6086.HK
Third time’s the charm: Fangzhou finally finds winning tonic for Hong Kong IPO

The company has become the latest internet healthcare stock to list, but continues to lose money and remains heavily reliant on drug sales 

Key Takeaways:

  • Fangzhou has been approved to list in Hong Kong on its third attempt, reporting nearly 900 million yuan in cumulative losses over the past three years
  • The online healthcare services provider specializes in chronic disease management and hospital-to-home business, but online drug sales remain its main revenue source

By Li Shih Ta

The graying of China has creating growing demand – and a big business opportunity – for chronic disease management services. But squeezing money from such typically cautious older patients may be easier said than done – a lesson that’s coming from Fangzhou Inc. as it heads into the final stretch of its Hong Kong IPO after nearly two years of trying.

Technically speaking, the ground is certainly fertile for this type of service, which can benefit from increasingly sophisticated technologies like Internet Plus, artificial intelligence and big data. Such a confluence has spawned a growing number of innovative business models, including ones for the management of chronic diseases like diabetes and high blood pressure that tend to affect people as they age.

Fangzhou is chasing that opportunity and could soon replenish its coffers with new funds after recently passing its hearing to list on the Hong Kong Stock Exchange – the last key step before an IPO. According to third-party data in its prospectus, Fangzhou was the largest online chronic disease management platform in China last year in terms of average monthly active users (MAUs). But that leading position has hardly equated to a smooth path to the listing. This latest application represents the third for the company, formerly known as Jianke.com, following failed attempts in November 2022 and June 2023.

Fangzhou is one of the earliest players to target chronic disease treatment in China through an online service. Its platform mainly serves patients with diabetes, hypertension and cardiovascular and other diseases, with more than 40 million registered users and 210,000 doctors in its network. According to its latest filing, Fangzhou’s business consists of three main segments: comprehensive medical services, online retail pharmacy services, and customized content and marketing services. The first two are provided through its Jianke platform.

Power shift

The Jianke platform gets its name from the Fangzhou’s Jianke.com website, which was established in 2006 and was first authorized to offer internet drug transaction services in South China’s Guangdong province in 2009. The platform was once regarded as the “Alibaba of the healthcare sector” for its status as a pioneer in online drug retailing. It grew rapidly in the years after its founding, attracting venture capital from names like Volcanics Venture and GTJA Investment Group.

But inside China, the Jianke name is equally famous for a power struggle that took place between its founder, Su Zhan, and second-largest shareholder Xie Fangmin. In July 2019, reports emerged that Su brought his managers, assistants, lawyers and more than a dozen security guards to Jianke’s office to seize the company’s official stamp, which is required for all official documents, and to remove Xie Fangmin. The incident ended with Su’s detention by the police and Xie’s takeover of the company. Fangzhou was incorporated not long after that. 

Despite the power shift, the Jianke.com online pharmacy remains Fangzhou’s largest revenue source. The company’s overall revenue grew from 1.76 billion yuan ($243 million) in 2021, to 2.2 billion yuan in 2022 and 2.4 billion yuan last year, with online retail pharmacy service revenue accounting for between 50% and 60% all three years.

The comprehensive healthcare services that are the company’s other main revenue source, accounting for about 40% of last year’s total, are also strongly “linked to the sale of pharmaceuticals,” according to the latest regulatory filing. The main difference between the two revenue streams lies in how buyers order their drugs. The comprehensive healthcare services is a hospital-to-home (H2H) platform, where patients receive their drugs after a doctor consultation. Thus, the two drug-selling businesses combined account for over 90% of the company’s revenue.

Profit-challenged

Fangzhou’s heavy reliance on drug sales hasn’t translated to profits on its bottom line. Its latest filing shows the company posted losses of 300 million yuan and 380 million yuan in 2021 and 2022, though the figure narrowed to 190 million yuan last year. That means the company lost a cumulative total of nearly 900 million yuan over the three-year period.

Low gross margins are another headache for Fangzhou. While customized content and marketing services logged enviable gross margins of 83% or more over the last three years, that part of the business was quite small. By comparison, gross margins for both comprehensive medical and online retail pharmacy services were less than 21%, trailing other online pharmacies like those owned by JD Health (6618.HK) and Alibaba Health (0241.HK), as well as chronic disease management service provider ClouDr Group(9955.HK).

Equally worrisome, Fangzhou’s number of MAUs decreased last year, and average spending per paid user also declined from 766.3 yuan in 2021 to 558.9 yuan in 2023. That’s why the company’s revenue growth has slowed.

Despite its money-losing status, Fangzhou has managed to complete six financing rounds and was last valued at $1.4 billion after its D+ round in December 2022. But that figure, which gives Fangzhou official “unicorn” status defined as companies worth more than a $1 billion, may be on the high side considering the company commands only 1.1% of China’s medical services and online retail pharmacy services market by sales.

Many medical companies are eager to seize on a final pandemic-related business surge last year to woo investors with new listings, and internet plays like Fangzhou are no exception. But the space for Fangzhou to grow is quite limited, as it competes with big names JD Health and Alibaba Health in the hotly contested online drug market. 

At the same time, the fate ClouDr doesn’t look too hopeful in terms of prospects for Fangzhou’s chronic disease management services. Once valued at as much as HK$ 15 billion at the time of its listing, ClouDR’s shares have tumbled from a peak of HK$17.80 to their current price of about HK$2.30, valuing the company at just HK$ 1.39 billion.

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