Sagging Profits Take the Shine off Beauty Farm’s IPO

Earnings at the beauty and health company were badly hit by Covid disruption in the first half of the year

Key Takeaways:

  • Beauty Farm Medical and Health had to shut many of its salons in Chinese cities when Covid struck in the first half of the year, sending its net profit plunging nearly 80%
  • With its valuation squeezed, the company might struggle to hit a $300 million fundraising target

By Emily Chan

Beauty may be big business in China, as incomes rise and social media puts an added premium on appearance, but the industry is not pandemic-proof.

Beauty Farm Medical and Health Industry Inc., a salon chain dubbed the “Hermes” of China’s medical aesthetics sector, is positioning for growth in a market that is rapidly catching up with South Korea and has spawned several giant companies.

But Covid disruption has blemished Beauty Farm’s profit performance, just as seeks to appeal to investors with an IPO.

The company is looking to raise up to $300 million by listing on the Hong Kong Stock Exchange. But a recent update to its IPO application showed just how much the pandemic has hurt its business.

Founded in 1992, Beauty Farm is one of China’s most established chains for cosmetic services. It started out providing conventional beauty treatments such as facials, then expanded into medical aesthetics and has even moved into the business of health management.

The group’s brands – Beauty Farm, Palaispa, CellCare and Neology – are targeting different parts of the market.  Through its flagship Beauty Farm brand, along with the Palaispa business acquired last year, the company provides facial, skin care and body care treatments through its own chains and franchise stores. The two core brands are the company’s main money-spinners, bringing in more than half of the group’s revenue between 2019 and the first half of 2022.

The company added the CellCare brand in 2011 to provide cosmetic procedures such as injections of Botox and Hyaluronic acid, with outlets sometimes offering more invasive double eyelid surgeries, fat grafting and liposuction as well. The medical aesthetics business has contributed 30% to 40% of total revenue in recent years. The company further branched out into health status checks and wellness counselling in 2018 through its brand Neology, which accounts for 3% to 6% of overall revenue.

The latest preliminary prospectus said that the company operated 189 of its own stores and had 177 franchise stores, mostly in first-tier cities, at the time of filing. The CellCare chain had 18 self-operated stores and Neology had five, with the rest run by Beauty Farm or Palaispa. Under the one-stop beauty services model, the company draws in customers with conventional beauty treatments before offering them cosmetic procedures and services to check or improve their health.

A research report cited in the prospectus valued the Chinese market for beauty care and health management services at 1.24 trillion yuan ($173 billion). Measured by 2021 revenue, Beauty Farm was the biggest provider of standard beauty services in China and the fourth-largest provider of non-surgical medical aesthetics services.

Profits marred by the pandemic

The company’s annual profit performance had been picking up in recent years. Revenue rose from 1.41 billion yuan in 2019 to 1.50 billion yuan in 2020, a 7% rise, before jumping a further 18.5% to 1.78 billion yuan in 2021. Net profits were also higher, rising around 3% from 147 million yuan in 2019 to 152 million yuan in 2020 and jumping nearly 37% to 208 million yuan last year.

The Covid pandemic suppressed earnings growth in 2020 but the following year brought a business rebound. The bounce proved short-lived as the resurgent pandemic took a heavy toll in the first half of this year.

Major cities such as Shanghai went into lockdown to contain new virus strains, forcing the company to close 142 of its stores in 18 cities, while 93 franchise outlets of Beauty Farm and Palaispa also shut for a while. The group’s revenue fell around 12% to 734 million yuan in the first half from the same period a year earlier. Rising R&D and administrative expenses meant net profit plunged 78% to 22.96 million yuan.

In addition, profit margins have also been shrinking. Over the past three and a half years, the company’s aggregate gross margin declined from 50.4% to 42.8%, squeezed by pandemic effects and high operational costs such as rent and wages. Personnel costs as a share of total revenue rose from 38.7% to 45.3% in the period, pushing gross margin on the traditional beauty business down from 43.1% in 2019 to 31.2% in the first half of this year.

Health warning: rising expenses

At the same time, the typically lucrative medical aesthetics business also saw its gross margin drop from 61.2% to 56%, as more customers opted for discounted treatments or low-margin injections of Hyaluronic acid, used as a filler to plump up the skin.

The latest prospectus shows that the group’s revenue already perked up in July and August, rising 16%.  But the pandemic is still clouding the outlook and the company will need plenty of cash for restructuring and other activities during the IPO process. Beauty Farm has already predicted that a sharp rise in operating costs will eat into its net profit.

The business of beauty does have its risks. The company has faced a series of lawsuits over medical accidents and disputes, paying out 59.5 million yuan in customer refunds and compensation over the last three and a half years. But it said most of the cases had been settled or were dropped by the plaintiffs by the end of June, with limited impact on overall operations.

The pandemic has hurt the whole medical aesthetics industry, pushing many companies into the red. To estimate Beauty Farm’s IPO valuation, we can use its peers, Raily Aesthetic Medicine (2135.HK), Perfect Medical Health (1830.HK) and Lancy Co. Ltd. (002612.SZ), which have an average price-to-sales (P/S) ratio of 2.35 times.

Combining that figure with annualized revenue based on Beauty Farm’s half-year earnings, the valuation could be just HK$3.76 billion ($482 million). So, it might be a stretch to reach an IPO fundraising target of $300 million.

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