Aesthetic Medical International Holdings Group Ltd.

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to Aesthetic Medical International second quarter and first half of 2021 earnings conference call. During today's presentation, all parties will be in a listen-only mode. As a reminder, today's conference call is being recorded. On the call today from Aesthetic Medical International are Dr. Pang Wu-Jiao, Chairman and Chief Executive Officer, Mr. Toby Wu, Chief Financial Officer, Mr. Joe Tzu, Senior Director of Investment Relations and Mr. Derek Shih, Assistant to Chairman. Dr. Joe will review the business operations and the company's highlights, followed by Mr. Joe Chu, who will introduce the company's financial performance. Chairman's CFO and IR team will all be available to answer your questions during the Q&A session that follows. Before we get started, I would like to remind you that some of the information discussed will include forward-looking statements regarding future events and our future financial performance. These include statements about our future expectations, financial projections, and our plans and prospects. Actual results may differ materially from those set forth in such statements. For discussion of these risks and uncertainties, you should review the company's filings with the SEC, which includes today's press releases. you should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call are based on assumptions and beliefs as of today, and we undertake no obligation to update them except as required by applicable law. Our discussion today will include non-IFRS financial measures, including EBITDA, adjusted loss, and adjusted EBITDA. You should not consider EBITDA adjusted EBITDA and adjusted loss as a substitute for or superior to net income prepared in accordance with IFRS. Furthermore, because non-IFRS measures are not prepared in accordance with IFRS, they are susceptible to varying calculations and may not be comparable to other similarly titled measures presented by other companies. You are encouraged to review the company's financial information in its entirety and and not rely on a single financial measure. At this time, I would like to turn the call over to Dr. Peng Ruizhou, Chairman and CEO of Aesthetic Medical International. His opening remarks will be delivered in English by his assistant, Mr. Derek Shi. Dr. Ju, Dr. Ju, please go ahead.

Thank you, host. Thank you all for attending today's meeting. I am very happy to announce that this week's The company's operation and financial performance have regrouped strategically, and its development in the medical field has also achieved impressive results. As the COVID-19 pandemic gradually subsided, residents have resumed their daily activities, and the consumption of medical services has benefited from the resumption of market demand. Our active customers increased by 21.7% in the first half of 2021 and increased by 68.6% and 8.4% in the second half of 2021. After adjustment,

Thank you, operator, and everyone for joining the call today. We are pleased to see an encouraging result in this quarter in terms of operational and financial results, strategic restructuring plans, and our development in the field of non-surgical aesthetic medical services. As the impact of COVID-19 has been gradually receding in mainland China, the public has resumed their daily activities as well as their consumption of aesthetic medical services. Supported by the recovery of market demand, the number of our active customers in the first half of 2021 increased by 21.7% year over year, which drove the revenue growth of 68.6% year over year, and a gross profit margin improvement of 8.4 percentage points in the first half of 2021. Adjusted EBITDA also rebounded from loss in the first half of 2020 to profit in the first half of 2021.

We are highly aware of the sustainable growth and are considering a strategic reorganization. Specifically, we plan to move away from We have evaluated the value of these hospitals and clinics and in the second quarter of 2021 We believe that improving our operating efficiency and consolidating the leading position in the market is very meaningful. In the long term, we expect that the overall profitability of the hospital and clinic will be improved, so that the company's financial performance will be healthier.

We highly value the importance of sustainable growth and have been contemplating a strategic restructuring plan. Specifically, we plan to cease the operations or divest certain hospitals and clinics that either are located in our non-core markets or do not meet our internal performance requirements before the end of this year. By ceasing the operations or divesting these underperforming hospitals and clinics that hindered our financial performance, we can focus on realizing the full potential of retained assets. We assessed the value of these hospitals and clinics, which was recorded a non-operating and non-cash impairment loss in the second quarter of 2021. We believe that this is an essential move to improve our operations and solidify AAH's leading position in the market. In the long run, We expect the overall profitability of the retained hospitals and clinics will improve, thus ensuring a healthier financial performance.

In the first half of 2021, we opened the first clinic in Beijing and achieved good results. In this quarter, In the first half of 2021,

We opened a non-surgical aesthetic medical clinic in Beijing. It has achieved outstanding performance with an average monthly revenue of over 1 million yuan in this quarter and has realized satisfying net profit margin. We expect it will continue the growth momentum in the third quarter of 2021. Currently, three similar satellite clinics will commence operations around the end of this year.

In the future, we will strategically focus on the rapid expansion of the country, transition to a more focused, stable, and sustainable income and profit growth. We will continue to worry about the existing qijian hospital, and set up a clinic that can have the same effect as the existing qijian hospital to promote internal growth. Going forward, we are strategically shifting its focus from rapid national expansion to a more focused, stable, and sustainable growth in terms of revenue and profitability.

We will continue to focus on renovating our existing flagship hospitals and investing in clinics to promote organic growth. We also plan to focus on the core regional market. For example, Guangdong, Hong Kong, Macau, Greater Bay Area, and the Yangtze Delta area. And we look for opportunities to establish hospitals or clinics in the regional market.

Although there are new cases of COVID-19 in China, the economic activities in Peng'an area have not been greatly affected. Our hospitals and clinics still implement necessary prevention measures, including disinfection for employees, check their body temperature, and disinfection of places, and provide a clean and hygienic service environment for employees and customers. Although sporadic COVID-19 cases are detected from time to time in mainland China, economic activities in regions where AIH operates have not been materially affected.

Our hospitals and clinics are implementing necessary precautions, including temperature checks for employees and disinfection of premises to secure a hygienic environment for both staff and customers. Riding on the vibrant development of the aesthetic medical market in the People's Republic of China, together with AAH's extensive experience in the field, we believe that AAH will be able to increase its market penetration and seize market opportunities from the expanding market.

Thank you again for all your support and attention. And I would now like to turn the call to our Senior Director of

Investor Relations, Joe, to introduce the financials for the second quarter and first half of 2021. Joe, please go ahead.

Thank you, Dr. Joe, and hello, everyone. I will summarize some of the key and noted financial results and operation results for the second quarter and June 30, 2021. In the second quarter of 2021, our total revenue increased by 34.4%. to RMB 224 million, primarily due to the recovery of economic activities and customers' demands and purchasing power in mainland China, together with the company's efforts to boost sales. Revenue from non-surgical aesthetic medical services was RMB 117 million, representing an increase of 41.3% from RMB 82.8 million in the second quarter of 2020, Revenue from minimally invasive aesthetic treatments was RMB 56.6 million, representing an increase of 33.5% from RMB 42.4 million in the second quarter of 2020. Revenue from energy-based treatments was RMB 60.4 million, representing an increase of 49.5% from RMB 40.4 million in the second quarter of 2020. Revenue from surgical aesthetic medical services was RMB 91.2 million, representing an increase of 27.9% from RMB 71.3 million in the second quarter of 2020. Revenue from general healthcare services and other aesthetic medical services was RMB 15.8 million, representing an increase of 25.4% from 12.6% meeting RMB in the second quarter of 2020. Gross profit was RMB 133.6 million, representing an increase of 40.3% from RMB 95.2 million in the second quarter of 2020, primarily due to the significant growth in total revenue. Gross profit margin was 59.6%, representing an increase of 2.5 percentage points from 57.1% in the second quarter of 2020, meaning due to more higher margin services and products sold during the second quarter of 2021. Gross profit of non-surgical aesthetic medical services was RMB 68.6 million, representing an increase of 48.8% from RMB 46.1 million in the second quarter of 2020. Gross profit margin was 58.6%. compared with 55.8% in the second quarter of 2020. Gross profit of minimally invasive aesthetic treatments was RMB 32.6 million, representing an increase of 26.8% from RMB 25.7 million in the second quarter of 2020. Gross profit margin was 57.6%, compared with 60.6% in the second quarter of 2020. Gross profit of energy-based treatments was RMB 36 million, representing an increase of 76.5% from RMB 20.4 million in the second quarter of 2020. Gross profit margin was 59.6% compared with 50.7% in the second quarter of 2020. Gross profit of surgical aesthetic medical services was RMB 55.4 million, representing an increase of 33.8% from RMB 41.4 million in the second quarter of 2020. Cross-profit margin was 60.7%, compared with 58.1% in the second quarter of 2020. Cross-profit of the general healthcare services and aesthetic medical services grew significantly, from RMB 7.7 million in the second quarter of 2020 to RMB 9.6 million in the second quarter of 2021. Gross profit margin was 6.8% compared with 61.3% in the second quarter of 2020. Setting expenses were RMB 112.3 million, representing 50.1% of the company's total revenue of the same period. Compared to setting expenses of RMB 92.5 million in the second quarter of 2020, which represented 55.5% of the company's total revenue of the same period. Selling expenses increased on a year-over-year basis, primarily due to the company launched more marketing initiatives after its gradually resumed operations in the second quarter of 2021. General and main expenses for RMB 44.8 million, representing a decrease of 21.3%, from RMB 56.9 million in the second quarter of 2020, primarily due to the decrease of RMB 11.4 million in ESOP-related expenses. Impairment of Goodwill was RMB 111.6 million compared with nil in the same period of 2020. Impairment of Intangible Assets was RMB 43.7 million compared with nil in the same period of 2020. Impairment of property, plant, and equipment was RMB 139.8 million, compared with nil in the same period of 2020. The company incurred these impairments during the second quarter of 2021, primarily due to its strategic restructuring. The change of these three items were primarily because the company has performed impairment assessments at cash-generating unit level and noted several recoverable amounts were lower than their carrying amounts for certain cash-generating units. Relevant impairments are non-operating and non-cash items. As a result of the foregoing, the company recorded a loss of RMB 324.5 million for the second quarter of 2021, compared with a loss of RMB 64.6 million in the second quarter of 2020. Basic loss for share was RMB 3.2 compared with basic loss per share of RMB 0.95 in the second quarter of 2020. Diluted loss per share was RMB 3.58 compared with diluted loss per share of RMB 0.95 in the second quarter of 2020. EBITDA for the second quarter of 2021 was a loss of RMB 294.9 million compared with a loss of RMB 34.3 million in the second quarter of 2020. Adjusted loss for the second quarter of 2021 was RMB 14.9 million compared with adjusted loss of RMB 31.1 million in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021 was a profit of RMB 14.7 million compared with loss of RMB 1.0 million in the second quarter of 2020. Now I would like to move on to the first half of 2021. financial results. Total revenue was RMB 434.5 million, representing an increase of 68.6% for RMB 257.7 million in the same period of 2020, primarily due to the recovery of economic activities and customers' demands in mainland China, together with companies' efforts to promote sales. Gross profit was RMB 255.8 million, representing an increase of 96.6% from 130.1 million RMB in the same period of 2020, primarily as a result of significant growth in the total revenue. Gross profit margin was 58.9%, representing an increase of 8.4 percentage points from 50.5% in the same period of 2020, mainly due to more services and products with higher profit margins sold during this period. Gross profit of non-certical aesthetic medical services was RMB 129.4 million, representing an increase of 104.7% from RMB 63.2 million in the same period of 2020. Gross profit margin was 57.3%. compared with 48.5 percent in the same period of 2020. Gross profit of minimally invasive aesthetic treatments was RMB 60.2 million, representing an increase of 65.8 percent from 36.3 million in the same period of 2020. Gross profit margin was 55.5 percent, compared with 53.4 percent in the same period of 2020. Cross-profit of allergy-based treatments was RMB 69.2 million, representing an increase of 159.2% from RMB 26.7 million in the same period of 2020. Cross-profit margin was 58.8%, compared with 43.1% in the same period of 2020. Cross-profit of surgical aesthetic medical services was RMB 108.5 million, representing an increase of 83.6% from RMB 59.1 million in the same period of 2020. Gross profit margin was 60.9%, compared with 53.2% in the same period of 2020. Gross profit of general healthcare services and other aesthetic medical services grew significantly. from RMB 7.8 million in the same period of 2020 to RMB 17.9 million in the same period of 2021. Cross-profit margin was 58.9%, compared with 48.4% in the same period of 2020. Setting expenses were RMB 206.3 million, representing 47.5% of the company's total revenue of the same period. compared to selling expenses of RMB 170.5 million in the same period of 2020, which represented 66.2% of the company's total revenue of the same period. Selling expenses increased on a year-over-year basis, primarily due to companies has launched more marketing initiatives after its gradually resumed operation in the second quarter of 2021. General and admin expenses were RMB 86.9 million, representing a decrease of 18.4% from RMB 107.8 million in the same period of 2020, primarily due to the decrease of RMB 21.7 million in ESOP-related expenses. As a result of the foregoing, the company recorded a loss of RMB 344.7 million for the six months ended June 30, 2021. compared with the loss of RMB 147.5 million in the same period of 2020. Basic loss per share was RMB 3.92 compared with basic loss per share of RMB 2.17 in the same period of 2020. Diluted loss per share was RMB 3.92 compared with diluted loss per share of RMB 2.17 in the same period of 2020. EBITDA for the six months in June 30, 2021 was a loss of RMB 286.7 million, compared with the loss of RMB 104.9 million in the same period of 2020. Adjusted loss for the six months in June 30, 2021 was RMB 22.8 million, compared with adjusted loss of RMB 89.6 million in the same period of 2020. Adjusted EBITDA for the six months in June 30, 2021 was profit of RMB 35.2 million, compared with the loss of RMB 46.7 million in the same period of 2020. Operational results. In terms of operating performance, repeat customers, defined as active customers who have previously received at least one procedure from the company, accounted for 61.5% of the company's active customer base in the first half of 2021. The total number of active customers was 125,000, excuse me, 261, representing an increase of 21.7% from 102,933 in the same period of 2020. This is mainly because the impact of COVID-19 has gradually receded in the first half of 2021. Number of treatments. In the first half of 2021, the company performed a total of 270,424 treatments, including 45,238 surgical treatments and 225,186 non-surgical treatments. representing an increase of 33.5%, 21.5% and 36.2% respectively. Respectively from 202,608 total treatments, 33,241 surgical treatments and 165,367 non-surgical treatments in the first half of 2020. As of June 30, 2021, cash and cash equivalents were RMB 47.2 million compared to RMB 44.4 million as of December 31, 2020. Looking ahead, we will continue to execute our strategies throughout the year. This is not only to provide better and quality services to our customers, but to provide sustainable growth to our shareholders. This concludes our prepared remarks. Thank you for joining us on today's call. And we will now open the call to questions. Operator, please go ahead.

Thank you. As a reminder, to ask your question, you will need to press star and the number one on your telephone. To withdraw your question, please press the pound or hash key. And please stand by while we compile the Q&A roster. Once again, for your questions, please press star and the number one and wait for your name to be announced. Our first question is from the line of Meg Cole of Safari. Please go ahead. The line is open.

Hello. Hi, management. Hello.

Hi, this is Derek. We can hear you.

Oh, hello. Thank you so much for the presentation. I'm learning that the company has actually diversed some sort of their assets during the period, and may I know what are the impacts of the divest to our net income and the profit, and are we expecting further asset diversion in the near future? Please, thank you.

Okay, I'm the CFO of the company, so thank you again for your question. Actually, the impact for the diversified, you can see our income statement, it will be the very huge number over there. Actually, the remaining hospital in our system is very profitable, and then we will also have a plan to improve and expanding our graduate hospital in 2022. So that's why we have a very strong commitment to turn our company to be a profitable company in the year 2020.

Okay, thank you.

Thank you. Once again, to ask a question, it is star and the number one on your telephone keypads and wait for your name to be announced. For your questions, please press star and the number one and wait for your name to be announced. Once again, if you have questions, it is time to number one on your telephone keypads and wait for your name to be announced. Once again, for those who wish to ask a question, please press star and the number one and wait for your name to be announced. We have one question. We're still getting the information. But for those who wish to ask a question for the others, please press star and the number one on your telephones. All right, he disconnected from the queue, but once again, please press star and the number one and wait for your name to be announced. Once again, for your questions, please press star one on your telephone keypads. We have a question from the line of Anna Shi of the River Circle. Please go ahead. The line is open. Hi, management.

Hello?

Can you hear me? Yes. Hello, hi. Thank you for the presentation tonight. I would like to ask, because previously you've mentioned that we are going to open up more satellite hospitals or satellite clinics in various regions, and also can you please share with us the upcoming opening plan? And also I would like to know which areas will be your key focus in the future. Thank you.

Thank you for the question. The area for our key progress would be the Guangdong, Hong Kong, and Macao Bay area, as well as the Yangtze River area, and other Tier 1 cities like Beijing in China. And for the expansion plan of our now surgical medical clinics, We're currently discussing partnership options with multiple e-masters, like Founds or other fiscal companies. So the final structure design will be subject to who we cooperate with. But the overall strategy is the same. That is, during the next year, we plan to complete about 10 clinics in the regions that we just mentioned. And for the next Three to five years, we plan to open about 30 to 50 clinics. Thanks.

Thank you very much. Can I ask another question as well? Sure. Hello. Yes. I would like to know that with the current economies and also with the current policy, especially the common prosperity, is there any impact on our business or on the demand for aesthetic services in overall?

Overall, we don't see any material impact from us. Thanks.

Okay, thank you very much. Thank you. Once again, for those who wish to ask a question, please press star and then number one on your telephone keypads and wait for your name to be announced. And to cancel the request, it is the pound or hash key. Once again, Please press star 1 for your questions. We have a question from Meg.

Operator, we cannot hear you.

Yes, we have a question from Kim Kang of Refer Circle Investment. Please go ahead. Oh, yes, we have a question from Meg Cole of Safari. Please go ahead. Meg Cole of Safari, your line is open. Please go ahead. All right, as your line is open, Meg Cole of Safari, please go ahead. Hello?

Hello?

Yeah, yeah, we're here.

Oh, yeah, hi. Thanks, management, for sharing that. I know that we are going to open further hospitals and clinics in other regions. May I just clarify, are we expecting any further assets divest in the near future? And how are we going to ensure that our existing remaining hospitals and clinics are performing, like hitting our performance guidance, please? Thanks.

We don't have any further plan during the near future for any further direction or disposal. And could you please repeat for a second question again?

Oh yes, because this time regarding the asset divets, it's because some of them are not performing. Do we have any measures to make sure that our remaining assets are going to perform well?

Actually, based on the past experience, all those remaining hospitals are performing well even though in the 2020 and 2021. So we have a very strong confidence that we can continue to maintain the performance of those remaining hospitals are doing profitable and getting better. So we also believe that we can put more our source and our attention on those areas. For example, in the Guangdong program, in the Shanghai area, so we believe that after we shutting down those not properly welcome hospital, so we have more attention and more sources on those existing, or we can call that remaining hospital. enhance those hospitals being better than 2010 here. So this is what we are planning to do. And additional thing we also plan to putting some improvement on the declaration as well as on the marketing on those remaining assisting hospital as well. So we believe that those hospitals will be doing good in the 2022. Okay, thanks management.

Thank you. Now I'd like to hand the conference back to Mr. Zhou Si for closing remarks.

Thank you, Operator. On behalf of our entire management team, I would like to thank everyone again for joining us today. If you have any further questions, please contact us through email at ir.penglai.com.cn or reach out to IR Council, DLK Advisory at ir.dlkadvisory.com. We appreciate your interest and support in Aesthetic Medical International and look forward to speaking with you again next time. Thank you.

Thank everyone again for attending Aesthetic Medical International's second quarter and first half of 2021 earnings conference call. This concludes our call today and we thank you all for listening in. Goodbye.