The spin-off of iFLYTEK Medical went public in Hong Kong, and iFLYTEK wanted to focus on its main business

Image source: Visual China

Blue Whale financial reporter Wang Jianwen

On the evening of January 9, iFLYTEK announced that it would spin off its subsidiary iFLYTEK Medical to be listed on the Hong Kong Stock Exchange.

iFLYTEK is one of the few AI companies in China that can achieve profitability. In recent years, affected by factors such as the decline in the gross profit margin of the main business and the large-scale investment in the research and development of large-scale model projects, the company's net profit level has gradually decreased, and the debt pressure has also increased. In this context, iFLYTEK threw out the spin-off plan, not only to promote the further development of the subsidiary, but also to reduce its own financial burden.

iFLYTEK Medical was spun off and listed, and the latter's performance reported a loss

On the evening of January 9, iFLYTEK announced that it would spin off its holding subsidiary, iFLYTEK Medical, to be listed on the main board of the Hong Kong Stock Exchange. After the completion of this spin-off, iFLYTEK will still maintain control of iFLYTEK Medical.

Founded in 1999, iFLYTEK is an intelligent voice and artificial intelligence company. At present, iFLYTEK's main business covers education, healthcare, smart city, enterprise digital and intelligent transformation and other aspects.

As a subsidiary of iFLYTEK, iFLYTEK Medical has also "inherited" iFLYTEK's AI genes. According to the official website, iFLYTEK Medical was established in 2016 and mainly relies on artificial intelligence technology related to the medical industry to carry out AI medical guidance, voice electronic medical records, image recognition, auxiliary diagnosis and other businesses.

From the perspective of equity structure, at present, iFLYTEK holds 52.47% of the shares of iFLYTEK Medical. In addition, the shareholders of iFLYTEK Medical also include well-known investment institutions such as China Merchants Capital, Tianzhi Investment, and Guoke Ruihua.

However, in recent years, although iFLYTEK Medical's operating income has continued to grow, its net profit has declined. According to the announcement, from 2020 to 2022, iFLYTEK Medical's operating income will be 321 million yuan, 356 million yuan, and 494 million yuan respectively, and the net profit attributable to the parent company will be 08 million yuan, -80 million yuan, and -204 million yuan respectively.

On why the company fell into losses and how to improve profitability in the future, Blue Whale Finance also sent an interview letter to iFLYTEK, but there was no reply as of press time.

For AI-enabled smart healthcare companies, achieving profitability is a practical problem that all enterprises have to face.

For example, YITU Healthcare, which was established by YITU Technology, one of the "Four Tigers of AI", focuses on intelligent imaging-assisted diagnosis and treatment. However, due to continuous losses, in 2021, YITU Technology sold YITU Medical to another medical AI company, Shenrui Medical. In addition, AI medical imaging company Eagle Eye Technology has also continued to record losses since its listing in 2021.

One of the reasons for the general loss of companies in the industry is that the relevant market is still immature. According to data from Frost & Sullivan, even the more mature AI image-assisted diagnosis and treatment market in AI diagnosis and treatment will only have a market size of about 1.95 billion yuan in 2023.

In order to improve the accuracy and practicability of AI products, companies in the industry also need to invest a lot of R&D funds to continuously upgrade and iterate their products.

In the announcement released by iFLYTEK, the company also said that the R&D and deployment in the field of artificial intelligence often require large-scale capital investment. With the continuous evolution of technology and the continuous change of downstream demand, iFLYTEK Medical may face high capital expenditure pressure in technology research, talent training and the purchase of hardware facilities.

Heavy bets on large models, debt ratios climb

As a leading AI enterprise in China, iFLYTEK is one of the few companies that can rely on AI model products to achieve profitability. However, in recent years, iFLYTEK's net profit has shown a downward trend.

In the first three quarters of 2021, 2022 and 2023, iFLYTEK's operating income will be 18.314 billion yuan, 18.820 billion yuan and 12.614 billion yuan respectively, while its net profit will be 1.611 billion yuan, 499 million yuan and 45 million yuan respectively.

Behind the decline in net profit is the continuous decline in the gross profit margin of iFLYTEK. In the first three quarters of 2021, 2022 and 2023, the comprehensive gross profit margin of iFLYTEK's main business will be 41.43%, 41.18% and 40.35% respectively. During the same period, the gross profit margins of the company's main business education products and services were 51.66%, 49.39% and 48.64% respectively, which also continued to decline.

In addition, in the third quarter report of 2023, iFLYTEK also said that the decline in the company's net profit was due to increased investment in general artificial intelligence cognitive large models. According to the financial report, in 2021 and 2022, the company's R&D investment will be 2.936 billion yuan and 3.955 billion yuan respectively, and the proportion of operating income will also increase from 16.03% to 17.83%.

Under the influence of the above factors, iFLYTEK's debt level has also continued to rise.

Wind data shows that in the first three quarters of 2021, 2022 and 2023, iFLYTEK's asset-liability ratio was 44.78%, 48.73% and 52.52% respectively, while the cash short-term debt ratio was 8.35, 5.54 and 1.81 respectively.

The "big model" is a track that iFLYTEK has bet heavily on in recent years. With the popularity of ChatGPT, technology companies such as Baidu, Alibaba, and Huawei have begun to lay out large models. In May 2023, iFLYTEK also launched the iFLYTEK Xinghuo cognitive model.

At the Global 1024 Developer Festival held in October 2023, Liu Qingfeng, chairman of iFLYTEK, further said that the Spark large model with a larger parameter scale that benchmarks GPT-4 has officially started training, and GPT-4 will be benchmarked in the first half of 2024.

However, it is still unknown whether the large model can bring new growth momentum to iFLYTEK. The company's semi-annual report disclosed that after the release of the Spark model, from May to June 2023, the company's C-end hardware GMV hit a record high, doubling year-on-year. Taking the Xi learning machine as an example, in May and June, the GMV of the learning machine increased by 136% and 21 Xi 7% year-on-year respectively after the support of the large model, and the sales of iFLYTEK AI hardware increased by 125% year-on-year during the "618" period. But even so, in the first half of 2023, the company's revenue fell by 2.26% year-on-year.

Or because of this, before the results are implemented, iFLYTEK chooses to reduce financial pressure by spinning off its subsidiary. For listed companies, the spin-off of subsidiaries can not only allow enterprises to better focus on their main business, but also allow subsidiaries to obtain more funds and resources, reduce the difficulty of follow-up financing, and reduce the financing pressure of the parent company.

In the announcement, iFLYTEK also said frankly that after the spin-off and listing of iFLYTEK Medical, it will be able to use the capital market to independently carry out equity and debt financing to meet the capital needs of continuous R&D investment and market expansion, reduce the company's financial burden, and also enable the company to allocate more resources to general model research and development and other strategic emerging directions in the future.