IFlytek hives off health unit to fund AI medical drive

The iFlytek group aims to list its Xunfei Healthcare subsidiary on the Hong Kong stock market, using the proceeds to deploy large AI models for medical services

Key Takeaways:

• Xunfei Healthcare has posted rising revenue since its launch, but the firm racked up a loss of more than 280 million yuan in the past two years
• The financial condition of the parent company, iFlytek, may have been a factor in the decision to spin off the subsidiary despite a Hong Kong market slump and weak healthcare stocks

By Molly Wen

An AI fever swept the business world last year, with products springing up in sectors from education to office work. The healthcare industry was not immediately caught up in the craze, but things are starting to heat up there too.

Chinese Artificial Intelligence (AI) company iFlytek (002230.SZ) announced last Tuesday it was planning to hive off its healthcare arm and list the business on the Hong Kong Stock Exchange. It said the unit, Xunfei Healthcare Technology Co. Ltd., would invest the cash in expanding its AI-enhanced medical services.

At present, iFlytek holds 52.47% of Xunfei Healthcare equity, with group Chairman Liu Qingfeng and USTC Holdings as the controlling shareholders. The announcement said Xunfei Healthcare will issue no more than around 20.09 million shares, or 15% of the enlarged share capital, rising to a maximum of approximately 23.1 million new shares if the over-allotment option is exercised. Therefore, iFlytek will keep control of the healthcare enterprise even after the spinoff.

Xunfei Healthcare was founded in May 2016 with a focus on utilizing AI to deliver enhanced medical care. Using technologies such as voice and image recognition, it provides doctor services and chronic disease management for individuals while helping hospitals with diagnosis and information management. The company has eight divisions covering medical technology services, Internet hospitals, software development, technological services and medical services.

Despite rising demand for medical AI, Xunfei Healthcare is operating at a loss. Annual revenues have grown steadily in the past three years, from 321 million yuan ($45.1 million) in 2020 to 356 million yuan in 2021 and 494 million yuan last year. But after posting a small profit of 7.61 million yuan in 2020, the company swung to a 79.73 million yuan loss the next year and the deficit widened to 204 million yuan last year, according to figures in the announcement.

The results are falling far short of the parent’s ambitions. Liu, the iFlytek chairman, said in February 2022 that the group’s revenues would reach 100 billion yuan in 2025, with a fifth of that total coming from medical services, second only in importance to its education business.  However, iFlytek‘s results for  the first half of 2023 showed that the medical business generated only 192 million yuan in revenue.

However, the development of large AI models might herald a turnaround. In May last year, iFlytek released an AI model called “SparkDesk”. Liu said the model had already surpassed the performance of ChatGPT in generating long Chinese texts, answering medical queries and working with numbers. In October, Xunfei Healthcare launched an “IFLYHealth” App driven by the new AI model, offering services from self-diagnosis of ailments to analysis of medical reports and management of health records. Basically, the app offers detailed health consultation services.

Using large language models to process medical texts, healthcare professionals can provide diagnosis and treatment plans with greater speed and accuracy, potentially improving medical outcomes and patient satisfaction. Using stroke patients as an example, the SparkDesk model enables the health platform to extract key patient information from medical records and generate personalized follow-up plans and interventions after hospital treatment, Xunfei Healthcare said.

Supportive policies but a stock slump

Chinese authorities have encouraged the uptake of AI and other technologies in recent years to optimize healthcare by integrating offline and online services. A policy document issued last March encouraged the development of smart hospitals as well as technologies for outpatient services, mobile payment, online inquiry and drug delivery. For Xunfei Healthcare, which has been promoting its smart hospital and insurance products, the policy is an endorsement of its strategy.

The spinoff plan for Xunfei Healthcare was first floated by iFlytek back in August 2021. At the time, the parent company said it wanted to seize market opportunities for rapid growth of the smart medical business. However, the plan was shelved until now. The timing for a renewed push does not look ideal, given that the Hong Kong stock market is in a deep slump and healthcare stocks are struggling. The move may have something to do with iFlytek‘s own financial challenges.

The iFlytek group’s revenue fell 2.3% in the first half of the year to 7.84 billion yuan, producing a net loss of 304 million yuan adjusted for non-recurrent business against a net profit of 279 million yuan in the same period of 2022. It was the first interim loss in the 14 years since the group’s IPO. The company blamed the red ink on pandemic-related project delays and increased investment in developing its large AI model.

Rivalry in the field of large AI models is already intense among Chinese companies. ByteDance, Baidu (BIDU.US; 9888.HK), Alibaba (BABA.US; 9988.HK), SenseTime (0020.HK) and many other well-known enterprises have launched their own AI tools. IFlytek can expect to encounter stiff opposition as it seeks to turn a profit from its newly launched model.

Details of the Xunfei Healthcare offering have not been announced, making it difficult to predict the market value. The first “AI + Healthcare” stock to float on the Hong Kong Stock Exchange was Beijing Airdoc Technology (2251.HK) in November 2021, with a lofty issue price of HK$75.1 per share. But four months after the listing, the price fell to HK$17 and hovered just above HK$10 for an extended period.

The AI healthcare sector is likely to struggle to appeal to investors, considering the need for big upfront investments and the daunting challenge of monetizing the business. Xunfei Healthcare will probably need to boost its financial performance to hold its ground on the Hong Kong market.

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