Image source: Visual China
Blue Whale financial reporter Shao Yuting
On December 15, Health 160 International Co., Ltd. (hereinafter referred to as "Health 160"), a digital medical and health service platform, submitted a prospectus on the Hong Kong Stock Exchange, with Shenwan Hongyuan Hong Kong and Qingke Capital as its joint sponsors.
The construction of digital medical service platform is one of the trends of today's medical services, and it is also an important means to realize the modernization of medical services. However, from the perspective of the overall industry, most of the so-called Internet medical platforms still can't escape the number of pharmaceutical e-commerce, and Health 160 is no exception. According to the prospectus, more than seventy percent of the revenue of Health 160 depends on the sale of low-margin medical and health supplies, and the proportion of revenue contributed by medical and health services is obviously weak. In terms of performance, since 2020, in three and a half years, Health 160 has suffered a total loss of more than 300 million yuan.
In addition, Health 160 is also facing the double high pressure of high inventory costs and contract liabilities, and for Health 160, landing in the capital market to expand financing channels to resist risks such as liquidity shortage may have become an urgent problem for the company to solve.
Seventy percent of the revenue comes from the sale of medical and health products
Founded in 2005, Health160 is a digital healthcare service platform that aims to connect healthcare institutions, healthcare professionals and individual users to provide diversified healthcare services. According to Frost & Sullivan data, Health 160 is the largest digital medical and health service platform in China's digital medical and health comprehensive service industry in 2022. The actual controller of the Company is Luo Ningzheng, who controls approximately 33.99% of the voting rights through its wholly-owned companies (LNZ Management Limited and Luo Holdings Limited). The proceeds are intended to be used to increase platform traffic, strengthen R&D capabilities, diversify service and product categories, explore value-added services, and carry out strategic cooperation and acquisitions.
Health 160's business line is divided into two parts, one is to provide digital healthcare solutions. For example, it helps medical institutions build digital hospitals, providing online appointment registration, online consultation, electronic prescription and other functions, providing online marketing solutions for medical institutions, and providing online medical services for individual users. The second is the sales of medical and health products, which currently supports the company's operating income, and in the first half of 2023, this business revenue will account for more than 70%.
According to the prospectus, in 2020, 2021, 2022 and the six months ended June 30, 2023, the revenue of Health 160 was 279 million yuan, 423 million yuan, 526 million yuan and 269 million yuan respectively. Among them, the revenue from the sale of medical and health products was 155 million yuan, 263 million yuan, 385 million yuan, and 186 million yuan respectively, accounting for 73.2% in 2022 from 62.3% in 2021.
Although Health 160's revenue has increased year by year, it has still been in the red for a long time. During the reporting period, the company's annual losses were 29.876 million yuan, 152.4 million yuan, 120.1 million yuan and 24.776 million yuan respectively. In the past three and a half years, the company has accumulated losses of 327.1 million yuan.
Behind the sluggish performance, the gross profit margin of Health 160 has also shown a downward trend year by year, which has added more worries to Health 160, which was originally difficult to make profits.
According to the prospectus, during the reporting period, the gross profit margin of Health 160 was 36.8%, 31.4%, 22.5% and 24.8% respectively. Health 160 said that the decline in gross profit margin was mainly due to the continuous expansion of the proportion of revenue from the sale of medical and health products. During the reporting period, the gross profit margin of the sales of pharmaceutical and health products business was 7.9%, 4.0%, 4.1% and 2.1% respectively, and the gross profit margin of digital medical and health solutions remained at about 75%. The gross profit margin of the sales of pharmaceutical and health products business has declined significantly, which has lowered the overall gross profit margin.
Regarding the fluctuation of the gross profit margin of the business line selling pharmaceutical and health products, Health 160 said that it was mainly due to the year-on-year increase in the proportion of revenue from the offline wholesale model of the business, and the relatively low gross profit of the wholesale model compared with the retail model.
The retail business has declined sharply
Health 160 is divided into two sales models: wholesale and retail under the business line of selling medical and health products.
While the gross margin of the wholesale model is relatively low, the wholesale model has a wider range of sales channels than the retail model, typically involves larger sales, and leads to more product sales in a single transaction. Therefore, in recent years, Health 160 has focused on the expansion of the wholesale model.
Under the wholesale model, Health 160 purchases drugs and sells them to corporate customers through online and offline platforms, with most of the wholesale business carried out through offline channels and a small part through third-party platforms. During the reporting period, the revenue generated by the wholesale model was 70 million yuan, 178 million yuan, 304 million yuan and 169 million yuan respectively. In 2020, the revenue generated by the wholesale model accounted for 44.8% of the revenue from the sale of medical and health products, and by the first half of this year, the proportion had increased to 91.2%.
Under the retail model, Health160 purchases drugs and sells them to individual users through online retail pharmacies and online stores on third-party e-commerce platforms. During the reporting period, the revenue generated by the retail model was 85.54 million yuan, 85.25 million yuan, 80.77 million yuan and 16.39 million yuan respectively, accounting for 55.2%, 32.3%, 21.0% and 8.8% of the revenue from the sales of medical and health products respectively.
According to the prospectus, in the first half of 2023, the revenue of the retail model fell sharply, with an income of only 16.39 million yuan, compared with 55.67 million yuan in the same period last year.
In this regard, Health 160 said that the significant decrease in retail business revenue in the first half of 2023 was mainly due to the adverse impact of a legal action.
According to the information, 160 Pharmaceutical, a subsidiary of Health 160, is mainly engaged in the retail business of medical and health products. In July 2020, the buyer of 160 Pharmaceutical was unable to deliver the masks due to the deterioration of the mask supplier's operation, which led to the buyer of 160 Pharmaceutical initiating legal proceedings against 160 Pharmaceutical.
Subsequently, the court of first instance ordered 160 Pharmaceutical to refund 600,000 yuan to the buyer, and the court of second instance ordered the refund amount to increase to 21 million yuan. In December 2023, during the execution process, 160 Pharma reached a settlement with the buyer, agreeing to a final compensation of 13 million yuan.
As a litigation preservation measure, 160 Pharmaceutical's bank account was restricted in November 2022, and as a result, Health160's retail business, including procurement and sales, was affected, resulting in a sharp decline in revenue from this business in the first half of 2023.
In order to mitigate this adverse impact and resume normal retail business, at the end of 2022, Health160 acquired a Hailiantang Pharmacy with a pharmaceutical retail qualification, but as of the first half of 2023, the operating performance of Hailiantang Pharmacy is still difficult to compare with the historical financial performance of 160 Pharmaceutical.
Facing the risk of liquidity shortage
Within the framework of wholesale sales, Health160 procures a wide range of pharmaceutical and health products from pharmaceutical companies, distributors and suppliers, and then sells them to corporate customers through online and offline platforms. With the expansion of the Health 160 wholesale model, its contractual liabilities are also growing year by year.
Health 160 said in the prospectus that the contract liabilities mainly come from prepayments paid by customers, which usually occur in the wholesale of pharmaceutical and health products as well as digital hospital solutions. During the reporting period, Health 160 recorded contract liabilities of 39.9 million yuan, 45.1 million yuan, 56.1 million yuan and 57.4 million yuan respectively.
At the same time, due to the one-off nature of the wholesale model, the top five customers of Health 160 have a large change every year. During the reporting period, the revenue from the top five customers accounted for 18.5%, 39.0%, 41.3% and 42.3% of the total revenue in the same period, respectively, of which the proportion of revenue from the largest customers was 8.3%, 17.0%, 16.4% and 9.3% respectively, which fluctuated greatly.
In order to acquire and retain customers, during the reporting period, the sales and marketing expenses of Health 160 were 56.5 million yuan, 81.9 million yuan, 97.4 million yuan and 37 million yuan respectively, mainly used for brand promotion.
As of the end of each reporting period, the cash and cash equivalents of Health 160 were 64.2 million yuan, 89.4 million yuan, 39.1 million yuan and 57.4 million yuan, respectively. The increase in cash and cash equivalents as at June 30, 2023 was mainly due to the injection of funds by two investors pursuant to the investment agreement in January and May, respectively. As of June 30, 2023, Health 160 had current liabilities of $54.5 million. The flow of funds is in a relatively tight state.
Luo Ningzheng, the founder of Health 160, once said that Health 160 will take root in urban operations as a medical and health platform in the future, and be deeply engaged in service e-commerce. In the Internet medical industry, how Health160 will explore value-added services and when it will generate profitability is still very uncertain.