Listed on the Hong Kong Exchange, Perfect Shape Medical Limited (HKG:1830) (“Perfect Shape”) is a premium slimming and beauty service provider operating under the well-recognised brand name “Perfect Shape 必瘦站”. As at 13 December 2019, the Group has a market capitalisation of approximately HK$3.42 billion. In this article, we will take a closer look at the business, management and financial aspects of the Group, to see if it is worth an investment.
Perfect Shape principally provides tailor-made quality, effective slimming and beauty services, complemented by slimming and beauty products to deliver better results for its customers. Currently, its outlets are located in 6 major cities, including Hong Kong, Macau, Shanghai, Guangzhou, Shenzhen and Beijing. Its top-end centres can be found in prestigious shopping malls located in areas frequented by high-income customers.
When seeking a public listing in 2011, the Group had stated in its IPO prospectus that its business objective is to capture market share in the fast-growing PRC sliming and beauty industry. While the Group has grown considerably since then, its most important market remains Hong Kong with 73% of revenue in financial year (“FY”) 2019. Mainland China and Macao are the other two principal markets, contributing 27% of revenue to the Group.
Brand awareness is important in the slimming and beauty industry. The Group has made substantial efforts and have spent a large amount of financial resources in order to establish brand recognition.
For the years ended 31 March 2018 and 31 March 2019, the Group has incurred marketing expenses of approximately HK$88.0 million and HK$169.1 million, representing 10% and 14% of revenue for the respective years to protect and promote its brand names in different markets. In fact, the Group counts popular Hong Kong actresses, Sharon Chan (陈敏之) and Charmaine Sheh (佘诗曼) as brand ambassadors.
The Group contents that its “Perfect Shape 必瘦站” brand distinguishes the Group from its competitors and contributes to its leading position in the market. Furthermore, the success of the brand enables it to charge premium prices and position its services towards the higher end of the market.
As foreigners, we may not be clients and have first-hand experience of the Group’s slimming and beauty services, but we can perhaps broadly gauge Perfect Shape’s popularity and market recognition by examining the Group’s various social media pages.
The Questionable Business Practices
Separately, given the nature of the slimming industry and subjective views on the level of satisfaction of slimming services provided, the Group is, on occasion, susceptible to various customer complaints, which can include unsatisfactory results of staff services, unsatisfactory treatment progress, or unethical selling or promotion of services, etc.
Some of the clients do file their complaints with consumer protection authorities. In fact, a Singaporean woman has recently in April 2019 sued the Hong Kong beauty chain over accusations that she was pressured into paying HK$1.3 million to upgrade her treatment plan against her will. See article link.
It is important to acknowledge that such complaints and negatively publicity, regardless of their validity, may affect the public’s perception about the Group and result in reduction of loss in the number of clients. Word of mouth and public perception is after all, paramount in this industry.
The Chairman and Chief Executive Office of Perfect Shape is Dr. Au-Yeung Kong. Dr. Au-Yeung graduated with a degree in medicine and surgery in 1995 and worked as a doctor since graduation. He has accumulated over 14 years of experience in slimming and high technology beauty industry. In 2003, he founded Perfect Shape.
Dr Au-Yeung, together with his family, owns about 67% of the Company’s shares. On the board of directors are two of his sisters, Ms. Au-Yeung Wai who also serves as Chief Operating Officer of the Company, and Ms. Au-Yeung Hung, who is primarily responsible for the operational management of the service centres of the Group. The fact that most of the Company’s shares belong to the Au-Yeung family basically guarantees that management is hugely motivated to ensure the Group’s continued success, as it is basically a family business.
(Source: FY2019 annual report)
Measure 1: Growth in revenue and profits
Perfect Shape has achieved remarkable compound annual growth rate (“CAGR”) of 20.55% in revenue and 36.90% in profits annually for the past 6 years, from FY 2014 to FY2019. This is on the backdrop as non-invasive medical beauty and slimming treatments are becoming increasingly popular in recent years.
Nevertheless, we should be reminded that slimming and beauty services are discretionary spending, and consumers would tend to restrict consumption when there is a slowdown of economy and erosion of consumer’s purchasing power due to higher cost of living.
Measure 2: Growth in deferred revenue
Perfect Shape promotes its slimming and beauty services by offering prepaid packages with discounted pricing to clients. Its directors believe that this prepayment mode of operation enables the Group to enhance customer loyalty and establish long-term relationships with its clients.
The prepaid packages are recorded as deferred revenue in the balance sheet at the point of sales and have a validity period of one year. For financial reporting purposes, prepaid packages are recognised as revenue from time to time in the income statement when the service treatments are delivered to clients. This recognition method results in large amounts of deferred revenue and represents the Group’s major source of funding to financial operation cash flow.
Measure 3: Profitability
Perfect Shape’s net
profit margin has nearly doubled from 13.8% in FY2014 to 25.8% in FY2019. In
addition, return on equity ratios are overall above 20%, hitting a stunning
55.1% in FY2019!
Measure 4: Liquidity
My preference is always for a conservatively managed balance sheet. Perfect Shape delivers on that account with favourable current asset. Its is in net-cash position and has zero borrowings for the past 6 years. Moreover, the Group is flushed with cash, as it has term deposits, pledged bank deposits and cash and cash equivalent totaling approximately HK$399.5 million as at 31 March 2019.
Round 5: Dividends payout
While the Group does not have a formal dividend policy, but it has been distributing increasing dividends every year from FY2014 to FY2019. Moreover, the dividend payout ratios have exceeded 100% of profits (excluding one-off adjustments).
Since the management team are also major shareholders, the Group will likely continue to be a generous dividend payer. However, future payout ratio may not be as high going forward as such elevated levels are unsustainable over the long term.
As a side note, management has not recommended any interim dividend for the 6 months ended 30 September 2019, citing the need to maintain more cash on hand due to current political and economic challenges in Hong Kong. Management also believes that present conditions are excellent for merger and acquisition opportunities.
With a closing share price of HK$3.03 as at 13 December 2019, Perfect Shape is trading at a price of earnings (PE) ratio of 10.56, with an indicative yield of 9.54%. At this valuation, the stock does not seem to be pricey and might be an interesting addition to your watch list.
Source: Google Finance