PomDoctor Files For Nasdaq IPO That May Be Overvalued

The online health services provider aims to raise up to $30 million through a Nasdaq listing, even as its liabilities far outweigh its assets

Key Takeaways:

PomDoc aims to raise up to $30 million with a New York listing, aiming to entice investors with its online healthcare business targeting patients with chronic conditions
The company's revenue and margins both improved last year, but its low cash and ongoing losses look problematic

Internet-based healthcare looks like a surefire bet for China, serving the hundreds of millions of people who may not have easy access to high-quality hospitals and clinics mostly concentrated in large cities. But the reality is quite different, since many of the people who could benefit most from such services are probably the least internet literate.

Industry leaders like Ping An Health (1833.HK) and JD Health (1688.HK) have both found ways to operate profitably in the sector, but have yet to find a strong audience among investors. Now, the unprofitable PomDoctor Ltd. is hoping to join their ranks as China's newest publicly traded online medical services provider, with plans to list on the Nasdaq, according to an updated version of its IPO prospectus filed last week.

The company hopes to sell investors on its niche providing services to patients with chronic diseases and conditions like diabetes and high blood pressure, which require regular medical consultations. Such a focus looks like a good choice, since such conditions often require frequent doctor visits that could easily be moved online to make patients' and doctors' lives more convenient.

But the company is still losing relatively big money, and lacks a major financial backer like Ping An Health (1833.HK), which is controlled by financial services giant Ping An Group, and JD Health (6618.HK), which is controlled by e-commerce giant JD.com. That's led PomDoc's auditor to raise concerns about the company's viability as a top vulnerability in the standard risk factor section of its prospectus.

While PomDoc would like to follow the example of Ping An Health and JD Health, there's also a more negative example of what could happen to the company from the far lesser-known Etao (ETAOF.US), which went public in 2023 using a special purpose acquisition company (SPAC). Since then, Etao's stock has cratered and is now essentially worthless, and it has yet to report any financials since its annual report for 2022.

Unlike Etao, which was founded in 2020 and was trying to grow rapidly through acquisitions, PomDoc's history dates back as early as 2010, making it look a bit more stable. It launched its current platform on mobile devices in 2015, making it a relative veteran in the emerging field of online healthcare. The company settled on providing treatment for chronic diseases due to the recurrent nature of doctor consultations and drug prescriptions for such conditions.

"We strategically chose to focus on this field because chronic diseases last at least one year by definition, and they are hard to cure, prone to complications and require ongoing medical attention," the company said. "As such, patients with chronic diseases have a great and relatively inelastic demand for frequent and repeat follow-up visits and of drug purchases, which gives a competitive advantage to platforms that are able to maintain long-term, stable doctor-patient relationships."

PomDoc said it aims to sell 5 million American depositary shares (ADS) for between $4 and $6 apiece, which would raise up to $30 million at the top of that range, making the IPO one of the largest by a Chinese company on Wall Street this year. A share sale in that range would give the company a market value of $472 million to $708 million, also a relatively large figure for new Chinese listings on Wall Street.

Aggressive valuation

PomDoc's business model and fundraising plans all sound good in principle, but a closer look at the company's actual financials paints quite a different story. In short, the company's valuation targets are quite aggressive compared with much larger peers Ping An Health and JD Health, even though PomDoc is losing money and its finances are quite shaky.

The company says its network hosted 212,800 doctors and nearly 700,000 patients at the end of last year, ranking it sixth among China's internet hospitals. What's more, many of its doctors brought their own patients to the network, meaning many of the doctor-patient relationships on PomDoc's platform are quite stable. Patients on the network are also boosting their spending, with average revenue per paying patient rising 7.3% to 766 yuan ($107) last year from 714 yuan in 2023.

But that relatively solid-looking façade masks PomDoc's tenuous finances, including negative cash flow over the last two years, including a 16.1 million yuan outflow last year; total liabilities of 546 million yuan last year, far outweighing its total assets of 46.6 million yuan; and just 7.65 million yuan in cash, or just over $1 million, at the end of last year.

The company's revenue looks relatively strong, rising 12.5% last year to 343 million yuan from 305 million yuan in 2023. Its gross margin also improved to 13.9% last year from 12.7% in 2023. But given its weak financial position, its net loss of 37.4 million yuan last year, similar to its 36.9 million yuan loss in 2023, looks unsustainable. The IPO fundraising would obviously help to stabilize the company's finances, though it's far from guaranteed that it will complete the offering.

All those question marks have led PomDoc's outside auditor to raise "substantial doubt about our ability to continue as a going concern," the company said as the lead "risk factor" in the standard section of its prospectus discussing such risk factors. It adds that it has addressed those concerns by taking out a series of loans totaling around 14 million yuan this year, though some of those carry high interest rates.

Then there's the issue of PomDoc's valuation, which looks quite aggressive. The market capitalization the company is seeking would give it a price-to-sale (P/S) ratio of anywhere from 10 to 15. That's quite a bit higher than the roughly 2.2 ratio for Ping An Health and JD Health, which both have higher gross margins and – unlike PomDoc – are profitable.

At the end of the day, PomDoc appears to have a pretty good business model and, if not for its shaky finances, would look well positioned to thrive in a Chinese digital healthcare industry expected to be worth 1.53 trillion yuan in 2027, according to third-party market data in its prospectus. An IPO would greatly improve the company's finances, giving it a better chance at long-term viability. But the high valuation it's seeking could turn off investors, making it difficult to complete its IPO.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.

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