As a medical giant, Huaxi Bio (688363.SH) hit the brakes.

on August 30, huaxi biology released its semi-annual report for 2023. According to the financial report, Huaxi Bio's results showed negative net profit growth for the first time since its listing in 2019, and revenue growth was also in the predicament of the lowest ever reported since its listing.

Specifically, in the first half of 2023, Huaxi Bio achieved operating income of 3.076 billion yuan, an increase of 4.77 percent over the same period last year; net profit attributable to shareholders of listed companies was 0.425 billion yuan, down 10.27 percent from the same period last year; and non-net profit attributable to shareholders of listed companies was 0.361 billion yuan, down 12.69 percent from the same period last year.

What makes Huaxi Bio feel even more in crisis is the "flight" of secondary market capital. Now Huaxi Bio's stock price is hovering around 92 yuan/share. As of the close of trading on September 5, 2023, it was reported at 93.19 yuan/share, with a total market value of about 44.888 billion yuan.

In sharp contrast, Huaxi Bio hit a historical high of 313.48 yuan per share in July 2021, with a market value of more than 140 billion, and has fallen by more than 70% in the past two years.

we can't help asking, what's wrong with this hot cake, which once came into the market with its aura of "the first share of hyaluronic acid" and was favored by the capital? can it reverse the decline?

1. core functional skin care business, overall pressure downward

Huaxi Bio's main business covers four major business segments: bioactive raw materials, medical terminals, functional skin care products and functional foods.

financial report shows that Huaxi Bio's raw materials and medical terminal business revenue achieved double-digit growth in the first half of the year. Among them, the company's raw material business achieved revenue of 0.567 billion billion yuan, an increase of 23.20 percent over the same period last year, while the medical terminal business achieved revenue of 0.489 billion billion yuan, an increase of 63.11 percent over the same period last year.

if we look at it further, "bedo finance and economics" found that huaxi biology's net profit fell sharply this time, which is directly related to the decline in revenue and gross profit margin of its core business of functional skin care products.

As we all know, with the continuous iteration of medical beauty technology, the medical beauty consumer market has hatched many explosive products under the innovation of major brands. At present, the popular mainstream products on the market are mainly functional skin care products. This business has contributed more than 60% of the operating income to Huaxi Bio all the year round. The products mainly launched for the market include four core brands: Runbaiyan, Quadi, Mibel and BM Muscle.

in the first half of the year, Huaxi's bio-functional skin care business achieved revenue of 1.966 billion yuan, down 7.56 percent from the same period last year, and gross profit margin fell 4.35 percent. The income of Run Baiyan, Quadi, Mibel and BM muscle live was 0.632 billion yuan, 0.543 billion yuan, 0.217 billion yuan and 0.341 billion yuan, respectively, corresponding to a year-on-year decrease of 2.04, 10.10, 16.81 and 29.62.

in fact, as the main product of medical and aesthetic consumption, every step of huaxi's advanced biological road cannot be separated from the following methods:

First, heavy warehouse online and offline channel development.

at the channel end, huaxi biology in order to expand the market coverage, has carried out a diversified channel layout, online market to create a traditional e-commerce + live interest e-commerce marketing model. The offline market is actively extending offline media cooperation to provide consumers with immersive scene experience, and continuously improve marketing ability and user stickiness.

The second is to use a variety of promotional means to amplify the sound volume.

huaxi biology has formed a marketing matrix of live broadcast, evaluation and soft text on platforms such as little red book, tremolo, microblog and wechat, combining content operation and live broadcast to accelerate reaching core customers and form sales transformation. under the continuous output of high-quality content, huaxi biology has accumulated many high-quality fans on major online official platforms. For example, if you search for the topic of "Huaxi Biology" on the tremolo platform, there will be more than 0.47 billion broadcasts.

under the 2. two strategic play, bring pressure multiplication

However, the above set of strategic play, reflected in the financial indicators, has obviously brought a lot of pressure to Huaxi Bio.

First, the net cash flow from its investment and financing activities in the first half of the year was negative, resulting in a significant decrease in the balance of cash and cash equivalents at the end of the period.

The financial report shows that in the first half of this year, the net cash flow generated by Huaxi Bio's investment activities and financing activities was -0.184 billion yuan and -0.385 billion yuan respectively, which also means that the funds consumed by its investment and financing activities are much higher than the amount of income generated for a long time.

under the interaction of the two indicators, Huaxi biological cash flow port was directly affected. As of the end of June this year, its cash and cash equivalent balance dropped by 38.9 compared with 1.432 billion yuan in the same period last year, only 0.875 billion yuan.

obviously, this situation is closely related to the online and offline channel construction of huaxi biological heavy warehouse mentioned above. We should know that for high-tech medical and aesthetic consumer goods, it is the most important thing to create integrated channels online and offline to ensure the effective supply of products. Huaxi Bio uses such a large amount of money to invest, but judging from the current performance growth, the effect is not obvious, and the income cycle will also be lengthened.

Second, high marketing costs.

in the first half of this year, Huaxi biological sales expenses were about 1.42 billion yuan, up 2.4 percent year-on-year, accounting for 46.17 percent of the company's total revenue.

Lengthening the timeline, in 2019-2022, its sales expenses were $0.521 billion, $1.099 billion, $2.436 billion, and $3.049 billion, accounting for 27.65 percent, 41.75 percent, 49.24 percent, and 47.95 percent of total revenue, respectively, with both indicators moving higher year by year. However, the sales cost rate of Aimee (300896.SZ) and Haohai Biotech (688366.SH), which are also known as "Medical Beauty Three Musketeers" with Huaxi Bio, are far lower than those of Huaxi Bio.

especially compared with the sales expense rate of about 10% or less all the year round, huaxi biology obviously spends a lot of money on marketing.

Third, the extremely low R & D investment does not match its own "domestic light" label.

Contrary to the ultra-high marketing investment, Huaxi Bio's poor R & D investment. In 2019-2022, Huaxi Bio's research and development costs were 0.094 billion yuan, 0.141 billion yuan, 0.284 billion yuan and 0.388 billion yuan, respectively, accounting for only 4.98 percent, 5.36 percent, 5.74 percent and 6.1 percent of revenue. In the first half of this year, its R & D cost was 0.187 billion yuan, and the R & D cost rate still did not break through the double-digit mark, only 6.08 percent.

As we all know, different from traditional industries, R & D investment has become an important source to enhance its sustainable innovation ability and core competitiveness, and an important driving force for the sustainable development of enterprises. It is not difficult to foresee that if Huaxi Biology has been leaping forward on the road of emphasizing marketing and neglecting research and development, it also means that it will lose its market competitiveness over time, and the position of the industry leader is very likely to be overtaken by other high-yield brands.

Under the 3. market, high inventory should be vigilant

there is no doubt that with the rise of e-commerce platforms and social software live delivery, the medical and beauty consumption track with functional skin care products as the core is becoming more and more involved. from the initial technological innovation of roll products to today's roll prices, the industry has spawned more and more enterprises to grab the food market.

under the unfavorable situation of many old and new brands exerting power at the same time, huaxi biology itself is facing great pressure to remove inventory. from its recent high inventory, we can see the difficulties it is encountering.

in 2022, huaxi biological inventory surged 63.8 percent over the previous year to 1.162 billion yuan. By the end of the second quarter of this year, huaxi biological inventory increased to 1.175 billion yuan, of which inventory accounted for half of the total inventory value of 0.99 billion yuan, accounting for 84.26 percent of the total inventory value.

The increase in the amount of inventory directly leads to an increase in its provision for inventory decline. As of the end of the second quarter, Huaxi Bio's total provision for inventory decline was 22.0745 million yuan. Of these, the provision for decline in value of goods in stock accounted for as much as 71.72 per cent of the provision for decline in value of inventories.

History has proved countless times that the increase in inventory is a matter of vigilance, and inventory backlogs are often the source of crises.

this point, huaxi biology also made a key mention in this semi-annual report, and said that the impairment risk brought by high inventory: "in the future, if the downstream customer demand and market competition pattern of the company change, or the company can not effectively broaden sales channels and optimize inventory management, the inventory may not be sold, and the company may face the risk of inventory impairment, this in turn will have a negative impact on the company's operations."

In other words, under the expectation that the market will be in a highly competitive pattern in the future, what Huaxi Bio has to do is to maintain an appropriate inventory level, maintain a high inventory turnover rate, or find a way to digest the external disadvantages as soon as possible. The problem of unsalable inventory goods caused by factors can be digested to the greatest extent.

Can 4. open up a second growth curve to solve the problem?

Under the situation of domestic and foreign difficulties, Huaxi Biology did not sit still and wait for death, but sought to achieve a breakthrough in new incremental business outside the main business.

On the one hand, vigorously develop functional food business.

in fact, huaxi biology launched hyaluronic acid drinking water brand "shuijiquan", hyaluronic acid food brand "black zero" and GABA night health drink brand "no corner" as early as 2021 ".

However, with market doubtsContinuously, the discussion of "whether oral hyaluronic acid is an IQ tax" once became a hot topic. Under this influence, Huaxi's biological functional food business began to decline. In the first half of this year, the business's revenue was only 32.9133 million yuan, a decrease of 11.4525 million yuan from 44.3658 million yuan in the first half of 2022, and a year-on-year decrease of 25.81.

On the other hand, Huaxi's research and development focus has shifted to synthetic biology, hoping to further enhance market competitiveness.

According to statistics, the word "synthetic biology" was mentioned 87 times in Huaxi Bio's 2022 financial report, and 52 times in the financial report in the first half of this year. Moreover, Zhao Yan, chairman of Huaxi Biology, has repeatedly stressed that Huaxi Biology is a biotechnology company, not a simple cosmetics company, raw material company or medical beauty company, which has invested 2 billion yuan in the field of synthetic biology.

However, up to now, Huaxi Biology has not yet launched any products produced through synthetic biology technology, only some raw materials are in the pilot stage, and there are still many bottlenecks to be broken through in order to be a leader in synthetic biology.

Judging from the actual results achieved at present, the two major directions of Huaxi Bio's new efforts are still limited in improving performance. But in any case, this shows us its determination to face the future reform and transformation, and it is also worth looking forward.