New Frontier Health Corporation Ordinary Shares

Good day, everyone, and welcome to the New Frontier Health Corporation Third Quarter 2020 Earnings Conference Call. Please note that today's call is being recorded. I would now like to turn the conference over to Mr. Bill Zima of ICR. Please go ahead.

Thank you, Operator. Hello, everyone, and welcome to New Frontier Health Third Quarter 2020 Earnings Conference Call. The company's earnings results were released earlier today and are available on the company's IR website at www.newfrontierhealth.com. In addition, remarks today will be accompanied by a presentation, which can also be found on the company's IR website. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in our Form 20F, filed with the U.S. Securities and Exchange Commission on March 31, 2020, and other documents filed with the U.S. SEC. New Frontier does not assume any obligation to update any forward-looking statements, except as required under applicable law. This press release also includes financial measures that are not calculated in accordance with international financial reporting standards, as issued by the International Accounting Standard Board. For reconciliation of these measures to most comparable measures calculated in accordance with IFRS, please see the earnings release or investor presentation published by New Frontier Health today and file with the SEC on Form 6-K. Allow me to introduce the management team on the call today. Ms. Roberta Lifson, Chief Executive Officer of New Frontier Health, and Mr. Carl Wu, President of NFH and Chairman of the Executive Committee of the Board, will provide updates for the quarter. Following managed prepared remarks, we will open up the call to questions. During the Q&A session, Mr. Walter Hsu, CFO of NFH, and Mr. David Zung, COO of NFH, will also be available to answer any questions. With that said, I would now like to turn the call over to Roberta. Roberta, please go ahead.

Thank you, Bill, and hello, everyone. Thank you for joining us for a discussion of our third quarter 2020 results. During this quarter, as the pandemic continued to evolve around the world, we were pleased with the performance of each of our business segments. Both the macro economy and patient behavior gradually returned to near normal this quarter, driving sequential growth in our revenues and patient volumes. We are optimistic about the ongoing trend in our recovery observed in the quarter as demonstrated by the increase in both outpatient and inpatient numbers from the prior quarter. For those of you following along with our presentation deck, please turn to slide 14 for a snapshot of the quarter. As the Chinese government implemented various measures during the pandemic, the COVID situation has begun substantially to come under control, and the economy started to pick up across the country towards the end of Q2 and throughout Q3. We have also seen a significant recovery in our business this quarter, as patient visits increased significantly from Q2 by 21.7%, Late July saw a spike in cases here in China and a temporary reinstitution of emergency control. After the resulting restrictions were eased in August, outpatient volumes began to recover significantly. By September, total outpatient volume of operating assets had exceeded the volume of the same month last year. We have seen similar recovery trends for inpatient admissions, which increased by 7.3% in Q3 2020 over Q2. Most of the increased admissions were for major surgery and medical cases. However, total inpatient admissions were still 15.1% lower than last year's level, primarily due to few admissions in the obstetrics department as a result of a continued decrease in the birth rate across China and fewer admissions in pediatrics as well as schools remain closed and enhanced personal hygiene and protective measures for school children were implemented. In addition, both outpatient and inpatient ASP increased this quarter as a result of an increase in the number of higher acuity services offered at our facilities. As a result, our revenue in Q3 2020 recorded a 3.7% year-over-year increase and a 14.1% increase from the prior quarter. We were also pleased to continue to achieve strong growth in adjusted EBITDA in the third quarter. Adjusted EBITDA increased by 162.8% year-over-year. The increase in revenue in Yubadana were primarily attributable to the steady recovery of patient volumes in various specialties across our facilities and the implementation of cost savings initiatives, as well as strong ramp-up of our expansion assets in Guangzhou and Shanghai Pudong, which achieved 36% year-on-year growth in revenue in Q3 2020. Please now turn to slide 15, which illustrates the recovery of both our local and expat patient bases. Due to the closure of international borders and other travel restrictions within China since the pandemic's onset, the company has seen a shift in patient mix. there was significantly higher volume and revenue contributions from domestic patients across the USH network. Despite a temporary re-imposition of restrictions in Beijing, the company recorded 11% year-over-year growth in revenue from local patients in Q3. In September, revenue from Chinese patients reached 16% year-over-year growth. This demonstrates high resilience and an increase in demand for premium private healthcare services from Chinese consumers. However, although foreign patient buy-in during the third quarter still lags pre-pandemic periods, we continue to see a favorable trend in recovery. And in fact, there was an increase in foreign patient buy-in in the third quarter compared to the second quarter. On September 28th, the Chinese government announced a slight easing of the travel restrictions of foreign nationals coming into China. And as a result, we expect to see continued recovery of foreign patient volumes. We are pleased with our latest recovery and believe it bodes well for the growth of our business. I'll now turn the call over to Carl Wu, who will share our latest developments from recent months. Carl, please go ahead.

Thank you, Rebecca. This quarter, we've taken a variety of measures to speed up the recovery process and prepare for next year's growth. Keith sent us slide 16, which illustrates the business mix on local and expat patients and the performance of our key specialty. Due to travel restrictions of foreign nationals since the pandemic onset and increased demand from Chinese patients, the company has seen a shift in patient mix. In 2019, 71% of our patients were local patients, and 29% were foreign patients. In 2020, the company experienced higher volume and revenue contributions from domestic patients across the USH network. And for 2020, year-to-date revenue at the end of Q3, the proportion of domestic patients has increased to almost 80%, and that has set some of the decline in expectation base. In the right-hand side of the slide, the majority of our specialty services recover well in Q3. We've seen strong year-on-year revenue growth from a variety of specialties including family medicine, internal medicine, surgery and orthopedics, demonstrating strong demand from our Chinese patients for high-acuity medical services. However, our overall revenue was still impacted by lower obstetrics revenue due to nationwide lower birth rates in 2020 and lower revenue from pediatrics as schools remain closed and enhanced personal hygiene and protective measures for school children were implemented. As various situations with the site and expectations as well as pediatrics and obstetrics business start to recover, we expect to see growth momentum of NFH to accelerate next year. Now, please turn to slide 17. We're excited to report that after only 21 months of operation, our hospital in Guangzhou, which had reported positive EBITDA for the first time in May, has maintained positive EBITDA since then. Even during the COVID-19 period, the Guangzhou Hospital has seen many months of continuous folding growth driven by OB-GYN, postpartum care, internal medicine, orthopedics and surgery, as well as the recently extended cosmetic dermatology centre. Most recently in October, Guangzhou Hospital recorded a 90% EBITDA margin, demonstrating the profit potential of this site. Expect EBITDA margin to continue to extend as patient volume and revenue continue to ramp up. Shanghai Student Hospital also recorded significant growth in both outpatient and inpatient volumes. In Q3, revenue for Pudong Hospital achieved 37.6% year-on-year growth, primarily driven by OBGYNs, family medicine, and other specialties. We expect Shanghai Pudong Hospital to achieve even that base even in 2021. Please tend to start 18 and 19. I'll share a few updates on our two upcoming new frontier United Family Hospitals. Firstly, the construction schedule of the Shenzhen New Frontier United Family Hospital remains on track despite the COVID-19 situation, with the completion and opening expected in Q3 2020. This new hospital is designed with 350 beds in approximately 64,000 square meters of growth to our area to provide comprehensive medical services ranging from specialty from including obstetrics, pediatric, family medicine, emergency medicine to oncology and other services. The Shenzhen Hospital is located in the middle of Shenzhen with prime access to transportation hubs within Shenzhen and Hong Kong, a method to attract patients for visits and also meet their increasing demand. Top managing positions such as the GM, CMO, Chief Nursing Officer, Chief Revenue Officer and HR Directors are confirmed while other specialty chairs are being finalized. Marketing campaign to promote Shenzhen United Family and educate local markets are under preparation and are planning to launch in Q1 and Q2 of next year. We've noticed a number of favorable policies and demands for medical service sector in Shenzhen following President Xi's recent visit. We believe Shenzhen United is uniquely positioned to capture a favorable regulatory environment for the Greater Bay Area. It's quite likely that our Shenzhen hospitals will be able to use both Hong Kong-registered and Chinese drugs, giving us significant advantage in our product offering. On May 19, our Beijing United Family Startup and Hospital will complete its construction and have its first opening in March 2021. The new hospital is designated as a Level 3 hospital with 200 beds and aims to provide comprehensive medical services with a focus on OB-GYN, PPR, paediatrics to attract younger customers in the hygiene industry. The Dazhong Hospital will be managed and operated as an integrated part of the Beijing market, which is expected to create revenue synergies and cost efficiencies. Several specialty talents are confirmed to the new hospital with the popular BJM petitions of the schedule to visit Saturn U.S. on a regular basis. Page 20 shows the historical revenue ramp-up of our facility since inception. The blue line denotes our Beijing U.S. hospital since its opening in 1997. The hospital was able to achieve a linear growth. historically as we continue to add new gas capacity, growth flow area, and add new specialties and capabilities to this facility. This trend has been consistent across all of our facilities and certainly demonstrates the potential and the consistency of our business model. We're particularly excited to report the progress of our new Tier 1 Extension effort The red and orange lines denote our Guangzhou Hospital and our Shanghai Pudong Hospital, which are able to achieve strong revenue ramp-ups even throughout the COVID-19 period. The two hospitals are able to exceed the revenue level of Tier 2 in just under two years of operation. Moving on, the details of Beijing's Building 1 lease exploration are provided in slide 21. The lease on Building 1 of the Beijing United Campus has started in 1995 and was renewed in 2016. The renewal expires in December 31, 2020 and we have yet to reach an extension agreement. Provisions are underway for the potential non-renewal with plans for certain existing operations to be relocated to existing UFH satellite clinics as well as other UFH facilities in Beijing. This building houses some of the most critical functions of the Beijing Chaoyang Hospital, including ER, imaging, obstetrics work, central server power generation, and others. The majority of the clinical functions will also be relocated to Building 2 and Building 3, where we have spare capacity, in addition to some newly leased street funds and leisure space adjacent to the hospital. Lockers and patients' maternity rooms will be supplemented by newer space in the new Dachuan Hospital, which will open in the first half of 2021. In addition to operating updates, I would also like to introduce two strategic cooperation agreements signed by Qingdao United Family Hospital in July 2022. During the quarter, Qingdao United Family Hospital signed an agreement for close cooperation with Shenzhen University Jilu Hospital. This is one of the leading public hospitals in China. The agreement calls for clinical collaboration, thereby offering our patients a deeper bench in medical specialty talent, as well as offering traditional patients of our public facility options to seek quicker access and more personalized care at our Qingdao facility. Under the terms of the cooperation, the Qilu Hospital will send medical talent to Qingdao University Hospital on a regular basis. and Qingdao physicians will be able to engage in academic communication on the Shandong University platform. Additionally, the Qingdao Hospital completed construction of its Radiation Therapy Cancer Treatment Centre. The centre will be managed jointly by QDU and the IACON Corporation of Australia under a profit-sharing agreement signed in August of this year. Housing and state-of-the-art variant LIMAC, the center is expected to attract cancer patients who are expected to also bring revenues from imaging, laboratory, and surgery to the hospital. The expanding new business model will allow New Frontier Health to directly access long-term partners and target customers. As we look forward to the remainder of 2020, we remain focused on our strategic growth priorities listed on slide 23. Already, we've begun to see results from our geographic market reorganization and consolidation, and we expect to continue to pursue more revenue synergies in the coming months. The Guangzhou facility is now contributing to our earnings, and our new stay-of-the-art facilities in Pudong and Kuxi will continue to make good progress in that ramp-up. We'll also continue to invest in our core markets and expand our offerings. For example, in Beijing, both our Beijing United Family Hospital and New Hope Oncology Center expanded their capabilities with investment in equipment upgrades. In particular, the Beijing Hospital made a major upgrade in its GEMRI system. This upgrade will enable higher quality and higher speed scanning of the brain, cardiac, morphology, and function, and off-center small change. In addition, the new software platform and post-processing will extend functional imaging and quantitative scanning for various additional conditions. As a result, we'll be able to significantly enhance the service range and the capacity of our clinical services. In addition, our new Hope Oncology Center in Beijing upgraded its variant linear accelerator to include the latest variant equipped treatment planning software. A major upgrade will bring the latest development in radiation therapy to the center. One key benefit is the ability to create better clinical treatment plans for our patients. With this, we'll be able to move more quickly from assessment to diagnosis to treatment and more accurately calculate the individual treatment plan for each specific case. This will also reduce patients' treatment time and is expected to produce better clinical outcomes. This upgrade will also allow us to connect with other specialty centers to collaborate more efficiently to provide the best care we possibly can to our patients. We also remain focused on developing our digital capability in the coming quarters and will continue to balance cost control while facilitating business recovery. Furthermore, we remain on track as we prepare for the opening of 18,000 hospitals and as many hospitals which will have a new management contract model in place. Finally, I'd like to conclude by presenting our outlook for fourth quarter. Historically, Q4 generates higher revenue due to flu season and higher volume in emergency medicine and orthopedics becoming due to more trauma cases. For Q4 this year, given higher protection of the general population and better seasonal hygiene practices, we expect a less busy flu season. Due to general avoidance of outdoor activities for school children and adults, we expect to see less trauma orthopedic patients. Therefore, for the first quarter, the company expects to see more or less a flat growth year on year in terms of revenue. This concludes our preparing mark. Operators, we are now ready for questions.

Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. or if just inserting speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question is from the line of Jason Liu with Credit Suisse. Please proceed with your question.

Hi. Good morning and good evening, management team. Congratulations on the quarter results. I have three questions here that I would like to ask the team online. The first question is more on a general trend kind of question. Could be, I guess, directed more towards Roberta. In previous earnings calls, you had mentioned that, you know, post-SARS, we have seen, you know, as things started winding down, that there also is a pickup in birth rates as well as, you know, OBGYN services. I'm wondering if In post-COVID, have you started to see some of these pick up, or this may be something that is more further out looking? That's my first question. And then my second question is along the lines of some of the expense management and the cost control efforts that Carl was talking about earlier. As we look beyond 2020 and into 2021, 2022, Do we continue to expect some of these cost control measures to be extended, or do we expect solid wage and benefits to increase as a result in a post-COVID environment? And then my third question is just I was wondering if management can comment on overall progress of potential secondary listing or dual listing in other markets, either in China or Hong Kong, and what is the progress on these activities? Thank you very much.

Thank you, Jason, and hi. In terms of the post-COVID trend versus the post-SARS trend, it's actually quite an interesting comparison. I think one of the big differences post-COVID, if we can call this post-COVID, although we do really feel like we're returning to much more of a normal situation, We have unfortunately, although China is doing great, the rest of the world is still a bit of a mess. So as we mentioned earlier, we're seeing less recovery in our international patients. although in the last month or two, we're starting to see international patients slowly come back. But still, international flights into China are extremely limited. Anybody that comes in has to have a two-week quarantine. So yeah, that's one issue. On the other hand, I think we've seen the same kind of increased uptake by Chinese patients, not only due to China becoming more normal and our traditional Chinese patients returning, but also a lot of new patients, a lot of rapid growth in patient first-time visits to our hospitals. And I think that that is reflective of what we saw in SARS because people began thinking more about the importance of their health and began thinking that, in fact, they need to keep up their health, but they don't want to go to crowded public hospitals. So I'm very encouraged by what we're seeing here with new segments of Chinese population coming in. In terms of that rush of childbirth business to come about nine months after the lockdown, I'm afraid we haven't seen a whole lot of that. And even if there is, actually, you know, I've been seeing a lot of very pregnant ladies walking around. And so hopefully we'll see the result of that But unfortunately, the decrease in the birth rate in general, I think, might be masking whatever kind of small surge there would be post-COVID in childbirth. So I don't know if that explains fully, but that's my thinking on that. But there might be a bit of a surge, but it's probably masked by the downturn in the birth rate. So we're not looking to obstetrics alone anymore, of course, for our growth. You see the focus that we have on non-obstetrics business and increasing the serious security to bring new patients in. under cost-saving measures? Carl, do you want to take that on?

So I think, obviously, I think we're still in the process of finalizing our not just for 2021. So I think the cost measures are being reduced and discussed. However, at the minimum, I think during our previous quarterly results, we have announced certain cost cuts that were supposedly permanent, and therefore those will obviously remain in place. There are certain cost cuts that are temporary. We expect a certain portion of that to recover as business recovers as well. But I think at our Q4, who would be able to give a little bit more clarity on this. And I think you also asked about the zero listing in Hong Kong. It's something that we're actively working on and we'll update you as well for more concrete timetable when that's ready. However, it appears that 2021 could be potentially the right time for us to do it. Having said that, we're also waiting for the right market window. We obviously hope that we could do it at a more auspicious share price, so that's something that we're working on. But in terms of qualifications, it appears that we are in the right territory from a regulatory perspective. At the same time, OBGY has been doing a lot of work on investment marketing, and you probably also saw that liquidity has improved over the last several months as well. Although there's still significant room for improvement, we believe both of these measures go hand-in-hand in terms of hopefully improving our share price performance.

Got it. Thank you very much. Thanks, Al.

Thank you. As a reminder, you may press star 1 to ask a question at this time. Thank you. There appear to be no further questions at this time. And at this time, I'd like to turn the call back over to management for any closing remarks.

No, well, I just want to thank everybody one more time for joining us in today's call, and we'll look forward to seeing you next quarter with hopefully even better results. So wishing everybody a very good day.

Excuse me, everyone. We do have a question that just came in that is coming from the line of Earthly V with Zima Capital. Please go ahead with your question.

Thanks for your time today. Just on your Q4 guidance, you mentioned it's going to be flat to up slightly in terms of revenue. Can you comment on the EBITDA? I mean, given that I think historically your Q4 cost is also highest as well. So you have to achieve a pretty strong EBITDA growth in Q3. Just wondering, what we should be expecting for Q4. And I guess the second question would be, you know, I understand that foreigners are not coming back yet and there's a lower birth rate than usual and other uh extraordinary items that's been happening this year but if you can exclude all those factors and if we look forward in 2021-22 um what should we be expecting in terms of the normalized growth in revenue and if they are going forward

So maybe on Q4 first, and then just, I guess, quote-unquote, normalised growth. I think while we expect to see flat-ish year-on-year growth in Q4, I think we have already explained that some flat flatness came from the fact that we barely have to see them this year. So in our perspective, this is, I guess, a special COVID impact. However, we do expect the EBITDA growth momentum to continue after it has been a result of earlier cost measures implemented. And therefore, we believe that while we were obviously yet to finalize the final number, but in terms of just the momentum in terms of growth rate or range of growth rate, it would be and should be consistent with what we saw in Q3. Secondly, I think in terms of, I guess, quote-unquote normalized growth, I think we presented the chart on one of the slides that shows basically our growth rate by specialty. I think if you exclude pediatric and obstetrics, our growth rate is in the mid-teens, roughly 15% to 16%. And if you exclude, obviously, decline in expats, that growth rate will further increase. These are what we think are the revenue impact of COVID, because probably, obviously, children are not getting sick, and there's no two seasons, which is obviously good news, but from our perspective, our revenue is impacted. And secondly, I think will be impacted this year. Now, while this is the year of mouse, which generally is the low year for childbirth, and therefore, you know, both of which refer to even flat or off-site growth or VCR growth where it would be you know, significantly higher because of that. And the same applies when expats start to return to China right now. Expat revenue is still in the negative territory. And hopefully, you know, vaccine and all the controls got relaxed. We expect to see that number contribute positively to our revenue growth.

Sorry, so if I turn this OBGYN from minus 10 to, say, mutant, then PXA going to mutant as well, and then also turn back the expect from negative to positive, I mean, looking at all the numbers, should I be expecting, like, a 25% plus growth in that case? I mean, I don't know the exact number, but that's just kind of a rough number that I'm thinking that.

Yeah, so I think if you look at revenue excluding obstetrics and pediatric, our growth is about 16%. And then during Q3, XSAT declined by 8%, so therefore revenue excluding XSAT would be about 11%. So I think it's correct. So if you do exclude obstetrics and pediatrics and that, obviously, the growth number would look substantially higher because of this, I guess, COVID-related impact.

Understood. And then, sir, just on the dual-list pain, sir, I couldn't here quite clearly. But did you say 2021? But did you say which quarter of 2021? I mean, market is obviously breaking right now. So I'm not sure why when you'd be looking at quote-unquote appropriate market timing. I mean, you want to get the market as soon as possible, right?

yeah yeah no i think we're obviously pushing this as um forward as quickly as possible uh ideally we're obviously because um the spec manager was 10 per share um our hope is that if we do a secondary listing it would be at least um that share price as well um we believe that we're very very close as well but that's not the determining factor of whether or not to go ahead with the secondary listing for obvious reasons but um our intention is also obviously to go ahead as quickly as we can So that's been happening in the background.

Understood. Sorry, but just one last question. So say that if your revenue goal is growing at X rate, I mean, what should I be expecting in terms of EBITDA growth given you are saving some costs from 2020? If I look at towards 2021, 2022, say that if your top line is growing by 25% to 30%, what should I be expecting for your EBITDA growth?

For 2021 and 2022, I think the best numbers to refer to would probably be the set of projections that we gave out at the end of last year. And in that projection, we provided guidance on revenue to bed as well as margin by facility. Now, that projection is probably still as accurate as it can be. However, we're probably about a year behind given the impact of the COVID. So I think obviously without doing more, we're obviously having updated our long-term projection on the basis of that. However, I think if you were to refer to any specific numbers, I think those would probably be the most accurate of that. However, we're probably about a year behind. I guess the other way to look at it is if you run with Q3, were probably in line with what we previously in terms of our point reasonably close to what we previously disclosed um for 2020 now um uh obviously you know with a lot of you know one off and others um uh however next year um it really depends on the recovery of obstetrics and pediatric as well other expat businesses. If recovery is robust, as we hope, then we do have the opportunity to get close to what we previously guided.

Got it. Thank you. Thank you.

This will conclude today's conference. Thank you for your participation.