So-Young Shares Get A Makeover

The cosmetic surgery specialist's shares have nearly doubled in the last two weeks as investors flock to its new business model centered on self-operated clinics

Key Takeaways:

• So-Young has delayed implementation of a planned reverse share split following a surge that has seen its stock price nearly double in the last two weeks
• The cosmetic surgery specialist is shifting its business model from referring people to third-party clinics to operating its own facilities to give it better quality control

Cosmetic surgery specialist So-Young International Inc. SY appears to be having second thoughts about its latest plan involving a makeover for its stock, which was ailing as recently as May 30 when it announced the equivalent of a 19.5-to-1 reverse share split. Such reverse splits are used by U.S.-listed companies to bring their prices back above the $1 level as required by New York Stock Exchange and Nasdaq listing rules.

So-Young's stock fell below the $1 mark on an extended basis last June, prompting the Nasdaq to notify it of failure to comply with listing requirements. Its reverse share split would have brought it back into compliance by raising its price well above the $1 mark, and was set to take effect on June 30.

But then the company's shares suddenly began to surge about two weeks ago, taking them above the $1 mark on June 17. They've continued to climb since then, and, at Tuesday's close of $1.71, have nearly doubled over the last two weeks. That sudden surge was most likely what prompted the company to announce last Friday it was reconsidering its reverse share split decision. It said it needed "additional time to finalize preparations" for the move and would announce a new date in the future.

So, what's happening here?

While it's possible the recent rally is coming from speculators looking to make some quick money, a more likely reason is that investors are just now discovering So-Young's own internal makeover that has the potential to return it to strong growth. Even after the rally, So-Young's stock still trades at a relatively low price-to-sales (P/S) ratio of 0.85. That's still ahead of Chinese hair transplant specialist Yonghe Medical's 0.32, but behind a more typical 1.73 for Perfect Medical (1830.HK), which operates centers in the more mature Hong Kong market.

Put simply, So-Young is discovering the importance of quality control, especially for something as sensitive as cosmetic surgery, where a few inexperienced doctors and shoddy surgeries can quickly spoil a company's reputation. In the past, So-Young was mostly an intermediary, helping to link consumers with the thousands of cosmetic surgery centers across China, and taking referral fees as its main revenue sources.

But that business proved problematic due to the difficulty of controlling quality among the many clinics on So-Young's network. Making matters worse for its core client base, health regulators in 2023 began requiring operators of all such centers to get licensed before being allowed to advertise their services. At that time, only about 13,000 such clinics were licensed, and a much larger 80,000 lacked any official qualifications, according to independent research.

Realizing the difficulty of operating in such an environment, So-Young made the decision about two years ago to start operating its own clinics where it could have complete control over the quality of not only its products, but also its personnel and service levels. That part of its business has developed quickly and looks likely to become its main revenue source in the next year or two.

"We believe the big key to our next phase hinges on developing our aesthetic center business with full control over the supply chain," said Chairman Jin Xing on the company's latest earnings call last month.

Rocky road

So-Young has traveled a rocky road since its New York IPO in May 2019, when it raised $180 million by selling shares for $13.80 apiece. The pandemic began less than a year later, putting huge pressure on its business as people put off cosmetic surgery for fear of being infected by Covid-19. As a result, the company's revenue went into reverse in 2022, falling 26% that year, before rebounding somewhat with the pandemic's end in 2023.

But even after the pandemic's end, the company was hit by the regulatory crackdown, causing its revenue to contract again by a milder 2% last year. The contraction hasn't ended yet, and So-Young's latest results show its revenue fell 6.7% in this year's first quarter to 297 million yuan ($41 million) from 318 million yuan a year earlier.

That drop was due to a 34% decline in the company's "information and reservations" services, which include the referral fees it receives from directing customers to clinics. That part of its business generated 143 million yuan in the first quarter, or just under half of its revenue for the period. By comparison, that part of the business brought in 217 million yuan a year earlier, when it accounted for more than two-thirds of the company's revenue.

While that part of its business was fading, the company's newer aesthetic treatment services from its growing chain of self-operated clinics was rapidly growing. Revenue from that part of the business jumped more than sixfold in the first quarter to 98.8 million yuan, making up one-third of its total, from just 15.2 million yuan a year earlier, when it accounted for just 5%.

The company said it expects that part of the business to keep growing rapidly as it opens new clinics, forecasting revenue from that segment of between 120 million yuan and 140 million in the second quarter. The company currently operates 23 aesthetic centers in major cities across China, among which only four have been open more than a year. It said on its earnings call it expects to open around 13 new clinics annually over the next few years.

"Our branded aesthetic centers continue to generate strong growth momentum, achieving triple-digit year-over-year revenue growth," said Jin. "We are confident this momentum will continue as we scale, enabling us to address key customer pain points and elevate the overall medical aesthetic experience."

We would tend to agree that So-Young's new business model looks better positioned for success, though it remains to be seen whether China's slowing economy and growing consumer caution might dampen demand for cosmetic surgery in general. But one thing that's more certain is that interest seems to be returning to the company's stock. As a result, we wouldn't be surprised to see So-Young ultimately cancel its previously announced reverse share split plan.