Description
Introduction
So-Young is a niche small-mid cap company listed on the NASDAQ with the ticker SY and a current market cap of $1.38bn, EV of $970mm, with currently US$411mm or 1/3rd of its market cap in cash and LT investments (IPO in May 2019 a 1-1/2yr back raised $187.5mm). The company offers long-term investors attractive growth at a reasonable price as SY operates in the niche marketplace business of medical aesthethics treatments in China and it is a leader in the space with low capital intensity, network effects with operating leverage given the trustworthy social community platform in this niche.
The company is an interesting investment opportunity with potential to grow at 35-40% CAGR for the next 3-5 years underpinned by the fast-growing consumption healthcare service market in China. So-Young's revenue grew +138% in 2018 and +86.6% in 2019. This year in particular Q1 2020 has been impacted due to COVID; 2Q revenue growth was +15.2% and So-Young expects 3Q growth to be in the region of 17% mid-point revenue growth guidance. the 4Q tends to be the strongest. Longer term, there is evidence that SY has attractive growth opportunities for the next 3-5 years ahead.
First, traditional providers such as search engines, offline providers and general e-commerce providers do not solve the problem for consumers like a niche platform like So-Young which provides consumers a more interactive, engaging customer experience. Having medical aesthethic treaments is a important and long-term decision and the quality of information, reviews, and outcome is important. Second, health & beauty is an attractive segment where consumers will continue to spend money in China and So-Young has the potential to expand into new segments within this area. Third, there is significant room for monetization to grow with efficiency in monetization tools, strategies to boost MAU and cross-selling opportunities in other health and beauty segments to consumers and service providers.
The stock this year has been range-bound given the COVID crisis, but as China has emerged ahead of other countries in dealing with the pandemic, So-Young's business is likely to rebound and the stock along with it. Most recently, China's GDP grew in the 3rd quarter again, as consumer spending bounced back. Finally, the company has value-oriented investors on its register including Orchid Asia and First Beijing.
Business Description
So-Young aims to be the largest and most vibrant social community in China in the medical aesthetics industry catering to consumers, professionals and service providers. The company does not provide any medical treament themselves, but instead operates a niche marketplace providing users reliable and transparent information on medical aesthetic service providers.
The information available on SY's platform includes but is not limited to information provided by medical service providers, including their registration or practicing license details, contact information, the services they provide, the price of such services and reviews and a large depository of day-by-day, case-based blogs called Beauty Diaries associated with the service providers contributed by users.
The company's online platform includes its So-Young mobile app, So-Young Weixin mini program, and soyoung.com website, where both users and medical aesthetic service providers can access our rich media content, engaging social community, and transparent online reservation function. In 2017, 2018 and 2019 and Q2 2020, average monthly UVs reached 4.8 million, 10.3 million and 11.9 million, and average mobile MAUs reached 1.0 million, 1.4 million and 2.9 million and 6.8 million respectively.
The company's business model is comprised into 3 components: (i) original, reliable and professional content and its distribution through social media networks and targeted media platforms in China, (ii) SY's engaged social community characterized by signature user-generated content, and (iii) its transparent and user-friendly online reservation services for medical aesthetic treatment. SY is also expanding into the dental, dermatology, ophthalmology, gynecology, and physical examination services in China. As users and medical aesthetic service providers are connected through content, social community, and online reservation function, So-Young's business model forms a virtuous cycle that fuels its continued growth and expansion.
Recent initiatives
In March 2020, in order to strengthen trust in users and content being posted, So-Young made strategic developments for Beauty Diaries. First, effective incentives and users wake up methods such as “diary recall” to encourage users to produce more high-quality content online. Second, the company optimized the content format to enable users to generate diaries more efficiently. By simply adding three related photos or one short-form video, users can start to share their medical aesthetic treatments and recovery progresses easily and conveniently. Third, SY uses AI-backed screening mechanism and manual content reviewing team to ensure the authenticity of content. The company is increasing the visibility of premium original content and high-quality cases by using effective technology upgrades and label identification
In 2Q 2020, the CEO announced core intiatives to continue to drive user growth and engagement. "First, we made great progress in increasing the trust between users and our platform by rolling out the preferred doctor lists, what we call “Emerald Doctor Lists.” Second, we expanded our community of users and medical aesthetic professionals through consistent content upgrades, including optimizing our live video diagnosis service and launching the “So-Young Ambassador” project, which generated a warm response within our community".
Given its relatively niche and new service vertical, SY’s community network has yet to be fully exploited and the company is positioned to ride the rising demand from consumers for improving lifestyle and health services.
Business and financial summary
The revenue model is broken down into two segments, information services and reservation services. The company offers a range of information services primarily to help its medical aesthetic service providers better introduce their services, and increase their customer base and enters into agreements annually with them. SY provides reservation services on behalf of medical aesthetic service providers when a medical or beauty treatment is performed for its platform, charging a rate of approx 10% of the total amount paid by users for services.
Over the last 3 years, So-Young's revenue has been US$39mm, US$92mm and US$172mm growing at +428%, +138% and 86% respectively in 2017, 2018 and 2019. In 2020, Q1 was significantly impacted with revenue declining -11%, 2Q +15% and 3Q guidance of mid-point +17%. Typically Q4 is the best quarter for So-Young. Full year 2020 revenue will likely be US$200mm highlighting modest growth this year. Without the impact of COVID, revenue should have been north of US$250mm. I expect the company to grow in the 35-40% CAGR over the next 3-5 years and profits to double in 3 years. The company has high gross margins of over 80% given its marketplace model. Impressively, So-Young spends almost 15% of its revenue in R&D (as of Dec 2019, 268 employees in R&D).
SY competes with Baidu, which has a search platform in the traditional online channel where service providers place advertisements and capture the majority of online ad budgets. This being said, Baidu is not dedicated to this niche, and we think the customer experience is more targetted and better in niche verticals like SY. The industry also attracts players like Alibaba Health but they lack the in-depth user generated content including experience shared by other users, rating and review systems.
The company's balance sheet has about 30% of its market cap in cash and LT investments. Given the low capital intensity model of the company, ROE is high. Over the last 3 years, FCF has been around US$14mm, $29mm and US$35-50mm respectively. Assuming no significant changes to its working capital and a revenue growth of 35-40%, and SY's current EV of US$970mm, the company is currently trading at 5-10% FCF yield which is reasonable considering its growth prospects and small-mid cap nature.
Management
Mr. Xing Jin is co-founder and has served as director and CEO of So-Young since its inception in March 2013 who has the significant voting rights and is the key man. Board members include Charles Yang from Netease, which is amongst China's best capital allocators. Other board members are from Matrix Partners and CITIC Capital Partners. More information on the team: https://ir.soyoung.com/corporate/management
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
There are several catalysts, the most important one being growth for So-Young. As 2020 has been a challenging year, growth can significantly bounce back next year as China has done a better job at handling the pandemic than other countries. SY is poised to benefit. Second, better monetization given the recent initaitives from the company. The third catalyst is expansion into other consumption healthcare verticals.