NH HEALTH clarifies short-selling doubts: The mystery of sales volume being several times lower than shipment volume is directly addressed.

NH HEALTH (6606.HK), which has been plagued by financial fraud scandals, has once again spoken out.

On August 21st, NH HEALTH held a communication meeting regarding the latest release of its semi-annual performance report, further addressing the doubts raised by various parties regarding revenue recognition and other matters.

In the first half of 2023, NH HEALTH's revenue reached 823 million yuan, a year-on-year increase of 264.60%. During the same period, its net profit was 126 million yuan, achieving profitability for the first time.

Changweiqing, used for colon cancer screening, remains the main source of revenue, generating 491 million yuan in the first half of this year, a year-on-year increase of 59.60%, accounting for 59.60% of the total revenue.

This product is also the focus of the short-selling institution CapitalWatch's attack.

CapitalWatch visited hospitals and conducted interviews with sales personnel, concluding that NH HEALTH inflated its revenue by more than 300 million yuan in 2022 by pressuring distributors to stock up and recognizing expired products as revenue.

"The effective period of Changweiqing products is 12 months. After the product exceeds its expiration date through extracorporeal circulation, it can be recognized as revenue in the company's sales financial data for the next year, creating a false impression of sales prosperity," CapitalWatch pointed out in its short-selling report.

However, according to the latest information disclosed by NH HEALTH, the actual revenue from products providing testing services still accounts for the majority.

NH HEALTH summarized two methods of revenue recognition for Changweiqing in its semi-annual report, with as much as 96% being "completion of testing services," while "revenue from expired products" only accounts for 4%.

However, the focus of the dispute between the two parties still lies in whether the revenue from completing testing services truly belongs to "completion of testing" or is merely in name.

NH HEALTH CEO Zhu Yeqing further explained during the performance communication meeting, "'Completion of testing services' means that revenue can only be recognized after the testing institution issues the relevant report."

"Normally, regardless of where Changweiqing is purchased from, after it is sold to consumers, the consumers must take samples and send them to our laboratory. Our laboratory will conduct normal testing on this sample and issue a testing report. Only then can we confirm the revenue with the relevant sales channels," NH HEALTH CEO Zhu Yeqing stated during the performance communication meeting.

However, this may not dispel the market's doubts.

In 2022, the quantity of Changweiqing shipments and the quantity of revenue recognition were 805,600 and 361,400, respectively, with the former being 2.23 times the latter.

If we calculate based on this revenue recognition quantity, the average selling price of Changweiqing per unit would be 1,363.89 yuan.

However, according to the price obtained by CapitalWatch, which is 500 yuan per unit, to achieve the 356 million yuan (mainland China) revenue recorded in the 2022 financial report for Changweiqing, the sales volume would have to reach 712,000 units, which is almost consistent with the quantity of shipments. In other words, if Chang Weiqing's average selling price is only 500 yuan per unit, there may be cases where some shipments are recognized as revenue but not included in the revenue recognition amount.

This has raised concerns in the market about the authenticity of Chang Weiqing's revenue recognition, namely whether there are cases where products are not actually sold after leaving the factory but are still recognized as revenue.

However, there has been a significant change in the difference between these two data points this year. In the first half of this year, Chang Weiqing's shipments and revenue recognition were 538,500 units and 428,700 units, respectively.

Zhu Yeqing explained that the main reason for the difference is that they did not have a clear understanding of the demand from hospitals and other institutions for their products. Therefore, as long as the relevant institutions have purchasing needs, they would directly ship in large quantities, resulting in a certain deviation between the shipment volume and the final inspection quantity.

At the same time, Zhu Yeqing stated that they will be more cautious in shipping based on their understanding of terminal demand.

"With our understanding of the distribution channels, we will be more cautious in our shipments. Therefore, the gap between our future shipment volume and revenue recognition will become smaller, and we will strive to ship according to demand," Zhu Yeqing explained at the performance communication meeting.

Whether these explanations can dispel market doubts still requires time to verify.