telemedicine and how much are the long distance diagnostics via the new type of mobile media? Can you shed some light on that? It would be great. Thank you.

Adam Sun

Sure. We talked about the overall, mobile, Internet, and telemedicine as new business units. We put them together, but they are separate operations from each other. For the mobile business units, what we do is we have developed a smartphone app, which you can download it in the App Store for iPhone, and also for the Android phones. The business model for that is for patients that can ask simple – first, they can do self-assessment of their health conditions. Secondly, they can submit questions to the online doctors, which can provide them with easy-to-implement answers on some of the health-related questions. So this is a model that you have seen. There are similar companies like this that have this online mobile app based health platform companies. So the business model will be for each question that is submitted, the patient will be required to pay a small fee, like RMB20 to RMB30, depending on the complexity of the question and also on the status of the doctor that answers this question. So this is a new business model and we have limited download so far since it went online during the first quarter. So we expect to have more promotion of that app as it becomes more developed. So this is for the mobile business. And for the telemedicine, what we do is we build up this network covering – now it covers about 40 hospitals around the country. So basically, when a hospital in one area needs to submit, emit diagnostic reports for the consultation or for the joint discussion about this case from doctors of different hospitals, clearly, the hospital will be able to charge extra fee from the patient. So it’s more like on a case-by-case basis consulting fee. So that’s the business model we have built. We have the line for the telemedicine network.

Jianyu Yang

[Interpreted] So the Internet service and also for the telemedicine, it has become very hot topics recently. But for us, for the reason that we make this investment in these two areas, first is based on market demand. And the demand comes from two sides. On the one hand, the doctor centers, they would like to have the support from our centers in big cities like Beijing or Shanghai. And also we see this demand from the patient as well. And also, for our specialty of radiotherapy and the diagnostics, those are the areas that is best suited for telemedicine, because the other department that, yearly, you need a face-to-face meeting between the doctor and patient. But in radiotherapy and the diagnostics, it can be purely based on transmitted imaging and planning, so that we believe this is a special area to develop this new telemedicine business. And also, our 130 centers around the country, each of them has very strong influence over this neighboring area so that in every city, every hospital, we’ll have a group of doctors who they can influence and impact both online and offline. Based on the feedbacks we have, we received so far, and it is very positive and we are now looking to explore this new opportunity in this area.

Adam Sun

Thank you.

Operator

(Operator instructions) We appear to have no further question at this time. I would like to hand the call back to Ms. Vickie Zhao for closing remarks.

Vickie Zhao

Once again, thank you for joining us today. Please don’t hesitate to contact us if you have any further questions. Thank you all for your continuous support.

Operator

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