ANALYSIS: So-Young Grows User Base, Marketplace Purchase Activity

SY had generated strong growth before the coronavirus outbreak began. Given resulting uncertainties over its next two quarters, I’m taking a wait-and-see approach to the stock at its current level but am watch-listing it for review in six months.

Donovan Jones
    Apr 12, 2020 5:00 AM  PT
ANALYSIS: So-Young Grows User Base, Marketplace Purchase Activity
author: Donovan Jones   

Quick Take

So-Young (SY) went public on May 2, 2019, on the Nasdaq Global Market, raising $180 million, excluding underwriter options.

The company has developed an online marketplace that connects plastic surgery and other aesthetic service providers with Chinese consumers.

SY had generated strong growth before the coronavirus outbreak began.

I'm Neutral on the stock at its current level but am watch-listing it for review in six months.

Company

Beijing, China-based So-Young was founded in 2013 to bring beauty and health to residents of China as well as connect plastic surgery providers with customers through its mobile medical aesthetics platform that facilitated $306.6 million worth of transactions in 2018.

Management is headed by Co-Founder, Director, CEO Xing Jin, who was previously vice president and general manager of social operations at IM2.0 Interactive Group.

So-Young has developed a one-stop mobile platform for discovery of a wide variety of medical aesthetic procedures, assessment of their quality, and scheduling appointments while engaging the user with original content and social features.

On the SY platform, people share their personal experiences with plastic surgery providers thus helping its users choose the deal that suits them best. As of December 31, 2018, the company had a collection of more than 2 million day-by-day case-based blogs which it refers to as Beauty Diaries.

The firm divides its revenue segments into two:

  • Information services - 67.3% of revenue in 2018. Videos and links, to help plastic service providers on its platform to increase their exposure, customer acquisition, and reservation volume.

  • Reservation services - 32.7% of revenue in 2018. When users book medical aesthetic procedures with service providers through the firm's online platform, it receives a fee rate of approximately 10% of the amount paid by consumers.

According to a 2018 market research report by HKTDC, the total cosmetics market in China was valued at $19.95 billion in 2012 and had grown to $37.43 billion in 2017, representing a CAGR of 13.4% between 2012 and 2017.

The main factor driving market growth is the rapid economic development in China of a consumer base with greater disposable income during the forecast period.

Recent Performance

SY's topline revenue by quarter has grown significantly in the past five-quarter period, as the chart shows below:

(Source: Seeking Alpha)

Gross profit by quarter has also increased materially:

(Source: Seeking Alpha)

Operating income by quarter has been somewhat uneven, but still positive in recent reporting periods:

(Source: Seeking Alpha)

Earnings per share (Diluted) has remained steady in recent quarters:

(Source: Seeking Alpha)

Since its IPO, SY's stock price has dropped 53% vs. the U.S. Interactive Media and Services index' fall of 16.4% and the overall U.S. market's drop of 17.8%, as the chart below indicates:

(Source: Simply Wall Street)

Commentary

So-Young has reported three quarter's results since going public and the firm exceeded analyst consensus in two of the three quarters, as the chart shows below:


Revenue and gross profit have shown a strong ramp through September 30, 2019, although in Q3 2019 management missed analyst expectations.

I suspect Q4 2019 and Q1 2020's results will be more negative, with Q1 2020's results downright terrible as the coronavirus outbreak halted demand for aesthetic treatments in China.

In its last earnings call for calendar Q3 2019, management highlighted the growth of its average mobile MAUs (monthly active users) increasing 144% and total number of purchasing users growing 60%, both over the same quarter in 2018.

Perhaps most importantly, the quarter produced a 75% increase in facilitated medical aesthetic transaction value, reaching RMB976 million ($143.5 million)

Interested investors should be cautious with So-Young's next report, which will probably include no financial impact from the coronavirus outbreak.

The firm's balance sheet appears strong, with $386.9 million in cash and short-term investments as of September 30, 2019. Total liabilities were only $81 million with no long-term debt.

After SY gets through the reports from its next two quarters (Q4 19 and Q1 20), the firm may be poised for a bounce-back.

While my current bias on the stock is Neutral, I'm watch-listing SY for a potential closer look in six months.

(The opinions expressed by contributing analysts do not reflect the position of CapitalWatch or its journalists. The analyst has no positions in any stocks mentioned, no plans to initiate any positions within the next 72 hours, and no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only, may be incomplete or out of date, and does not constitute financial, legal, or investment advice.)

YOU MAY LIKE