On Wednesday, New Horizon Health Limited (06606.HK) fell more than 20% in trading, the biggest decline among healthcare companies on the Hong Kong Stock Exchange. The stock narrowed its decline in the last trading and closed at HK$18.42, down 6.88%.

A report titled "Investigation on Financial Data Fraud of New Horizon Health” has been circulating online. It alleges that New Horizon Health stocked up goods and 90% of its sales revenue was false. The company's actual business volume was far less than its disclosed financial data, with its actual sales of 76.95 million yuan in 2022, which was about one tenth of the 765 million yuan disclosed in its financial report.

New Horizon Health has responded twice, stating that the accusations in the report are notoriously false  and the information distorts the facts. The company will take legal action to hold the false accuser accountable and protect its legitimate rights and interests.

The issuer of the report is Capitalwatch.

According to publicly available information, Capitalwatch is a local financial news outlet based in the United States, with a history of over 20 years. Starting in 2022, J Public Relations Group, Capitalwatch's parent company, launched Chinese services on Capitalwatch.com in Hong Kong, China.

It is worth noting that in March 2022, Capitalwatch published a short-selling report entitled "AI Mythology Exposed: Nine Questions for SenseTime".

This time, Capitalwatch claims that it took 16 months to conduct investigations across the country, collect information from e-commerce platforms, government public projects, and other related sources, and compiled this report after careful calculation.

In response to the short-selling report, New Horizon Health stated, "The information in the report distorts the facts and intends to harm the reputation of our company. We will take legal action to hold them accountable and protect the legitimate rights and interests of our company. The information we have disclosed on the Hong Kong Stock Exchange is true and compliant."

After the Hong Kong stock market closed on Wednesday, New Horizon Health once again responded by issuing a clarification announcement on the Hong Kong Stock Exchange. The announcement stated, "On August 16, 2023, a so-called short-selling institution issued a report containing numerous false, baseless, and misleading allegations against our company. The purpose of the report is to negatively impact our stock price and serve the private interests of the institution. The allegations in the report are blatantly false."

During a meeting with investors on the same day, Zhu Yeqing, the Chairman of New Horizon Health, also clarified the issues raised in the report. He stated that every public annual report and data of the company can withstand research and verification, and the company has paid over 75 million yuan in value-added tax to the Binjiang Tax Bureau in the first half of the year.

"The short-selling institution has sought cooperation with our company multiple times through public relations companies, but we have rejected them," Zhu Yeqing said at the meeting.

At the same time, a snapshot of alleged remarks from New Horizon Health's IR social platform is also circulating, mentioning "extorting 3 million yuan from the company" and other information.

The Sales Data of Three Major Products of New Horizon Health are Questioned

Currently, New Horizon Health has three commercialized products about cancer screening: ColoClear by Circle and Pupu Tube for colorectal cancer screening, and UU Tube for Helicobacter pylori screening. In addition, the company is working on three tube-based products for liver cancer, cervical cancer, and nasopharyngeal cancer screening.

According to New Horizon Health's 2022 annual report, the company's annual revenue was 765 million yuan. Among them, the total sales revenue of ColoClear by Circle domestically and internationally was 357 million yuan, a year-on-year growth of 266%. Pupu Tube's revenue was 201 million yuan, a year-on-year growth of 74%. The sales revenue of UU Tube, launched in January of that year, was 208 million yuan. In 2022, the sales revenue of the three products accounted for 46.61%, 26.22%, and 27.16%, respectively.

The report raised multiple questions regarding the sales data of the aforementioned three products.

Question 1: Doubt about the sales data of ColoClear by Circle in public hospitals.

The report claims that there are three main sales channels for cancer screening tests in the Chinese market, namely medical and physical examination institutions, government projects, and e-commerce. Among them, public hospitals are the largest channel for the sales volume of in vitro diagnostic medical devices.

The report states that there are about 655 hospitals with high activity and a large number of people tested in the tumor early screening business. New Horizon Health's ColoClear by Circle has entered approximately 26 hospitals, with a sales volume of about 6,000. Optimistically estimating, based on the supply price of 500 yuan/person in hospitals, the confirmed sales revenue of ColoClear by Circle in the professional medical market in 2022 is about 3 million yuan.

The report further "speculates in good faith" that if the sales volume of the product doubles in the clinical end, it will be only 6 million yuan.

Question 2: Doubt about the sales amount of Pupu Tube through the public health channel.

In the public health project about colorectal cancer screening, the report uses Pupu Tube as the participating product and assumes that the project in 2020 will occur synchronously in 2022. The sales data of New Horizon's Pupu Tube in the government projects that have been publicly disclosed is approximately 650,000 yuan.

The report combines the information obtained from New Horizon's internal sales personnel and speculates that the supply volume of New Horizon's Pupu Tube in 2022 would be approximately 2.95 million. Calculated based on a uniform supply price of 10 yuan per person, the sales amount will be 29.5 million yuan.

Question 3: Doubt about the confirmed income of ColoClear by Circle in private physical examination institutions.

In the sales channel of private physical examination institutions, the report states that New Horizon's products mainly rely on Ikang Healthcare's physical examination institutions for tied selling. Due to the impact of pandemic control, the number of people undergoing physical examinations in 2022 has significantly decreased. Therefore, New Horizon can hardly achieve a 266% growth in sales of ColoClear by Circle solely relying on one or two close private physical examination institutions.

The report points out that according to an insider in the industry, the selling price of New Horizon's products to Ikang Healthcare Group is 260 yuan per person (including testing and delivery fees).

Based on the assumption that the supply amount to Ikang Healthcare doubles and all products sold are retested, the report speculates that the confirmed income of New Horizon's ColoClear by Circle in 2022 is about 20.8 million yuan.

Question 4: E-commerce platforms are a hotbed for fake orders.

The report claims that e-commerce platforms are a hotbed for sales data fraud by New Horizon Company. The sales data of its products in e-commerce platforms violates the normal rules of promotion in Chinese e-commerce platforms. In 2022, the sales revenue of ColoClear by Circle on e-commerce platforms was 12.6 million yuan, Pupu Tube was 3.42 million yuan, and UU Tube was 3.98 million yuan, with a combined sales revenue of about 20 million yuan.

The report states that the data published by New Horizon for the November 11th, 2022 was 60 million yuan, twice more than the actual data. In addition, the report also claims that there are fake orders on e-commerce platforms, with sales links for an average transaction value (ATV) of 9,200 yuan.

New Horizon Health Denies Accusations of "Fake Orders"

In response to the four major questions raised in the report, New Horizon Health said that a comparison can be made with the previous data regarding the supply price of ColoClear by Circle in the hospital.

On July 12th, New Horizon Health's supplementary disclosure announcement on the Hong Kong Stock Exchange showed that in the first half of this year, the sales revenue of ColoClear by Circle in tertiary public hospitals, secondary public hospitals, and private hospitals were 12.2 million yuan, 2.3 million yuan, 128 million yuan, and 80.7 million yuan respectively and the corresponding sales units were 9,600, 1,700, 79,500, and 54,200.

Accordingly, the revenue confirmed by New Horizon Health from each unit of ColoClear by Circle in the above-mentioned four medical scenarios was 1,270.08 yuan, 1,352.94 yuan, 1,606.29 yuan, and 1,488.93 yuan respectively.

The price of ColoClear by Circle obtained from the above calculation differs significantly from the "optimistic estimate of a supply price of up to 500 yuan per person" mentioned in the report.

According to the report, the price of ColoClear by Circle sold to Ikang Healthcare is 260 yuan per person (including testing, delivery fees, etc.)", almost half of the "supply price of up to 500 yuan/person" on the hospital side mentioned in the report. The rationality of the data is questionable, but the truth is still unknown.

In addition, TMTPost App found in its analysis of the report that according to the data listed, the sales data of New Horizon Health from October 1st to November 1st, including the period of November 11th (October 20th, 2022, 20:00 - November 11th, 2022, 23:59), should be 8.249 million yuan, but the conclusion of the "fabricated performance exceeding twice the actual performance" mentioned in the report does not match the data.

During the exchange meeting on Wednesday afternoon, New Horizon Health stated that the sales data obtained from the third-party platforms is not accurate. Zhu also explained that the income confirmation process of ColoClear by Circle in the e-commerce channel is complex, including purchase, examination, confirmation of examination, invoice verification, etc.. Fraud of orders and stocking are not beneficial to the income system, but will increase the impairment risk caused by unexamined cases.

In addition, the report that targeted New Horizon Health also questioned the testing ability of ColoClear by Circle: Qichacha, a Chinese company that delivers business data and credit information, shows that New Horizon's subsidiary includes Guangzhou New Horizon Medical Laboratory Co., Ltd. with 8 registered personnel, Hangzhou Nuokang Medical Laboratory Co., Ltd. with 18 registered personnel, and Hangzhou Nuokang Medical Laboratory Co., Ltd. (specific number of registered personnel unknown).

The report stated, "By a generous estimate, the number of testing personnel in the three third-party medical laboratories established in Beijing, Hangzhou, and Guangzhou does not exceed 40."

New Horizon Health stated in the exchange meeting that the number of registered personnel of the company is in compliance with the minimum requirement and is not the same as the actual number of personnel, and the number of laboratory personnel far exceeds that of registered personnel.

Regarding testing capabilities, Zhu stated that the testing capabilities of their laboratories in Hangzhou, Beijing, and Guangzhou will not be a problem in the next three years. They can complete testing volumes of 2 to 4 million through shift work, and they are also looking for automated solutions to further improve testing capabilities.

The report also pointed out the following findings based on industry feedback:

1. New Horizon Health and distributors and partners mutually purchase equivalent products and services.

2. Internal employees of New Horizon Health are worried about being implicated in a potential scandal.

3. New Horizon Health repeatedly provides testing samples through internal employees.

4. New Horizon Health expands the number of samples for retesting through distributors.

5. The revenue from physical examinations in most Grade-A tertiary hospitals in many regions has decreased by about one-third in 2022.

6. UU Tube has no actual sales in highly active professional medical institutions with large testing volumes.

7. UU Tube is not popular, with less than 100 units sold in six months.

8. The advertisements for UU Tube and Pupu Tube are significantly different from reality.

9. New Horizon Health constantly claims false sales figures to the public.

10. Pupu Tube's annual production capacity of 5 million units is significantly different from actual production and sales.

11. ColoClear by Circle's testing in the main sales channel in the health market  is completed in New Horizon Health Medical Laboratory.

In addition, the report raises many questions about New Horizon Health's accounts receivable, intellectual property rights, and promotion.

In response to the accusations of "fabricated data" in the report, New Horizon Health also stated that almost no figures can withstand scrutiny.

New Horizon Health stated that after the quiet period following the Hong Kong Stock Exchange's trading on Monday, the company will hold a series of investor and media exchange meetings to openly and transparently discuss the company's development and performance. On August 21, New Horizon Health will release its interim performance report for the first half of 2023 after the Hong Kong stock market closes.

Previously, New Horizon Health released a profit forecast, stating that it is expected to record an adjusted net profit of over 45 million yuan in the first half of 2023, compared to an adjusted net loss of 106.2 million yuan in the same period last year. The company's turnaround is mainly attributed to the commercialization of its products and cost control of marketing, management, and research and development costs. (This article was first published on the TMTPost App. Author: Yang Yaru, Editor: Sun Cheng)