Changling Capital: Bullish on Preventive Medicine and Other Niche Segments in Healthcare Services; Advocates for Companies to 'Return to Their Core Mission' in 2023

Long Hill Capital, founded in 2016, is perhaps no stranger to the outside world.

Long Hill Capital, which has been actively investing in the big health and aging-related sectors, has cumulatively invested in more than 60 innovative enterprises in these fields over the past six years.

In 2020 and 2021, Hygeia Healthcare and Gushengtang Traditional Chinese Medicine, both portfolio companies of Long Hill Capital, went public one after another. By the end of 2022, these two companies had maintained impressive performance, standing out as few among pharmaceutical firms listed in Hong Kong in 2020 and 2021 that demonstrated strong post-IPO market performance. While valuations across the secondary market for pharmaceutical companies declined broadly, with some share prices even falling below their IPO offering prices, Hygeia Healthcare and Gushengtang Traditional Chinese Medicine continued to exhibit a robust upward trajectory.

This may be attributed to Long Hill Capital’s unique investment vision. Jiang Xiaodong, Managing Partner of Long Hill Capital, has repeatedly emphasized that the firm will remain focused on medical technology, healthcare services, and related sectors, without making any structural changes.

As an investment firm that has long focused on this sector, its insights into the changes in the 2022 investment market and future trends are undoubtedly worth noting.

VCBeat: How do you view the changes in investment across the entire healthcare sector in 2022?

Jiang Xiaodong, Long Hill Capital:Investment in the healthcare sector underwent significant changes in 2022. Influenced by macroeconomic conditions and valuation corrections of publicly listed companies in the secondary market, financing for innovative enterprises in the primary market was also substantially impacted. Meanwhile, fluctuations in the pandemic situation in 2022 exerted temporary effects on business operations. Compared with 2021, these changes were undoubtedly pronounced.

VCBeat: Have investment firms, including Long Hill Capital, made corresponding adjustments to their investment strategies?

Long Hill Capital’s Jiang Xiaodong:Long Hill Capital’s investment strategy has remained unchanged; we continue to focus on the healthcare services and health technology sectors.We do not believe that the changes in the macroeconomic environment over the past year have led to any structural or fundamental shifts in our core views on these two subsectors or in our outlook on future investment opportunities; therefore, no adjustments have been made, nor are any required, to our investment strategy.In terms of investment pace, it was mainly affected by objective factors such as the fluctuation of the epidemic. The efficiency of many works was greatly reduced, such as inconvenience in business trips and inability to meet offline, which led to our investment pace in 2022 being relatively slower than before. As society gradually returns to normalcy, Long Hill Capital's investment pace will also gradually return to normal.

From an industry perspective, the pace of investment across the entire healthcare sector slowed down in 2022.The extent of the impact on each investment institution may vary, but the overall situation remains consistent. In particular, valuation adjustments over the past two years have made some investors more cautious in their deployment of capital. In fact, valuations in the secondary market have rebounded significantly in the last two months. Although they have not returned to the 2021 levels, there has been a notable recovery from the 2022 lows, with rebound magnitudes reaching even 20%–30%. However, the extent of this rebound differs substantially across various sub-sectors and target companies within the broader pharmaceutical and healthcare industry.The entire market has shifted from the fervor of two years ago, when any stock conceptually linked to pharmaceuticals enjoyed robust financing support, to a current climate where investors in both primary and secondary markets exercise greater caution—more prudently screening distinct targets within various niche sectors.

In addition to assessing the current landscape, it is also essential to anticipate trend shifts over the next two to three years and even in the longer term.In a volatile market, as investors adopt a more rational perspective on the intrinsic value of each company, which types of enterprises are likely to be viewed more favorably?Taking Hygeia Healthcare and Gushengtang, two companies in our investment portfolio, as examples, they went public in 2020 and 2021, respectively. As of the end of 2022, Hygeia Healthcare demonstrated the strongest post-IPO performance among nearly 30 Chinese pharmaceutical and healthcare companies listed in Hong Kong in 2020; similarly, Gushengtang was the top performer among nearly 30 such companies listed in Hong Kong in 2021. Moreover, they were among the few companies that experienced post-listing share price appreciation. Although valuations in the pharmaceutical and healthcare sector have been recovering over the past two months, with some companies’ stock prices rebounding by 20%–30%, most pharmaceutical and healthcare companies listed after 2020 still trade at valuations below their IPO prices. In contrast, the share prices of both Hygeia Healthcare and Gushengtang remain above their respective IPO prices. This reflects the distinctive characteristics of these two companies, and alsoReflects the ability of the healthcare services sector to transcend economic cycles.

Despite the various challenges and difficulties facing the entire industry—some structural, others temporary—we remain confident, as we have witnessed the ability of our portfolio companies to navigate through economic cycles.Investing requires a realistic view of risks and an optimistic outlook on the future.From a macro perspective, the most difficult period has passed. Market sentiment, confidence, and certain fundamentals are all in the process of gradual recovery. At this point in time, we should be more confident.

VCBeat: What were Long Hill Capital’s key investment achievements in 2022?

Long Hill Capital’s Jiang Xiaodong:From the perspective of portfolio companies, the analysis can primarily be conducted from two aspects: one is the follow-on financing of the portfolio companies.Throughout 2022, 15 portfolio companies of Long Hill Capital completed 17 follow-on financing rounds, with total funding exceeding $250 million.Notably, three to four financing rounds were completed during the Shanghai lockdown. Given the broader market conditions, we are quite satisfied with this achievement. On another front, we have seen revenue growth among our portfolio companies.In 2022, the overall revenue of portfolio companies under Long Hill Capital increased by over 30%.Amidst severe macroeconomic volatility, achieving such results is no small feat. It also demonstrates the business resilience of companies backed by Long Hill Capital. In a cooling capital market, securing financing smoothly poses a significant test for every enterprise. Companies affiliated with Long Hill have successfully navigated this phase, completed subsequent financing rounds, and achieved revenue growth.

As for Long Hill Capital itself,Although Long Hill Capital, like its peers, has slowed its investment pace, it continues to invest actively—neither halting operations nor adopting a passive stance.For example, in September 2022, Long Hill Capital announced its exclusive investment in Shengnuo Medical, a company focused on the field of medical imaging. Although the company is still in its early stages of development, both the maturity of its products and the volume of customer orders have shown significant progress and growth over the past few months. We also look forward to the rapid development of Long Hill Capital’s portfolio companies in 2023.

VCBeat: In the future, will there be other opportunities in the niche segments within the healthcare services and health tech sectors?

Jiang Xiaodong, Long Hill Capital:In 2022, the healthcare services industry experienced transient disruptions due to factors such as pandemic-related lockdowns. These constraints have since been gradually lifted. Throughout this period, both the industry and society have become acutely aware of the shortcomings in China’s healthcare services sector. Addressing these weaknesses and resolving the increasingly severe supply-side challenges in healthcare delivery have become imperative.From a certain perspective, development opportunities are improving. The macroeconomic and policy environments are expected to become more predictable over the next two to three years, creating conditions more favorable to the growth of privately run healthcare institutions. Having weathered past difficulties, high-quality enterprises that can truly deliver differentiated medical services and possess unique core competencies will not only achieve rapid growth but also outperform the broader market.Over the next ten, twenty, and thirty years, there will be a substantial gap between the demand for and supply of medical services in China. While numerous challenges exist, significant opportunities also abound. There is heightened concern regarding the health challenges faced by the aging population, a structural issue that demands resolution. Ensuring healthy lives for the nearly 400 million elderly individuals expected in ten to fifteen years presents both a formidable challenge and a tremendous opportunity. In 2023, and beyond, entrepreneurs and investors alike have considerable potential for success in our areas of focus.

In more specialized sectors, Long Hill Capital has also focused on many areas. To illustrate a sector with future growth potential, consider this example: the most significant change brought about by the pandemic over the past three years has been a fundamental shift in people’s awareness, willingness, and ability to manage their own health. We should not underestimate this change, as it will have a profound impact on the healthcare industry. This shift will drive the rapid development of preventive medicine, creating numerous opportunities from technological, product, and service perspectives.In the past, the healthcare industry’s focus was on disease treatment, with both products and services largely centered around curative care. While demand for treatment will persist in the future, the development of preventive medicine will emerge as a new and increasingly important theme, shaping entrepreneurship and investment within the healthcare sector.In the post-pandemic era, this can be viewed as a new opportunity from certain perspectives, and both entrepreneurs and investors should seize it.

VCBeat: In the context of the new policy environment, how do you think enterprises should seize future development opportunities?

Jiang Xiaodong, Long Hill Capital:I believe that companies should return to their original mission. Whether they are product-oriented or service-oriented, their core purpose should be to provide solutions that genuinely address customers’ problems—and do so in a way that is superior and more differentiated than that of their competitors.Enterprises need to refocus on their original entrepreneurial mission, which means returning their attention to customers., it is crucial to recognize that customers themselves are undergoing rapid changes. For instance, influenced by the pandemic, there has been a further strengthening of customer awareness regarding health management, along with new shifts in consumption habits. As customers evolve, enterprises must adapt accordingly. Companies in the healthcare industry should not construct hollow business models merely to craft narratives for investors. We have also observed over the past year the significant disparity in capital market recognition between companies genuinely endorsed by customers and those that simply rely on storytelling.

An outstanding entrepreneur’s original intention is never solely to make more money, gain fame, or realize personal ideals. The most fundamental, long-term, and motivating goal that can guide entrepreneurs to success should be to leverage their unique expertise to help customers solve problems more effectively. Only in this way can you earn the market recognition and success you deserve. This has become particularly important in the new capital market environment.Companies that only tell stories will find it difficult to survive and develop in the post-pandemic era.In a sense, investors become less critical; you should not focus on what investors say, but rather pay greater attention to customer feedback. All efforts should be directed toward meeting customer needs. Only by resolving customers’ problems can your enterprise achieve better growth, thereby earning greater confidence from shareholders and investors.

VCBeat: What expectations did Long Hill Capital have for itself in 2023?

Jiang Xiaodong, Long Hill Capital:There are no more than two “expectations.” The first is the hope to make up for the time lost over the past year. More importantly, it serves as a self-motivation to approach our work with greater enthusiasm and initiative, fully dedicating ourselves to helping our portfolio companies achieve rapid growth in an environment that is gradually recovering. The second is the aspiration to seize development opportunities over the next five years. Over the past six years, Long Hill Capital has experienced ups and downs and weathered various challenges, while achieving proud accomplishments in the market.We believe that the significant development of China's healthcare services sector has only just begun, and we aim to seize this opportunity with a more proactive stance.Against this broad backdrop, our accumulated differentiated advantages and deep understanding of the industry will help us truly seize this opportunity. In the fields focused on by Long Hill Capital, such as healthcare services and health technology, we are more than happy to engage in discussions with entrepreneurs at any stage who have new financing ideas and development visions, exploring how we can work together to promote the development of the entire industry.