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Some might see it as a retreat, or perhaps a move to raise cash in troubled financial times. But medical big data specialist Yidu Tech Inc. (OTCPK:YIDUF) is calling its decision to sell part of its international operations a strategic move to assist in its overseas business expansion, according to a regulatory filing last week to the Hong Kong Stock Exchange.
The filing shows the company will sell 20% of EVYD Technology for $55 million to Yaqut, an investment holding company owned by the sovereign wealth fund of the oil-rich Southeast Asian nation of Brunei. The deal “will help to further cement the purchaser’s support for the company’s international businesses to expand within Brunei and overseas”, the filing said.
But given the limited potential of the Brunei market and Yidu’s own tightening finances, the sale looks more like a cash-raising exercise. The company had cash and cash equivalents of 3.4 billion yuan ($487 million) at the end of March this year, which looked more than ample to fund operations over the short-term. But the figure plunged to just 873 million yuan just six months later at the end of September, though we should note a big part of that decline was due to a 1.8 billion yuan rise in its term-deposits, according to Yidu’s latest half-year financial report released last month.
The EVYD Technology sale also looks more like a retreat from its international ambition rather than an effort to beef up the operation, coming as the company shifts its focus away from growth at any cost to profitability. Its latest half-year financial report shows Yidu started rolling out massive spending cutbacks in most of its major areas over that period, leading to its first-ever sales decline.
Such cost-cutting has become all the rage among money-losing Chinese tech firms these days, as investors become more reluctant to provide new funds to such loss makers. The movement has gained urgency during the difficult economic times now facing China.
Regardless of Yidu’s actual motivation, investors seemed to like the latest stake sale, bidding up Yidu’s shares by 6.2% over the three trading days after the announcement. But the company’s stock has fallen steadily over the longer term since its IPO in Hong Kong early last year. Its latest closing price of HK$6.24 ($0.80) is about one-fourth of its IPO price, and is down by nearly 90% from an all-time high of HK$60 at its peak in January 2021.
After the latest rally, Yidu’s shares now trade at a price to sales (P/S) ratio of 4.17 times, trailing the 6.57 for its closest competitor Sinohealth Holdings Ltd. Yidu also trails more traditional online healthcare service providers JD Health (OTCPK:JDHIF) and Medlive Technology (OTCPK:MDLVY), which trade at P/S ratios of 5.5 and 20 times, respectively.
We’ll take a closer look at the company’s new strategy shortly, and also analyze what challenges it faces on its road to achieving profitability. But first we’ll step back and look at what Yidu does, including its development history.
End to aggressive spending
Founded in 2014, Yidu offers products and services powered by artificial intelligence and cloud computing technologies to help clients from the healthcare industry analyze big data trends to make more informed decisions. Those clients include hospitals, pharmaceutical, biotech and medical device firms, research institutions, insurance companies, patients, and regulators.
The company’s three business segments include: A big data platform, which partners with hospitals and policymakers to drive better efficiency; life sciences solutions, which enable better probability of clinical trial success by reducing drug development time and costs; and health management solutions, which help with patient management.
Yidu has developed rapidly since its founding, growing from revenue of just 23 million yuan for its fiscal year ended March 2018 to 558 million yuan for the 2020 fiscal year. Much of the growth was fueled by aggressive spending in a bid to acquire customers. For example, the company tripled its spending on sales and marketing from its 2018 fiscal year to its 2020 year.
But more recently Yidu has cut back spending in almost all of its categories, including a 46.8% decrease for sales and marketing, and a 37.6% drop in administrative expenses for the latest six-month reporting period. Yidu’s R&D spending also decreased by 5.3% for the period, a sharp reversal from the 66.2% rise for its fiscal year ended this March.
Such cost-cutting helped Yidu pare its net loss by 20% to 356.3 million yuan for the period. But such improvement came at a price, with revenue falling 5.5% to 474 million yuan. Among its three categories, its big data platform saw the biggest decline, with sales down by 21.5% to 124 million yuan. Its health management platform business grew by 7% to 203.8 million yuan, while its life sciences solutions business grew slightly by 0.6% to 146.5 million yuan.
Yidu blame Covid-19 headwinds for the lackluster performance, as frequent lockdowns and other restrictions to curb the virus’ spread delayed many of its projects.
While the company’s austerity strategy may lead to margin improvement, it is also leading some to taper their growth expectations for the company. Last month, research house Morningstar sharply lowered its revenue assumptions for the company to a 3% decline in 2023, a return to modest growth in 2024, from a previous forecast for 10% growth in both years. Yidu has previously said it expects to reach its target of breakeven in 2024, but Morningstar believes it will only do so in 2026.
Still, the macro environment is working at Yidu’s favor due to favorable policy support, with the government calling for better integration between the medical industry and big data. Such calls are leading stakeholders, from hospitals to pharmaceutical companies, to increase their IT spending, with market research firm Frost & Sullivan estimating that China’s healthcare intelligence industry will be worth more than 1.1 trillion yuan in 2030.
At the end of the day, Yidu’s ability to regain investor favor will depend on whether it can return to growth over the longer term while also becoming profitable. The $55 million it generates from selling part of its international business should help to pad its finances and give it more flexibility in its business planning. But for now, the austerity measures and potential for longer-term revenue declines could weigh as a major concern for investors.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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