Xiangyu Medical Completes Second Round of Inquiry for STAR Market IPO

Original Title: Sunnyou Completes Second Round of Inquiries

□ By our reporter Fu Suying

Xiangyu Medical recently completed the second round of inquiries for its STAR Market listing application, with questions regarding core technologies and sales models being raised again following the initial round.

Sunnyou is a research and development leader in China's rehabilitation medical device industry, providing a series of rehabilitation products and comprehensive solutions to medical institutions at all levels across China, elderly care facilities, disability rehabilitation centers, welfare institutes, educational systems, and households. The company plans to raise RMB 708 million to fund the technological transformation project for intelligent rehabilitation medical equipment production, the production and construction project for elderly care and postpartum rehabilitation medical equipment, the construction project for a rehabilitation equipment R&D and exhibition center, the R&D and sales center project for intelligent rehabilitation equipment (Southwest), and working capital reserves.

Rich Product Portfolio

Sunnyou Medical has been deeply engaged in the field of rehabilitation medical devices for 18 years and is currently one of the few enterprises in China with the capability to produce a full range of rehabilitation medical devices. The company’s main products consist primarily of rehabilitation medical devices required by medical institutions at all levels. Its product portfolio covers acoustic therapy, phototherapy, electrotherapy, magnetotherapy, physical therapy (PT), occupational therapy (OT), and rehabilitation assessment equipment, thereby encompassing the major domains of rehabilitation medical devices, including rehabilitation assessment, training, and physical therapy.

As of the date of signing this prospectus, the Company has obtained registration and filing for 127 medical device products. Through long-term accumulation and development, the Company has formed a rich product structure comprising 20 major series and more than 400 proprietary products. Among the Company’s products, 38 items—including the multi-functional traction bed for cervical and lumbar spine treatment, the ultra-short wave therapy machine, and the transcranial magnetic encephalopathy physiological therapy instrument—have been included in the Recommended Catalogue for Evaluation and Selection of TCM Diagnostic and Therapeutic Equipment issued by the National Administration of Traditional Chinese Medicine. Additionally, eight products, such as the extracorporeal shock wave therapy instrument, the four-limb linkage rehabilitation training device, and the cognitive impairment rehabilitation assessment and training system, have been selected for the Catalogue of Excellent Domestically Produced Medical Equipment, which was compiled by the Chinese Association of Medical Equipment under the commission of the National Health Commission. Meanwhile, the Company has been included in the procurement catalogue of the Logistics Support Department of the Central Military Commission and has been rated as a Tier-1 manufacturing supplier.

In recent years, the continuous rise in gross domestic product (GDP), the accelerating onset of an aging society, the increasing emphasis placed by medical institutions at all levels on the development of rehabilitation departments, and the growing awareness of rehabilitation among patients have collectively driven a rapid increase in the demand for rehabilitation equipment.

According to statistical data from the “Analysis Report on the Development Prospects and Investment Forecast of China’s Rehabilitation Medical Industry” released by Qianzhan Industry Research Institute, the scale of China’s rehabilitation medical industry showed a year-on-year upward trend from 2011 to 2018. In 2011, the market size of China’s rehabilitation medical industry was RMB 13.4 billion, which grew to RMB 45 billion by 2018, with a compound annual growth rate (CAGR) of 19%. Based on this projection, the industrial scale of rehabilitation medical devices is expected to exceed RMB 100 billion by 2023. As China’s healthcare system gradually aligns with that of developed Western countries, the future market capacity of the rehabilitation industry may surpass expectations.

Continuously Increasing R&D Investment

The company has always placed technological research and development in an extremely critical position. During the reporting period (2017 to 2019), the company continuously increased its investment in technological R&D, with annual expenditures on technology development and innovation showing a consistent upward trend. The R&D expenses were RMB 17.42 million, RMB 28.8167 million, and RMB 41.4931 million, accounting for 6.02%, 8.03%, and 9.71% of the revenue, respectively.

The Company has established a comprehensive R&D system and holds independent intellectual property rights over key technologies involved in the R&D, production, and design of rehabilitation medical devices. This ensures the superior quality and stability of the Company’s products while driving continuous product innovation. The Company has strategically structured its R&D network; in addition to the headquarters’ R&D center located at its domicile, it has established R&D centers in Zhengzhou, Tianjin, Nanjing, and other cities. As of December 31, 2019, the Company employed 253 R&D personnel, including seven core technical staff. The R&D team possesses diverse professional backgrounds covering electronics, computer technology, signal processing, precision mechanics, clinical medicine, and other disciplines. This diversified and multidisciplinary workforce meets the R&D needs for core technologies across multiple specialized segments of the Company’s rehabilitation medical device portfolio.

The Company holds proprietary core technologies protected by independent intellectual property rights in over 30 technical fields, including shockwave therapy, magnetic therapy, phototherapy, and electrotherapy. To date, the Company has been granted 16 invention patents and 334 utility model patents. It currently possesses 89 Class II medical device registration certificates and 38 Class I medical device filing records. Furthermore, the Company participated in the drafting of one national standard and contributed to the drafting or evaluation of 25 industry standards, while obtaining 28 provincial-level scientific and technological achievement awards.

The company’s core technologies were subject to further inquiries. The second round of inquiry letters required the company, in light of its R&D management practices and technological reserves, to further elaborate on whether its existing R&D system possesses sustained innovation capabilities, or to detail its mechanisms and specific arrangements for continuous technological innovation; additionally, under the section “Competitive Advantages and Disadvantages of the Company,” the company was required to objectively disclose information regarding its technological disadvantages.

The Company responded that it prioritizes technological development and accumulation, has mastered multiple core technologies critical to rehabilitation medical devices, and is one of the few enterprises in China with the R&D and manufacturing capabilities for a full range of rehabilitation medical devices, demonstrating strong R&D and design competencies. Currently, the Company boasts substantial technological reserves, enabling it to effectively sustain its capacity for technological innovation.

The Company stated that, compared with foreign manufacturers of rehabilitation medical devices, it still faces certain technological disadvantages. As the rehabilitation medical device industry in China started relatively late, the concept of rehabilitation medicine has not been fully popularized, the upstream industries are less developed compared to other sectors, downstream customers have relatively low awareness of the rehabilitation medical device industry, and national demand for rehabilitation services has not yet been fully tapped. These factors have resulted in a certain gap between domestic rehabilitation medical device manufacturers and some international counterparts in terms of independent design and product innovation. However, in recent years, the Company has remained committed to researching and developing high-quality Chinese-made medical equipment, striving to narrow the technological gap with foreign R&D and manufacturing enterprises in the field of rehabilitation medical devices and reverse its technological disadvantages.

Sales Model Subject to Further Inquiry

During the reporting period, the Company’s sales model was divided into indirect sales and direct sales. Under the indirect sales model, customers primarily consisted of distributors and general indirect customers; under the direct sales model, customers were end-users. Both indirect and direct sales conducted by the Company were structured as outright product sales (buyout arrangements). From 2017 to 2019, indirect sales revenue accounted for 90.04%, 82.69%, and 81.87% of the Company’s total operating revenue, respectively. During the reporting period, the Company relied primarily on indirect sales, although revenue from the direct sales model increased year over year.

The Company’s sales model was once again subject to inquiry. According to the response to the first round of inquiries, the Company’s distributors enjoyed preferential purchase prices compared to general indirect customers; however, the gross profit margin difference between distributors and general indirect customers was minimal. In the first half of 2020, the gross profit margin for distributors was 65.49%, higher than the 64.67% for general indirect customers. The second round of inquiries required the Company to explain the reasons for and rationality of the similar gross profit margin levels between distributors and general indirect customers, as well as the higher gross profit margin for distributors in 2020, by referencing the average unit prices of the three product categories and comparing the selling prices of major products.

The Company responded that the average unit price for its three major product categories sold through distributors was generally lower than that for general indirect customers. In cases where the average unit price for distributors exceeded that of general indirect customers, this was primarily attributable to differences in the sales product mix between distributors and general indirect customers. From 2017 to 2019, the average unit price of the Company’s main products sold through distributors was slightly lower than that for general indirect customers, with the similar gross margin levels mainly driven by differences in the sales product mix between these two customer types. Data showed that from 2017 to 2019 and in the first half of 2020, the Company’s top ten products accounted for 45.92%, 43.47%, 42.28%, and 42.99% of distributor sales revenue, respectively, while accounting for 42.69%, 40.74%, 38.11%, and 38.53% of general indirect customer sales revenue, respectively. The slight differences in sales product mix resulted in variations in selling prices and gross margins between the two customer types. The slightly higher gross margin for distributors compared to general indirect customers in the first half of 2020 was primarily due to differences in sales product mix and the fact that semi-annual rebates had not yet been realized for distributors (as distributors are eligible for certain rebates only after fulfilling annual sales performance targets), which is reasonable.