Transition To Franchise Model And Clinic Expansion Will Strengthen Future Prospects

Key Takeaways

• Rapid clinic expansion and franchise model promise increased revenue and improved net margins through reduced costs and operational efficiency.
  
• Vertical integration and data insights bolster competitive advantage, enhancing profitability and boosting overall earnings.
  
• The decline in key business segments and consumer spending, combined with competitive pressures and expansion uncertainties, threatens So-Young's long-term revenue and profitability stability.

Catalysts

Operates an online platform for consumption healthcare services in the People’s Republic of China.

• The rapid expansion of So-Young's clinic chain is expected to be a key growth driver, with significant revenue growth from new clinics and increased gross margins, positively impacting future revenue and net margins.
  
• The integration of upstream and clinic businesses offers strong synergies and competitive advantages, which should bolster revenue growth and improve net margins due to economies of scale and reduced operational costs.
  
• Expansion into high-demand market areas and optimization of customer acquisition costs are expected to further enhance operational efficiency and profitability, impacting revenue and net earnings positively.
  
• The transition to a franchise model aims to accelerate network expansion at a lower cost, promising financial advantage and greater profitability, which is likely to improve earnings and net margins over time.
  
• Continuing vertical integration and leveraging data-driven insights for marketing efficiency is expected to refine cost control and enhance profitability, which should lead to improved net margins and overall earnings.

So-Young International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming So-Young International's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 8.2% in 3 years time.
• Analysts expect earnings to reach CN¥146.5 million (and earnings per share of CN¥2.11) by about February 2028, up from CN¥35.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.2x on those 2028 earnings, down from 17.8x today. This future PE is lower than the current PE for the US Interactive Media and Services industry at 24.1x.
• Analysts expect the number of shares outstanding to decline by 11.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.77%, as per the Simply Wall St company report.

So-Young International Future Earnings Per Share Growth

Risks

• The decline in the POP business, with a decrease in medical service providers subscribing to information services and a drop in reservation service revenues, poses a risk of reduced revenue from this segment.
  
• The ongoing transformation and early stages of clinic expansion introduce uncertainties regarding the pace of opening new clinics and their ramp-up, which could impact future revenue growth and profitability.
  
• Competitive pressures and lack of unified standards in a market dominated by small institutions could challenge So-Young's ability to maintain consistent service quality and profitability as it expands.
  
• High reliance on the nascent upstream business and the uncertainties in nurturing competitive advantages may affect long-term revenue stability and earnings if the market shifts or competition intensifies.
  
• A decline in consumer spending on the platform could continue, impacting overall revenue growth and potentially straining net margins, especially in uncertain economic conditions.

Valuation

• The analysts have a consensus price target of $1.19 for So-Young International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1.46, and the most bearish reporting a price target of just $0.8.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥1.8 billion, earnings will come to CN¥146.5 million, and it would be trading on a PE ratio of 5.2x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $0.86, the analyst's price target of $1.19 is 27.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.