Yidu Finds Good Medicine In Regulatory Nod For Its AI

Key Takeaways:

• Yidu Tech’s shares rose 13.6% on the day it disclosed that two key algorithms behind its medical big data services were approved by the Cyberspace Administration of China
• Like many of its money-losing peers, the company has recently sacrificed growth at any cost to focus on operating profitably

By Doug Young

If you’re a big data company, how much is a blessing from China’s cyber regulator worth for the key large model algorithms that are your main asset? The answer is “big,” though perhaps not as large as some might have guessed.

For medical big data services provider Yidu Tech Inc. YIDUF, the official acceptance of two of its main algorithms by the Cyberspace Administration of China (CAC) was worth about HK$500 million ($64 million), which is how much its market value rose after it announced the news last week. More precisely, Yidu’s shares shot up 13.6% the day of the announcement on trading volume that was more than four times its usual level.

That brief disclosure said that its Yidu Happy Health Large Model Algorithm and Yidu Happy Health Large Model Service Algorithm both recently “passed the deep synthesis service algorithm filing of the Cyberspace Administration of China,” according to Yidu, whose software solutions are used by medical institutions like hospitals and insurance companies for functions like assisting in disease diagnosis and management.

Both algorithms use artificial intelligence (AI) whose huge potential has vaulted into global headlines over the last two years with the rise of large language models like ChatGPT. Like ChatGPT and other large language models (LLMs), the deep synthesis technologies behind Yidu’s algorithms are subsets of the broader category of generative AI.

China has been especially proactive about regulating such generative AI, especially LLMs, due to its tight oversight of data and information. But it has also been actively regulating other types of AI like deep synthesis technology in a bid to ensure the technology’s orderly development.

The CAC’s rule governing its oversight of deep synthesis technology took effect in January last year and applies to any company that uses such technology to provide internet information services in China. Since then, the CAC has announced at least five batches of companies whose deep synthesis algorithms have been approved, including one as recently as April. Yidu’s name wasn’t on the round of approvals released in April, but it’s possible a new round has concluded and the company was informed individually.

We can’t really comment on how easy or difficult it is to obtain such approvals, though failure would obviously be disastrous for any company. We should note that China’s various regulators have been quite business friendly lately, reversing an earlier trend of regulatory toughness. Many believe the easing could reflect Beijing’s broader attempts to prop up the Chinese economy, whose growth has slowed sharply in recent years after three decades of breakneck expansion.

In the context of that business-friendly approach, the approval for Yidu’s algorithms probably doesn’t come as a huge surprise, which explains the large – but not huge – gains for the company’s stock after announcement of the news.

The bigger issue for Yidu is profitability, which was a lower priority for the company and many of its peers in earlier times when investors were more interested in growth and building up market share. But sentiment has shifted notably in the last two years, causing Yidu and other perpetual money-losers to slash costs and pare down or jettison lower-margin parts of their businesses to show they can operate sustainably over the longer term.

Shrinking Revenue

Yidu’s shift was front-and-center in its latest financial results, led by a 25% revenue decline to 357 million yuan ($49 million) for the six months through last September, the first half of its fiscal year. Analysts expect that situation to reverse in the second half of the company’s fiscal year, anticipating revenue will rise more than 30% for the period, resulting in roughly flat revenue for its entire fiscal year. The company is due to report its full fiscal year results on Thursday.

Yidu breaks down its business into three main areas: big data platforms and solutions; life sciences solutions; and health management platforms and solutions. Among those, the culprit behind the big revenue decline in the first half of Yidu’s fiscal year was health management platforms and solutions, whose revenue plunged 71% year-on-year to 58 million yuan. By comparison, big data platform and life sciences solutions rose 3% and 16%, respectively.

That huge decline dropped health management platforms and solutions from Yidu’s top breadwinner in the year-ago period, when it accounted for 43% of the total, to its smallest revenue source, with just 16% in the latest period. Yidu was vague in describing the reasons for the big drop, attributing it to “streamlining our business portfolios.”

But a closer look at the numbers shows this is one of the company’s lower-margin businesses, which provides insurers and government health plan operators data-related services used for things like chronic disease management. As Yidu dropped many of the less-profitable clients for this business, the category’s gross margin shot up to 53.2% in the first half of its fiscal year, more than double the 25.1% in the year-ago period.

By comparison, big data platform and solutions posted a gross margin of 45.2% in the latest quarter, while life science solutions stood at 27.8%.

At the same time, Yidu slashed its expenses, including particularly large cuts of more than 40% year-on-year for its R&D and administrative spending in the first half of its latest fiscal year. As a result, the company’s overall gross margin improved by 12.1 percentage points to 38.2%, and its net loss narrowed sharply to 80 million yuan from 356 million yuan a year earlier.

The two analysts polled by Yahoo Finance expect the company to continue losing money this year, though they expect the figure to keep narrowing by about half.

Investors seem to like the company’s efforts to become profitable, though they aren’t ready to reward Yidu with an inflated, AI-caliber valuation just yet. The company’s stock currently trades at a price-to-sales (P/S) ratio of 5.8, which is roughly comparable to the profitable Sinohealth Holdings Ltd.(2361.HK), but well behind the 12.8 for Medlive Technology (2192.HK), which is also profitable.

Yidu’s stock was once valued quite highly, rising to as much as HK$50, or roughly double its 2021 IPO price of HK$26.30. It now trades at far more earthbound levels, including last Friday’s close of HK$4.16. The latest approvals for its algorithms represent a solid show of government confidence towards the company that clearly encouraged investors. Now, Yidu needs to show it can earn some profits and return to steadier revenue growth while maintaining its hard-won higher margins.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.