Recently, Health Road Co., Ltd. (hereinafter referred to as 'Health Road') has launched a Hong Kong stock offering, planning to globally issue 25 million shares at a maximum issue price of 8.8 Hong Kong dollars per share, raising approximately 0.22 billion Hong Kong dollars at most. It is expected to be listed on the Hong Kong Stock Exchange on December 30, 2024, with CCB International as the sole sponsor.

Indeed, the concept of Digital Health is not new, having first been proposed in 2014. After that, three years of pandemics accelerated the development and diversification of China's Digital Health enterprises. After undergoing this 'baptism', the Industry has returned to the competition of future profitability and business models.

Tertiary hospitals cover over 80%, with an annualized revenue growth of nearly 70% within three years.

Health Road Co., Ltd. was established in 2001, with its Business divided into two main Sectors: providing health Medical Services for individual users, corporate clients, pharmacies, and trading companies, and providing enterprise services and Digital Marketing Services for corporate and institutions users.

As of June 30, 2024, the Health Road platform has 0.195 billion registered individual users, with monthly active users reaching 3.5 million. Additionally, the platform has 0.877 million registered doctors. The platform is also connected to 11,727 hospitals, including 1,494 tertiary hospitals. According to the '2023 Statistical Bulletin on the Development of Health and Medical Care in China', there are a total of 1,795 tertiary hospitals nationwide, indicating that the proportion of tertiary hospitals covered by Health Road has reached 83.2%.

Source: Prospectus

The key to the Digital Health platform lies in meeting the multi-level and diversified health needs, committed to eliminating the imbalances on both the supply and demand sides, thus improving the communication efficiency between patients and doctors, and helping patients provide high-quality precise Medical Services. It is not difficult to see that achieving these goals requires a large user base, including both supply and demand sides as support. From the current data of the Health Road platform, it is evident that the Health Road platform already meets these conditions.

Reviewing the prospectus, Health Road's revenue growth momentum is rapid. From 2021 to 2023, the company achieved revenues of 0.431 billion yuan, 0.569 billion yuan, and 1.244 billion yuan respectively. At the same time, the company's profit performance is also remarkable. The company's adjusted Net income increased significantly from 0.486 million yuan in 2021 to 39.41 million yuan in 2023. Comparing the growth rates between the income and profit sides indicates that the company's profitability continues to strengthen.

Breaking the norm, creating new paths for Internet Plus-Related medical business models, with a year-on-year growth exceeding the industry average.

To understand the reasons behind the profitability of Health Road, it may be necessary to dig deeper into the company's business model, which seems to be reflected in the company's revenue proportions.

The company's two main business sectors can be simply understood as consumer health services and enterprise services and digital Marketing Services. It is not difficult to see from the prospectus that the company's revenue mainly comes from B-end institutional users. As of June 30, 2024, the company's enterprise services and digital Marketing Services achieved revenue of 0.489 billion yuan, accounting for 79.9% of the total revenue, almost eight out of ten. This is vastly different from other companies in the Internet Plus-Related medical field.

Source: Prospectus

As mentioned earlier, Internet Plus-Related medical is not an emerging concept; companies like JD HEALTH and ALI HEALTH have already made layouts in this field. The tactics of the three can be simply described as "driven by To C to B". Leveraging their traffic advantages at the consumer end to create a "Pharmaceutical E-commerce" model, their main revenue source is C-end users, while the primary business model is drug sales. This is also why many people's first reaction to hearing about Internet Plus-Related medical is "selling drugs."

It must be admitted that the advantage of this model is that it is easier to achieve a larger revenue scale under the drive of traffic, but the drawbacks are also evident; the concept is too narrow and focuses solely on the sales end. Especially for Capital Markets, this model may lack imaginative space, and for the Industry, it merely shifts drug sales from offline to online.

The business model adopted by Health Road resembles "driven by To B to C."

Firstly, the original driving force of this model lies in establishing deeper cooperative links with providers such as platforms, doctors, hospitals, and pharmaceutical companies, thus naturally possessing the ability to optimize medical resource allocation. This can effectively alleviate the severe uneven distribution of medical resources in China and holds significant practical meaning for the patient demand side. Meanwhile, this model also lays the foundation for the ecological closed-loop layout of the industry, achieving a shift from treatment-centered to health-centered.

Secondly, this model does not follow the Pharmaceutical E-commerce route, avoiding a futile competition for traffic with large Internet companies. Instead, it follows a path of deep integration with the Medical Services system, thereby building a patient-centered Medical Services system. Evolving from a disease-centered approach to a patient-centered one is not only seen from the perspective of empowering the Medical Industry through Internet platforms, but also from the aspects of new drug development and disease treatment. This is especially true for patients with comorbidities, as their treatment often involves multiple departments working together, and this health path model can provide more precise and personalized Medical Services through strong supply-side resources.

Overall, compared to Pharmaceutical E-commerce, the challenge of the health path's business model lies in its high entry barriers and slow profitability. However, the health path has achieved self-sustainability through years of in-depth industry experience and accumulated Medical resources. It is worth mentioning that this growth, driven by a B2B model, has lower profitability volatility and higher growth certainty, with a more rapid growth momentum. According to the latest publicly available information, JD HEALTH and ALI HEALTH reported year-on-year revenue growth rates of 6.04% and 12.62% respectively, while PA GOODDOCTOR's revenue declined year-on-year, and the health path recorded a year-on-year growth of 14.51%, surpassing the industry average.

The market prospects for Digital Health are broad, with expectations for AI to inject new power into company growth.

Returning to the industry perspective, the Internet Plus-Related Digital Health sector where the health path operates will迎来 its Golden growth period driven by the development of Big Data, AI, and other digital technologies. According to Frost & Sullivan data, China's digital health and wellness market is developing rapidly, with the market size expected to reach 3.88 trillion yuan by 2030, entering the trillion-level market.

Source: Prospectus

As an emerging field in the big health industry, Digital Health is increasingly promising with people's growing health awareness. On the technology side, digital technologies such as Big Data and AI have become key supports for the development of Digital Health and are important components of the Medical Services system.

As a leading enterprise in the Digital Health industry, the health path has also keenly captured this point. Since 2023, the company has gradually launched several AI-based add-on programs within the platform, including AI Medical Assistant and AI Tutu. The AI Medical Assistant improves doctor-patient communication efficiency through automation in the pre-diagnosis phase and summary following the consultation, while AI Tutu offers patients common health management consultations and personalized health advice.

From the health path's layout in the AI field, it can be seen that the company focuses the application of AI technology on the demand side of Medical Services. Whether it is AI Medical Assistant or AI Tutu, the core objective is to enhance the patient's user experience. There are two main reasons behind this decision. On one hand, the imbalance between supply and demand in China's Medical Industry is prominent, with patients' demands being pressing; on the other hand, both AI tools empower segments characterized by frequent communication and rapid response, with usage scenarios having a high tolerance for AI technology errors, allowing the full power of AI tools to be leveraged while quickly reflecting the effectiveness of its empowerment.

It is worth mentioning that Baidu, one of the three tech giants in China, is a major shareholder of Health Road. The company collaborates with Baidu in multiple business fields, especially in AI-based Search Engine technology and information dissemination. The partnership will continue to drive the company's technological advancements and business growth, demonstrating a higher performance elasticity.

In the future, the market potential of the Digital Health Industry is enormous. Health Road, with its years of industry experience and a differentiated profit model, combined with the empowerment of AI technology, is expected to achieve more high-quality and sustainable development.