The central theses:
- Yonghe Medical sees tremendous growth potential in transplant and other hair care services from China’s -parently growing middle class
- The company releases shares at a high valuation with a forecast P / E ratio of 85 times
By Jony Ho
Can a billion dollar company build an empire out of the suffering of others? Possibly. Hair loss often seems to be inevitable as you age, causing discomfort for many. But that creates a huge opportunity for the few who can deal with the disease.
Founded in 2005, Yonghe Medical Group Co. Ltd.(2279.HK) is one such hair transplant specialist who believes it is possible. The owner of the locally known chain “Svenson Medical Hair Care Center” in China officially has his IPO in Hong Kong this Wednesday that raised a whopping HK $ 1.5 billion (US $ 192 million). The shares will trade on December 13th, making it Hong Kong’s “First Hair Transplant Stock”.
One in six Chinese, or about 250 million citizens in the country, has, according to data in Yonghe’s. Had problems with hair loss IPO prospectus by the National Health Commission of China in 2019. About 84% of people with hair loss are younger than 30, she added.
Separate data from market research firm Frost & Sullivan cited in the prospectus showed that the Chinese medical hair services market was valued at 18.4 billion yuan ($ 2.89 billion) last year and is expected to reach 138.1 billion by 2030 Yuan will increase sevenfold. This reflects a great business opportunity for selling hair transplant services to millions of China’s r -idly growing wealthy middle class.
Yonghe provides hair transplant services from 51 centers in 50 cities across China. It was the largest supplier of its kind in China in terms of total income and patient volume last year with a market share of 10.5%.
Yonghe’s hair transplant services have also grown steadily, from about 35,000 procedures in 2018 to 51,000 last year, with the average patient spending up to 28,000 yuan. The company is also quite profitable, having held a gross profit margin of over 72% for the past three and a half years.
Yonghe will offer 94.42 million shares as part of the listing, which corresponds to 18.1% of the total of -proximately 520 million shares. The division of the shares between the international and local parts of the offering has been set at nine to one, with the share price being HK $ 15.80. It said it will use the raised funds to expand and modernize its hair transplant centers, increase brand awareness, and research and development.
As the number of customers with hair problems has grown, Yonghe’s sales reached 1.64 billion yuan last year, up 34.4% from 2019. Business continued to accelerate in the first half of this year, with sales in Year over year rose 75% to 1.05 billion yuan. With such “thick” opportunities, the company is striving to open up the financial market in order to finance its growth in the years to come.
Hair transplants are Yonghe’s main business right now and made up most of its sales in 2018 and 2019. As part of a diversification offering, Yonghe introduced separate medical hair care services in 2019 and posted sales of 15.06 million yuan that year. Sales from this store rose to 213 million yuan for the next year, accounting for 13% of total Yonghe sales. The company continued to grow beyond its main business in the first half of this year, reaching 254 million yuan, accounting for 24.1% of total sales.
Unlike transplants, Yonghe hair care services use non-surgical procedures such as drugs and medical devices to treat hair loss and other conditions such as soft hair or itchy scalp. Management assumes that the market is still in its early stages. It estimates that the addressable market in China was worth only 5 billion yuan last year, and it is expected to grow at an average annual rate of 28.7% to 62.5 billion yuan in 2030.
Transformation in progress
The company hopes its recent fundraising will pave the way for business transformation. Founder and CEO Zhang Yu said in an online press conference that hair transplantation is just one of many ways to treat hair problems, and the broader hair market is filled with other options.
“China’s overall hair treatment market is many times larger than that of hair transplants, so our company’s business is transforming from hair transplant centers to full-scale hair clinics in prime cities. Future expansion will only accelerate by expanding into third category cities within three years, ”he said.
While Yonghe certainly sees its own future as bright, a major question for investors will be whether the company sees itself a little too bright. The IPO of HK $ 15.80 and total shares of HK 520 million give Yonghe a market value of -proximately HK $ 8.2 billion. Estimating this year’s full year earnings based on earnings of 39.49 million yuan for the first half, the company’s forecast price-earnings ratio (P / E) would be quite high at 85 times.
Comparable hair transplant specialists in China and other major markets such as the US are relatively rare. For comparative evaluations, listed companies in the plastic surgery industry, which also offers cosmetic procedures to make people look better, could be a good group.
Major plastic surgery stocks listed in Hong Kong include Perfect Medical Health Management Ltd. (1830.HK), EC health (2138.HK) and Raily Aesmed International Holding Ltd. (2135.HK). The first two achieved earnings per share of HK $ 0.177 and HK $ 0.142 for the first half of their final fiscal years, respectively.
Assuming stable earnings in the second half of the year, the forecast P / E ratios for Perfect Medical and EC Healthcare would be 17 and 42 times, respectively. Raily Aesmed is losing money and therefore has no forecast P / E ratio.
We can also compare Yonghe with So-Young International Inc. (NASDAQ: SY), a company that operates an information and service platform for plastic surgery in China. So-Young’s most recent P / E is roughly 49x, but should go down as earnings increase.
The high valuation that Yonghe is aiming for has dampened the attitudes of some analysts. Francis Lun, CEO of GEO Securities, agreed that Yonghe’s core business is highly profitable and that unlocking the c -ital markets for its expansion is a good step. “The industry’s technical threshold is not high, however, and there are many competitors in the market offering similar services at lower prices. This is Yonghe’s greatest hidden concern, ”said Lun.
While Hong Kong’s recent IPO market was volatile, Lun believes the risk of heightened regulatory oversight for companies like Yonghe is relatively small compared to tech and internet stocks like Weibo Corp. (9898.HK; NASDAQ: WB) and NetEase cloud music (9899.HK). Hence, Lun believes that with its high growth expectations, Yonghe will have no trouble attracting investors.
With early demand signals for the company’s stock looking strong, he estimated that Yonghe stock could make a strong trading debut, rising perh -s about 10% on the first day of trading.