EC Healthcare (2138) Earnings Call Transcript & Summary

Good afternoon from Hong Kong, ladies and gentlemen, warm welcome from EC Healthcare to you all to our annual results investor presentation for the 12 months ended the 31st of March 2025. Today's presentation will be conducted in English, introducing the company representatives. They are Mr. Eddy Tang, Founder, Chairman and Executive Director; Mr. Leslie Lu, Executive Director and Chief Executive Officer; Mr. Levin Lee, Executive Director and Chief Financial Officer. During today's presentation, Levin will first brief us on the group's financial performance for the 12 months ended the 31st of March 2025, followed by Leslie, who will walk us through the group's operation highlights during FY '25. After that, Leslie and Eddy will present the group's strategy and outlook.

Good afternoon to our shareholders, investors and everyone. We have the privilege of presenting to you the final results for the financial year ended 31st March 2025. Today's agenda will cover our key financial highlights, detailed breakdown of our cost structure and profitability, updates on our portfolio optimization and our capital management strategies. While the net loss status might surprise many of our investors, it is important to highlight that this is mainly attributable to nonrecurring one-off impairment and fair value write-downs. If we look beyond these accounting provisions, our core operations remain fundamentally healthy. During the year, we generated operating cash inflow of HKD 427 million, delivered adjusted EBITDA of HKD 375 million and maintained over HKD 1,000 million in cash reserve across our bank accounts. These metrics demonstrate that our underlying business remained profitable and financially resilient. For the full financial 2025, our group recorded revenue of HKD 4,140 million and sales volume of HKD 4,170 million, representing slight decreases of 1.7% and 1.0% year-on-year, respectively. However, if we carve out the HKD 310 million additional revenue contributed by the newly acquired M&A assets during the year, our organic revenue actually reported a decline of HKD 283 million, representing an underlying decrease of approximately 6.9%. This reflects the macro-driven softness in consumer health care demand, particularly in discretionary health care services such as pain management, health screening and dental services. Adjusted EBITDA for the year amounted to HKD 375 million, representing a decrease of 15.1% year-on-year. The reduction was primarily due to weaker discretionary health care demand and our deliberate decision to divest noncore and underperforming business units. Despite we have delivered a positive adjusted EBITDA of HKD 375 million, the group reported a net loss this year. This was mainly due to nonrecurring noncash write-offs, including impairment of certain goodwill, interest in joint ventures and associates and revaluation losses on investment properties and financial assets. I want to emphasize that these accounting provisions, though impactful on the bottom line, do not affect our operating cash generation. And based on our recent observation, we do not see any further impairment indication. A detailed reconciliation will be shown on the next page to illustrate how these noncash and nonrecurring impairment items led to the reported net loss despite our underlying operations remaining fundamentally profitable. Let me now walk you through this waterfall chart, which explains how we reconcile from the reported net loss before tax of HKD 101 million back to the adjusted EBITDA of HKD 375 million for the year. We begin with the bottom line net loss before tax of HKD 101 million, which understandably raised concerns among our stakeholders. However, once we unpack the components step by step, it becomes clear that the reported loss was primarily driven by noncash and nonrecurring accounting adjustments. The first set of add-backs includes finance costs of HKD 89 million relating to interest on our bank borrowings and convertible bonds, and depreciation and amortization expenses totaling HKD 337 million, which reflect accumulated noncash charges from past investments in clinics, equipment, intangible assets and leased properties. After adding back depreciation, amortization and finance costs, we arrive at a positive EBITDA of HKD 308 million, which already explains a substantial portion of the difference between accounting loss and operating profitability. From there, we further adjust for one-off items, in particular, nonrecurring impairment and fair value losses, which includes HKD 116 million of goodwill impairment, mainly related to underperforming dental clinics and aesthetic service points in Hong Kong and Mainland China. While performance in this segment weakened during the year, recent sales data from our dental business has shown signs of stabilization, and we remain cautiously optimistic that no further impairment will be needed in the coming year. HKD 88 million impairment on interest in an associate, which reflects the fair value of shareholder loans advanced to the project company holding our Tsim Sha Tsui medical building. In addition, we recorded HKD 69 million fair value loss on investment properties, also relating to property-related projects. These adjustments were made based on recent market comparables, which indicate a general downward revaluation in Hong Kong's commercial property sector. That said, we view these movements as cyclical and not structural, and we are hopeful of a recovery in due course. We also booked a total fair value losses of HKD 47 million on other receivables and financial assets. These were prudent provisions, reflecting broader market volatility and credit risk environment. All of these are noncash one-off items that have no bearing on our core business operations or cash flow generation. After normalizing for these adjustments, we arrive at an adjusted EBITDA of HKD 375 million, which better reflects the strength of our underlying business. This reconciliation clearly demonstrates that despite a reported net loss, the group remains fundamentally cash generating and operationally profitable. Now turning to the revenue composition. Our Medical Services segment contributed HKD 2,507 million or 60.6% of total revenue, representing a 4.74% decrease from last year. The decline was mainly due to softened demand in discretionary segments such as dental and health screening and the impact of our strategic disposal of certain underperforming medical assets. The Aesthetic Medical and Wellness segment reported HKD 1,296 million or 31.3% of revenue, down 1.0% year-on-year. Although retail conditions in Hong Kong and Mainland China remain subdued, our acquisition of the BMF and Svenson brand network helped stabilize the overall performance. Veterinary and other services contributed 8.1% of revenue. Our organically built flagship veterinary hospital has reached profitability and the segment is expected to become a key growth pillar going forward. In addition, revenue from Mainland Chinese visitors remained weaker than expected throughout FY '25. The recovery in cross-border medical demand has fallen significantly short of pre-COVID levels, both in terms of volume and average ticket size. At the same time, we observed a reverse flow where a portion of our local Hong Kong customers shifted their discretionary medical spending to service providers in the Greater Bay Area, attracted by lower pricing and aggressive promotional offers. As a result, our Mainland-related revenue base contracted with a decline in both the number of inbound visits and the average spending per visit. This trend notably impacted higher ticket items such as health screening and dental procedures and partially explains the decline in our Medical segment revenue despite stable overall demand from local patients. Let us now walk through our cost structure and margin analysis. Our cost of sales was HKD 798 million or 19.3% of revenue. This was mainly driven by higher contribution from distribution business. If we further analyze into the cost of sales by Service segment and Distribution segment, we can see that the cost of sales to revenue under both segments remained stable. Rental expenses and right-of-use assets decreased to HKD 385.7 million in aggregate and percentage to revenue decreased from 10.3% to 9.3% this year as we rationalized underutilized space totaling over 66,000 SQFT and reduced the total expenses by HKD 51.7 million. Marketing expenses were well contained at 4.3% of revenue through tighter control on media spend and CRM enhancements. Employee benefit expenses and medical practitioner costs were HKD 1,016 million and HKD 1,076 million, respectively. These together account for 50.6% of revenue, reflecting the labor-intensive nature of the business. To address this, we have implemented roster optimization and achieved a net reduction of 613 headcounts from FY '23 baseline, leading to an improvement of percentage to revenue from 52.6% in last year to 50.6% in this year, representing a decrease in the expenses by HKD 122 million. General administrative expenses incurred was due to one-off surrendering expenses for closing down underutilized space and also transaction costs incurred for asset disposal. Depreciation and amortization expenses totaled over HKD 337 million. Finance cost was HKD 89 million. We expect these charges to gradually normalize as we slow down capital expenditure and reduce leverage, half-on-half comparison. If we compare the second half of FY '25 to the first half, we observed a weaker performance in the latter half of the year. This was primarily driven by several factors. Most notably, sales performance during the Chinese New Year period fell below expectations, especially in our Aesthetic Medical segment, which is typically one of our higher-margin businesses. We also observed a significant outflow of local customers, many of whom chose to spend their discretionary budgets on services in Mainland China or overseas travel, taking advantage of post-pandemic mobility and competitive pricing in neighboring markets. This shift in consumption pattern was particularly evident in elective treatments, bundled packages and mid- to high-tier services. As a result, our second half EBITDA and margin were softer compared to the first half. Let's now turn to the contribution of our M&A portfolio versus existing business. In FY '25, revenue from existing business remained resilient at HKD 2,101 million, while revenue from our M&A cohort reached HKD 2,039 million, bringing total group revenue to HKD 4,140 million under this breakdown. Over the past 5 years, our M&A strategy has delivered meaningful scale. Since FY '19, M&A-related revenue has grown from HKD 15 million to HKD 2,039 million, illustrating the effectiveness of our disciplined acquisition and integration strategy. On the EBITDA level, the combined contribution of the M&A cohort in FY '25 was HKD 287 million. M&A-related EBITDA margin came in at 14.0% for this year, which remained relatively stable. This margin profile reflects a few important developments. First of all, the continued ramp-up of acquired assets into operational maturity. Secondly, strategic alignment of upstream businesses with higher EBITDA contribution. On this page, we illustrate how EBITDA from M&A assets of HKD 287 million and organic business of HKD 320 million collectively support the group's performance, but ultimately reconcile down to the adjusted EBITDA of HKD 375 million and the reported net loss of HKD 112 million. As indicated, despite both our M&A and existing businesses delivering healthy EBITDA contributions, the group's margin was under pressure due to headquarters overhead and general administrative expenses. In addition, depreciation, amortization and a number of one-off noncash items, including impairment and fair value losses contributed to the headline net loss. In line with our disciplined capital strategy, we completed the disposal of New Medical Center and its wholly owned imaging center in Tsim Sha Tsui to AIA as well as the disposal of several other underperforming assets. Altogether, these transactions generated a net gain of HKD 268 million during the year. This strategic collaboration reinforces our partnership with major insurers and showcases our ability to unlock value and recycle capital into higher growth opportunities. On the acquisition side, we successfully completed the purchase of a 90% stake in a premium beauty and wellness platform in Hong Kong, operating under the BMF, MSC and Svenson brands. This transaction broadened our service portfolio, strengthened our position in consumer health care. Looking ahead, we will continue to focus on quality over quantity acquiring scalable, margin-accretive assets that complement our existing network. Our track record of extracting value from M&A, both financially and strategically, remains a core growth engine for the group. As at 31st March 2025, the group held cash and bank balances of HKD 1,055 million and maintained a net cash position of HKD 259 million. Total debt stood at HKD 796 million, resulting in a reported gearing ratio of 36.1% and a debt-to-EBITDA ratio of 2.1x. However, if we adjust for the nonrecurring noncash items such as impairment and fair value losses, our normalized gearing ratio would have been approximately 27%, reflecting a stronger underlying capital structure. This also represents a meaningful improvement from the 38% gearing level recorded in the previous financial year. To sum up, FY '25 was a transitional year. While the macro backdrop remained challenging, we made decisive moves to consolidate our platform, reduce costs and rebalance our portfolio. I will now hand over to Leslie to walk you through the operational and strategic developments.

Thank you, Levin. On the operational front, as of the end of financial year 2025, our overall servicing floor area has been further consolidated to 591,000 SQFT, while we maintain an extensive network proposition of 164 service points for enhanced customer accessibility. Our medical specialty now covers 38 disciplines across our 316 registered doctors. While on the veterinary practices, we have grown our vet team to 71 across 7 disciplines, which enables our veterinary customer needs within ecosystem. Over the course of financial year 2025, we fulfilled over 1.7 million customer visits with an average spending of HKD 2,096 per visit, demonstrating our resilience in capturing the mass affluent customer segment. Customer satisfaction and loyalty remains high with 66.6% of our top line coming from customers of the last financial year. We have already observed a repurchase rate of 65.7%. Since 2018, 38.9% of our customers have already spent in 2 or more brands under the EC Healthcare Group, demonstrating our success in leveraging our ecosystem approach to deepen our share of wallet in their health care and wellness expenditure. In FY 2023, with aim to enhance market competitiveness to offer sustainable and affordable preventive health care services, we have committed to achieve an annual recurring cost saving target of HKD 225 million by financial year 2025 against our financial year 2023 baseline operation, which equates to our current operation minus 3 new M&A ventures, Surecare and distribution business, our newly built vet hospital and our recent disposal of an O&G clinic new medical center group. Over the past 2 years, we have been extremely rigorous and disciplined with our actions. We have reduced our baseline operation workforce by 613 headcounts, including 219 back-office employees and 341 frontline staff, generating HKD 185 million of savings for financial year 2025. We have achieved rental reduction over 137,000 square feet and returned 233,000 square feet by consolidating 6 warehouses, 4 back offices as well as consolidated 46 overlapping or synergistic service points within the same district. This has resulted in HKD 96 million of annual rental savings. We have also reduced administrative expenses by HKD 5 million with tight control over one-off expenses, back-office operation streamlining and strategic outsourcing. In summary, we have achieved an annual recurring cost saving of HKD 286 million by financial year 2025 against baseline of financial year 2023, which greatly surpassed, giving a strong operational foundation and resilience against market uncertainty. The chart here displays the shop performance under our 7 different subpillars at various stages of maturity, with the vertical axis representing the EBITDA margin for FY '25 which includes full allocation of group overhead and G&A and the horizontal axis represents the time after these shops enter into service commencement. To note, this chart does not include nonretail business such as distribution business. I'd highlight that. 16.7% of our GFA are at infancy stage with EBITDA loss narrowing down to HKD 20.7 million. We'd expect to see further improvement to improve the margin squeeze from the ramp-up phase. For the cluster of mature shops at the top right-hand corner, you'd see an indicative EBITDA margin as these pillars achieve a higher capacity utilization and economies of scale. It is worth highlighting that Advanced Imaging and Medical Aesthetics maintained relatively good margin, while dental pillar had turnaround from loss into a continuous positive EBITDA improvement trend while we see sharpest decline in profitability from pain management. Third, we endeavor unlock stakeholder values by further integrating various brands and pillars into comprehensive and differentiated product and service proposition. So let's look at year-on-year progress of our roll-up strategy. Financial year 2025 sees a challenging operating environment, especially around B2C Discretionary Service segment, leading to an EBITDA reduction of HKD 60.4 million. We see satisfactory progress of infant stage service points with an EBITDA improvement of HKD 29.4 million, while we see a HKD 91.5 million EBITDA reduction on mature state service points, especially around aesthetics, medical, pain management and medical specialties. Meanwhile, we see good turnaround of dental pillar despite the hallowing effect from northbound spending shift as well as margin improvement from our advanced imaging. We expect to see further improvement on our dental, health screening and lab as well as medical specialty through a targeted series of consolidation and restructuring exercise in the next reporting period. On strategy and outlook, there are a few major developments for financial year 2026, which I'd like to highlight. On TTIPP partnership development, we have entered into the RIMAG-EC Health Tech Alliance with Jiangxi RIMAG Group, HKEX: 2522, merging their medical imaging and supply chain strengths with our health care platform in Hong Kong, Macau and global markets. This partnership streamlines procurement of high-end imaging equipment and supplies, reducing costs while advanced diagnostic solutions through integrated operations. On the property and pharmaceutical development, I shall cover on my next 2 slides. EC Healthcare has entered into a 30% joint venture on Project Cameron to deliver a purposely built medical building at 35-37 Cameron Road, which encompasses an aggregate GFA of roughly 103,000 square feet with anticipation to house over 300 medical professionals to serve over 20,000 patient visits per month at full capacity. The site construction work has been completed with the expectation that the granting of occupation permit and the transition of construction loan to term loan will both be completed by July 2025 smoothly. As the master tenant, EC Healthcare shall commence its renovation and the establishing of various media and wellness practices, ranging from advancing imaging, health screening and laboratory, day procedure center and various medical specialties clinic linked via a unified tech stack, IoTs and a pneumatic tube that would penetrate through all floors to enable us to pilot our central pharmacy operation with electronic prescription by 2026. The building will partially commence service by fourth quarter 2025 with full opening by first quarter 2026. With this building, we will unlock synergies across our organic and acquired medical assets, driving asset value appreciation by centralizing our premium medical services, enhancing corporate branding, patient convenience and operational efficiency. On the financial front, we have made reasonable and prudent impairment loss in financial year 2025 to reflect the valuation changes in commercial building in Tsim Sha Tsui. Annual depreciation increment from this project will be contained within HKD 10 million for the next 9 years, given landlord provision as well as tight renovation cost control via rigorous tendering process, centralized procurement and reusing of equipment from sites which we have purposely consolidated in past years. This would imply our group's depreciation is still on a sharp declining trend in next few years. Even with the rental expense increment from this building, our rental expense of the entire group will be still contained within 10%, given the fact that we had proactively returned 233,000 square feet of space in the past years. In addition, as about 75% of our operation at this building is indeed from relocation of existing clinic, there will be an additional 54,000 square feet of space return on [ Cameron ] side, which will again offset the increase, partially the rental expense increase. While we have achieved aggressive recurring cost savings of HKD 286 million per annum from our 2-year cost rationalization against our baseline operation from financial year 2023, our focus for 2026 is to deliver an accelerated integration program, mainly focusing on our platform's back-office operation on IT, customer service, human resources, finance and centralized procurement while respecting our medical autonomy by our frontline leadership. From our digitalization program point of view, on human resources, by April 2025, we have rolled out our new HR system across 3,300 employees under all our subsidiaries, allowing us to standardize profile, leave, payroll, roster and MPF operation, which not only allow us to streamline and automate our payroll process, heighten our governance and compliance, but allow us to also roll out a new MPF scheme with improved terms for our staff. Customer engagement is key to successfully growing our market share and elevating customer endorsement on our brands. As a start, we shall complete the rollout of our call center solution and chat-based solution, which allow us to strike a great balance of centralization and localization talent to deliver better customer accessibility to our service. In preparation for our central procurement strategy, we have acquired WDL distribution license in fourth quarter 2024 as well as establish a strategic partnership with Kerry Logistics on our warehouse and logistics solution with system integration completed by second quarter 2025. Furthermore, we had consolidated purchase records data over 75,000 SKUs with over 3,000 suppliers. We will take the opportunity to streamline all policy, organization, operating model and systems that would well position us to realize cost saving, efficiency as well the opportunity to explore any upstream distribution business opportunity. To heighten our financial reporting efficiency and governance, we are leveraging the upgrade exercise of SAP to also review and unify policy, organization, operating model and system to enable our management at brand and group level to deliver prompt and sharp response to dynamic market changes. On the outlook, we see our adjusted EBITDA to experience some downward pressure in financial 2026 due service commencement of Project Cameron Road, followed by a good ramp-up in subsequent 2 financial years. Given our impairment and fair valuation adjustment done in this reporting period, we see limited room for further write-down in next few reporting periods. Amortization, depreciation are expected to be an ongoing downward trend, while finance cost should also come down with debt repayment. As such, we see good recovery in the next 3 years to bring EC Healthcare back to positive net profit. To conclude, one, we took swift and decisive measures during financial year of 2024, 2025 to rationalize our cost structure to achieve a recurring annual saving of HKD 286 million for FY '25 on baseline operation against our baseline of financial year 2023. Two, we have clear integration plans for our various assets, especially around Dental, [ Health Screening & Lab ] as well as Medical Specialty pillars as well as systematic integration of IT, HR, finance, centralized procurement and customer service in 2026 to further unleash synergy and financial improvement. Three task, we persistently execute our defined consolidation platform strategy to effectively drive growth and diversification of market segments via our dedicated business development efforts alongside operational efficiency enhancement through robust capital and asset management and stepping up our integration across our brands with digitalization, which will bring us back to net profit within coming 3 years. With that, I'd hope to pass on to Mr. Eddy Tang, our Chairman, to share his outlook on the industry and market.

Dear esteemed shareholders, partners and stakeholders, as Chairman of EC Healthcare, it is my privilege to share our perspective on the company's performance, the evolving health care landscape and our strategic vision for the future. While global economic uncertainties persist, Hong Kong's resilient health care sector remains a beacon of opportunity, and EC Healthcare is uniquely positioned to capitalize on long-term growth across the region. Policy support driving sector advancement. Hong Kong's steadfast commitment to health care innovation continues to yield transformative results. The government's primary health care blueprint has deepened public-private partnerships while streamlined approvals via the NMPA and GDMPA are accelerating patient access to cutting-edge therapies. The establishment of the Greater Bay Area International Clinical Trial Institute and expanded R&D funding are further cementing Hong Kong's status as Asia's medical innovation hub. Cross-border integration under SEPA is also unlocking synergies in pharmaceuticals and medical technology, fostering a dynamic interconnected health care ecosystem. These initiatives provide EC Healthcare with a robust foundation to expand our services and enhance technological leadership. Structural demand and demographic tailwinds. Compelling demographic trends underpin the sector's sustained growth. The Greater Bay Area's population is projected to reach 88 million by 2030, while Hong Kong's population is expected to grow to 8.5 million within 2 decades. Post-pandemic health care expenditure in Hong Kong surged 17% year-on-year to HKD 284 billion, with private sector growth hitting 12.6%, a clear testament to rising health awareness and demand for premium care. Hong Kong remains the destination of choice for complex medical treatment backed by world-class infrastructure and expertise. The city's success in attracting global talent is equally striking with over 300,000 applications received across talent admission programs between late 2022 and March 2025. This influx of skilled professionals drives demand for our integrated health care solutions. Foundations for sustainable growth. Hong Kong's infrastructure evolution continues to strengthen our competitive edge. The third runway system and expanded high-speed rail connectivity are enhancing regional accessibility, creating new avenues for medical innovation and cross-border collaboration. On the talent front, the planning for HKUST third medical school in Hong Kong will address critical workforce needs with the doctor-to-resident ratio set to improve from 2.15 to 3.0 per 1,000 residents by year 2034. Moreover, the hospital authority has introduced 301 nonlocally trained doctors as of 30th April 2025. These advancements ensure Hong Kong's capacity to deliver exceptional health care outcomes while driving down practitioner cost efficiency. EC Healthcare's strategic priorities. Our strategy remains anchored in 3 pillars: business development, expanding our footprint and service offerings to B2I, B2B and B2G segments. Operational excellence, optimizing efficiency and patient-centric care across our network, digital transformation, leveraging technology to elevate service quality and accessibility. Through our one-stop platform integrating health, beauty and wellness, we are redefining comprehensive care for the Greater Bay Area and beyond. Looking ahead, while mindful of near-term macroeconomic headwinds, EC Healthcare is exceptionally positioned to harness Hong Kong's structural advantages. Our unwavering focus on innovation, quality and strategic execution will continue to create lasting value for shareholders and stakeholders alike. We're also committed to advancing health care technology, enabling lower costs, higher efficiency and better service quality for Hong Kong, Mainland China and Asia. At EC Healthcare, our vision is simple to build Asia's leading healthcare platform promoting health, beauty and happiness for everyone. Thank you for your trust and support. Together we will shape a healthier and brighter future for all.

EC Healthcare management team, thank you all investors for joining the presentation today. Despite the challenges, we have encountered over the past 12 months, ECH remains steadfast in our commitment to establishing a premium one-stop healthcare platform in Asia, emphasizing health, beauty and wellness for all. On behalf of the entire EC Healthcare team, I would like to extend our heartfelt gratitude to each of our investors for joining us today. Your continued support is invaluable as we strive to realize our vision. We look forward to welcoming you at our future investor events. Thank you for your trust and partnership.