Yonghe Medical's Share Repurchase Gets Results, But Can't Hide A Receding Profit Line

Key Takeaways:

• Yonghe Medical’s gamble on growing demand for its hair transplant services led to losses in the second half of 2022 and first six months of 2023
• A stock repurchase plan announced late last month propped up its shares, but the stock is still down by about three-quarters from its 2021 IPO price

By Edith Terry

Yonghe Medical Group Co. Ltd. (2279.HK) got a lift on its trading debut in mid-December 2021, rising 5.1% on its first day, as investors gave it HK$1.5 billion ($192 million) in a nod to its unique position in China’s growing market for nonessential cosmetic products and services. But the initial jump for China’s leading hair restoration specialist was rooted more in big hopes than reality, as China’s economy began to sputter late in the pandemic after years of rapid growth.

Following that initial post-IPO gain that took the debutante’s shares to HK$16.60 on their first day, the stock has crept steadily downward to a recent low of around HK$3. Yonghe hoped to perk things up with its announcement of a plan to buy back up to 10% of its outstanding stock late last month. The tonic had the desired effect, boosting the shares 20% over the next three trading days before the momentum slowed.

The stock was still up 16% at Friday’s close from pre-announcement levels, though it’s still down about three-quarters from headier post-IPO levels just two years ago.  

Investors at that time were excited at Yonghe’s position at the leading edge of a Chinese “hair health” sector, which a recent report from the Chinese Academy of Social Sciences forecast would be worth 100 billion yuan ($13.7 billion) by 2030. Yonghe Medical controlled 10.5% of China’s hair transplant services market around the time of its IPO, according to its prospectus.

Public hospitals often provide better diagnostic and treatment services for hair loss. But private clinics still make up 85% of the market for hair loss services, in part because public hospitals put low priority on a type of surgery that is often considered cosmetic and nonessential.

Yonghe Chairman Zhang Yu described in an interview last year how increasingly affluent young people experiencing hair loss were an especially fertile market for Yonghe. He started the business in 2005 in Beijing, and by 2010 became China’s first hair transplant provider to obtain an ISO certification.

While the share buyback was good news, Yonghe’s interim results released in late August were a bit bleaker. The company posted respectable 10.6% year-on-year revenue growth to 827.8 million yuan in the first half of the year, as demand rebounded after a bleak period in 2022 during the last year of the pandemic. Its patients served in the first half rose by an even stronger 23.1% to 72,591, and its hair transplant patients soared 34.6% to 28,304.

But the strong revenue and patient growth couldn’t keep Yonghe profitable, and the company reported a loss of 226.1 million yuan for the six months, reversing a 17.6 million yuan profit the year before. The latest loss was likely expected, since the company fell into the red in the second half of last year as many of its clinics were forced to temporarily close during China’s final attempt to control the pandemic with its “zero Covid” policy. As a result, it reported a net loss of just over 100 million yuan in the second half of 2022. 

Spending Pullback

The pullback for Yonghe’s stock owes partly to a recent broader pullback for China consumer stocks, especially for this type of highly discretionary spending. Luxury spending in September was about 80% of what it was pre-pandemic in 2019, according to HSBC.

A second hair transplant specialist, Barley Hair Transplant Medical (Shenzhen), submitted its IPO prospectus to the Hong Kong Stock Exchange in June last year. But that plan has stalled in the current chilly climate where Chinese consumers are becoming more cautious.

Yonghe may have also overplayed its hand both before and after the end of China’s “zero Covid-19” policy late last year, betting too heavily on growing demand for its services that increasingly focus on both transplants and cheaper, less invasive treatments.

It has used nearly one-third of its IPO proceeds to expand its clinics, opening 15 during the height of Covid lockdowns in 2022 and another 14 in the first half of 2021, bringing its total to 72. It added 459 medical professionals in the 12 months to June this year, representing a nearly 30% expansion of its professional team.

Its staffing costs increased about 30% from 108.4 million yuan in the first half of 2022 to 140.9 million yuan in the same period of 2023 as it staffed up its new clinics. Its biggest bulge was in marketing and promotion expenses, which rose 43% year-on-year to 345.2 million yuan in the first half of 2023.

The company also responded to growing competition with a new “fixed price” system in February. Instead of charging for its transplant services per hair follicle, it began charging based on physician rankings and hair replacement techniques, offering more affordable pricing for aesthetic hair replacement services used mainly by women.

“The implementation of our new pricing system has greatly reduced the cost of patients’ decision making,” management said in the interim results. Reflecting the pricing pressure the company is feeling, it said its average spending per patient for hair transplants dropped around 14% from 26,314 yuan in the first half of 2022 to 22,640 yuan in the same period of 2023.

The high costs of expansion and growing competition are pressuring Yonghe from two directions, and could force it to take a breather from its rapid expansion. Reflecting those pressures, the company’s stock now trades at a relatively low price-to-sales (P/S) ratio of just 1. So-Young SY, which operates a cosmetic surgery platform, trades at a P/S of 0.53, while Hong Kong-focused Perfect Medical (1830.HK) trades higher at 3.3.