By the first half of 2024, it has become an indisputable fact that the growth rate of the pharmaceutical industry has slowed down. The latest data from the National Bureau of Statistics shows that in the first half of 2024, the industrial added value of the pharmaceutical manufacturing industry above scale increased by 2% year-on-year, and the growth rate slowed significantly. According to the Zhongkang Industry Research Institute's forecast, the full-year growth rate of pharmaceuticals is expected to drop to 4.9% in 2024, with the annual growth rate of pharmaceutical categories expected to be only 2.9%. The growth rate of the B2C market has also narrowed to 6%, and the pharmaceutical retail, pharmaceutical industry, and research and development service sectors are under pressure.

As the industry enters the era of stock growth, research and development innovation has become the key to industrial upgrading, and a number of emerging technologies such as big data, artificial intelligence, and cloud computing will become important drivers for companies to find new growth.

Recently, the National Bureau of Statistics officially released the "Digital China Development Report (2023)", which pointed out that the estimated value added of the core industries of the digital economy in 2023 will exceed 12 trillion yuan, accounting for about 10% of GDP. The revenue of emerging businesses represented by cloud computing and big data has been increasing year by year, with a growth rate of 37.5% compared to the previous year.

As a pioneer in the digitalization of the health industry and its practices, Zhongkang Holdings (02361) delivered an outstanding performance in the first half of 2024, with excellent financial indicators. It is one of the few industry-listed companies that achieved positive profitability compared to its peers.

In the face of the current pressure and challenges in the pharmaceutical industry, how will Zhongkang Holdings use research and development innovation to achieve value growth and find new market opportunities?

"Product strength" builds a solid moat, and "innovation power" drives high-quality growth.

After setting a new performance record in 2023, Zhongkang Holdings continued its high-speed growth momentum, and continued to deliver outstanding performance in the interim report, with both revenue and profit achieving double-digit growth.

Specifically, in the first half of 2024, benefiting from the continuous expansion of the industry cooperation network, and constant innovation in products and services, the customer base and prices of smart retail cloud and SaaS products increased, driving the simultaneous improvement of revenue scale and operational efficiency. The company's operating income was approximately 0.16 billion yuan (RMB, same below), a year-on-year increase of about 10.1%; leading big data processing technology and solid data platform construction led to a significant improvement in technology efficiency, thereby continuously optimizing the group's cost efficiency and nurturing a higher quality group profit model, with operating profit increasing by about 62.1% year-on-year. Excluding the impact of exchange gains and losses, the net profit amount was about 40.1 million yuan, an increase of about 23.2% year-on-year, and the net profit margin (excluding exchange gains and losses) increased by 2.7 percentage points compared to the same period in 2023.

During the reporting period, the company's customer base already covered the main participants in the health industry such as pharmaceutical manufacturers, pharmaceutical retailers, physical examination institutions, medical institutions, and innovative pharmaceutical companies. The number of enterprise-level customers was 869, an increase of 3.2% compared to the same period in 2023. The repurchase sales rate of top pharmaceutical and medical equipment enterprise customers increased by 5 percentage points year-on-year.

The excellent performance is mainly attributed to Zhongkang relying on its leading industry data assets, AI algorithm models, rich industry experience, and professional insights, leveraging technological innovation and the transformation of scientific and technological achievements to continuously enrich the variety of products and services, enabling the comprehensive digital transformation of the medical health industry.

For the smart decision cloud, the revenue in the first half of the year was about 68.2 million yuan, with 412 enterprise-level customers. The overall repurchase sales rate of enterprise-level customers increased by about 0.8 percentage points year-on-year, maintaining its leading position in the market. Among them, the multi-information intelligence system CHIS received good market feedback, with enterprise-level customers increasing by about 36% year-on-year, and the average customer price increasing by about 9% year-on-year.

By integrating pharmaceutical and consumer market data, consumer profiles, and retail terminal data, Zhongkang has established the Zhongkang Digital Decision Service and Product System of "3 Big Data x 3 Big Services + Digital Insights SaaS System", providing customers with pharmaceutical market insight services, consumer research insight services, and precise terminal strategic information services, covering the multiple dimensions of "people", "goods", and "scene" with intelligent modeling for interaction and multi-angle analysis. Simultaneously, the decision-integrated SaaS system driven by data insights will also help clients intelligently and visually manage market data, assist clients in conducting governance analysis on internal data, and interact with market data, thus providing assistance from a data perspective for client's decision-making on production, marketing, market layout, and drug research and development.

As for the smart retail cloud, the revenue increased by about 28.8% year-on-year in the first half of the year, from approximately 43.8 million yuan in the same period in 2023 to 56.4 million yuan. It had 519 enterprise-level customers, an increase of about 17.2% compared to the same period in 2023, and the average purchasing price of enterprise-level customers increased by about 22.5% year-on-year.

By deeply analyzing consumer needs, preferences, and behavior using big data, Zhongkang has integrated the SIC as a core system, including digital functions such as membership management, category management, smart marketing, chronic disease management, pharmaceutical services, etc., to provide a one-stop digital precision marketing solution for pharmacy consumer scenarios. As of the end of the reporting period, Zhongkang has established partnerships with more than 2900 pharmaceutical retail companies and over 0.16 million pharmacy stores, further increasing its market share and maintaining a leading position in the market.

In the field of smart health management cloud, Middlehealth's AI-MDT health management system is a typical example of the successful application of AI technology in the health examination industry. The system has gathered the consensus of more than 300 experts from 16 disciplines in the top three hospitals, combined with professional medical guidelines, and built a medical knowledge graph covering 31 diseases, 1770 disease types, and 801 single indicators.

Since its launch, due to mature technology and differentiated advantages, the AI-MDT application range has rapidly expanded. As of June 30, 2024, the number of users receiving physical examination report interpretation has accumulated to over 4.345 million, an increase of approximately 4.04 million from the same period in 2023. The daily highest processing volume of AI-MDT system physical examination report interpretation has exceeded 0.04 million cases, an increase of approximately 448% from the same period in 2023.

In the field of smart medical cloud, Middlehealth focuses on medical scenarios and integrates digital applications with the development needs of the health industry, deepening the layout of the full-service medical and health chain centered on patient value throughout the lifecycle. Through the integration of patient management services with medical services, pharmaceutical services, psychological support, remote intelligent detection, economic assistance, and home care, the company has launched a digital therapy for comprehensive disease management and private patient service solutions, and innovatively provides a full-process patient care service model; through the research SaaS platform, it covers the entire research process from topic selection and literature retrieval to paper drafting, and improves the research efficiency of doctors based on deep learning and multimodal large language models. In the first half of the year, this business sector achieved a revenue of approximately 18 million yuan, and the overall repurchase sales rate of enterprise-level customers increased by approximately 13.5 percentage points compared to the same period last year.

The capability flywheel safeguards the business, empowering the digital transformation of the health industry.

2024 is the 'Al big model application outbreak year', and digital technology led by artificial intelligence and large models will bring about a profound change in the medical and health industry, and will also become an important way to lead the industry to achieve 'break and establish'.

As a pioneer in the digitalization of the health industry, Middlehealth continues to deepen its differentiated competitive advantages, and now has extensive industry cooperation networks, leading big data processing technology, and an ecological industry platform as its three core competitive strengths. The formation of the three core competitive strengths creates a flywheel effect, constantly iterating itself, strengthening its core, driving steady business growth, and empowering the digital transformation of the health industry.

During the reporting period, Middlehealth actively promoted industry cooperation, and through a comprehensive digital network covering 'medicine, pharmaceuticals, and patients', it has built a wide and solid industry cooperation network, constantly exploring the practical application of technology to empower the industry, widely covering pharmaceutical retail, health checkups, clinical diagnosis and treatment, and other scenarios. As of June 30, 2024, the company's pharmaceutical retail cooperation network has covered over 0.16 million stores, distributed across 30 provinces and 349 cities, with the number of stores using the SIC system reaching over 0.11 million; the health management cooperation network has reached approximately 160 hospitals and 650 medical examination centers, and the patient management service has cooperated with over 300 hospitals, serving over 0.25 million patients; the registered number of oncologists on the iMDT platform has exceeded 0.013 million, with over 500 MDT treatment conferences held and over 1.2 million doctors connected.

In the field of medical and health, the collection, analysis, and application of data are crucial for improving the quality and efficiency of medical services. To this end, Middlehealth has established a standardized and structured main database, including 38 health industry main databases covering pharmaceutical retail, industry supervision, medicine, pharmacy, and life sciences, forming a unified structure for medical and health data; data processing capabilities have significantly improved, with a machine automatic cleaning rate of over 97%, an accuracy rate of over 99%, and the fastest response speed reaching T+1; the 'Tiangong-1' commercial data intelligent platform and the 'Zhuomu Niao' intelligent health management and medical platform respectively target different application scenarios of medicine and medical care, and provide customers with standardized SaaS products, customized professional services, and overall solutions based on leading data insight capabilities and AI models.

In addition, the company has built a leading position in the health industry conference/exhibition activities and media services portfolio, constructing a value ecosystem for industry participants. The company's hosted SIP Conference has been successfully held for seventeen sessions and has developed into a forward-looking industry conference in China, leading in terms of specifications, scale, and influence. The conference has attracted over 8,000 decision-making elites from government agencies, domestic and foreign leading brand industries, innovative pharmaceutical companies and innovative pharmaceutical technology companies, mainstream pharmaceutical commerce, retail enterprises, domestic and foreign capital institutions, digital technology companies, commercial insurance institutions, medical and health service institutions, etc., with a total of over 0.06 million attendees. Through this extensive and diverse resource exchange and docking platform, Zhongkang not only obtains an in-depth understanding of the industry's operational network, but also accelerates the improvement of the industry ecosystem.

Looking ahead, Zhongkang will focus on three major business sectors: To B, To C, and To R. It will continue to track and study consumer demand, technological innovation, and social trends, accelerate the iteration and innovation of industry digitization applications, and grasp new market opportunities in the industry.

Zhongkang has already established a clear advantage in the To B business. In order to further expand the scale of the To B business, Zhongkang will promote the iteration and innovation of products and services, establish a "hospital in-hospital + hospital out-hospital" medical and pharmaceutical data connection, and help customers accelerate digital construction, establish rapid decision-making capabilities, accurate market connection capabilities, and efficient operation capabilities to fully respond to industry competition and seize market opportunities. In order to better serve medical product suppliers, more data will be introduced to enhance the types and scale of data, build a diversified and stable multi-channel health industry data foundation, continuously develop potential models and predictive models, fully tap the value of data, expand visualization SaaS tools, industry-depth insight consulting, flow data governance, and other diversified products and services, grasp the growth opportunities in the industry's transformation trend, and help the industry's digital transformation and upgrade.

The To C business will accelerate the layout of the personal health management market, build differentiated service capabilities and competitive advantages through big data, artificial intelligence, and cloud computing, and provide a personal health service platform that includes health management and digital full-path precise services. Public data shows that with the improvement of the national standard of living and the deepening of health concepts, the number of people receiving physical examinations in China has exceeded 0.5 billion person-times/year and is expected to reach 0.87 billion person-times/year in the future; the current penetration rate of the physical examination industry in China is only 38.9%, which still has a large room for improvement compared to developed countries in Europe and the United States.

With the important lever of the Zhuomu Niao AI-MDT system, Zhongkang provides a variety of services to individual users, including AI-MDT deep physical examination report services, health follow-up services for sub-healthy populations, disease-specific health management services, and personalized physical examination services, fully meeting the diverse post-examination health management needs of individual users. In response to the pain points in medical treatment and chronic disease management, the company will also build a digital platform for comprehensive disease management services for individual patients, connecting critically ill patients with multidisciplinary medical expert teams, and formulating high-quality comprehensive diagnosis and treatment and overall disease management plans.

Finally, the To R business is aimed at the biopharmaceutical research and development stage for pharmaceutical and medical institutions, and will unite medical institutions, innovative pharmaceutical companies, CRO companies, CMO companies, pharmaceutical retail companies, and other entities to create a digital empowerment platform, establish an industrial cooperation ecosystem, and actively promote the research and development, investment, and commercialization of potential drugs. According to incomplete statistics, the total research and development investment of listed pharmaceutical companies in China in 2023 has reached about 119.2 billion yuan, and the enthusiasm for innovative drug research and development is increasing. In the field of pharmaceutical research and development, Zhongkang still has great potential.

Summary

Since the "Thirteenth Five-Year Plan" period, a series of policy documents such as the "Healthy China 2030" strategy, the "Fourteenth Five-Year Plan" for National Health, and new medical reforms and the high-quality development of public hospitals have provided strong support for the rapid development of the medical and health industry.

From a business model perspective, Chungkang provides customers with a one-stop product and service solution of "SaaS + professional services + industrial ecosystem platform", efficiently empowering customers in digital transformation, market expansion, customer management, decision-making operations, and has become a leading pioneer in the digital transformation of the medical and health industry.

In the context of global economic situation combined with domestic and international pressures, as well as changing consumer demands, the health industry is facing unprecedented challenges. In the future, the company will continue to actively explore and practice in various fields of the health industry, taking on responsibilities, daring to break through and stand out, continuously leading the way, further anchoring the digital technology innovation, empowering the digital transformation of the industry chain in an all-round manner, promoting the high-quality development of the medical and health industry, accelerating the driving force for the reconstruction of industrial value, and stimulating new productive forces in the industry.