iKang Healthcare Group Inc. (NASDAQ:KANG) is a growing Chinese healthcare company. It provides preventive healthcare solutions solely in the People’s Republic of China. The company offers a range of medical examinations, which comprise internal, gynecology, ophthalmology, ENT, dental, lab tests, electrocardiogram, ultrasound, and X-ray examination items. It also provides value-added services at selected medical centers, such as disease screening focusing on cancer screening, cardiovascular disease screening, chronic disease screening, and functional medicine testing; dental care, including oral health, pediatric dentistry, cosmetic dentistry, orthodontics, and dental implants; outpatient services comprising acupuncture, Chinese medicine, gynecology, internal medicine, obstetrics, ophthalmology, pediatrics, urology, and minor surgery as well as on-site healthcare management or clinical services. In addition, the company offers relaxation and recreation services. It primarily serves corporate and individual customers.
The company provides its services through self-owned medical centers and the facilities of third-party service providers. It owns and operates a network of nearly 50 self-owned medical centers located in Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, Tianjin, Nanjing, Suzhou, Hangzhou, Chengdu, Fuzhou Changchun, and Jiangyin. The stock has been on fire, rising 30 percent in the last month. Can this momentum continue?
Well, the annual results for the company were quite strong. Net revenues were $202.3 million, which grew 51.1 percent year-over-year from $133.9 million for the fiscal year ended March 31, 2013 (the fiscal year 2012.) These results reflect a stable and solid growth across all three major service categories. The sales growth was mainly driven by a fast growing corporate and individual customer base and increasing demand for respective services, as well as the expansion of its medical center infrastructure. The number of its self-owned medical centers increased from 36 as of March 31, 2013 to 45 as of March 31, 2014. The company served in total 2.7 million individuals in fiscal year 2013 under both corporate and individual programs, an increase of 37.9 percent over the fiscal year 2012.
What about net revenues by service? Well, net revenues from medical examinations were $173.9 million, an increase of 49.3 percent year-over-year from $116.4 million in the previous fiscal year. This was mainly driven by the increase of 41.6 percent in the number of visits for the medical examination as well as an increase of 5.5 percent in the blended average selling price, as compared to the fiscal year 2012. Net revenues from disease screening were $15.0 million, an increase of 62.5 percent year-over-year from $9.2 million in the previous fiscal year. Disease screening refers to the additional service requested by individuals under the basic corporate medical examination programs as a result of individual needs.
We have seen an increasing demand for this additional service as its percentage of total revenues increased from 6.9 percent in the fiscal year 2012 to 7.4 percent in the fiscal year 2013. Net revenues from other services were $13.4 million, an increase of 63.6 percent year-over-year from $8.2 million in the previous fiscal year. The increase was primarily due to its acquisition of Yuanhua Medical Consultancy Services (Shanghai) Co., Ltd. in July 2013, which provided medical consultancy services to customers, apart from medical examination and disease screening services.
But what did the company spend to make its money? Well, costs of revenues were $106.4 million, representing a 49.7 percent increase from $71.1 million in the previous fiscal year. With the scale effect and the company’s efforts to control the cost, the company has improved the cost structure from 53.1 percent of total net revenues in the fiscal year 2012 to 52.6 percent in the fiscal year 2013. Gross profit was $95.9 million, representing a 52.7 percent increase from $62.8 million in the previous fiscal year. Gross margin was 47.4 percent, compared to 46.9 percent in the previous fiscal year.
Total operating expenses were $62.5 million, representing a 44.7 percent increase from $43.2 million in fiscal year 2012. The increase was in-line with the company’s business expansion. Sales and marketing expenses were $28.9 million, accounting for 14.3 percent of total net revenues, an increased from 13.8 percent of the previous fiscal year. The increase was mainly due to the increase in payroll and commission of sales team as a result of their high achievement of sales growth as well as the increase in the company’s brand investment to enhance its company image. General and administrative expenses were $32.1 million, accounting for 15.8 percent of total net revenues, an improvement from 17.5 percent in the previous fiscal year. The improvement was mainly attributable to the operating leverage as a result fast revenues growth. Research and development expenses were $1.6 million, accounting for 0.8 percent of total net revenues, which stayed the same level as 0.9 percent in the previous fiscal year.
Income from operations was $33.4 million, an increase of 70.3 percent from $19.6 in the previous fiscal year. Operating margin was 16.5 percent, an increase from 14.6 percent in the previous fiscal year. Net income attributable to the company was $21.6 million, an increase of 78.4 percent from the previous fiscal year. Net margin was 10.7 percent compared to 9.1 percent in the previous fiscal year. Non-GAAP net income excluding share-based compensation expense was $22.5 million, an increase of 56.7 percent from $14.4 million in the previous fiscal year. Non-GAAP net margin was 11.1 percent compared with 10.7 percent in the previous fiscal year. Mr. Lee Ligang Zhang, Chair and Chief Executive Officer of iKang, stated:
Year 2013 has been a historical year for iKang, topped by our successful listing on the NASDAQ on April 9, 2014. Our public offering is a true testament to our capabilities as the prime mover in China’s fast moving private preventive healthcare services market and reinforces our drive to offer a comprehensive range of quality services to a high-end customer base. Our earnings have underlined the successful execution of this business model, with a strong annual operating performance, growing by 70.3 percent, a substantial quarterly net revenues increase of 60.9 percent, and powerful growth across all of our major service categories.
The solid top and bottom line performance for the fourth-quarter and fiscal year ended March 31, 2014 show that we are on the cusp of taking the company in an exciting direction. For the year to come, we aim to focus on network expansion through new centers and acquisition in existing tier one cities and new high-growth tier two cities, invest in advanced medical examination equipment in our self-owned medical centers to provide high-end medical examination for our customers, and continue to promote our iKang Evergreen brand, winning new contracts and expanding our customer base. With the recent milestones under our belt, our unswerving commitment to achieving solid growth and our focus to become the best healthcare service provider in China positions us well for future prospects. We believe we will be able to expand our market leadership, continue to grow the business in a healthy direction and build long term shareholder value for years to come.
Looking ahead, the company is expecting record growth. For the fiscal year ending March 31, 2015, the company expects its net revenues to be between $283 million and $290 million, representing a year-over-year increase of 40.0 percent to 43.4 percent. With these types of numbers, the stock is a great buy at current levels.
Disclosure: Christopher F. Davis holds no position in iKang Healthcare Group and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $82 price target.