Another company in the digital health sector is preparing for an IPO.

According to the Denglonghui, recently, Health Road Co., Ltd. (hereinafter referred to as "Health Road") submitted documents to the Hong Kong Stock Exchange, with CMB International as the sole sponsor.

This is the third submission after two unsuccessful submissions in June and December 2023.

Health Road was established in 2001, headquartered in Fuzhou, Fujian. Formerly known as Renren Health, the company initially started by providing online healthcare services to individual users and expanded its business to enterprise services and digital marketing services in 2015.

According to the prospectus, based on the number of registered individual users on the Health Road platform at the end of 2023, Health Road is one of the largest digital health care service platforms in China. As of July 31, 2024, the company's platform had 196 million registered individual users, 879,000 registered doctor users, and connected over 10,000 hospital institutions.

Zhang Wanneng is the company's controlling shareholder, holding 34.70% of Health Road shares through Fengji before this offering.

During the development of Health Road, it has attracted a group of institutional investors to participate, with Baidu being the most well-known. In 2015, Baidu participated in the company's Series A financing, with a total investment of $60 million. The prospectus shows that Baidu currently holds 12.46% of the shares, making it the company's second largest shareholder.

It is worth noting that with the growth in platform users, the company's revenue has gradually increased; however, the net income for the reporting period accumulated losses of nearly 0.8 billion yuan.

Company official website images.

01

The company is one of the largest digital health medical service platforms in China.

The Health Road is a pioneer in China's digital health medical services. The company launched 'Yi Hunet' in 2001, making it one of the first companies in China to provide digital health medical services.

According to Frost & Sullivan's data, the scale of China's digital health and healthcare market increased from 109.8 billion yuan in 2018 to 582.3 billion yuan in 2023, with a compound annual growth rate of 39.6%. The expected market size will increase from 582.3 billion yuan in 2023 to 1.46 trillion yuan in 2027, with an estimated compound annual growth rate of 25.8%. Sullivan expects this market size to further reach 2.7 trillion yuan by 2030.

The scale of China's digital health and healthcare market, Source: Prospectus

As of the end of 2023, based on the number of registered individual users on the company's platform, Health Road is one of the largest digital health medical service platforms in China; based on the number of registered doctors, the company ranks first in China's digital health medical service platform; in terms of the number of primary / secondary / tertiary hospitals connected to the company's platform, the company ranks third in China's digital health medical service platform.

Health Road has two businesses: medical services, enterprise services, and digital marketing services.

Medical services target individual users. During the reporting period, the proportion of this business first increased and then decreased, with a proportion of 20.1% in the first half of 2024.

Enterprise services and digital marketing services are aimed at enterprises and institutions. During the reporting period, the proportion of this business first decreased and then increased, with a proportion of 79.9% in the first half of 2024.

The absolute amount and percentage of each business of the company as a percentage of total revenue, source: prospectus.

Through these two services, Health Road can benefit multiple stakeholders in the Chinese medical care market:

1. Individual users. The company mainly provides medical services to individual users, helping them manage their own health and well-being. Direct channels are the main customer acquisition channels, and users can access the company's health and medical resources through multiple channels such as Health Road mobile app, medical care network, WeChat official account, and WeChat mini program. As of the end of 2021, the number of registered individual users on the company's platform was 0.156 billion, growing to 0.195 billion by the end of June 2024, further increasing to 0.196 billion by the end of July 2024.

2. Hospital end. The company has established and maintained a leading medical resource platform, which manages cooperation with medical institutions in China. As of the end of July 2024, the company's platform has connected with 11,731 hospital institutions.

3. Pharmaceutical companies. The company's services are very valuable to pharmaceutical companies, helping them reduce marketing expenses, increase brand awareness in medical communities, and introduce their drugs and medical devices to more patients in need. During the reporting period, the number of the company's pharmaceutical company customers increased from 8 in 2021 to 59 in the first half of 2024.

4. Doctors. As of the end of July 2024, the company's platform has 0.879 million registered doctors. The company's cooperation with doctors is strong and lasting mainly because the company can provide digital tools and services that are helpful for doctors in the treatment process and patients in the recovery process. Patients can interact more with doctors, allowing doctors to continuously care for patients in need of long-term medical attention.

As of June 30, 2024, key operating data of the company, source: prospectus

02

A loss of nearly 0.8 billion yuan in the past three and a half years

Although the number of users on the Health Road platform is steadily increasing, like other companies in the digital health industry, the company is also facing the challenge of profitability.

In 2021, 2022, 2023, and the first half of 2024 (referred to as the "reporting period"), the company's total revenue was 0.43 billion yuan, 0.569 billion yuan, 1.24 billion yuan, and 0.61 billion yuan, with a compound annual growth rate of 69.9% from 2021 to 2023.

During the same period, the company incurred net losses of 0.155 billion yuan, 0.256 billion yuan, 0.314 billion yuan, and 57.28 million yuan, with a cumulative net loss of 0.78 billion yuan during the reporting period.

Financial data overview, Source: Prospectus

The reason for the continued losses on the path to health, according to the prospectus, is mainly due to changes in the book value of redeemable liabilities.

During the reporting period, the company incurred losses from changes in the book value of redeemable liabilities of 84.4 million yuan, 0.2678 billion yuan, 0.3248 billion yuan, and 63 million yuan respectively.

According to the prospectus, the changes in the book value of redeemable liabilities are related to the changes in redemption obligations arising from the priority rights granted to investors. Previously, on the financing and investment purposes, Health Road agreed with institutions such as Baidu, Shangrao State-owned Assets, and Shanghai Jiejia to enjoy liquidation priority and redemption rights.

In addition, if Health Road fails to complete the qualified initial public offering and the founding shareholders seriously violate the transaction agreement by June 30, 2024, Baidu has the right to require Health Road to repurchase its shares.

Health Road states that this non-cash item is not expected to result in cash payments by the company in the future. The company expects all convertible redeemable preferred shares' priority to cease after (compilation), and the related redemption liabilities will be reclassified as equity.

It is worth noting that, after adding back the changes in share-based payment expenses settled in equity, the amounts of redemption liabilities, the adjusted net income for the reporting period were 0.5 million yuan, 23.9 million yuan, 39.4 million yuan, and 14.8 million yuan, showing modest profitability, still not very impressive.

Looking at the company's gross margin, it was 40.2%, 43.2%, 32.0%, and 30.0% respectively during the reporting period. The overall gross margin has been declining since 2022, primarily due to a decrease in the gross margin of the health medical services business. The reasons are: 1. Increased sales costs for medical support services and higher utilization of the company's health membership plan; 2. Increased revenue contribution from pharmaceutical sales, which typically have lower gross margins compared to other services.

Additionally, the company's sales expense ratio was 29.3% in 2021, decreasing to 16.1% in the first half of 2024. While trending downwards, this sales expense ratio level is still not low relative to the company's current gross margin levels.