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Dec 12, 2019 05:51 pm ·

‘Medical Aesthetic Platform’ So-Young Faces Dilemma: Sell Adds or Retain Trust?

“The plastic surgery industry in China is indeed filled with sketchy practices, and there is plenty of news coverage about people ruining their lives getting surgery from unlicensed doctors. Apps like So-Young allow me to review the past cases and customer reviews on each surgeon & clinic, so I can make a wiser choice and avoid unqualified surgeons,” a user of the medical aesthetic platform told EqualOcean.   The same individual spent over CNY 75,000 on the medical aesthetic services marketplace. He did multiple appointments for Botox, hyaluronic acid and face sculpting injections, one facial liposuction, an upper lip thinning surgery and buccal pads deletion surgery, all while tracking the hundreds of clinics exposures on the platform. There were 172,500 purchasing users like him in the third-quarter of 2019, the medical aesthetic services marketplace revealed in its third-quarter filings.  So-Young (SY: NASDAQ) peaked new heights in the third quarter of 2019. Total revenues were CNY 302.4 million, a YoY increase of 79.6%, and the average mobile Monthly Active Users (MAUs) were 3.42 million, a YoY increase of 143.8% – meaning now the company has entered a new stage where its aggressive growth has started to cool down due to the limited addressable market size. The company could still retain its eye-catching gross margins at around 85%. Critical Indicators for So-Young So-Young's business relies on the accumulation of two crucial numbers: mobile MAUs and the number of clinics shown on the app. While accumulating the revenues generated from the paying users, the firm has been trying to optimize the promotion services fees collected from the hundreds of small and mid-sized clinics around the mainland. At the same time, it has been advertising on mass media to hold its ‘most-trusted medical aesthetic information provider’ position against its competitors, including Gengmei (更美), a Sequoia-backed private medical aesthetic information services firm. The company spent CNY 156.6 million on its sales and marketing operations in the third quarter of 2019, more than half of its total revenues in the same period. Considering the proliferation of similar apps and dynamic sector conditions, we expect that the marketing expenses will be the major obstacle for the company in the foreseeable future. We defined Gross Bookings as "Aggregate value of medical aesthetic treatment transactions facilitated by So-Young’s platform." The firm achieved over CNY 90 million increase in its Gross Booking Values from Q3 to Q4 of 2019, although the average number of purchasing users decreased in absolute terms from 201,500 to 172,500 in the same period. Purchasing users are defined as people who made verified transactions with the service providers; the average transaction by each purchasing user increased from CNY 4433 to CNY 5659 from the third quarter of 2019 to the fourth. Most of those purchasing users use the app at most once or so, due to the nature of having cosmetic surgery.  Yet, the revenues are mainly comprised of information services, which are the fees collected by placing information about medical aesthetic service providers' on So-Young's platform: advertisement. And ads’ contribution to the firm's total revenues has been increasing, dangerously so. So-Young generated 40.5% of its revenues from information services in 2016, 67.4% in 2018, and around 71% far in 2019. “Medical service providers who use our information services are obliged to comply with relevant laws and regulations and ensure the credibility and reliability of all information provided to us and distributed on our platform,” says the firm in its prospectus. Yet, considering that the majority of these medical service providers are small and mid-sized clinics, it is less likely for all of them to deliver exactly what they’ve promised, and one case may hurt the entire brand image of the company, ultimately resulting in user loss. The company is not likely to keep increasing its revenue more from adds to service providers, and at the same time achieving its mission to become "the most-trusted tech company in the consumer healthcare industry" This business model will probably prove cancerous for the firm in the long term. Although it has been decreasing since the third quarter of 2018, the cost of acquiring new users is still high for So-Young. New players are entering the industry aggressively, and the technical barriers to entry are not so high. There is a little possibility for So-Young to successfully keep decreasing its user acquisition costs in the near term. What's Next for the Beauty Priest "I personally have a very specific 'beauty goal' and sometimes I don’t know if surgery can achieve my very particular goal, but the app helps me to see what surgeries I am able or unable to pursue... I can refer to other people's cases, before-vs-afters, and predict what I actually need and what I don’t, without getting persuaded to do surgeries or treatments that I personally don’t desperately need, only because the salesperson at a clinic recommend them to me," said the user to EqualOcean.  He and thousands of others are assuming that the platform is not in itself a manipulator of users. And the app is increasing its bet on advertising revenues, risking its brand recognition and new user acquisition. Thus, revenue composition will be one of the fundamental factors deciding the company's integrity over time. Besides all the above, the company is still in its expanding stage, serving the growing crop of upper-middle-income citizens. It is the most recognized-platform by far, in a business field where the winner takes the most – but not necessarily all.

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Analysis EO
May 3, 2019 11:38 am ·

So Young IPO: the Winner in Such a Rocketed Market

At 9:30 pm EST on May 2, So Young International Inc (新氧), a Chinese online platform for searching and purchasing aesthetic surgery services, will issue 13 million shares on the Nasdaq under the ticker symbol SY, at a price of USD 13.80 per share. Each 13 ADS is equivalent to 10 shares of Class A common stock. In the case that the underwriters did not exercise the over-allotment option, the total amount of funds raised was approximately USD 179.4 million. According to the issue price, So Young's market value is USD 1.38 billion. Launched in 2013, So Young has grown to be the most popular online platform for searching and purchasing aesthetic surgery services in China today, and to be the first listed company in this field. Rapid growth in 9 quarters in such a rocketed market In the past 9 quarters, So Young’s revenue has maintained a sustained high growth rate. According to the prospectus, its annual revenue increased from CNY 49 million (USD 7.28 million) in 2016 to CNY 259 million (USD 38.46 million) in 2017, with a substantial increase of 428.2% year-on-year. And its annual revenue reached CNY 617 million (USD 91.63 million) in 2018, with a increase of 138% year-on-year. So Young’s revenue is from information service and reservation service. In 2018, information service contributed CNY 415 million (USD 60.38 million), accounting for 67.26% among the total revenue, while reservation service contributed CNY 202 million (USD 29.40 million). So Young started to make profit in 2017, when its net profit reached CNY 17 million (USD 2.52 million), while its loss reached CNY 81.04 million (USD 12.04 million) in 2016. In 2018, it achieved a net profit of CNY 55.08 million (USD 8.18 million), with a substantial increase of 223.5% year-on-year. In 2019 Q1, its revenue reached CNY 206 million (USD 30.59 million), with an increase of 81.8% year-on-year. The net profit of this quarter was CNY 45.9 million (USD 6.82 million), with an increase of 49.9% year-on-year, according to So Young. So Young is benefited from the large and rapidly growing of medical aesthetic service industry in China. According to Frost & Sullivan, the total revenues of the medical aesthetic services industry reached CNY 121.7 billion (USD 17.7 billion) in 2018, representing a CAGR of 23.6% from 2014. The total revenues of this industry are expected to reach CNY 360.1 billion (USD 52.4 billion) by 2023, with an accelerated CAGR of 24.2% from 2018 to 2023. With such growth rate, China has become one of the fastest growing medical aesthetic service markets in the world, ranked the second in terms of market size in 2017, and is poised to become the largest market in the world by 2021. In particular, non-surgical medical aesthetic procedures enjoy a higher-than-market expected growth rate, a CAGR of 26.3% from 2018 to 2023, as they can reach a larger group of consumers thanks to the less risky and painful processes and shorter recovery time. The business development of So Young When founded in 2013, So Young was just a content online community focused on the topic of plastic surgery at first. Users share their cosmetic experience, evaluation, diaries and cases on this platform, and this content promotes the aesthetic surgery services consumption indeed. In 2014, So Young launched e-commerce business to build connection with offline beauty hospitals, introduce their services and purchase services online. Today, So Young’s business mainly consists of three parts: original content related to aesthetic surgery, socialized community and service reservation online. In addition, it provides various services to encourage and stimulate users to consume aesthetic surgery services, including medical beauty encyclopedia, live video, drug source traceability, doctor qualification inquiry, e-commerce transaction, financial services, etc. So Young has built connection with nearly 6,000 consumer medical service providers and covered more than 300 cities in China. The number of monthly active users (MAU) of its App increased from 1.08 million in 2018 Q1 to 1.93 million in 2019 Q1, with an increase of 78.7%. The number of paying users also increased from 68,900 in 2018 Q1 to 127,300 in 2019 Q1, with an increase of 84.9%, according to So Young. Before IPO, So Young had 6 series funding with total amount of around USD 150 million. The main investors includes Tencent, MatrixPartners China, Apax Partners, CDH Investments, Trustbridge Partners, etc. Under the O2O business model and e-commerce platform, the medical aesthetic service market in China grows rapidly, in which the platform makes contribution a lot. However, this market is different from others. JIN Xing (金星), the CEO of So Young, said in an interview: The e-commerce platforms such as Taobao and JD.com have massive traffic and millions of users. What they need to do is to continuously expand categories, and to pursue the conversion rate of traffic. But in the medical aesthetic service market, the threshold of consumption decisions is higher, so So Young aims to provide personalized and best service for each of our user. Before So Young, there is no such a listed company to combine the internet and consumer medical service. MU An (慕安), the group director and general manager of Beaucare Clinics (联合丽格), said that: With the feature of non-standardized, medical information platforms need to provide richer and more professional content to assist consumers in making decisions, especially in the consumer medical service market.

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May 2, 2019 10:05 pm · EO company

Just now, So Young is listed on the NASDAQ

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Apr 23, 2019 05:42 pm ·

Reputation On the Line for China's Medical Aesthetic Platforms

China’s aesthetic medical industry has been growing furiously. Online platforms like So-Young (新氧) already saw the opportunity and began to fill the gaps that arise from the information asymmetries. However, as the market expands and competitors get into it, the risk appetite increases too. The medical esthetic market is expected to grow 25% annually and be worth CNY 300 billion by 2020, according to CITIC Securities. As the market brutally expands; counterfeits and fakes proliferate in the market. The China Association of Plastics and Aesthetics has revealed that it believes 70% of the country’s Botox and hyaluronic acid, a type of dermal filler, to be either counterfeit or smuggled into China illegally, The Paper reported. There are end-customers, medical aesthetic service providers and intermediaries in the market. The primary function of the intermediaries is to clear the information between the hospitals and end-customers. The need for an intermediate platform increases as the number of SMEs increase in the market: the aesthetic medical industry chain is changing from the value chain of “vendor-institution-consumer” to “vendor-institution-platform-consumer.” What brings the need for an information cleaner and an intermediary in this sector is the weak oligopolization within the industry. The industry is diverse and decentralized with a myriad of clinics and hospitals which motivate patients to exchange information through these platforms. The reputation is the most critical asset of an aesthetic medical service provider in China since the market is full of fakes, imitations and scandals. When it comes to protecting the brand image and providing transparency, clinics and hospitals are choosing to cooperate with medical aesthetic service platforms like So-Young. So-Young enables its users to discover and consider more options in the market. It provides an ecosystem for people who want to know more about medical aesthetic services. In an environment where the market is full of crooks, the platform’s revenues skyrocketed. Frost & Sullivan estimates 111% increase of the medical aesthetic service platforms in China between 2014-18 and 59% increase between 2018-23*. In such an environment, providing such a business seen as a profitable one and the market is invaded by different platforms. So Young,  GMei (更美), literally “More Beautiful” and YueMei (悦美), literally “Happy Beauty” dominate the market. So-Young is the most most significant player in the market; however, there is no a convincing barrier to entry in its business model, i.e. there is no reason at all for GMei and YuMei not to replace So Young in future. In the long-term, resistance to degeneration will decide the dominant one. The business model of these platforms is problematic due to the significant source of revenue is generated via self-proclaimed adds placed by the SMEs on the platform. If the platform loosens its procedures in promoting the services, it can create a massive branding and reliability crises for the platform; and in the medical sector, reliability and trust are even vital than the price.

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Apr 11, 2019 09:45 am ·

So-Young: What to Expect for the IPO and for China’s Medical Aesthetic Industry

We are initiating coverage of So-Young (新氧). Established in 2013, So-Young is a marketplace to discover, evaluate, and reserve medical aesthetic services in China. The company submitted its prospectus, planning to list on the Nasdaq under “SY” and to raise up to USD 150 million. Potential valuation is USD 2-3 billion. In this report, we discussed 6 key questions investors would like to learn about.   How do So-Young’s financials look and what are the implications? So-Young recently disclosed its financial results for the first time, and we are impressed by the financial outlook of the company. Below are some key takeaways. Revenue growth has been skyrocketing So-Young’s revenue grew from CNY 49 million to CNY 617 million from FY16 to FY18, representing a CAGR of 255%. In FY18, the company generated 67% of revenues from information services, essentially the advertising fees charged to medical aesthetic service providers, and 33% from reservation services, the treatment booking fees paid by the service providers. We expect continued triple-digit revenue growth in the following multiple years, supported by the trend that medial aesthetic service providers are moving away from traditional advertising channels to online medical aesthetic marketplace channel, and So-Young is the leader in this space. Gross margins of ~85% matching online verticals' peers In FY17 and FY18, the company’s gross margin was 83% and 85%, comparable to FY18 gross margin of Autohome (NYSE: ATHM), Ctrip (NASDAQ: CTRP), and 58.com (NYSE: WUBA). Similar to So-Young, these companies are Chinese online marketplaces which target users with specific needs, though the contents vary. So-Young incurs COGS primarily from servers and bandwidth costs, payment processing fees, content-related costs, and so on. We see the growth of most semi-variable costs immaterial compared to the top-line growth. Given the early stage of the company, gross margin may have the potential to reach ~90% in the long-term. Significant upsides for operating margins expansion So-Young impressively reached a positive operating margin of 10% and a positive net margin of 5% in its third year of operating. While revenue increased by CNY ~360 million from FY17 to FY18, R&D and G&A only rose by CNY 180 million and CNY 46 million respectively during the same period. Sales & Marketing was the largest OPEX item and was 50% of total revenues in FY18, but it is likely to gradually come down as So-Young builds bigger brand awareness and drives marketing via word-of-mouth reputation. In the short-term, we see possible margin pressure as the company is likely to invest in sales and operation functions after its IPO, but in the long-term, we see great upsides for margin expansion.   What about the market size and industry trend? We first take a look at So-Young’s revenue stream, the medical aesthetic service providers. One of the biggest challenges for these providers is the high customer acquisitions costs - average customer acquisition cost per person falls in the range of CNY 4000 to 6000 (USD 600 to 900), according to MobData. For example, Arsmo Cosmetic Surgery Hospital and Leader Cosmetic Surgery Hospital, two publicly traded cosmetic surgery hospitals in China, showed gross margins of 54% and 61% and S&M/Revenues of 27% and 45% last year. Hence, looking for more cost-effective marketing channels and better targeting customers is a prioritized goal for the medical aesthetic service providers So-Young’s total addressable market of USD 7 billion According to Frost & Sullivan, medical aesthetic service providers spent CNY 31 billion (~USD 5 billion) on customer acquisition in 2018, representing 26% of the total revenues in this industry. This USD 5 billion of marketing spending in China is generally allocated to several channels: 1) offline channels, including beauty salons and outdoor advertisement; 2) online channels, including medical aesthetic platforms (So-Young), search engines (Baidu) and general online e-commerce platforms (Weibo, TikTok, and news apps). Among those channels, traditional TV and newspaper ads currently take the largest market shares, but they are harder to identify potential consumers. Online marketing remains a more effective tool since users already have the interest/intention to receive medical treatments when they look up results on search engines or check out medical aesthetic apps. According to Frost & Sullivan, online customer acquisition spending from Chinese medical aesthetic service providers totaled CNY 18 billion (~USD 3 billion) in 2018 and is expected to grow at a 5-year CAGR of 22%, reaching CNY 49 billion (~USD 7 billion) by 2023. Growth of customer acquisition via service platforms exceeding other online channels With the emergence of online medical aesthetic service apps such as So-Young, Gengmei (更美), and Yuemei (悦美), these platforms quickly gained market shares from traditional channels. While customer acquisition via online medical aesthetic platforms was less than 1% of total customer acquisition spending in 2014, the number grew to 7% in 2018 and is expected to reach 26% by 2023. In an absolute dollar amount, the spending rose from USD 9 million in 2014 to USD 200 million in 2018 and is projected to be USD 2 billion in 2023, at a CAGR of 58%. Technological improvement in the overall cosmetic sector Medical aesthetic services can be divided to a) surgical treatment such as blepharoplasty, rhinoplasty, face contouring and breast augmentation; b) non-surgical treatment such as injection procedures and laser skin management. One of the most crucial industry drivers is the increasingly mature technology, which has allowed the surgeries less risky, less painful, and less time-consuming (most surgeries are under 2 hours and injection-based surgeries take less than 30 minutes).   Why can So-Young attract users? Right now, ~90% of site traffic of medical aesthetic service providers comes from Baidu and ~5% comes from Sougou, according to Ptmind (铂金智慧). Baidu’s advertising is bidding-based, listing companies who submit higher bids on top of the results. In 2016, the scandal of the death of WEI Zexi led to significant public concerns on Baidu’s pay-for-placement results which affected the fairness and objectivity of search results. The 21-year-old college student who passed away because of a rare cancer received several treatments at a hospital recommended by Baidu, and he accused Baidu of promoting distorted information. Although Baidu adjusted its ads displaying tactics afterward and lowered the number of ads from 18 to 3 on its first page, the search engine still lacks consumer trust which likely leads to relatively low purchase conversion rates. In the medical aesthetic industry filled with false information and questionable ads, we believe an increasing number of prospective patients will choose to collect information from So-Young’s platform. So-Young’s customer value proposition comes from 1) professional and reliable contents: Contents are created by users who went through cosmetic surgeries and is inherently different from commercials, and thus viewed as more credible. 2) one-stop shop with comprehensive services: So-Young not only gathered service, pricing, discounts, and license information from ~14,000 medical aesthetic service providers across China, Korea, Japan, and Thailand, but also assist users with hospital selection, real-time interaction with doctors, appointment reservations, and after-treatment emotional support services. 3) stringent monitoring systems: So-Young verifies the qualifications and licenses of all medical service providers on its platform and pays regular visits to those providers. If users who book medical treatment appointments through So-Young end up with undesirable surgery outcomes, So-Young will assist them with complaints, litigation, and refunds, creating additional layers of consumer rights protection. We believe after the IPO, the company will have more capital to strengthen its content production and screening procedures, thus driving moat.   Where does So-Young stand relative to peers? The first mover in this space was not So-Young but Yuemei. Today, similar well-known apps are Gengmei, Yuemei, Meierbei (美尔贝), and MDL (美黛拉). Those five platforms (include So-Young) share similar information about medical aesthetic treatments to consumers and offer similar advertising and data management services for service providers. So-Young features for its most complete services, according to Deloitte. We believe So-Young is the industry leader based on its high user engagement and booking transactions, which are the two most important metrics service providers look at when measuring their ROI. According to Frost & Sullivan, in 2018, So-Young app accounted for 84% of total daily user time spent on online medical aesthetic service mobile apps; In a survey of 1,000 respondents conducted in October 2018, So-Young ranked the first in both brand awareness and customer stickiness. Based on those metrics, we believe So-Young can offer a higher ROI for service providers relative to its peers.   Is the USD 2-3 billion valuation reasonable? Though the IPO has not priced yet, the previous 7 rounds of founding implied a company valuation of USD 2-3 billion. Given So-Young’s FY18 revenue of around USD 90 million, this indicated at least a 22x P/S multiple. We believe the high valuation can be justified by 1) triple-digit revenue growth 2) large upsides for margin expansion 3) secular shift towards online aesthetic medical service platforms and So-Young’s market leader position.   What are the downside risks? Becoming a pure advertiser and losing consumer trust So-Young’s core competency comes from the original reviews posted by customers who went through medical aesthetic surgeries. The company is intended to become the most trusted platform in which users can easily find high-quality medical aesthetic services. However, since So-Young earns revenue primarily from the medical service providers, it inevitably has conflicts of interests to facilitate more transactions for them. Based on its contracts with the providers, it appears that if service providers have larger advertising budgets, So-Young will make their ads more noticeable to consumers. In the event that So-Young does not conduct sufficient due diligence on providers with deeper pockets, or allow comments posted from providers themselves instead of real customers, users will find the app no differs from general search engines such as Baidu. High-risk industry with regulation uncertainties Even today in which cosmetic surgeries are becoming more and more common, consumers are still cautious about the risks and returns of those surgeries and have almost zero tolerance for accidents. Negative news and articles regarding failed surgeries and long-term health risks could lead to deterioration in consumer confidence. Also, users may have different expectations on the outcomes, which is something less controllable by So-Young. In addition, since the online medical aesthetic service industry in China is at an early stage of development, applicable laws and regulations may be adopted from time to time to address new issues and may require additional licenses and permits other than those we currently have obtained, according to the company. Competitive landscape is far from being settled According to one of So-Young’s competitors, Yuemei, 80% of service providers who partner with Yuemei also partner with other 2-3 platforms simultaneously, and the numbers of platforms are increasing. Penetration of online astigmatic medical platforms remains only less than 1%, and the competitive landscape is far from being fixed. So-Young’s competitors are aggressively richening their user bases, with Yuemei and MDL developing offline channels. In addition, larger-sized players such as Meituan and Alibaba have also entered the space recently with the products Meituan Healthcare and Ali Healthcare; those larger competitors have more financial capabilities and large numbers of existing users on their E-commerce platforms. In the event that competitors own more high-quality contents than So-Young, users may switch to other platforms.   Business overview App display Among the So-Young App, Wechat mini-programs and its official site, app is the most popular form and there are four sections on the So-Young app, “Recommended content” recommends corresponding articles, short videos, live video broadcasting, and sales promotions based on user preferences and behaviors. “Beauty Research Club” contains articles written by users who have undergone medical aesthetic treatment. Users can comment on and share the articles as well as message and follow the original bloggers. “Q&A” section allows users to review and post different types of questions. Surgeons and other medical professionals will provide solutions. “Explore” section is similar to the “recommend content” section, but offers more comprehensive contents, including medical knowledge and KOL interviews. Customer profile According to MobData, 77% of users on So-Young are females in the age of 18-34; 57% of them are married and 70% of them have monthly income of CNY 3k-20k. Contracts with service providers So-Young typically enters a one-year contract with medical service providers. The company charges information service fees primarily (i) at a fixed fee per each day’s content display, (ii) based on a contractual rate per unit of output, such as per click, etc. and (iii) at a fixed fee per article posted on the company's social media accounts. These fees vary based on geographical location, target users, and desirability of the online location where the content is displayed. Additionally, the company typically charge a reservation services fee rate of approximately 10% of the amount paid by consumers. Major shareholders So-Young's class A shares are 100% held by the founder JIN Xing (金星) and class B shares are held by ATCG Holdings, Matrix Partners, Apax Partners, Trustbridge Partners, and Orchid Asia.