Cosmetic Surgery Information Hub So-Young Dolls Up With Major Acquisition

Plan to buy 85% of Wuhan Miracle Laser System for $122 million would represent company’s biggest purchases since its 2019 IPO

Key points:

• So-Young’s $122 million purchase of a laser medical equipment maker represents its biggest investment since its 2019 IPO
• Such investments could help to drive So-Young’s growth, though it needs to better articulate its acquisition strategy for investors

By Doug Young

Cosmetic surgery specialist So-Young International Inc. (SY.US) was probably hoping that news of the first major acquisition since its 2019 IPO would make it prettier to investors. But if that was the case, the procedure failed to have the desired effect.

Of course, So-Young probably could have done a better job packaging the announcement, which it made on Monday and looks quite intriguing. Most interesting is the investment’s large size – worth 791 million yuan ($122 million) to be exact.

And yet, nowhere in the brief announcement is there any mention of what the acquired company, Wuhan Medical Laser Systems, actually does. Nor does So-Young put the purchase in any bigger context, including how big it is compared with any previous M&A or how the investment fits into its bigger strategy.

Without any of that context, perhaps it’s no surprise that So-Young’s stock closed flat the day of the announcement. We’ll try to bridge the gap here by providing some of the missing information, which appears to show that this purchase represents a relatively big step for So-Young in China’s lucrative but also highly fragmented cosmetic surgery market.

But first we’ll review the basics in the actual brief announcement issued by So-Young on Monday. That announcement says the company has agreed to purchase an unspecified controlling interest in Wuhan Miracle Laser Systems for the 791 million yuan figure mentioned above. It adds the deal should close in the third quarter.

“We believe that China’s medical aesthetics industry possesses huge growth potential and we are especially optimistic about non-surgical medical aesthetics,” Chairman Jin Xing said in a statement accompanying the announcement. “We hope our strategic investment in Wuhan Miracle will enable us to continue to seize the opportunities of the industry and bring greater returns to our shareholders.”

Nowhere in the announcement is there any mention of what Wuhan Miracle Laser actually does, nor how it fits in with the broader strategy at So-Young, which runs one of China’s largest online communities for people interested in cosmetic surgery and the companies that provide such services. So-Young generates about three-quarters of its revenue by providing industry-related information to its users, with the remainder coming from fees for people who book procedures on its platform.

Some online searching shows that Wuhan Miracle Laser was founded in 2001 and is listed on China’s thinly-traded, over-the-counter style “New Third Board” in Beijing. It is primarily a maker of laser medical equipment often used in cosmetic surgery. The company issued its own announcement specifying that So-Young will ultimately control 84.5% of the company via direct holdings and investment in a third company that also holds Wuhan Miracle Laser’s shares.

Wuhan Miracle Laser’s webpage shows it is quite well-connected with China’s medical community, boasting more than 10,000 users of its products and connections with many medical experts and cosmetic surgery providers. Thus, from a strategic perspective, this particular acquisition looks like it could become an important source of referrals to So-Young among the many companies and professionals in Wuhan Miracle’s network.

Big Deal

The other missing piece of this puzzle is exactly how big a step this is for So-Young, which raised $180 million with its May 2019 listing on the Nasdaq. In the two years since then, the company has yet to announce any other major acquisitions or investments in its sector.

A look at its latest annual report shows So-Young does indeed have a few investments in other companies, though nearly all are quite small and are mostly in consultant-type outfits. The largest of those is So-Young’s 35% stake in Beijing Yicai Health Management Consulting Co. Ltd., which it purchased in 2019 for 17.5 million yuan, or less than $3 million.

If So-Young is disclosing investments that small and even smaller, it’s probably safe to assume that this latest acquisition is by far the company’s largest to date and perhaps could presage future additional investments.

So-Young is relatively cash rich, with the equivalent of nearly $400 million in cash at the end of March, according to its latest quarterly results. Equally important, the cash figure is relatively stable, nearly unchanged from a year ago, which owes to the fact that So-Young is mostly profitable despite posting several recent quarterly losses due to pandemic-related disruptions.

Financial analysts see the company bouncing strongly back into the profit column later this year, which would give it a price-to-earnings (PE) ratio of 23 if it can meet average expectations for a profit of 41 cents per share this year. By comparison, InMode, a U.S.-listed Israeli maker of cosmetic surgery equipment, trades at a PE of 35 based on analysts’ forecasts for this year.

That would seem to indicate investors currently undervalue So-Young’s shares, which now trade about 30% below the price from their 2019 IPO. 

The fact of the matter is that China’s cosmetic surgery industry is quite large but also very fragmented and in need of consolidation that companies like So-Young could provide. A white paper on the industry released earlier this year by New York-listed cosmetic surgery clinic operator Aesthetic Medical International pointed out that the industry in China is now worth about $30 billion a year and is expected to grow more than 20% annually over the next few years.

So-Young’s latest quarterly report shows it should be able to outpace that industry growth. The company’s revenue reached 360 million yuan in the first three months of the year, roughly double the year-ago figure, which was hurt by the pandemic. But the latest quarterly figure was also up sharply from 206 million yuan in the first quarter of 2019 before the pandemic.

Now, So-Young just needs to find better ways to tell investors about its growth strategy, including the role for future major acquisitions like its new purchase of Wuhan Miracle Laser.

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