Demand for treatments such as Botox, skin lasers and double eyelid surgery is soaring across Asia as the region’s burgeoning middle class spends more on looking good.
Investors are dubbing the “appearance economy” one of their top targets for the year. Private equity firm Bain Capital’s $830 million bid for South Korea’s Hugel is one of the largest deals by dollar amount so far.
However some early-stage investors are calculating that Korean and Taiwanese beauty salons are already well established and awash with capital, so they are looking to enter the potentially enormous but more risky Chinese market.
A Chinese chain of beauty clinics, PhiSkin, closed a Rmb120 million ($17.66 million) second round of fundraising last week; led by the healthcare fund of Legend Capital and followed by New York-listed alternative asset manager Ares Management, which is using its first renminbi fund.
China's medical beauty sector had a market size of about Rmb75 billion in 2015, according to equity research analysts at China Galaxy Securities Research. Within that, the injectable products segment was growing at 40% annually and surgical procedures expanding at 20% annually.
“This industry is going to continue to attract a huge amount of capital as anything consumer-facing is popular right now, but the pace may slow a bit,” Mark Hsu, managing director of H&Q Asia Pacific, an early investor in PhiSkin, told FinanceAsia during an interview.
Investors are looking for entry points. One way is to help Korean or Taiwanese firms enter China, but they are seeking a high price for the right to use their established brand names. Given the low barrier to entry into the Chinese market and fierce local competition as a result, this tactic doesn’t often pay off.
Another way is to build up a local brand.
“The ability to grow domestic brands is a tremendous opportunity right now,” Hsu said. H&Q Asia Pacific led the first round of fundraising for PhiSkin in 2015, investing RMB54.4 million of the RMB64 million raised. “There is no major barrier to entry other than business execution," he added.
Even then it is still a high-risk venture given the need for big marketing budgets to build brand awareness and high rent for downtown locations.
PhiSkin management is making sure each clinic is breaking even in less than a year. It is placing clinics in high footfall shopping malls but also lower rent commercial buildings. In one commercial building next to a hospital, its rent is a very low Rmb5 per square metre per day.
In 2015 H&QAP hired Catherine Kang Ya Jun to run PhiSkin. She is a former China CEO of French cosmetics chain Sephora, who grew Sephora from three to more than 100 stores in China.
Botch jobs
Another risk for investors in the aesthetics sector is the wave of bad press following a series of botch jobs involving treatments such as blood transfusions to boost vitality, stem cells from umbilical cords used in anti-aging therapies, liposuction and breast enhancements.
There has been at least one death linked to a stem cell procedure gone wrong in Shanghai while Hong Kong has seen a flurry of heavily reported cosmetic surgery blunders, including a fatal, botched blood transfusion.
Regulators are cracking down on the sector. The health bureau is making licenses harder to obtain licenses, said one investor in the sector.
To steer clear of these risks, PhiSkin is focusing on minimally invasive, high frequency treatments targeted at the mass population. The Shanghai-based company says it employs highly trained doctors from the US, Taiwan and Korea as well as using US and Israeli medical equipment
“We’re not going for the super-high-margin business but more volume and high-quality products,” said Hsu.
Legend Capital’s health care team could also help smooth government relations and help obtain new clinic licenses.
The over-investment in the sector by venture capital companies in recent years has led to the emergence of a lot of small, mom and pop clinics, that are now struggling to cope with increasing regulations. PhiShin is looking to consolidate a few of them.
Back in 2013, PhiSkin had only one clinic, which had an annual revenue of RMB3 million, it now has seven clinics, together generating a revenue of over RMB60 million revenue across China.
Founded in 2012, PhiSkin is targeting an A-share listing in mainland China in a few years’ time. By that point Hsu expects the firm to have around 40 to 50 clinics.
