Company with less than two years of history has grown rapidly through a series of acquisitions, as it seeks to claim $300 million through a SPAC merger

Key takeaways:

•      ETAO’s SPAC merger with Mountain Crest Acquisition Corp. III is expected to close by this summer, providing it with up to $304 million in gross proceeds

•      Digital health company was founded about a year and a half ago and has grown rapidly since then through acquisitions  

By Trevor Mo

Demand for digital healthcare services has grown steadily in China, especially during the Covid pandemic when many are reluctant to visit hospitals and clinics due to fear of infection. That trend has laid a foundation for the rapid growth of an emerging group of related specialists, many finding good medicine from eager investors.

Three of the biggest names are JD Health (6618.HK), the healthcare unit of Chinese e-commerce giant JD.com (JD.US; 9618); Ping An Healthcare (1833.HK), also known as Ping An Good Doctor, backed by financial services giant Ping An; and WeDoctor. Both JD Health and Ping An Good Doctor are listed, while WeDoctor, backed by social media giant Tencent (0700.HK), applied for a Hong Kong IPO last year but has yet to make it to market.

Those three, all backed by corporate giants, could soon welcome smaller, independent rival ETAO International Group, which late last month revealed its plan to go public in the U.S., defying recent regulatory headwinds towards such listings. Rather than take the traditional IPO route, the company is jumping on a recent bandwagon by making a backdoor listing using a special purpose acquisition company, or SPAC, that is all the rage these days in global markets.

We’ll look shortly at ETAO’s businesses, including its merger-driven development model and how its technologies stack up against rivals. But first we’ll look more closely at the company’s decision to go public via a SPAC, as well as what risks may lie ahead.

ETAO has chosen a U.S.-based shell company to go public, essentially merging itself with an empty publicly traded shell containing nothing but money raised through its own earlier IPO. The deal with Mountain Crest Acquisition Corp III (MCAE.US) will provide the combined company with up to $304 million in gross proceeds, including a $250 million private investment from China SME Investment Group, according to the Jan. 28 announcement.

Also known as blank check companies, SPACs are listed entities without commercial operations and are created solely for the purpose of taking a private firm public. Companies are increasingly opting to use such SPACs to enter the public market, attracted by benefits such as less scrutiny that usually comes with a traditional IPO.

Such scrutiny has become a big issue for Chinese companies seeking to list in the U.S. these days, as both countries have tightened regulations for such IPOs. Accordingly, the SPAC route may open a new, lower-profile path to market for Chinese entities seeking to tap U.S. capital markets in a lower-profile fashion.

ETAO said it expects its merger with Mountain Crest to be completed by this summer. But the deal could still come unglued, since investors must approve it. And if they don’t like it or simply want to cash out, they can quickly redeem their shares for cash after it’s done. ETAO highlighted those and other risks in a separate prospectus-like document filed with the U.S. securities regulator.

Growth through acquisitions

Unlike its rivals with big-name backers, ETAO was largely unknown in the digital health world and only began attracting attention around the middle of last year, when news first emerged that it was considering a U.S. listing through a SPAC deal.

That’s probably due to its short history. The company appears to be deliberately keeping its background obscure, which may partly explain its decision to list via a SPAC with lighter disclosure requirements. For starters, it didn’t reveal a founding date on its official website or in its filing to the U.S. securities regulator.

But according to Chinese media reports, ETAO was founded just a year and a half ago, in August 2020 to be precise, by Chinese national Liu Wensheng. The U.S. filing describes Liu as having a financial background with 25 years on Wall Street. Its other three top executives are all non-Chinese, including President Lee Winter, CFO Joel Gallo and Chief Health Officer Robert Dykes, perhaps signaling its ambition to go beyond the Chinese market.

ETAO’s rapid development in its short history has been largely fueled by acquisitions of both real-world and online assets. The latest of those came in October when it announced it would acquire Dnurse, a digital provider of diabetic management solutions and services.

As of early this year, physical assets controlled by ETAO included 12 hospitals and 30 chain clinics with a combined 3,000 beds, covering an area of 242,000 square meters, according to its website.

ETAO provides a range of digital healthcare service in China, including online consultation, online retail pharmacy and insurance, as well as enterprise software targeting hospitals and clinics. The company projected its revenue will reach $637 million by 2026, up from a forecast $133 million for this year. It also revealed it expects to be profitable on an operating basis this year, saying it expects its operating income to climb from $5 million in 2022 to $138 million by 2026.

The company didn’t reveal financials for its past two years’ performance, again potentially reflecting the looser regulations surrounding SPAC listings. But it said it had 6.5 million telemedicine users and 3 million online insurance clients in 2021. Those numbers pale compared with JD Health, which had 109 million active users at the end of June 2021.

Then again, ETAO’s market value is relatively modest – though still somewhat competitive – when compared with its larger peers. The company is currently worth $2.5 billion, according to its filing, not too far behind $3.7 billion for Ping An Good Doctor. But both of those are far smaller than JD Health, whose latest market value stands at $26 billion.

Despite its relatively small size, the strong growth potential of China’s digital healthcare market certainly works in ETAO’s favor. That market is expected to reach 1.1 trillion yuan ($174 billion) by 2024, growing at a compound annual rate of 38.9% in the five years between 2019 and 2024, according to data cited in the filing from market research consultant Frost & Sullivan.

The current fiercely competitive environment means ETAO will need to invest heavily in the future, requiring large amounts of funds. The company said it would use the money raised in its SPAC listing to improve its healthcare delivery and the quality of its specialized clinics and hospital settings, as well as for its internet medical services.

Should the deal be successfully completed, ETAO’s $2.5 billion valuation would translate to a price-to-sales (P/S) ratio of about 18 based on its estimated revenue for 2022. That’s actually a lot higher than the 6.58 for JD Health and the 2.83 for Ping An Good Doctor, though both of those figures are based on 2021 sales. Still, there’s no disputing that ETAO is seeking a rich valuation, perhaps reflecting its confidence that it can thrive in both its home China market and also possibly abroad.

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