China beauty: Service with a smile

If further evidence were needed of the value China’s increasingly affluent consumers place on appearance and wellness – and the premium they are willing to pay for quality service – Angelalign Technology and Yonghe Medical Group might provide it.

Last month, Angelalign, best known for its invisible dental braces, raised HK$3.3 billion ($509 million) through a Hong Kong IPO after the overallotment option was fully exercised. The stock, priced at $173 in the offering, surged to HK$401 on the first day of trading. It ended July 19 at HK$444, delivering significant paper gains for PE backers CareCapital and Hillhouse Capital.

A day after Angelalign’s debut, hair transplant clinic chain Yonghe filed for its own Hong Kong IPO. The company – which counts CPE as an investor – is looking to leverage the momentum created by a near doubling in revenue over the past two years and a threefold increase in net profit.

“In the coming era, the biggest opportunity in China is services. Every country eventually reaches the stage where services rather than products are the major growth engine. What you buy at a restaurant is not just a meal, it is a service. Such opportunities will appear in all different sectors,” says Jinjian Zhang, a founding partner of Vitalbridge Capital - a spinout from Trustbridge Partners.

This view is endorsed by Bruno Lannes, a Shanghai-based partner at Bain & Company and previously head of the China consumer products and retail practice, who emphasizes that consumers want to be taken care of, which means being advised on what to buy. Beauty and wellness is a key area.

“Advising people on their skin needs and spa or spa-related options will have a great future because it’s part of that growing sophistication,” he says.

Bigger is better?

There is, however, often a trade-off between scale – a priority for any China investor – and quality. In a recent report on opportunities in the aesthetic medical space, China International Capital Corporation (CICC) concluded that upstream product providers have more promise than downstream service providers. As companies grow, they face more challenges around the standardization of services and management, which can eat into margins. Some investors agree.

“If you are a pure service chain, say hairdressing or beauty salon, I am not optimistic, because scale actually leads to diminished margins. For a product-type company, the more stores we open, the lower our costs become because volumes are rising and management efficiency might be improving. But it is difficult to standardize services. Management costs will grow significantly as you expand your chain," says Ying Xu, a general partner at Vertex Ventures China.

Xu concedes that high-cost, high-value services could be the exception to the rule. However, it remains to be seen whether start-ups can achieve standardization in the premium segment.

Yonghe is a good example. It operates China’s largest chain of hair transplant clinics chain, with 51 outlets across 50 cities. Customers pay RMB20,000 ($3,100) to more than RMB100,000, depending on the service. Physicians skilled in performing the dozens of tiny incisions required for a hair transplant are integral to the business model.

Yonghe has established a standardized physician training system. Each recruit participates in a program that lasts four to six months, including a three-month stint of clinical practice training under the one-on-one supervision of an experienced physician. The company boasts the largest professional medical team in its segment, with 229 registered physicians and 930 nurses. Plans to build out the talent pipeline include cooperating with medical schools and other training institutions.

“When you move from commodities to services, and you are seeing explosive growth on the demand side, it can be difficult for the supply side to keep up. You need to recruit so many specialists in such a short time,” says Zhang.

While Yonghe focuses on internal training, Angelalign relies on technology solutions to increase the productivity of its workforce. Orthodontics certainly has a talent shortage. The market has more than doubled in size over the past five years, reaching $7.9 billion in 2020, and it is expected to hit $29.6 billion in 2030, according to China Insights Consulting. The number of patients will rise from 3.1 million to 9.5 million. Yet China only had 6,100 practicing orthodontists last year.

Angelalign uses scanners and digital rendering equipment to show patients what their teeth will look like post-treatment. Orders are made and treatments initiated through a cloud-based service platform, and an artificial intelligence-driven engine reviews and modifies these plans. The cloud platform coordinates manufacture and delivery on receiving sign-off from a dentist, and manages patients’ medical records.

The approach might be more technology-led than that of Yonghe, but the price point is similarly high. Angelalign's average selling price for a set of braces is RMB7,700. A full-service package costs around RMB30,000.

Staying power

Angelalign’s approach is based on that of US-listed Invisalign and its rise dates from the expiry of some of Invisalign’s local patents covering oral scanning, 3D printing, and related software. Each company now has a 41% market share. If this is an example of standardization inspired by third-party technology, others achieve via independent specialists.

Meiwei Dental Group, which recently secured RMB1 billion in Series B funding, is China’s first dental support organization platform. It provides digital transformation services, brand management support, equipment upgrades, and financing to nearly 200 dental clinics under a subscription model. Central to the offering is a cloud-based platform that formulates standard procedures across appointment booking, customer relationship management, treatment planning, and long-term care.

The same demand-supply imbalance is present in aesthetic medical services, and it goes to the heart of CICC’s reservations about the vertical. In 2019, revenue surpassed RMB143.6 billion, making China the second-largest market globally after the US, according to Frost & Sullivan. But CICC notes that only 12% of procedures take place in legally compliant clinics and only 24% are performed by legally compliant doctors.

Cosmetic surgery specialist BeauCare Clinics, which recently raised RMB200 million in Series D funding, has developed its own solution to the talent shortage. The company uses economic alignment of interest as an incentive, establishing clinics in partnership with doctors. As of March, there were 50 across a dozen cities, and 80% are said to be profitable. BeauCare has also introduced an online consultation platform, accessible to all clinics, as a means of driving offline business.

Achieving scale without sacrificing quality will remain a challenge for beauty and wellness players even when there is enough talent to cater to expanding demand. There is no shortage of start-ups championing innovative business models, but investors are unsure as to how many of them have staying power. There will be many casualties as the industry matures and professionalizes.

“You have to back top players, and I think the investment value of followers – as opposed to market leaders – is relatively low,” says James Wang, a partner at Vision Plus Capital. “There are more viable targets in the product space, because it’s a larger track, and a more proven one. And then product needs are more scattered from a demand perspective.”

China is not the only market expected to see a thinning of the herd. Ravi Thakran, previously of L Catterton and LVMH and now founder of Aspirational Capital observes that countless start-ups have flocked to beauty and wellness globally. In Dubai alone, he estimates there are 1,300 aesthetic clinic brands, and he predicts that only 10-20 will survive.

“In China, investors are spraying capital far and wide because the wind is blowing so well, even a turkey could fly. That is the case in so many areas in China,” Thakran observes. “Everyone can see the buoyancy right now, but eventually many of them will fall."

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• Topics
• Greater China
• Consumer
• Technology
• Expansion
• Early-stage
• Healthcare
• China
• TMT
• Vertex Ventures
• Aspirational Capital
• Vitalbridge
• Vision Plus Capital
• Bain & Company