Haoxi Health Technology Ltd. ( HAO ) rode a post-Covid boom in China's healthcare sector to become one of six Chinese firms to list in the U.S. in January. It was typical of the roughly 20 Chinese and Hong Kong companies to list in New York so far this year, which have quietly raised a collective $195 million. Unlike blockbuster Chinese IPOs of the past, the latest listings have all been relatively pint-sized, including Haoxi's at just $11 million.

Investors lapped up Haoxi's story of feeding on demand for marketing services from China's vibrant healthcare industry, at least initially. After debuting strongly, the stock traded well above its IPO price of $4 in its first four months, valuing the company at more than $200 million at its height. But a May 5 announcement of a rebate plan to advertisers brought an abrupt end to the honeymoon, touching off a downward trend.

Those concerns accelerated after the company announced plans last week to sell an additional 1.5 million shares, as well as warrants with an exercise price of $6.26 per share - the price stock at the time of the announcement. That would raise as much as $9 million, slightly less than the amount it raised in its IPO. Investors dumped the stock after that, wiping another 28% off the company's value in the next four trading days.

Even after the selloff, the stock's Tuesday close of $4.60 means the shares are still above the IPO price of $4. But it could be just a matter of time before they fall below that level if the stock keeps falling from its all-time peak of nearly $9 in early May.

Two of the biggest losers from the selloff are Haoxi Chairman and CEO Fan Zhen, who controls 91.25% of the company's voting power after the latest offering, and company founder and COO Xu Lei, who will hold 2.83% of the voting power. Fan's background lies in fintech, while Xu set up Haoxi in 2018 after a career in medical advertising.

Despite the waning investor confidence, there's little doubt that Haoxi's financials are healthy. Its revenue and profits have both been rocketing along in the last two years, buoyed by a booming Chinese industry where healthcare spending doubled between 2016 and 2021 to 7.6 trillion yuan ($1 trillion), making it the world's second largest market after the U.S.

Haoxi supplies advertising content generation services, mainly in the form of short videos, to healthcare providers, including dentistry. Health services is a niche of the broader digital advertising sector, accounting for about 9% of an estimated $189 billion in global spending on digital advertising in 2024, according to Statista. Third-party research in Haoxi's IPO prospectus said China's internet healthcare market was worth 343 billion yuan that year, a figure that grew during the pandemic as more people were forced to seek medical care online.

In the final six months of last year, which corresponds to the first half of Haoxi's fiscal year, the company's overall client base grew to 338 advertising customers from 183 in the year-ago period, according to its latest financial report released last month. Average revenue per client increased by 39% over that time to $69,538. That translated into a 157% increase in revenue from $9.2 million to $23.5 million over the period, with its gross profit up 65% to $1.2 million.

Big Hopes

Haoxi is aiming to sign up 10% of advertisers in China's healthcare industry as its customers by 2025, which it would do by acquiring 150 to 200 new advertisers per year, according to its prospectus. Its name, Haoxi, translates to "great hopes."

One of Haoxi's biggest risks is its heavy dependence on ByteDance as a partner for placement of Haoxi's ads. The parent of TikTok, which operates the similar Douyin service in China, was responsible for 96% of Haoxi's ad placements in its 2023 fiscal year, representing $34.8 million of its revenue. Drilling down into the company's cost structure, its cost of revenues - mostly payments to ByteDance - rose from $8.4 million in the last six months of 2022 to $22.3 million in the last six months of 2023, almost tripling.

ByteDance has become a major target for Chinese regulators lately, in a sector that has received intense scrutiny over the past few years. In 2018, the company was fined 3.7 million yuan after failing to submit ads for two healthcare products and a non-prescription drug for regulatory checks, as well as for failing to verify the content of the ads.

Another concerning metric is the explosion in Haoxi's accounts payable, which ballooned to about $1 million by the end of December last year from just $27,312 six months earlier. This could mean the company's clients are falling behind in their payments as China's economy slows. Haoxi's rebate to advertisers in May could also reflect difficulties facing the industry, forcing it to make such rebates as a form of discount.

On a more positive note, Haoxi still trades at a strong price to sales (P/S) ratio of 3.44. That's well ahead of the 1.0 for Shanghai-listed Neusoft (600718.SS), which provides software and technology for the healthcare industry, including e-commerce and advertising services. It also leads the 1.7 P/S for leading search engine Baidu ( BIDU ) , which is often seen as a benchmark for digital advertising services.

Haoxi may be too new and too small for analysts to follow just yet, but it may be just a matter of time before it gains attention for its growth potential. Simply Wall Street described it in January as a "quality company" based on its return on equity of 62%, and its low debt-to-equity ratio of 0.55. While its most recent fundraising may dilute existing shareholders, the issue of new shares will also boost the size of its public float, which could attract new investors looking for higher liquidity before buying in to the stock.