더 예쁘시면서 => Actually you're prettier.(더 = more, 예쁘시면서 = 예쁘시다 + 면서(while/when ...))
"XX-면서 (YY-하다)" makes an adverbial clause, like "when/while XX is happening ... (YY is happening too)".
It can also present two opposing situations, like "When XX (is true), YY (is presented instead) ".
Your example is the latter case, implying "(You're saying I'm pretty) when actually you're prettier (than me)".
It's a response of modesty, like "Don't mention it." or "That flatters me.", rather than a serious statement.