Catching Listing Chill, Dingdang Health Slashes Hong Kong IPO

China’s third largest digital retail pharmacy has been approved for a Hong Kong IPO, but cut the size by 90% from an earlier target

Key Takeaways:

• Dingdang Health has passed a listing hearing in its second try at a Hong Kong IPO, aiming to raise $100 million
• The company has shifted from its original asset-light to a more asset-intensive model to make good on its promise of faster deliveries

By Emily Chan

Hong Kong is finally opening the door for digital retail pharmacy Dingdang Health Technology Group Ltd., approving the company’s IPO at a listing hearing after rejecting its first attempt last year. But investors may be less welcoming of the company, whose Chinese name sounds like a doorbell ringing to emphasize the speedy deliveries that are also driving up its costs.

Following its failed application last year,DingdangHealthfiled for an IPO again in March and passed its listing hearings in the middle of this month. It has enlisted CICC and CMB International Capital Corp. as the deal’s co-sponsors with the aim of getting listed by September. But the company is apparently tempering its expectations with a relatively modest goal of raising up to $100 million – just a tenth of what the market was expecting during frothier times last year.

According to its preliminary prospectus, Dingdang ranked third in the industry last year, trailing only rivals JD Health (6618.HK) and Alibaba Health (0241.HK), which are both backed by China’s top two e-commerce companies. But the company is quite distant in its third-place position with only 1% of the market, far behind the 10% and 6.5%, respectively, for the other two.

Dingdang was founded in 2014 as a provider of real-time healthcare products and services to users through an integrated network with both online and offline components. Its services include online diagnosis, drug delivery, and health and chronic disease management services. It delivers drugs via its online platform and network of brick-and-mortar pharmacies. The company also uses major e-commerce platforms and other online distributors to hawk its products.

Rising revenue, rising losses

The company’s revenue has been on the rise for the past four years, growing rapidly from 585 million ($85.4 million) yuan in 2018 to 3.68 billion yuan last year, and close to 1 billion yuan in the first quarter of this year. But its growth rate slowed from 118.1% in 2019 to just 26.6% in the first quarter of this year, indicating its fast-growth period may be coming to an end.

Its main source of revenue is its pharmaceutical and healthcare business, which accounted for more than 95% of its revenue. It also derives a small portion of revenue from providing marketing services.

Like most healthcare platforms, the company is in the red, with no signs of profitability on the horizon. Its losses increased from 103 million yuan in 2018 to 1.6 billion yuan last year. The annual figure looks set to be the same or even grow this year, with the company reporting a loss of 404 million yuan in the first quarter of 2022 alone.

The growing losses are the result of rising costs for just about everything, from operations to marketing, sales expenses and administration. Its preliminary prospectus shows its marketing expenses alone accounted for 19.8% to 22.7% of its total revenue in the last three years, and administrative expenditures surged from 4.5% of its total revenues in 2019 to 13.1% last year. The growing costs owe partly to the company’s shift from an asset-light strategy to a more asset-intensive one that has seen Dingdang open more of its own brick-and-mortar pharmacies to boost efficiencies, including improved delivery times.

Dingdang’s original asset-light model saw it partner more with third-party brick-and-mortar pharmacies to help it deliver goods to consumers, saving it the huge cost of building and operating its own pharmacies.

But it later identified problems with those partners, including in their supply systems, fee structures and especially in their frequent failure to honor Dingdang’s promise to deliver goods to customers’ doorsteps within 28 minutes. To address that, the company established its own chain of smart pharmacies in major cities like Beijing, Shanghai, Guangzhou and Shenzhen. By the time of its IPO application, it had 351 such smart pharmacies across 17 Chinese cities. Those, together with added costs of its own delivery fleet, means the company’s business is now a big consumer of both capital and labor.

Third-party platform reliance

Dingdang’s online platform has been its main distribution channel, accounting for over 70% of its total revenue on average in the past three years. Its offline retail and distribution business account for most of the remainder at 16% and 11.5%, respectively.

Despite having its own mobile apps and WeChat business account, data from its prospectus shows that revenue generated over third-party platforms has grown as a proportion of the total over the past three years, reaching 72.6% in the first quarter of this year. That shows the company’s strong reliance on third-party platforms, which can lead to problems due to having to play by those platforms’ rules.  

Its third-party partners include Meituan (3690.HK)and Ele.me, which charge commissions for the orders that come over their platforms. Those platforms also charge for other services like improving Dingdang’s search rankings and doling out discounts to boost sales. According to its preliminary prospectus, Dingdang earned nearly 1.8 billion yuan over these platforms last year. But it paid nearly 100 million yuan in commissions for those sales, equal to 5.6% of the total figure.

Adding to its costs, the company must keep providing generous discounts to consumers to remain competitive with more deep-pocketed rivals like JD Health and Alibaba Health. It provided more than 1.3 billion yuan in consumer subsidies over the past three years combined, accounting for between 15% and 20% of total sales revenues, weighing on its profitability.

Dingdang is making its IPO in a weak market for internet healthcare stocks, which have slumped in recent years partly as a result of a revised Chinese law that outlaws the direct sales of pharmaceutical goods by third-party platforms to consumers. Shares of JD Health and Alibaba Health have tumbled about 60% and 85%, respectively, since the beginning of March last year.

Such strong headwinds are likely to dampen the company’s chances of gaining an impressive valuation, which may also explain the severe reduction in its fundraising target compared with last year’s.

The company previously raised over 3 billion yuan in seven financing rounds. The latest of those came in May last year, bringing in $220 million from investors including TPG Capital Asia, OrbiMed Advisors and Redview Capital.

TPG invested a hefty $100 million in exchange for 6.33% of the company, which suggests a valuation of 10.84 billion yuan. Given the company is still unprofitable, market sentiment is weak and recent steep declines for Alibaba Health and JD Health shares, Dingdang might find the door open for its listing in Hong Kong, but lukewarm investors inside when it sells its shares. Based on roughly 72% declines in its two main rivals’ valuations since the time of its last funding in May last year, Dingdang might expect a valuation of just 3 billion yuan now, making it difficult for its most recent investors to earn a profit on their investment.

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