New Stock Preview | Performance Loss, Fierce Competition, Asks Zhizhi Chinese Medicine "Shouldering" to Sprint Hong Kong Exchange

Driving innovation and transformation in the global healthcare industry and pursuing the deep integration of traditional medicine with modern technology, Traditional Chinese Medicine (TCM) technology is rapidly rising as an important force to enhance the quality of medical services and expand the boundaries of healthcare. Against this backdrop, Wan Zhi Chinese Medicine Technology (referred to as "Wan Zhi Chinese Medicine") is gradually gaining prominence with its independently developed TCM artificial intelligence-assisted diagnosis and treatment system - the TCM Brain, as well as its strategic layout in various areas such as TCM healthcare services, TCM lifestyle products, and TCM community development. As a leading mainland Chinese company in AI-enabled TCM healthcare services, Wan Zhi Chinese Medicine has established a wide-ranging service network and accumulated rich clinical case data. On January 9th, Wan Zhi Chinese Medicine submitted its application for listing on the Hong Kong Stock Exchange with the aim of further enhancing its technological research and development capabilities and expanding its market share through the capital market. However, Wan Zhi Chinese Medicine also faces various challenges such as performance losses, strict industry regulations, intense market competition, and risks in technological research and development, all of which bring uncertainty to its future sustainable development. AI-empowered TCM service provider According to the prospectus, Wan Zhi Chinese Medicine was established in 2018 and focuses on providing TCM healthcare services empowered by the TCM Brain. Wan Zhi Chinese Medicine Technology has independently developed the TCM artificial intelligence-assisted diagnosis and treatment system - the TCM Brain, which is equipped with the largest clinical knowledge graph in the global TCM healthcare service industry. According to ZK Consulting report, as of the final practicable date (January 1st, 2025), the TCM Brain of the company is the first and only TCM artificial intelligence-assisted diagnosis and treatment system that has undergone consistent clinical research in a Triple-A hospital in mainland China, and has been reviewed by experts from the Institute of Traditional Chinese Medicine and Material at the China Academy of Chinese Medical Sciences. The TCM Brain serves as the core of Wan Zhi Chinese Medicine Technology's clinical consultation and prescription process. Wan Zhi Chinese Medicine Technology has established Jingyi Academy, which, according to ZK Consulting report, is the largest global community of registered users of TCM knowledge through sharing ancient and modern TCM classics and original TCM content by the company until September 30, 2024. In terms of business, Wan Zhi Chinese Medicine generates revenue through three main business areas: TCM healthcare services; TCM lifestyle products (including various TCM health products, online courses, and books); and TCM Brain subscription services. Among them, TCM healthcare services are the main source of revenue, accounting for 81.1%, 88.5%, and 89.4% of total revenue in the first three quarters of 2022, 2023, and 2024, respectively. Wan Zhi Chinese Medicine's TCM healthcare services cover a full range of TCM consultations, prescriptions, treatments, and follow-up services provided on online platforms and offline clinics. The company provides high-quality decoction services through its self-operated decoction center. The company strategically divides TCM healthcare services into three practice areas: cancer critical illnesses, complex diseases, and general practice. As of September 30, 2024, the company has developed effective treatment plans for over 3,000 types of diseases, accumulating over a million real clinical cases. All of these real clinical cases are marked with follow-up data. In terms of TCM lifestyle products, the company has launched the Wanzhi Light Nutrition brand, which includes edible herbal powders and herbal personal care products. The company also provides online recorded courses and a series of TCM publications through the "Great Medicine Small Courses" channel. As for TCM Brain subscription services, the company provides a subscription-based version of the proprietary TCM Brain to private doctors, medical institutions, and other corporate clients through the Wan Zhi AI Alliance. In the first three quarters of 2024, revenue from TCM lifestyle products and TCM Brain subscription services accounted for 10.6% of Wan Zhi Chinese Medicine's revenue. In terms of performance, Wan Zhi Chinese Medicine Technology achieved revenue of approximately 62 million yuan, 189 million yuan, and 173 million yuan in the first nine months ending September 30th of 2022, 2023, and 2024, respectively. During the same period, the company reported losses of approximately 154 million yuan, 194 million yuan, and 56 million yuan. Adjusted net profits (measured under non-Hong Kong financial reporting standards) were 5.2 million yuan, 43 million yuan, and 49.5 million yuan in 2022, 2023, and 2024, respectively. "AI + TCM" market poised for rapid growth It is observed that the main external factor driving Wan Zhi Chinese Medicine's rapid revenue growth is the increasing demand for medical services, with TCM as a unique healthcare system in China gradually becoming a key driver of the mainland Chinese healthcare service industry. According to ZK Consulting report, in 2023, the number of TCM outpatient visits in mainland China reached 2.2 billion, with a compound annual growth rate of 4.5% from 2019 to 2023, surpassing the overall medical service industry's growth rate of 2.3% during the same period. It is projected that by 2028, the number of TCM outpatient visits in mainland China is expected to increase to 3 billion, with a compound annual growth rate of 6.9% from 2023 to 2028, exceeding the overall medical service industry's growth rate of 3.8% during the same period. However, the TCM healthcare service industry in mainland China is highly fragmented. On the supply side, TCM healthcare services heavily rely on scarce and experienced TCM practitioners. According to the ZK Consulting report, in 2023, there were only about 700,000 licensed TCM practitioners in mainland China, with less than 5% being senior TCM practitioners. In addition, the remuneration of TCM practitioners accounts for a significant proportion of the total costs of TCM medical institutions. On the demand side, patients are geographically dispersed, and their awareness of the benefits of TCM is limited. Consequently, TCM healthcare service providers often face high customer acquisition costs and low treatment compliance issues. Therefore, establishing customer acquisition channels that focus on educating and building trust with customers about TCM is crucial. AI-empowered TCM healthcare services utilize AI technology as the foundation, providing TCM diagnosis and treatment services assisted by intelligent systems. These AI-based systems draw insights from the diagnostic experience and professional knowledge of senior TCM practitioners and extract a large amount of knowledge from classical TCM texts to provide standardized and intelligent clinical decision support and guidance for TCM practitioners. By enhancing the capabilities of TCM practitioners, AI-empowered TCM solutions effectively address the challenges faced in delivering TCM healthcare services.Challenges and fragmentation issues faced by the traditional Chinese medicine healthcare service market in mainland China.In recent years, the market for traditional Chinese medicine medical services empowered by artificial intelligence has experienced rapid growth. In terms of revenue, it is estimated that by 2023, the market size will be approximately 10.9 billion yuan, with a compound annual growth rate of 158.3% from 2019 to 2023. It is expected that by 2028, the market size will increase to 86.9 billion yuan, with a compound annual growth rate of 51.4% from 2023 to 2028. Industry competition may become intense, and Wenzhi Chinese Medicine has taken the lead in the traditional Chinese medicine medical services market empowered by artificial intelligence. According to Zhi Shi Consulting's report, based on revenue empowered by artificial intelligence, Wenzhi Chinese Medicine ranks first in the mainland Chinese market for traditional Chinese medicine medical services empowered by artificial intelligence, with a market share of 1.5% in 2023. The company is also the only provider of traditional Chinese medicine medical services empowered by artificial intelligence that has commercialized its proprietary technology on a large scale, with revenue exceeding 100 million yuan. It is worth noting that Wenzhi Chinese Medicine does not yet have an absolute leading advantage in the market for traditional Chinese medicine medical services empowered by artificial intelligence. In 2023, the market share of the top five participants in the industry was only 5.4%. According to the prospectus, as of December 31, 2023, there were approximately 12,600 traditional Chinese medicine medical service providers empowered by artificial intelligence in mainland China. Wenzhi Chinese Medicine faces competition from public and private traditional Chinese medicine hospitals, clinics, and other providers of traditional Chinese medicine medical services. Zhi Shi Consulting's report shows that the number of providers of traditional Chinese medicine medical services empowered by artificial intelligence is expected to increase from 12,600 in 2023 to 36,900 in 2028, with a compound annual growth rate of 24.0% from 2023 to 2028. Public hospitals have strong financial resources and abundant medical resources, allowing them to provide low-cost medical services, while private clinics may have an advantage in personalized services. As artificial intelligence technology becomes more widespread in the field of traditional Chinese medicine, new competitors continue to emerge, and Wenzhi Chinese Medicine needs to continuously improve its competitiveness, which in turn increases the company's operating costs to some extent. In order to stand out in the competition, Wenzhi Chinese Medicine may need to continuously optimize service quality, improve technological capabilities, increase market promotion efforts, all of which lead to cost increases and ultimately impact the company's profitability. To enhance its competitiveness, Wenzhi Chinese Medicine plans to use the funds raised from the listing mainly for the following aspects: expanding the network of traditional Chinese medicine medical services provided by Wuxi Online Offline Communication Information Technology Co., Ltd., including opening new clinics, upgrading existing clinic facilities, and expanding the functionality and coverage of the online service platform; strengthening the construction of the supply chain, expanding the scale of the herbal medicine center and exploring the development of in-house preparations; continuously upgrading the existing artificial intelligence-powered traditional Chinese medicine brain software, enhancing technological capabilities, increasing research and development investment, attracting and nurturing more technical talents; developing the Jinyin Academy; expanding overseas markets and promoting traditional Chinese medicine culture and services in the international market. In view of this, as an important participant in the field of traditional Chinese medicine medical services, Wenzhi Chinese Medicine has achieved certain results in the market with its advantages in technology, medical team, service network, and the traditional Chinese medicine community. However, the company still faces challenges such as performance losses, high market expansion costs, and industry competition pressure. Through measures such as optimizing research and development management, meticulous market expansion, and enhancing operational efficiency, the company is expected to improve performance and achieve sustainable development. Against the backdrop of broad industry prospects, the rational use of the funds raised through the listing by Wenzhi Chinese Medicine will provide strong support for its future development, help the company continuously innovate in the field of traditional Chinese medicine technology, provide better quality traditional Chinese medicine medical services to patients, and promote the development of the traditional Chinese medicine industry.