In recent years, China has placed great emphasis on the inheritance and innovative development of the traditional Chinese medicine (TCM) industry. A series of encouraging policies have injected new vitality into the development of the traditional Chinese medicine industry. From optimizing the review and approval process, strengthening intellectual property protection, to promoting deep integration of industry, academia, and research, and facilitating the modernization and internationalization of TCM, policy dividends continue to be released, paving a fast track for the high-quality development of the TCM industry. A number of TCM companies have achieved robust growth, including Henghong Technology, which has initiated its journey to go public in the United States.
According to Zhito Finance APP, Hainan Hengcheng Health Industry Co., Ltd. (hereinafter referred to as &#34;Hengcheng Health&#34;)’s holding company Henghong Technology Inc. (hereinafter referred to as &#34;Henghong Technology&#34;) submitted its public prospectus (F-1 document) to the SEC for the first time on March 27, applying for a listing on NASDAQ under the code &#34;HCPC.&#34; It plans to issue 2 million shares of common stock in this IPO, with a price range of $4-6 per share, aiming to raise up to $12 million.
In terms of performance, Henghong Technology has shown significant volatility. In 2023, its revenue grew by 13.79% to 264 million yuan (RMB, the same below), with a net profit of 22.3876 million yuan during the period, a year-on-year increase of 38.87%, achieving impressive results of steady revenue growth and high net profit increase. However, entering the first half of 2024, its revenue recorded 116 million yuan, a year-on-year decrease of 17.73%, with a corresponding net profit of 11.086 million yuan, a year-on-year drop of 35.2%.
Why is Henghong Technology's performance so volatile? Can the company return to a growth trajectory? More importantly, how will its business model rooted in Eastern traditional medicine effectively convey the modern TCM story to Wall Street capital, which adheres to &#34;quantitative verification&#34;?
<h2>Declining Market Demand Leads to Significant Performance Volatility</h2>
The development history of Henghong Technology can be traced back to the end of December 2008. Since its establishment, the company has continuously focused on the pharmaceutical product distribution industry. Currently, Henghong Technology has formed two major business segments: pharmaceutical sales and promotion and marketing services. In 2023, the revenue proportions of these two segments were 95.2% and 4.8%, respectively, indicating that pharmaceutical sales are the core of Henghong Technology's revenue.
Specifically, Henghong Technology's pharmaceutical sales are divided into three major categories: TCM sales, chemical drug sales, and TCM raw material sales. Among these, the revenue proportions for the first two product categories in 2023 were 84% and 11.2%, respectively, while TCM raw material sales only began in the first half of 2024, accounting for 1.7% of revenue during that period, indicating a relatively small scale. TCM products are the flagship business in Henghong Technology's pharmaceutical sales.
According to the prospectus, Henghong Technology's pharmaceutical sales primarily involve purchasing traditional Chinese medicine, related nutritional supplements, health products, and certain chemical drugs produced by its affiliate, Guangdong Hengcheng Pharmaceutical Co., Ltd. Henghong Technology sells 34 popular products, totaling 106 specifications, covering multiple treatment areas such as respiratory, cardiovascular, and digestive.
Among these, therapeutic and tonic traditional Chinese medicines are the company's sales focus. Most therapeutic TCMs are used to treat colds and coughs, such as cold-clearing granules, wind-cold cold granules, and silver hawthorn detox granules. Tonic products mainly include spleen-tonifying granules for nourishing blood and calming the mind, pulse-activating granules for nourishing yin and generating fluids, and He Shou Wu tonics for kidney replenishment
And the Zhuang Yao Jian Shen Wan used for strengthening the waist and kidneys.
From the channel perspective, Henghong Technology has established a multi-channel sales system, including offline distribution of products and distribution to online pharmacies and their platforms, with offline distribution and marketing currently contributing the majority of the company's revenue. In terms of offline distribution, Henghong Technology has a distribution network in 22 provinces and autonomous regions in China and has established business relationships with well-known large chain pharmacies in China, such as Yifeng Pharmacy Chain Co., Ltd.
In mid-2023, Henghong Technology's total revenue grew by 13.6% to 264 million yuan, mainly due to the company's increase in product pricing. Although sales of traditional Chinese medicine products and chemical drugs declined, the revenue from these two businesses increased by 14.7% and 13.4%, respectively, after the price increase.
<img src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20250410/1744254050817265.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="hhkj.png" original-src="https://imageproxy.pbkrs.com/https://img.zhitongcaijing.com/image/20250410/1744254050817265.png"/>
After the increase in product pricing, Henghong Technology's gross profit margin rose from 19.81% to 23.21% in 2023, enhancing profitability. Coupled with effective control of operating expenses, the company achieved a net profit increase of 38.87% during the period.
However, in the first half of 2024, revenue fell by 17.73%, mainly due to a decline in demand for traditional Chinese medicine products after the pandemic. This led to a decrease in both sales and prices of traditional Chinese medicine products, resulting in a 26.8% drop in revenue from this segment. Even though chemical drugs achieved a 26% revenue increase driven by sales growth, it was difficult to reverse the overall revenue decline of the company.
Despite the revenue decline, Henghong Technology's operating expenses did not significantly decrease. Additionally, the reduction in government subsidies and the increase in interest expenses led to a sharp drop of 35.2% in net profit in the first half of 2024.
<h2>Market Structure Stabilized, High Debt-to-Asset Ratio and Accounts Receivable</h2>
As a typical pharmaceutical distributor, Henghong Technology's business model is relatively simple, and its performance is the result of the combined effects of channel expansion, market demand, and product pricing. The essence of the performance decline in the first half of 2024 is that the new volume brought by channel expansion is far less than the reduction in market demand, and the decrease in market demand negatively impacts product prices.
In the prospectus, Henghong Technology provided a detailed future development explanation for the two controllable dimensions of channels and products. The company stated that it will continue to deepen its efforts in the hospital external market, establish strategic partnerships with chain pharmacies and online e-commerce platforms, continuously optimize marketing channels, promote balanced development across all products, and increase efforts in the online market.
Regarding products, Henghong Technology indicated that it plans to increase the promotion and marketing of nourishing products, explore the market potential of Zhuang Yao Jian Shen Wan, Lock Fresh Kidney Oral Liquid, and Qi Zi Tian Jing Oral Liquid, and develop a series of medicinal wine products, including He Shou Wu Kidney Tonic Wine, Ba Jitian Nourishing Wine, Mao Ji Blood Supplement Wine, and Hui Chun Nourishing Wine.
For pharmaceutical distributors, products cannot be significantly differentiated; they merely fill growth paths through a diversified product matrix. The key to establishing competitive barriers lies in building channels or expanding into other segments of the industry chain. Although Henghong Technology has made detailed plans for future development in terms of products and channels, its growth path may not be easy, as the pharmaceutical distribution industry has undergone years of policy guidance and market consolidation
A &#34;one super, many strong&#34; pattern has formed, dominated by state-owned leading enterprises, with regional leaders and emerging platforms coexisting, making it relatively difficult for small and medium-sized enterprises to expand and grow.
In addition, Henghong Technology's relatively high debt-to-asset ratio will also constrain the company's expansion speed. According to the prospectus, as of June 30, 2024, Henghong Technology's total assets were 72.1379 million yuan, total liabilities were 66.989 million yuan, and the debt-to-asset ratio reached 92.86%.
Moreover, the asset structure contains certain risks. According to the prospectus, as of June 30, 2024, Henghong Technology's accounts receivable and notes receivable were 35.8022 million yuan and 20.6824 million yuan, respectively, totaling 56.4846 million yuan, accounting for 82.6% of current assets. Such a high level of accounts receivable not only poses a risk of bad debts that could affect the company's profitability but also hinders the company's cash flow, further obstructing the enterprise's expansion.
This also indirectly indicates that Henghong Technology does not have strong bargaining power over downstream clients. The company may be trying to enhance customer stickiness by extending payment terms, which is not a healthy customer expansion model. Coupled with the flaw of high debt, Henghong Technology's valuation level may be somewhat suppressed after going public

Henghong Technology plans to go public on NASDAQ, issuing 2 million shares of common stock to raise up to $12 million. Despite a 13.79% increase in revenue to 264 million yuan in 2023 and a 38.87% surge in net profit, revenue fell by 17.73% and net profit dropped by 35.2% in the first half of 2024. The reasons for the performance fluctuations include a decline in market demand. The company needs to tell a good modern Chinese medicine story to Wall Street capital to get back on the growth track

- The article discusses the recent developments in China's traditional Chinese medicine (TCM) industry, highlighting supportive government policies that have invigorated the sector.  
- Henghong Technology Inc. has filed for an IPO on NASDAQ, aiming to raise up to $12 million, despite experiencing significant revenue fluctuations due to market demand changes.  
- The company's high debt ratio and substantial accounts receivable pose risks to its expansion and profitability, indicating challenges ahead in a competitive market landscape.

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US Stock IPO Outlook | With significant performance fluctuations and high debt, how will Henghong Technology tell a new story in pharmaceutical distribution?