Uptrend of hair transplantation creates a niche

Frost & Sullivan: Market size of sector expected to surpass $5.85b in 2025

China's hair transplantation market is embracing rapid development as more consumers are willing to pay for care services for hair, which meanwhile should be given more careful thought to optimize the business roadmap and ensure a sustainable development of the sector.

By the end of June, Beijing-based Yonghe Medical Group Co Ltd, the Chinese mainland's largest hair transplantation company by sales, filed its initial public offering application to the Hong Kong stock exchange.

The company said it plans to raise HK$1.9 billion ($244.7 million) via the IPO. The money will be used to establish 50 more hair transplantation outlets and 60 nonsurgical medical centers in China.

At a time when offline chain stores were mostly impacted by COVID-19, the company has accelerated its business pace and opened 11 new stores last year.

"Hair problems are major pain points for those who pay great attention to their looks, generating lucrative hair-related business. Hair transplantation is one potential subcategory," said Dun Yuting, a healthcare analyst at the online technology media platform 36Kr.

United States-based investment bank Morgan Stanley and China's first joint-venture investment bank China International Capital Corp Ltd were among the outfits advising the firm. If Yonghe Medical's IPO and expansion plan works out, it will be the country's first listed hair transplantation company, and also the first of its kind to have over 100 outlets.

Data from the National Health Commission showed that in 2020, the number of people experiencing hair loss in China surpassed 250 million, with males accounting for over 65 percent, or 164 million.

US Research firm Frost& Sullivan estimated that by 2025, China's hair transplantation market will reach 37.8 billion yuan ($5.85 billion) from 13.4 billion yuan in 2020, which means a compound annual growth rate of 23 percent.

The prospectus of Yonghe Medical said that in 2020, there were around 516,000 cases of hair transplants in China, and the market penetration rate was 0.21 percent. The market demand has not been satisfied and remains vast.

Despite the promising prospects, industry experts said hair transplantation is not an easy business. They estimated the average transaction per customer is between 30,000 yuan and 70,000 yuan. However, marketing costs take up 15 percent to 40 percent of the total revenue, while personnel, rent and utilities account for 20 percent to 40 percent, and 10 percent, respectively. The net profit ratio stands at less than 10 percent.

Dun said a main reason for such high marketing costs is that hair transplantation is a "once-for-all "deal. Consumers will not re-purchase such services and their desire to share what they go through is low. It is hard to establish brand recognition, so companies can only keep looking for new customers.

"Besides, the industry lacks technology advancement, which contributes to low differentiations between organizations. Enterprises need to spend a lot to acquire customers," Dun said.

"To increase net profits, companies should expand their business and service scales including daily hair strengthening and maintenance. After all, the appeal for consumers is to solve hair loss. The dual business mode combining hair transplantation with daily maintenance is expected to increase user experience and bring steady income to industry players."

"Enterprises also need to improve their techniques and services to guarantee sustainable growth," Dun added.

By 2030, the daily hair strengthening and maintenance sector will take up 45.3 percent of China's hair-related medical services market, said Frost & Sullivan.

In 2017, Yonghe Medical acquired the Chinese mainland business of British hair strengthening brand Svenson. It also launched scientific research on stem cells within hair follicles to further improve its hair loss product portfolio.

"In 2020, daily hair strengthening and maintenance only contributed to 13 percent of Yonghe Medical's sales revenue. The business had the characteristics of low per customer transactions, high re-purchase rates and high user stickiness. It is estimated that daily hair strengthening and maintenance will turn into a main driving force of the hair-related medical service sector," said Qi Yeqing, a healthcare analyst at Beijing-based think tank EqualOcean.

Industry problems such as fake advertisements and opaque pricing are hindering the development of the sector.

Data from Shanghai-based beauty information platform Caomeipai showed that in 2018,41 percent of hair transplantation customers were unsatisfied with unexpected payments, 35 percent said support services were inadequate, while others worried about bad postoperative results and the low hair follicle survival rate.