ZhiKr | Has the bull market arrived, and has the spring of hair transplantation also come?
Author | Huang Yida
Editor | Zheng Huaizhou Ding Mao
During the one-month period from mid-September to early October this year, driven by the positive impact of overseas interest rate cuts and the continuous improvement of liquidity, as well as the domestic announcement of a package of economic stimulus policies, the Hong Kong stock market experienced a short-term sharp increase. In this general rally, Yonghe Medical, which mainly focuses on hair transplantation, performed outstandingly, with its increase ranking among the top in the healthcare sector of the Hong Kong stock market during this period.
Figure: Stock price trend of Yonghe Medical; Source: wind, 36Kr
However, before this, the stock price of Yonghe Medical once experienced a long and severe decline. At the end of 2021, the initial public offering price of Yonghe Medical was HK$15.8 per share, and it reached a historical high (HK$19 per share) on the fifth trading day after listing, which can be said to be a peak at the beginning; after that, the stock price entered a long-term downward channel, and by the intraday historical low on August 23 this year, its stock price dropped to HK$0.6 per share.
Then, what are the reasons for the long-term decline in the stock price of Yonghe Medical? Is Yonghe Medical still worth investing in the future? What are the core investment points?
01 Slower Revenue Growth and Profitability Pressure
Yonghe Medical achieved a revenue of 1.777 billion yuan in 2023, with a year-on-year growth of 25.8%. However, in the long term, the revenue peak of Yonghe Medical was in 2021. After that, it was mainly affected by the epidemic and the weak economic recovery. The revenue in 2022 decreased significantly, and the revenue side has been in a weak recovery so far. If calculated based on the revenue growth rate in the 2024 interim report (8.75%), the revenue at the end of this year will still not exceed the revenue peak in 2021.
Figure: Revenue and year-on-year growth rate of Yonghe Medical; Source: wind, 36Kr
In terms of revenue structure, the company's main businesses consist of two major businesses: hair transplantation and medical hair care services. Among them, the hair transplantation business is the company's main source of income, with the business income ratio in recent years being around 75%; the long-term income ratio of medical hair care services is about 25%. In terms of growth, the high growth of medical hair care services before 2021 was mainly benefited from the low base factor; in the past two years, the growth of the two main businesses has been in a recovery state.
Figure: Revenue structure of Yonghe Medical; Source: wind, 36Kr
In terms of profitability, the company's gross profit margin in the past two years has decreased significantly, mainly affected by the decline in the average price of the main business, the increase in labor costs and depreciation and amortization caused by the expansion of stores, etc.. The interim report data this year shows that the company's gross profit margin has a certain recovery, mainly related to the slowdown in the store opening speed.
In terms of expenses, the period expenses of Yonghe Medical have always been relatively heavy, and in terms of structure, sales expenses are the largest, which is in line with the industry characteristics of the company with a strong consumer attribute. In the past five years, the company's expense ratio has fluctuated greatly, which is directly related to the company's revenue shrinkage after 2021 and the increase in expense expenditures caused by store expansion, and has had a significant impact on net profit.
Figure: Sales expense ratio and period expense ratio of Yonghe Medical; Source: wind, 36Kr
In terms of net profit, there was a negative growth in net profit in 2021, when the revenue was at its peak, and the company's net profit has been in a loss since 2022. The main reasons for the negative growth/loss are: on the one hand, the revenue shrinkage caused by factors such as the epidemic and the weak economic recovery; on the other hand, it is affected by the company's strategic expansion in 2022 and 2023, which has led to a weakening of profitability, a significant narrowing of gross profit, and the period expenses remaining at a relatively high level, ultimately eroding too much profit. For example, the sales expenses in 2023 exceeded the gross profit of the same period, and the total period expenses in 2022 and the interim period of 2024 also exceeded the gross profit of the same period.
02 Why Has the Performance Shrunk?
From the stock price performance of Yonghe Medical since its listing, it can be seen that at the beginning of its listing, it was once highly favored by investors. In the case of the weak performance of the pharmaceutical sector, the stock price experienced a short-term increase. At that time, the corresponding investment logic was mainly based on the industry dimension, and a certain valuation premium was given based on Yonghe Medical's leading position in the hair transplantation industry.
When it comes to the market prospects of the hair transplantation industry, it can be simply summarized as having a huge market space and a low penetration rate. Public data shows that the number of people with hair loss in China in 2020 was as high as 250 million, of which about 164 million were men; from the perspective of age distribution, people under the age of 30 are the high-incidence group of hair loss, accounting for about 70% of the total population with hair loss, and those aged 26 - 30 are the hardest-hit areas, with the proportion of the population with hair loss in this age group exceeding 40%, and the trend of younger age is prominent.
In terms of penetration rate, public data shows that The penetration rate of the domestic hair transplantation industry in 2020 was only 0.2%, and the penetration rate of the medical hair care industry was only 1%, with huge future growth space. According to Frost & Sullivan's estimation, The domestic hair transplantation market size will reach 75.6 billion yuan in 2030, and it is predicted that the CAGR from 2025 to 2030 will be as high as 27.6%. The high growth of the hair transplantation industry is one of the main reasons why investors are bullish on Yonghe Medical.
In terms of business, there are three main ways to treat hair loss: hair transplantation, medication, and medical aesthetic therapy, and there is a certain competitive relationship among them. From the perspective of effectiveness, the effect of hair transplantation is the best, with a postoperative hair follicle survival rate of up to 90%. The effectiveness of medication and medical aesthetic therapy is slightly lower than that of hair transplantation; From the perspective of cost, the average surgical cost of hair transplantation is relatively the highest, but the surgery usually only needs to be performed once. Medical aesthetic therapy is the second, and although medication treatment is low-cost, the treatment frequency is too high, requiring daily oral or topical administration, and the treatment cycle requires six months to one year. It can be seen that hair transplantation is characterized by good curative effect and short treatment cycle, but the cost is relatively the highest.
In terms of the competitive landscape, the domestic hair transplantation market mainly consists of four types: private chain hair transplantation institutions, hair transplantation departments of beauty institutions, hair transplantation departments of hospitals, and non-chain private hair transplantation institutions. Public data shows that in 2020, the proportion of non-chain private hair transplantation institutions was about 45%, The proportion of private chain hair transplantation institutions was about 24%, the proportion of hair transplantation departments of beauty institutions was about 16%, and the proportion of hair transplantation departments of public hospitals was about 15%. In terms of industry concentration, The CR4 of the hair transplantation industry in 2020 was about 24%, higher than that of medical aesthetics and dentistry, And Yonghe Medical ranked first in the market share of the hair transplantation industry, with a market share of about 10.5% (in terms of revenue).
From the perspective of business attributes, Hair transplantation surgery is more inclined to medical aesthetics, so the importance of service level is prominent, and public hospital resources are more inclined to serious medical treatment, so the hair transplantation business is more suitable to be carried out by the private sector, which determines the competitive landscape where the private sector (including private chains, private non-chains, and medical aesthetic institutions) dominates the hair transplantation industry.
Judging from the industry concentration index, the current hair transplantation industry is still in a stage of full competition, and the competition is relatively fierce. Even though Yonghe Medical currently has a stable leading position in the industry, it still needs to face high-intensity competition. Moreover, the threshold of the hair transplantation industry is not high, mainly reflected in the low dependence on doctors and equipment, and the business process emphasizes standardization, so it has strong replicability, which is one of the root causes of the fierce competition in the current hair transplantation industry.
Regarding the core logic of the performance growth of private chain institutions such as Yonghe Medical, in addition to the demand growth brought about by the increase in penetration rate, the expansion of the chain to increase the business scale is also its main means, which is also the core strategy of Yonghe Medical in recent years. The high replicability of the hair transplantation business is a very favorable condition for chain expansion. However, the difficulty of the chain expansion of hair transplantation institutions is actually relatively large, and the main reasons are as follows:
1. Difficulty in forming a scale effect. Among the stores under the same chain brand, it is difficult to share equipment and personnel, which makes it impossible to reduce costs through the scale effect while the store expansion and fixed asset investment increase. This is a rather unfavorable impact on chain operations;
2. Heavy assets and the corresponding depreciation and amortization will have a greater pressure on the performance. According to the 2024 interim report data, the ratio of (fixed assets + right-of-use assets) / total assets of Yonghe Medical is as high as 58%, and this ratio has been in the range of 43% to 78% in recent years. Fixed assets mainly include properties, factories and equipment, and building leases are included in right-of-use assets. The relatively large depreciation and amortization pressure brought by heavy assets, the depreciation and amortization in 2023 was as high as 335 million yuan, which is included in the corresponding subjects of costs and expenses. The erosion of profits by depreciation and amortization is also one of the main reasons for the company's continuous losses in recent years.
In terms of business development, hair transplantation is very dependent on marketing at this stage. The reason is that, on the one hand, the development level of the hair transplantation industry is not high at present, and it is necessary to continuously improve the awareness and brand awareness of the hair transplantation business through continuous marketing and consumer education to seize the minds of potential consumers; on the other hand, compared with medical aesthetics and dentistry, the IP effect of doctors is not obvious in the hair transplantation industry, and potential consumers relatively value the brand of the hair transplantation institution more, so brand building is also an important part of the development of the hair transplantation institution.
It is precisely based on the above two main factors, combined with the store expansion strategy in recent years, that the sales expenses of Yonghe Medical have remained at a relatively high level after 2021. The expenditure of sales expenses, in addition to the traditional offline advertising, also follows the trend of the Internet, and a part is invested in self-media platforms. The maintenance of sales expenses at a relatively high level has a significant erosion on profits, especially in 2022 when the revenue decreased year-on-year, and the sales expense ratio increased by 5 percentage points year-on-year in the same period. In 2023, the sales expenses even exceeded the gross profit of the same year.
Regarding the macro-level impact, Hair transplantation has a strong optional consumption attribute, belongs to the concept of consumption upgrade, and is a typical pro-cyclical industry. One of the core logics that the market was bullish on the hair transplantation industry before was that with the growth of per capita disposable income, it would help to release the demand for hair transplantation, and the population with hair loss has shown a younger trend. Young people's higher requirements for appearance are also one of the main driving forces for the growth of the demand for hair transplantation. However, there is a relatively large expected difference between the current actual situation and the above expectations. The weak economic recovery has a huge impact on the pro-cyclical industry, which has already been reflected in the performance of Yonghe Medical in recent years.
In the long term, the current hair transplantation industry is still in the primary stage. Based on the general law of penetration rate climbing, it can be judged that the current hair transplantation industry is still a long way from explosive growth. So when the demand growth is not so fast, but unfortunately encounters the impact of the epidemic and the weak economic recovery, and at the same time, the business development is very dependent on marketing, requiring a relatively high-intensity sales expense expenditure, and the relatively heavy assets have the problem of depreciation and amortization eroding profits during expansion. This explains why the performance of Yonghe Medical decreased year-on-year in 2022, and the revenue growth rate in the past two years has recovered to some extent, but it is far less than that before 2021 and other phenomena.
03 Is Yonghe Medical, Which Has Been Weak for a Long Time, Still Worth Investing In?
In conclusion, regarding the reason for the long-term decline in the stock price of Yonghe Medical, Essentially, it is a pro-cyclical asset encountering a counter-cyclical situation, resulting in the previous good expectations being falsified. Then it triggered a series of chain reactions such as the increase in revenue but not in profit in 2021, the performance shrinkage in 2022, and the weak performance recovery in the past two years.
Of course, it is undeniable that behind the long-term decline in the stock price, there are also negative impacts at the sector level and the Hong Kong stock market. The timing of Yonghe Medical's listing coincided with the entire medical service sector entering a long-term downward channel; the continuous weakness of the Hong Kong stock market in recent years, especially the liquidity problem, is very unfriendly to small-cap stocks like Yonghe Medical.
Therefore, the continuous decline in the stock price of Yonghe Medical in recent years is also the result of the negative resonance between the company's fundamentals, the sector, and the Hong Kong stock market.
For the judgment of the long-term investment value of Yonghe Medical, determining the inflection point of the performance is a rather important step. Looking back at Yonghe Medical's performance in recent years, the key point is that after encountering the counter-cyclical impacts such as the epidemic and the weak economic recovery, the hedging effect of