New stock outlook | The three submissions of Healthy Road: Accumulated losses of 800 million yuan in three and a half years. Is it difficult for the leading digital health medical service platform to be profitable?

In the past three years, under pressure from public hospitals and internet giants, internet healthcare platforms have experienced a rapid decline after a brief period of prosperity at the beginning of the pandemic. Many players in the industry have had to resort to large-scale layoffs, shrinking operations, accepting reduced valuations and being acquired by larger companies, or even closing down completely. Amid the general pessimism in the internet healthcare industry, the path to IPO for Health Road, a leading platform in digital health services in China, has become increasingly difficult. According to the Hong Kong Stock Exchange disclosure on September 13, Health Road Limited has submitted an application to list on the main board of the Hong Kong Stock Exchange, with CMB International as its sole sponsor. The company had previously filed for listing on the main board of the Hong Kong Stock Exchange on June 13, 2023, and December 29, 2023. Nearly 8 billion yuan in losses over three and a half years According to the prospectus, Health Road, one of the earliest pioneers in the internet healthcare industry in China, was founded in 2001 to provide online appointment booking and doctor consultation services mainly to individual users. By 2014, with the rise of the "Internet+" trend, Health Road began to attract capital investment. In addition, in 2015, the company also started providing enterprise services and digital marketing services. In December 2014, Health Road received a $60 million Series A financing from Baidu (Hong Kong), making Baidu the second largest shareholder of Health Road. As of the end of June 2023, Baidu held 12.46% of Health Road's shares. Since then, Health Road has received multiple rounds of financing from investors such as Shanghai Jijia, Shangrao State-Owned Assets, Meizunren, and others, in addition to Baidu's initial financing, totaling approximately 437 million yuan. Based on the last round of financing in July 2023, Health Road was valued at approximately 4.1 billion yuan. Despite the favor of investors, Health Road's revenue growth has not translated into profits. From 2021 to the first half of 2024, the company's revenue was approximately 431 million yuan, 569 million yuan, 1.244 billion yuan, and 611 million yuan respectively. During the same period, the company incurred losses of approximately 155 million yuan, 256 million yuan, 314 million yuan, and 57.275 million yuan, accumulating a total loss of 782 million yuan over three and a half years. In the prospectus, the company truthfully disclosed the reasons for the losses, which were mainly due to changes in the book value of redeemed liabilities. From 2021 to the first half of 2024, the losses due to changes in the book value of redeemed liabilities were approximately 84.37 million yuan, 268 million yuan, 325 million yuan, and 62.989 million yuan. According to sources, the changes in the book value of the redeemed liabilities are non-cash items. During the same period, the amount of redeemed liabilities was 1.1 billion yuan, 1.4 billion yuan, 1.7 billion yuan, and 1.8 billion yuan, and the company expects the redeemed liabilities to be reclassified as equity because the rights of all convertible redeemable preferred shares will expire in the future, causing the redeemed liabilities to be reclassified as equity. However, compared to the entire internet healthcare industry, the revenue of 600 million yuan in the first half of the year for Health Road is not competitive. For example, JD HEALTH achieved a revenue of 28.3 billion yuan in the first half of this year, nearly 40 times that of Health Road. PA GOODDOCTOR, which focuses on its main business, also had a revenue of 20.9 billion yuan in the first half of the year, which is more than three times that of Health Road. During the same period, the company's profitability also showed a downward trend, with overall gross profit margins of 40.2%, 43.2%, 32.0%, and 30.0%, and adjusted net profit margins of 0.1%, 4.2%, 3.2%, and 2.4%, respectively. It is also worth noting that Health Road's operating cash flow has shown a downward trend. From 2021 to the first half of 2024, Health Road's operating cash flow was 14.157 million yuan, 8.781 million yuan, 3.591 million yuan, and 13.03 million yuan, respectively. At the end of the reporting period, the company's cash and cash equivalents were 44.022 million yuan, 69.719 million yuan, 169 million yuan, and 150 million yuan, respectively. In addition, the company's liabilities remain high, with net liabilities of approximately 1.199 billion yuan, 1.441 billion yuan, 1.652 billion yuan, and 1.709 billion yuan from 2021 to the first half of 2024. B2B revenue accounts for about 80% Market expansion: worth the effort? Although Health Road only started to expand its B2B business in 2015, this segment has contributed nearly 80% of the total revenue. During the reporting period, the company conducted two main types of business: health medical services, and enterprise services and digital marketing services. From 2021 to the first half of 2024, revenue from health medical services was 1.28 billion yuan, 1.83 billion yuan, 2.97 billion yuan, and 1.23 billion yuan, accounting for 29.7%, 32.2%, 23.9%, and 20.1% of the company's total revenue, respectively. During the same period, revenue from enterprise services and digital marketing services reached 3.01 billion yuan, 3.85 billion yuan, 9.46 billion yuan, and 4.89 billion yuan, accounting for 69.8%, 67.6%, 76.0%, and 79.9% of the company's total revenue, respectively. According to observations, Health Road's clients are mainly enterprises, including pharmaceutical companies, insurance companies, advertising agencies, and information technology companies. During the reporting period, a small number of clients contributed a large portion of its revenue, with revenue from the top five clients accounting for 52.2%, 41.5%, 33.7%, and 36.2% of total revenue on an annual and period basis. If the company's business cooperation with its major clients undergoes unfavorable changes in the future, its revenue may significantly decrease, impacting its business, financial performance, and prospects. Health Road is also aware of the risks of client concentration, so it has been increasing its investment in market expansion. However, the results do not seem to be optimistic. During the reporting period, sales expenses for Health Road reached 126 million yuan, 147 million yuan, 212 million yuan, and 99 million yuan, doubling in three years. From 2021 to 2023, the amounts of advertising and marketing expenses in the company's sales expenses were 105 million yuan, 131 million yuan, and 187 million yuan, accounting for more than 80% of sales expenses. According to sources, Health Road has been increasing its investment in advertising and marketing expenses, but it has not generated a strong enough ""The leverage effect" drives the company's profitability improvement. On the contrary, some business sectors of the company have shown signs of growth fatigue in the past three years.Data shows that from 2020 to 2022, the revenue from direct individual customers in the company's health membership plan business was 11.357 million yuan, 10.821 million yuan, 11.646 million yuan, and 3.402 million yuan respectively. In 2022, the average selling price of the company's health membership plan to direct individual customers increased by 6.3 yuan to 51.3 yuan compared to the previous year, but did not bring in revenue growth. In short, the road to health has encountered challenges in expanding the market. With the further increase in customer acquisition costs, the road to health still needs to make greater efforts in optimizing traffic conversion rates and increasing customer willingness to pay. It is gratifying that the road to health is positioned in the rapidly growing Chinese digital health and healthcare market. According to Frost & Sullivan, the market size of the Chinese digital health and healthcare market is expected to 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% from 2023 to 2027. According to Frost & Sullivan, the market size is expected to further increase to 2.7 trillion yuan in 2030. The prospectus shows that the competition in the Chinese digital health and medical services market is fierce, but the road to health has already taken a leading position. As of the end of July this year, the registered individual users reached 196 million, the registered doctor users reached 879,000, and connected 11,731 hospitals nationwide. In the first half of 2024, the platform had 1.8 million medical consultations, 2.9 million online appointments, and 6.4 million fee-paying individual users for health services. Therefore, the road to health may be able to enjoy the dividends of rapid industry development. In conclusion, the vast digital health and medical services market is still on the rise, but the increasing losses, high debts, and challenges in market expansion are issues that the company cannot ignore. If these challenges are not addressed for a long time, the road to health may not be "healthy" either.