So-Young International: Corporate Developments And 2023 Outlook (NASDAQ:SY)

Elevator Pitch

I have a Hold rating for So-Young International Inc.’s (NASDAQ:SY) shares.

My prior November 29, 2022 article was focused on evaluating SY’s Q3 2022 performance. I turn my attention to So-Young International’s recent corporate developments and its 2023 financial outlook in the current article

I have a positive view of SY’s recent corporate developments like a larger share buyback program, but I am negative on So-Young International’s top line growth prospects for 2023 and beyond. After assessing the above-mentioned factors, I have decided to award a Hold rating to SY.

Corporate Developments

There are two key positive developments relating to So-Young International which are worth mentioning.

The first positive development is that SY’s risk of delisting has been reduced to a large extent.

On January 6, 2023, So-Young International disclosed that it “regained compliance with the minimum bid price of US$1.00 per share requirement” which is part of Nasdaq’s regulations. SY’s shares have been trading below $1 for most of the trading days in the mid-May 2022 to late-December 2022 time period. In comparison, So-Young International’s last closing stock price as of February 13, 2022 was $2.61.

With China moving away from a COVID-zero stance, it is very likely that SY’s share price won’t revisit historical lows and fall back to $1 or below again in the short term. This implies that So-Young International’s delisting risk pertaining to non-compliance with Nasdaq’s rules on minimum bid price has been significantly lowered, taking into account SY’s last traded share price which is way above the $1 mark.

The second positive development for So-Young International is that the company has increased its share buyback authorization from $15 million previously to $25 million now as per a January 3, 2023 announcement.

So-Young International’s $25 million share repurchase authorization expires in mid-November this year, and this is equivalent to a significant 9% of SY’s current market capitalization.

Returning more cash to shareholders via share buybacks will help to shrink SY’s equity base and boost the company’s future EPS growth and ROEs. Also, assuming that SY does spend $25 million on share repurchases by November 2023, investors in So-Young International can look forward to earning an enticing share buyback yield of around 9% based on its current share price. As such, SY’s enlarged share buyback program will make the stock more attractive in the eyes of many investors.

2023 Outlook

SY’s outlook for this year isn’t as good as I expected, judging by the current consensus financial figures for the company.

2023 is anticipated to be a year in which consumption in China recovers in a meaningful way as the country reopens. But the market consensus only sees So-Young International’s top line growing by +20.7% from RMB1,256 million for fiscal 2022 to RMB1,517 million in FY 2023 (source: S&P Capital IQ). The consensus FY 2023 top line expansion rate for SY is much lower than the company’s FY 2019-2021 revenue CAGR of +39.9% in RMB terms. Notably, the sell-side analysts also predict that SY’s revenue growth rate (in local currency terms) will decelerate slightly to +19.5% for FY 2024.

It is also worthy of note that the sell-side’s consensus FY 2023 top line forecast for So-Young International was cut by -3% from RMB1,568 million as of September 30, 2022 to RMB1,517 million now. In other words, the analysts haven’t become more positive on SY’s revenue growth outlook in the past few months despite China’s pivot away from its COVID-zero strategy.

In my view, investors are skeptical that China’s medical aesthetics industry can grow as fast as it did in the past taking into account policy headwinds. This explains why the analysts’ consensus FY 2023 and FY 2024 revenue expansion rates for So-Young International are lower than the company’s FY 2019-2021 top line CAGR as highlighted above.

The regulatory crackdown for the Chinese medical aesthetics industry started in 2021. In February 2021, The Chinese Association Of Plastics And Aesthetics or CAPA introduced a new set of guidelines referred to as “Rules for the Implementation of the Standard for the Evaluation of Medical Beauty Institutions”, which was meant to provide guidance for organizations offering medical aesthetics services. As recent as late last year, there were still new rules rolled out to exercise tighter regulatory control over China’s medical aesthetics industry. In November 2022, China’s National Medical Products Administration or NMPA issued a new circular announcing changes to the registration and categorization of products containing sodium hyaluronate.

It is fair to assume that the growth outlook for the Chinese medical aesthetics industry and So-Young International won’t be as favorable as what it was previously as a result of regulatory constraints.

Closing Thoughts

So-Young International warrants a Hold rating. I am encouraged by recent developments for the company such as an increase in its share buyback authorization and reduced delisting risks. But it will be difficult for SY to see a substantial re-rating of its stock price and valuations, when it is expected to deliver slower revenue growth in the coming years.