Luke Chan
Elevator Pitch
I leave my Hold investment rating for So-Young International Inc.’s (NASDAQ:SY) stock unchanged.
I previously wrote about So-Young International in an earlier article written on September 12, 2022. In that write-up, I noted how the “challenging operating environment for the Chinese medical aesthetics market” has adversely affected SY’s Q2 2022 results and its near-term outlook.
With this latest update, I focus on So-Young International’s Q4 2022 financial guidance and the company’s recent corporate action. On the positive side of things, SY has done the right thing by initiating a new share repurchase plans to return excess capital to its shareholders and unlock the value of the cash on its books. On the negative side of things, SY’s Q3 2022 operating data and Q4 2022 top line guidance don’t give investors a lot of confidence about the company’s financial performance in the quarters ahead.
Fourth Quarter Management Guidance Points To Continued Revenue Weakness
So-Young International has provided guidance for the company’s financial performance in the final quarter of the current year, as disclosed in its Q3 2022 earnings media release.
The company sees itself generating a top line of RMB320 million for Q4 2022 based on the midpoint of its management guidance. This suggests that SY expects its revenue to decrease by -29% YoY and -1% QoQ in the last quarter of this year. It also implies that So-Young International’s revenue deceleration might become worse in Q4 2022 as compared to its -25% YoY revenue decline for the preceding Q3 2022.
At the company’s most recent Q3 2022 earnings call, So-Young mentioned that the “overall retail market (in China) is in a slow recovery stage.” SY also highlighted at the recent quarterly investor briefing that institutions in China’s medical aesthetics industry are more likely to allocate a greater proportion of their “marketing budget” to the company’s “So-Young platform”, assuming that “the impact of uncertain factors (new regulations governing the industry) gradually ease” and “they can operate normally.”
In my prior mid-September 2022 write-up for SY, I have already identified weak consumer sentiment and regulatory issues for the Chinese medical aesthetics sector as the key headwinds for So-Young International. SY’s management comments at the third quarter earnings briefing as referred to above are aligned with my earlier views.
Third Quarter Operating Data Was Poor
If one studies So-Young International’s Q3 2022 operating data, it will be easy to understand why SY’s Q4 2022 top line guidance was disappointing.
The number of mobile monthly active users for SY’s platform fell by -51% YoY from 8.0 million in Q3 2021 to 3.9 million for the recent quarter.
The total value of transactions booked through So-Young International’s platform dropped by -52% YoY to RMB364 billion in Q3 2022. SY’s paying user base also shrunk by -22% YoY to 136,700 over the same period.
Separately, So-Young International saw its information services subscriber base contract by -35% QoQ and -24% YoY to 1,704 in the third quarter of this year.
Taking into account the negative trend in SY’s operating metrics, it is reasonable that So-Young International guided for lower revenue in the current quarter (Q4 2022).
New Share Buyback Plan Is Worthy Of Attention
Investors interested in considering So-Young International should delve deeper into the company’s recent corporate action which might help to unlock the value of SY’s shares.
The noteworthy corporate action for SY is a new share buyback plan.
As indicated in its third quarter financial results press release, So-Young International has secured a new share buyback authorization from the board to spend a maximum of $15 million to repurchase its own shares within the next one year.
This share repurchase program is particularly meaningful for two reasons.
One reason is that SY has cash and short-term investments ($231 million as highlighted in its Q3 earnings release) on its books equivalent to three times its current market capitalization.
Therefore, it is clear that So-Young has substantial excess capital which should be returned to its shareholders, unless the company has other significant value-accretive growth opportunities. SY’s new share buyback program, albeit still small relative to the cash pile that it has, is a step in the right direction.
The other reason is that So-Young International’s valuations are depressed. As such, it makes good sense for the company to be considering share repurchases as the most optimal use of capital, and also as a means of addressing SY’s undervaluation issue.
Based on valuation data obtained from S&P Capital IQ, So-Young International currently trades at a trailing price-to-tangible book value (P/TBV) of 0.31 times and a consensus forward next twelve months’ price-to-sales (P/S) multiple of 0.38 times. As a comparison, SY’s three-year mean historical P/TBV and forward P/S multiples were considerably higher at 2.18 times and 2.95 times, respectively.
Concluding Thoughts
So-Young’s stock is still rated as a Hold. The company’s prospects in the near term aren’t good as seen with its Q4 2022 guidance, but its new share buyback plan might provide some support for its share price.
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