Riding on the DeepSeek frenzy, medical imaging provider Airdoc Tech has found favor with investors again after revamping its AI model, but will the recovery be short-lived?

Key Takeaways:

• Shares in Airdoc Tech jumped to an eight-month high after the company announced that its upgraded AI system had been integrated with DeepSeek's model
• The medical diagnostics company has been mired in net losses for five straight years, despite rising revenues

The unexpected arrival of DeepSeek on the global tech scene this year has set off a rapid chain reaction, as Chinese companies scramble to lock into the economical AI model as a tool for everything from chip-making to medical services.

In particular, the health technology sector was jolted out of a long stock market hibernation, as investors woke up to the potential benefits that cheaper AI could bring.

Riding the wave of enthusiasm, imaging provider Beijing Airdoc Technology Co. Ltd. (2251.HK) announced on Feb. 7 it had carried out an upgrade of its self-developed medical AI model to integrate the system with DeepSeek's technology.

Airdoc Tech's share price leapt 21% to an eight-month high in the 10 days after the news, buoyed by the optimism surrounding the DeepSeek breakthrough, which has shaken the foundations of the global tech industry.

Founded in 2015, Airdoc Tech specializes in diagnostic imaging tools for eye problems such as short-sightedness or vision loss caused by diabetes. Its signature product, Airdoc-AIFUNDUS, has gained a profile in the medical industry as an AI-enabled healthcare solution.

Since unveiling its own AI system, the Wanyu Medical Large Model, last July, Airdoc Tech has been trying to extend the system's reach from image-based diagnosis to general medical Q&A and health management.

The Wanyu model can provide doctors with swift access to medical information, clinical guidelines and research results to inform decision-making, according to Airdoc Tech, while offering patients personalized health analysis and treatment recommendations. The upgrade announced this month has improved the speed of data processing and the accuracy of disease recognition, as well as providing a more personalized health management experience, the company said.

However, it is hard to judge the medical benefits of the revamped model as the Airdoc Tech website does not give any information on its use by medical partners to go with the publicity images.

The field of AI-powered medical services is fiercely competitive, and complex. A research report from CITIC Securities found that Chinese companies had launched more than 50 AI models for medical use. The diagnostics arena alone contains models from many big tech names, such as Tencent's Hunyuan, Baidu's Lingyi, Alibaba's Tongyi Renxin, and JD's Jingyi Qianxun.

The tools cover many medical scenarios from pre-diagnosis to follow-up care, including AI-enhanced analysis of medical images and decision-making for clinicians. Specialized tools can be easier to apply than those with a wide scope, as illustrated by the We Doctor system for managing chronic diseases and the post-diagnosis system from Xunfei Healthcare (2506.HK). In contrast, the commercial pathway for Airdoc Tech's Wanyu is less clear-cut, if the software aims to serve both doctors and patients across a range of services.

In fact, the Wanyu model is not Airdoc Tech's first foray into AI-assisted diagnosis. Two years ago, the company launched AI-powered products to prevent or control myopia.

The company's financial report for the first half of 2024 said service users had reached 16,000, with more than 800 hospitals across China using its vision training tools. However, Airdoc Tech did not disclose the specific revenue generated from the new business. It merely stated that revenues from its overall eye health business rose 22% in the six months to 38 million yuan ($5.24 million) from the year-earlier period. Sales of the tool have stalled since China reclassified it last July as a Class Three medical device, requiring stricter controls on its use. The company is in the process of applying for the necessary certifications to reboot sales.

Caught in a vicious cycle

Airdoc Tech was priced at a lofty HK$75.1 per share when it went public on the Hong Kong stock market in November 2021. But the price has gone downhill from there, shedding more than 80% of its value to hover around HK$10 for a long time. The constant stream of red ink has been a focus of investor concern.

Between 2019 and 2023 the company made cumulative losses of 623 million yuan. Revenue rose 13.6% to 93.71 million yuan in the first half of 2024, but the net loss doubled to 81.49 million yuan. The medical device provider appears to be trapped in a cycle of rising topline revenue coupled with a weak bottom line.

Taking a closer look at the company's financial data, the cost structure appears out of balance for a tech company that should typically have a big R&D budget. In fact, R&D expenses fell around 13% to 49 million yuan in the first half of 2024, but sales and administrative expenses came in much higher, at 80.19 million yuan. On top of that, wage costs for 254 staff amounted to whopping 103 million yuan, exceeding revenue in the same period.

Airdoc Tech may have to boost R&D spending if it hopes to make a breakthrough in the business of large medical AI models. However, that could be a stretch, as the company's cash and cash equivalents had dropped to 548 million yuan by mid-2024.

Airdoc Tech's price-to-sales (P/S) ratio stands at only 7 times, in contrast to the 36 times for Xunfei Healthcare Technology, an expert in AI-powered tools for medical use. Although AI has the power to reshape the medical services business, it is hard to realize that potential in the form of commercial profits. It will take time to verify whether Airdoc Tech can grab a significant share of the medical model market.