China’s Booming Beauty Industry Offers Augmented Reality for Investors

(Beijing) — “After having plastic surgery done to my nose, I have become prettier and more confident. Everyone has the right to be better-looking!” a 20-year-old model using the pseudonym Xixi wrote on the website of beauty clinic chain M’Union.

M’Union is part of a fast-growing domestic market worth hundreds of billions of dollars that has witnessed 30% annual growth over the past five years. The industry certainly seems to have attractive prospects, as Westernized features — double eyelids, longer noses and larger breasts — become increasingly in vogue with Asian women born without them.

Although some artificial stunners, after having a series of plastic surgeries, injections and laser treatments, can end up looking unnatural and often require repeated adjustments — and in some cases die as a result of medical malpractice — plastic surgery still remains a lure for many women as they see their peers gaining fame and then wealth through augmentation.

There are several chains that run beauty clinics, including M’Union, Arsmo and Ever Care. Although no single company has dominated the industry, the business is largely controlled from Putian, a coastal city in the southeastern province of Fujian, where entrepreneurs built their nationwide private hospital empires from nothing.

Clinics belonging to the Putian alliances are often closed to nonlocal investors, and stakes in the companies are co-owned by families and fellow townspeople. About 80% of the Putian-owned clinics are family businesses.

In July 2016, real estate group Suning Universal Co. Ltd. acquired M’Union for 218 million yuan ($32.0 million), all in cash; Ever Care started at least five years earlier to take in outside funds, although its Putian boss, Wang Yongan, still holds a 60% share of the company.

As beauty clinics gradually embrace a more-diverse shareholder base, and some are listed on the Chinese over-the-counter (OTC) New Third Board, the public has started to learn about their profitability. Many achieve an amazing gross profit margin of 50%, but the net profit margin, after subtracting marketing and sales costs, usually ends up only in single digits.

Putian is a relatively isolated town that is surrounded by mountains on three sides and faces the sea, with a local dialect totally different from its neighbors. Starting in the 1980s, some Putian residents, sensing that China’s socialist roots were beginning to loosen, left their hometown in search of opportunities.

Some of the wanderers worked as roving doctors, and began encroaching on the state-owned hospital system by helping operate some divisions before gradually managing a whole clinic.

There are now four families that dominate the beauty clinic businesses — the Huang family, led by Huang Defeng, who is behind M’Union; Lin Guoliang and his family, which runs Arsmo; Yestar, under Chen Guoxiong; and Chen Jinxiu, who controls MyLike.

After decades of effort, the families, which own diverse health care assets, are financially sound. The oldest and largest beauty clinic brand — MyLike, under the Chen family — brings in about 3 billion yuan in revenue every year, and 98% of the company is owned by Chen Guoxiong, according to insiders’ estimates.

“We don’t have any plans to raise funds,” Hu Dazhi, deputy manager of MyLike’s online business department, told Caixin.

Qian Tingzhi, managing partner of Shanghai-based Prosperico Ventures, told Caixin: “They (the Putian magnates) are not willing to open the assets to the public. When they need investments, they’ll borrow within the circle, which makes the corporate structure tangled and hard to break into for outside investors.”

But Suning Universal, the real estate giant, made it. The way they acquired M’Union was by paying the entire purchase price in cash, after which the Putian management quit the company.

“They (M’Union’s former management) just sold it once and forever. They don’t engage with outsiders, they don’t engage with capital,” said Sun Changmin, M’Union’s former chief financial officer.

M’Union is running four hospitals each in Beijing, Tangshan, Shijiazhuang and Wuxi. Although it has been seeking to evolve from a family business to a modern corporation by hiring professional managers, it still has had poor financial results.

“The Beijing clinic makes a little profit, and the Shijiazhuang branch is profitable, while the Tangshan and Wuxi outlets have been losing money,” Sun said.

Suning Universal told Caixin that financial data is just one of many standards to measure a company, and since the M’Union management team has been upgraded, the clinics have recently been doing better.

M’Union is not alone in terms of poor profitability. Almost all the large hospitals are not as profitable as they appear to be.

A real cash cow?

Beauty clinics’ gross profit margins of over 50% may have attracted many investors, but it’s only when they look closer that the clinics don’t appear as lucrative.

“There is a limited number of players in the industry that are really making money,” an investor in the industry who requested anonymity told Caixin. After having read the financial reports of nearly 20 companies, he learned that almost all could achieve a gross profit margin of 100%, while the highest net profit margin was only 30%.

Beauty clinics rely largely on marketing, which spend 6,000 yuan on average to secure a client, according to Guosen Securities. In the whole market, marketing contributes to 50% of the value, sales account for 20%, while the surgery itself and doctors make up around 15%, according to Guosen.

And the rise of the internet has further placed a burden on beauty clinics, which previously took out only print or television advertisements but now have to penetrate social network platforms such as Sina Weibo and Tencent Holdings Ltd.’s WeChat.

For example, the marketing expenses of Arsmo, which is listed on the OTC board, increased 68% to 112 million yuan last year, while net profits fell 38% to 21 million yuan.

Thus, many clinics have started to cut expenses, with one of the main methods being tax evasion.

“Most beauty clinics have tax-evasion problems,” the unnamed investor mentioned above told Caixin. For example, clinics usually compose dual accounting methods, showing fewer profits for the tax bureau’s reference.

In this sense, acquiring beauty clinics has become even harder as buyers, in order to meet legal requirements, have to pay back the evaded taxes. “Many investors find the clinics are money-losing assets after having cleared the unpaid taxes,” the unnamed investor said.

Even though, big players have joined the game.

Suning Universal has set up a fund of 5 billion yuan specifically for the cosmetic surgery industry, which so far has spent around 1.4 billion yuan buying assets and will keeping adding the total number of assets up to more than 50 companies.

Another player named Lancy, which makes apparel but has seen net profit drop 40% for two years, has decided to invest 700 million yuan in building two large beauty hospitals and 30 smaller clinics in two years.

Lancy’s moves include buying 30% stakes in beauty service group DMG in South Korea, a country where cosmetic surgery is more popular than it is in China. The apparel maker has also bought six beauty clinic operators in China for 327 million yuan.

But insiders don’t anticipate an oligarchy to dominate the industry.

Newcomers might have enough capital, but what matters in this business is the team and management, which requires experience, deputy general manager of beauty clinic brand Ever Care told Caixin.

Clinics are different from hotels and restaurants that are scalable, in that it will be difficult for companies that arrive in the industry with only money and no experience, Hu from MyLike told Caixin.

Contact reporter Coco Feng (renkefeng@caixin.com)