US IPO Preview | HengHong Technology (HCPC.US): The Dilemma of Revenue Growth Without Profit Growth Remains to Be ResolvedCan a Multi-Dimensional Narrative Support Its IPO Valuation?

Title context: US IPO Preview | HengHong Technology (HCPC.US): The Dilemma of Revenue Growth Without Profit Growth Remains to Be ResolvedCan a Multi-Dimensional Narrative Support Its IPO Valuation? Text: Traditional Chinese medicine distributor HengHong Technology (HCPC.US) has significantly increased its fundraising scale, accelerating its sprint toward a Nasdaq IPO. It has been observed that since first submitting a public F-1 prospectus to the SEC on March 27, 2025, applying for a Nasdaq listing, HengHong Technology completed its fourth F-1/A amendment on September 2 of this year. Along with multiple rounds of updates, the most change has landed on the fundraising plan. In the three public prospectuses disclosed in 2025, the company all planned to issue 2 million ordinary shares at $46, implying maximum fundraising of $12 million at the upper limit. After entering 2026, the offering structure was significantly elevated. The latest two prospectuses show that the price range was raised to $67, the number of shares offered was expanded from 2 million to 5 million, implying maximum fundraising of $35 million at the upper price limit, with an additional 750,000 shares of over-allotment rights simultaneously added. From the background perspective, this expansion is directly related to Nasdaq's new rule requiring China-related issuers to underwrite IPOs of no less than $25 million. The new plan has clearly crossed that line, but the company's valuation has moved up accordinglybased on approximately 25 million total shares outstanding post-offering, the $67 pricing corresponds to an IPO valuation of approximately $150 million to $175 million. Once the valuation reaches this range, the real question is: is the market willing to subscribe in full at this price? And this, ultimately, must return to HengHong Technology's fundamentals for an answer. Revenue from Chinese patent medicines exceeds 80%, trapped in the "revenue growth without profit growth" quagmire Since its establishment in 2008, HengHong Technology has engaged in pharmaceutical product distribution in China through its operating entity HengCheng Health, primarily purchasing Chinese patent medicines and some chemical drugs from related party Guangdong HengCheng Pharmaceutical Co., Ltd. for sale. The company currently has 34 product varieties and 106 specifications on sale, covering therapeutic areas such as respiratory, cardiovascular and cerebrovascular, and digestive. Among them, therapeutic Chinese patent medicines are HengHong Technology's core products, mainly medications for colds, flu, and coughs, primarily including Ganmao Qingre Granules, Fenghan Ganmao Granules, Yinqiao Jiedu Granules, etc. Tonic Chinese patent medicines mainly include Yiqi Yangxue Anshen and Jianpi granules, Shengmai Granules (tonifying qi, nourishing yin, and promoting fluid production), Shouwu Bushen Granules (tonifying the kidney and replenishing essence), and Zhuangyao Jianshen Pills, etc. While selling pharmaceuticals, HengHong Technology also sells raw materials for Chinese patent medicines and provides market promotion services to related party Shaanxi HengCheng Pharmaceutical Co., Ltd. It is worth noting that due to the impact of the company's business strategy adjustments, the business scale of market promotion services has dropped to a relatively low level. From the 2025 revenue structure, HengHong Technology's revenue from pharmaceutical sales accounted for as high as 97.4%. Among this, Chinese patent medicine revenue accounted for 81.2%, with main products including Ganmao Qingre Granules, Fenghan Ganmao Granules, Yinqiao Jiedu Granules, etc.; chemical drug sales revenue accounted for 14%, mainly Compound Triamcinolone Acetonide Solution (trade name: Anlong) purchased from Guangdong HengCheng, used for dermatological treatment; raw material sales revenue for Chinese patent medicines accounted for 2.2%; and promotion and marketing service revenue dropped to 2.6%. At the sales channel level, HengHong Technology's sales network covers 22 provinces and autonomous regions in China, approximately 200 cities, and has established stable cooperative relationships with quality distributors and chain pharmacies across various regions. In each business region, HengHong Technology selects 2 to 3 local leading distributors as first-tier distributors, which purchase from the company and resell to local retail terminals and pharmacies. At the same time, HengHong Technology has established cooperation with well-known large chain pharmacies such as Yifeng Pharmacy, and continues to optimize distribution channels covering stores nationwide. It is worth noting that with the implementation of new regulations on online drug sales in China, the company actively responds to regulatory changes, increases online marketing investment, raises the proportion of online sales, has established business relationships with multiple online pharmacies and related platforms, and continues to expand into the pharmaceutical e-commerce sector. From the performance perspective, HengHong Technology presented a typical case of "revenue growth without profit growth" in 2025. In 2025, the company's full-year revenue was approximately RMB 215 million, a year-on-year increase of 7.2%; among this, pharmaceutical sales revenue grew 10.80% to RMB 209 million, becoming the core driver of the company's revenue growth. However, divergence within pharmaceuticals was obvious. Among this, Chinese patent medicine revenue grew 17.1% year-on-year to RMB 174.3 million, while chemical drug product revenue declined 13.7% to approximately RMB 30 million, and raw material revenue for Chinese patent medicines also declined 5.9%. It can be seen that although HengHong Technology's total revenue grew, the structure became more skewed toward Chinese patent medicines, with their proportion rising to 81.2%, while high-gross-margin chemical drugs contracted and promotion services were nearly marginalized. While total revenue grew 7.2%, HengHong Technology's net profit instead plunged 21.5% to RMB 11.96 million. This was mainly due to two reasons. First, on the cost side, more than 90% of procurement depended on related parties, procurement costs rose, and combined with exchanging rebates for volume, this led to increased volume of Chinese patent medicines but eroded price and profit, causing HengHong Technology's gross profit in 2025 to decline 17.37% to RMB 36.8517 million. Second, the decline in government subsidies further suppressed profit release. Alongside the gross margin decline, HengHong Technology maintained operating profit at a level comparable to 2024 by sharply compressing selling expenses, which fell 31.3% year-on-year to RMB 19.28 million, cutting market investment. However, because government subsidies dropped from RMB 5.02 million to RMB 1 million, net profit was further dragged down. Whether the multi-dimensional narrative can deliver performance increment becomes the key to valuation Although HengHong Technology fell into the performance quagmire of "revenue growth without profit growth" in 2025, its path to breakthrough remains clearthe company is standing at the intersection of rigid demand in the Chinese patent medicine distribution track and changes in channel structure, and is expected to leverage structural dividends to reverse the situation. The prospectus cites Menet data showing that in 2023, total sales of Chinese patent medicines across China's three major terminals were approximately RMB 397.39 billion, a year-on-year increase of 5.69%; among this, demand for respiratory and cold-cough medications was particularly rigid during the winter-spring flu season. From the channel landscape perspective, the retail end is gradually taking over some share flowing out of hospitals. For respiratory Chinese patent medicines recommended in only 55 provincial-level diagnosis and treatment plans, total sales in retail pharmacies (including online) in 2024 already exceeded RMB 41 billion. Menet further predicts that by 2029, the total scale of China's out-of-hospital pharmaceutical market will reach RMB 1.6 trillion, providing broad incremental space for distributors focused on OTC products. HengHong Technology's foundation happens to be in sync with this trend. The company currently uses therapeutic products such as Ganmao Qingre Granules, Fenghan Ganmao Granules, and Yinqiao Jiedu Granules as its cornerstone, supplemented by tonic products such as Shengmai Granules, Shouwu Bushen Granules, and Zhuangyao Jianshen Pills, and has built a sales network covering 22 provinces and approximately 200 cities. Through an asset-light model of "23 leading distributors per region as first-tier distributors + direct supply to chains such as Yifeng Pharmacy," the company is deeply embedded in the out-of-hospital market. With the refinement of online drug sales regulation, new formats such as pharmaceutical e-commerce and instant retail continue to penetrate, and HengHong Technology is expected to extend its offline distribution capabilities online, further smoothing seasonal fluctuations and reducing dependence on a single channel. Facing the industrial dividends of rigid demand in the Chinese patent medicine distribution track and changes in channel structure, HengHong Technology's future layout is not simply "selling a few more types of drugs," but rather a coordinated advancement of three layers of logic: product iteration, channel deepening, and digital empowerment. On the product side, the company continues to take "preventiontreatmentrehabilitation" as the main line. Therapeutic products rely on cold and cough granules to stabilize the base, while tonic products focus on Zhuangyao Jianshen Pills, Suoxian Bushen Oral Liquid, Qizi Tianjing Oral Liquid, and medicinal wine series such as Shouwu Bushen Wine, Bajitian Bu Wine, Maoji Buxue Wine, and Huichun Bu Wine, gradually promoting a transition in the profit model from low-gross-margin wholesale volume to high-repurchase conditioning-oriented consumption; at the same time, it supplements new products through patent cooperation, mergers and acquisitions, or obtaining exclusive distribution rights, in order to alleviate dependence on a single supplier, related party Guangdong HengCheng Pharmaceutical. On the channel side, the company continues to deepen the out-of-hospital market on top of its existing 22-province first-tier distributor system, signs deeper strategic distribution agreements with chain pharmacies, and cooperates with online platforms for e-commerce distribution. More critically, the company plans to use digital user profiling and channel management systems to link terminal sell-through, rebate policies, and accounts receivable payment cycles, directly addressing the pain point of asset-light distributors"fast distribution but slow cash collection"and improving operational quality. Looking further ahead, HengHong Technology's layout also extends to internationalization and supply chain reinforcement. The company plans to use Chinese patent medicine health food standard products and tonics as entry points, relying on existing multinational pharmaceutical company relationships to test the European and overseas markets; at the same time, it will use exclusive distribution, patent licensing, or joint venture models to introduce high-quality innovative foreign drugs, forming a two-way combination of "Chinese patent medicines going global and imported drugs supplementing." In addition, if the IPO fundraising is successfully completed, part of the funds will be used to acquire GMP-compliant pharmaceutical assets or strengthen upstream supply agreements, fundamentally reducing the concentration of related-party transactions. Taken together, although the 2025 performance of "revenue growth without profit growth" has put short-term pressure on HengHong Technology's fundamentals, the company's long-term value anchor does not lie in the fluctuations of past financial reports, but in the industrial dividends of "rigid demand for Chinese patent medicines + out-of-hospital onlineization." What HengHong Technology truly needs to face market scrutiny on is whether it can gradually translate the multi-dimensional new narrative of "second curve of tonic medicinal wine + chain/e-commerce channels + digital middle platform + overseas and upstream supply chain reinforcement" into solid performance increments. Only the quality of strategic implementation is the core variable determining its future performance elasticity, and also the most authentic touchstone for measuring the company's intrinsic value.