Source: China Economic Net China Economic Net Editor's note: Hong Kong Stock Exchange documents show that on January 24, oral medical service provider Riel Group Co., Ltd. submitted a listing application on the Hong Kong Stock Exchange, with Morgan Stanley and UBS Group being the

Source: China Economic Network

China Economic Network Editor's Note : Hong Kong Stock Exchange documents show that on January 24, oral medical service provider Riel Group Co., Ltd. submitted a listing application on the Hong Kong Stock Exchange, with Morgan Stanley and UBS Group being the joint sponsors. This is not the first time that Ruier Group has made a sprint for Hong Kong stock IPO. It first submitted its statement on July 1, 2021, but the prospectus has expired on January 1, 2022.

Public information shows that Ruier Group established its first dental clinic in Beijing in 1999. Currently, it has Ruier Dental, which is positioned at high-end dental medical services and Ruitai Dental, which is positioned at public dental medical services. The prospectus pointed out that in the past 10 years, the company has served about 7.4 million patients. The oral medical services provided include general dentistry, orthodontics and implants.

Ruier Group lost more than 1.2 billion yuan in three years. The prospectus shows that from fiscal years 2019 to fiscal years 2021 and the six months ended September 30, 2021, Ruier Group's revenue was approximately 1.08 billion yuan, 1.1 billion yuan, 1.515 billion yuan and 841 million yuan respectively. During the same period, the losses during the period were approximately RMB 304 million, RMB 326 million, RMB 597 million and RMB 464 million, respectively.

According to Hexun Stock Report, the prospectus shows that in the three fiscal years ended March 31, the total assets of Ruier Group were 1.876 billion yuan, 1.903 billion yuan and 2.351 billion yuan respectively. The total liabilities were RMB 3.512 billion, RMB 3.931 billion and RMB 4.807 billion, respectively, and the debt-to-asset ratio of Ruier Group was 187.21%, 206.57%, and 204.47%, respectively.

As of September 30, 2021, Ruier Group had total assets of 2.869 billion yuan, liabilities of 5.78 billion yuan, and debt-to-asset ratio of 201.46%.

According to Securities Daily, the cost of sales remains high. From fiscal year 2019 to fiscal year 2021 and the six months ended September 30, 2021, the sales costs of Riel Group were RMB 917 million, RMB 988 million, RMB 1.151 billion and RMB 654 million, respectively, accounting for 84.8%, 89.9%, 75.9% and 77.7% of the total revenue, respectively. From the detailed perspective, the most important part of sales costs is employee welfare expenses, which always remained above 50%, including RMB 463 million, RMB 502 million, RMB 585 million and RMB 352 million, respectively.

According to China Science and Technology News Network, Riel Group explained in its prospectus that the main factor affecting its revenue costs is personnel welfare expenses (including wages, salaries and bonuses for dentists and other employees). In the fiscal years 2019 to 2021, its personnel welfare expenditure was RMB 566 million, RMB 615 million and RMB 717 million, respectively, accounting for 61.8%, 62.3% and 62.3% of the current revenue costs, respectively.

According to China.com Finance, Ruier Group was fined or punished by relevant government agencies for several non-compliance incidents in daily business. Among them, 43 Chinese subsidiaries were imposed 75 administrative penalties by relevant government agencies during the track record period, and 53 of them were fined for a total of RMB 852,180, of which RMB 112,300 (fined due to 35 incidents of 27 subsidiaries) were fines for violating relevant health management regulations and rules.

According to the Investment Times, during the reporting period, the total purchase amount of Ruier Group to the top five suppliers accounted for 46%, 47% and 33% of the total purchase amount, respectively, with a high concentration of suppliers. Among them, the purchase amount of the largest supplier accounts for 17%, 20% and 10% respectively, and this largest supplier is always a human resources service provider. As an oral medical service company, Riel Group's largest procurement is actually the procurement of labor. According to the prospectus data, as of March 31, 2021, the company had a total of 3,240 full-time employees, of which only 856 were dentists, and the rest were nursing staff, customer service staff, general administrative staff and marketing team.

According to Investors Network, now that the bet is undermining, the process of applying for listing by Ruier Group is imminent. Since 2010, Ruier Group has carried out five rounds of financing, with a financing amount of nearly 400 million yuan. Investors include Goldman Sachs Group, Pusi Capital, Hillhouse Capital and other institutions. The largest financing event occurred in April this year, with a Series E financing led by Temasek, with a total transaction volume of nearly US$200 million.

Sprinting for Hong Kong stock IPO Hillhouse Temasek acquires a stake in

Founded in 1999, Ruier Group provides various professional and personalized oral medical services, including general dentistry, orthodontics and implants.In the fiscal years 2019, 2020 and 2021 and the six months ended September 30, 2021, the follow-up rate of loyal customers of Riel Group (i.e., the percentage of patients who went to the clinic or hospital again after six months from the first visit, excluding follow-up consultations for the same treatment) was 42.1%, 41.4%, 45.8% and 47.6% respectively.

Public information shows that the number of oral medical institutions in China has increased from 64,100 in 2015 to 87,700 in 2020, with an annual compound growth rate of 6.5%. It is expected that the number of oral medical institutions will reach 144,500 in 2025, with an annual compound growth rate of 10.4%. In particular, private dental clinics accounted for 51.9% of China's total dental medical service market in 2020, while dental hospitals and general hospitals with dentistry departments accounted for 48.1% of the total market share.

As of September 30, 2021, Ruier Group operated 111 hospitals and clinics in 15 major first- and second-tier cities in China (including four clinics located in Changsha operated under exclusive consultation and service agreements), providing mid-to-high-end oral care services, and has nearly 7.4 million visitors from 882 senior dentists.

As of September 30, 2021, Ruier Group operated 7 hospitals in China under the Ruitai Dental Brand; and operated 104 clinics (including 51 Ruier dental brands and 53 Ruitai Dental Brands).

According to Frost & Sullivan's data, based on the total revenue in 2020, Riel Group is the largest oral medical service provider in China's high-end private oral medical service market, and based on the revenue of the same period, it is also the third largest oral medical service provider in the entire private oral medical service market in China. Based on revenue in 2020, Ruier Dental accounts for 24.1% of the high-end private oral medical service market.

In terms of equity structure, Zou Qifang, Rise Day Holdings Limited, Mingda International Limited, Beier Holdings Limited and ESOP BVI are the controlling shareholders, and Zou Qifang is the founder and largest shareholder. Temasek (Elbrus Investments) holds 10.88% of the shares and is the largest institutional shareholder of Riel Group. At the same time, Total Success Investment Ltd. holds 10.32% of the shares, Goldman Sachs holds 8.24% of the shares, KPCB holds 6.35% of the shares, Qiming Venture Capital holds 5.54% of the shares, and Hillhouse Capital holds 5.13% of the shares.

The proceeds from the funds raised by Ruier Group in this IPO will be used for business expansion, the opening of new Ruier and Ruitai hospitals and clinics in existing and new cities; for the construction and optimization of information technology infrastructure; and for the implementation of working capital, we will continue to provide customers with high-quality oral medical services.

losses have increased year by year, with a loss of more than 1.2 billion yuan in three years

Prospectus shows that from fiscal years 2019 to fiscal years 2021 and the six months ended September 30, 2021, Ruier Group's revenue was approximately 1.08 billion yuan, 1.1 billion yuan, 1.515 billion yuan and 841 million yuan respectively. During the same period, the losses during the period were approximately RMB 304 million, RMB 326 million, RMB 597 million and RMB 464 million, respectively.

Prospectus shows that in the 2019, 2020 and 2021 fiscal years and the six months ended September 30, 2020 and 2021, Riel Group's revenue from general dentistry accounted for 55.9%, 54.0%, 54.7%, 54.2% and 53.3% of the total revenue. The income from orthodontics accounts for 20.6%, 22.3%, 22.6%, 24.6% and 23.7% of the total income. The income from planting families accounts for 21.4%, 21.5%, 19.8%, 18.7% and 20.7% of the total income.

gross profit margin is only half of Tongce Medical

2019, 2020 and 2021 fiscal years, Ruier Group's gross profit margin was 15.2%, 10.1% and 24.1% respectively. For the six months ended September 30, 2021, the gross profit margin was 22.3%.

According to Interface News, although Ruier Group and Tongce Medical businesses are similar, their gross profit margin is only about half of Tongce Medical.

data shows that Tongce Medical's gross profit margin in 2020 is 45%, and Ruier Group's gross profit margin in 2021 is 24%. The two companies have little difference in medical materials costs, which means that the difference in gross profit does not lie in raw materials. In 2020, Tongce Medical Materials' cost of 310 million yuan accounted for 15% of its revenue, and Ruier Group's material cost of 232 million yuan accounted for 15.3% of its revenue in fiscal 2021.

The difference in profitability of the two companies is due to different human burdens. In 2020, the labor cost of Tongce Medical's sales costs accounted for 30% of its revenue, while the proportion of Ruier Group in fiscal year 2021 was 38.6%, 8.6 percentage points higher than Tongce Medical.

The reason is that domestic dentists are in short supply. According to Frost and Sullivan data, the number of dentists per million in China in 2020 was 175, while that of Europe and the United States was 810 and 608 respectively.In addition, because of the low requirements for operation, supervision and capital, domestic private service providers are mainly composed of oral clinics, diversion of a large number of experienced dentists.

prospectus disclosed that the average monthly income of dentists who joined the Riel Group in 2016, 2017 and 2018 increased at a compound annual growth rate of 43%, 54% and 30% during the five-year, four-year and three-year period, respectively, which constitutes an increasingly heavy cost burden on the company. In order to alleviate labor costs, Ruier Group also adopted the labor dispatch employment model. At the end of March 2021, the company's first and third largest suppliers were human resources service providers.

depreciation and amortization are another major reasons for the difference in profitability. In 2020, the depreciation and amortization of 27 million yuan of Tongce Medical's sales costs accounted for 1.3% of its revenue, while the proportion of Ruier Group was as high as 14%, which was 12.7 percentage points higher than Tongce Medical.

Depreciation and amortization in sales costs mainly includes depreciation of medical equipment and office properties. The "depreciation of right-of-use assets" in the depreciation and amortization of Ruier Group in fiscal year 2021 is particularly prominent, with this item reaching 147 million yuan. The company disclosed that the "right of use assets" refers to the leasing of dental hospitals, clinics and office spaces. As of March 31, 2021, the company's "right of use assets" reached 595 million yuan, while its own fixed assets (property, factory buildings and equipment) were only 260 million yuan. Tongce Medical has no "right to use assets" in 2020, and both the hospital and office space are owned properties.

"Right to Use Assets" is a new product after the implementation of the 2019 "Enterprise Accounting Standard No. 21 - Leasing (Revised Edition)". Under the new standards, whether it is financial leasing or operating leasing, the lessee must include it in the "Right to Use Assets" account to account and make depreciation, and the operating leasing assets shall be determined based on which of the lease period or the remaining service life of the leased assets. Ruier Group has a small fixed assets, and hospitals and office spaces rely on leasing, and will be under pressure on depreciation and amortization costs for a long time under the new standards.

High debt ratio

According to Hexun Stock Report, there is not much time left for Ruier Group to sprint to go public before the end of the year. A more severe challenge is how to achieve self-generating and reduce debt ratio.

prospectus shows that in the three fiscal years ended March 31, the total assets of Ruier Group were 1.876 billion yuan, 1.903 billion yuan and 2.351 billion yuan respectively. The total liabilities were RMB 3.512 billion, RMB 3.931 billion and RMB 4.807 billion, respectively, and the debt-to-asset ratio of Ruier Group was 187.21%, 206.57%, and 204.47%, respectively.

As of March 31, 2021, cash and cash equivalents were 676 million yuan. However, the net current liabilities in the same period were 4.257 billion yuan, of which 3.178 billion yuan was convertible and redeemable preferred shares. After deducting the impact of preferred shares, the funding gap of Ruier Group still exceeds 400 million yuan.

Sales cost remains high

According to Securities Daily, for the continued losses, Ruier Group's explanation is that the sales cost remains high.

From fiscal year 2019 to fiscal year 2021 and the six months ended September 30, 2021, the sales costs of Riel Group were RMB 917 million, RMB 988 million, RMB 1.151 billion and RMB 654 million, respectively, accounting for 84.8%, 89.9%, 75.9% and 77.7% of the total revenue, respectively.

From a detailed perspective, the most important part of sales costs is employee welfare expenses, which always remained above 50%, including RMB 463 million, RMB 502 million, RMB 585 million and RMB 352 million, respectively.

As a private dental hospital, compared with public hospitals, Riel Group's biggest competitive advantage in recruiting professional doctors is its high salary. This part of the cost cannot be offset by the expansion of the company's scale or the refinement of operations. Therefore, Riel Group also clearly stated in its prospectus that due to the shortage of dentists, the company has and is expected to continue to provide more competitive compensation for dentists.

Performance problems are in "dentist". Human resources cost weakens profits.

In fact, compared with other departments, oral medical care has a unique handicraft property and relies more on dentist resources. The number of practicing doctors, practical ability and professionalism have become important factors in the supply capacity of oral medical services. Riel Group also stated in its prospectus that its future success depends on its ability to retain, attract and inspire a sufficient number of qualified and experienced dentists.

Therefore, Riel Group provides dentists with abundant resources and attractive economic incentives to stabilize their partnership, but it also increases the operating burden.Compared with Tongce Medical, Ruier Group has higher per capita labor expenditure. In the 2021 fiscal year, Ruier Group's personnel welfare expenditure was 717 million yuan, with a total of 3,240 employees, with an average expenditure of 221,200 yuan; while Tongce Medical's labor cost in 2020 was 637 million yuan, with 4,118 employees, and a per capita expenditure of 154,600 yuan, with a difference of more than 60,000 yuan.

43 subsidiaries have been punished with 75 administrative penalties

According to China.com Finance, as of the last feasible date, Ruier Group has not yet obtained the required fire registration for four dental medical institutions (composed of three clinics and one hospital). As of the date of the prospectus, Riel Group has carried out necessary fire safety facilities improvements to one of the clinics and one hospitals and obtained a fire registration. In addition, a medical institution in Changsha was previously fined RMB 4,000 for failing to handle firefighting registration in a timely manner.

In addition, during the trailer record period, Riel Group was fined or otherwise punished by relevant government agencies for several non-compliance incidents in daily business. Among them, 43 Chinese subsidiaries were imposed 75 administrative penalties by relevant government agencies during the track record period, and 53 of them were fined for a total of RMB 852,180, of which RMB 112,300 (fined due to 35 incidents of 27 subsidiaries) were fines for violating relevant health management regulations and rules. The maximum fine for each single incident is RMB 20,000; (ii) RMB 1,600 (fined for five incidents of five subsidiaries) is a fine for violation of relevant tax management regulations and rules. The maximum fine for each single incident is RMB 1,000; (iii) RMB 460,300 is a fine for violating relevant environmental protection regulations and rules (fined for five incidents of five subsidiaries). The maximum fine for each single incident is RMB 200,000; (iv) RMB 258,980 (fined for six incidents of four subsidiaries) is a fine for violation of regulations and rules regarding medical advertising. The maximum fine for each single incident is RMB 174,480; and (v) RMB 19,000 (fined for both incidents) is a fine for violation of the provisions and rules of fire safety management.

Supply concentration is high

According to the Investment Times, during the reporting period, the total purchase amount of Ruier Group to the top five suppliers accounted for 46%, 47% and 33% of the total purchase amount, respectively, with a high concentration of suppliers. Among them, the purchase amount of the largest supplier accounts for 17%, 20% and 10% respectively, and this largest supplier is always a human resources service provider.

As an oral medical service company, Riel Group's biggest purchase is actually the procurement of labor. According to the prospectus data, as of March 31, 2021, the company had a total of 3,240 full-time employees, of which only 856 were dentists, and the rest were nursing staff, customer service staff, general administrative staff and marketing team.

Another supplier worthy of attention is Hangzhou Shengchao Medical Technology Co., Ltd. (hereinafter referred to as Hangzhou Shengchao), the fourth largest supplier in fiscal year 2021. Because Zou Qifang's daughter Zou Jin holds 65% of the shares of Hangzhou Jiaworth, and Hangzhou Shengchao is a subsidiary of Hangzhou Jiaworth, Hangzhou Shengchao is recognized as an affiliate of Ruier Group.

In the fiscal year 2021, Ruier Group purchased 16.61 million yuan of dental products from Hangzhou Shengchao. Not only that, in the same year, Hangzhou Shengchao became the largest customer of Ruier Group, and its products were also dental products. It is both a big customer and a major supplier, and the sales and procurement of products are both dental products. What kind of story behind this related transaction may be confusing.

bets to hit the listing

According to Investors Network, since 2010, Ruier Group has carried out 5 rounds of financing, with a financing amount of nearly 400 million yuan. Investors include Goldman Sachs Group, Pusi Capital, Hillhouse Capital and other institutions. The largest financing event occurred in April this year, with a Series E financing led by Temasek, with a total transaction volume of nearly US$200 million.

prospectus shows that ESOP BVI, the employee shareholding platform of Ruier Group, holds 22.42% of the shares, and the voting rights will be held by the founder Zou Qifang in agency form; in addition, combined with the 11.87% stake held by Zou Qifang, he controls a total of 34.29% of the shares and is the controlling shareholder of Ruier Group.Elbrus Investments Pte.Ltd, a subsidiary of Temasek, is the largest institutional investor and holds a 10.88% stake.

During the last E-round financing of Riel Group, several investors subscribed a total of 2.5317 million Series E-round preferred shares at a consideration of approximately US$117.6 million, with a shareholding ratio of approximately 11.82%. From this we can calculate that the valuation of Riel Group during its Series E financing was approximately US$995 million.

According to the shareholder agreement, Riel Group and investors agreed that if it fails to successfully list before December 31, 2020, its market value before listing is less than US$1 billion, or it seriously violates any transaction documents, any preferred stock holder may ask Riel Group to redeem the shares.

It is worth noting that Inriel Group failed to fulfill its listing commitment on time, and all preferred shares of round A to round E were classified as current liabilities on March 31, 2021. According to the prospectus data, from 2019 to 2021, the statistics of Ruier Group and convertible redeemable preferred shares classified as current liabilities were RMB 0, RMB 2.463 billion and RMB 3.178 billion, respectively.