So-Young International Inc.

Ladies and gentlemen, thank you for standing by for Sue Young's first quarter and 2023 earnings conference call. At this time, all participants are in a listen-only mode. After management gives their prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I will now like to turn the meeting over to your host for today's call, Ms. Vivian Zhu. Please proceed, Ms. Zhu.

Thank you, Operator, and thank you, everyone, for joining Soyoung's first quarter 2023 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to those outlying our public findings with the SEC, including our annual report on Form 20F. So Young does not undertake any obligation to update any forward-looking statement, except as required under applicable law. Join me today on call is Mr. Xin Jin, our co-founder, chairman and CEO, and Mr. Nick Zhao, CFO. At this time, I would like to turn the call over to Mr. Xin Jin.

Hello, everyone. Thank you for joining Soyang's first quarter 2023 earnings call. With the decline of the epidemic and the resumption of normal operations by medical institutions, a good start has come to Xinyang in 2023. In the first quarter, the total income reached RMB 3.1 billion, which increased by 3%, exceeding the high end of the previous company guidance. At the same time, strict cost control measures and the improvement of overall operating efficiency have caused our operating costs to drop by 15%. Losses have been greatly reduced. We kicked off 2023 with a strong financial performance as the effects of the pandemic recede and the gradual recovery of medical aesthetics industry gains momentum.

Total revenue for the first quarter reached $310 million, a year-on-year increase of 3%, and exceeding the high end of our previous guidance range. Strict cost control measures and operational efficiency improvements resulted in a 15% year-on-year decrease in operating expenses, while our non-GAAP net loss attributable to Soyang International Inc. narrowed significantly, decreasing by 94% year-on-year to 2.75 million. I will now walk you through the progress we have made on Soyang Prime, our strategic priority this year.

As we emphasized in the phone conference last quarter, the Chinese medical industry is undergoing structural changes. On the one hand, the user group is constantly upgrading. Women in China, as the main population of the entire medical consumption, have very obvious consumption characteristics. First, pay attention to the safety of the project. Second, the consumer projects are mainly based on anti-aging, skin management, and body management, and the consumption frequency is relatively high. As we have emphasized on our last earnings call, the medical aesthetics industry in China

is undergoing numerous structural shifts. Users are becoming increasingly more sophisticated and discerning. For example, middle-class female users are a major demographic group within the light medical aesthetic sectors. They are increasingly showing distinctive consumption habits that reflect these structural shifts, such as more attention to safety, service quality and cost for specific high-frequency procedures such as anti-aging, skin care, and body sculpting. Medical institutions and SMEs, on the other hand, face new challenges such as higher user acquisition costs, constant CapEx requirements to upgrade equipment, and a lack of qualified doctors. This impacts their ability to expand.

The advantages of Xinyang include the ability to accumulate online customers and operations for many years. Second, the ability to integrate upstream, midstream and downstream resources to ensure that consumers enjoy the value of goods and services. Third, the excellent medical resources that have been accumulated over the years and the ability to serve and contract with them in depth. These advantages make Xinyang able to enter the industry in a deeper and more serious way. Prior to this structural shift taking hold, our focus was squarely on strengthening the numerous competitive advantages we have accumulated. This span from user acquisition, streamlined operations,

and integrating upstream and downstream resources to ensuring the quality and authenticity of services and doctors. This competitive advantage enables us to build significant barrel-to-entry, tap into broader verticals within the industry, soft pain points, and offer a unique value proposition to both consumers and medical institutions.

Xinyao launched Xinyao Youxiang last year. This is a temporary lease solution created by Xinyao's leadership and cooperation with the institution. Xinyao is deep into each section from goods to pricing and delivery. In order to ensure the quality of the lease, Xinyao has a dedicated consultant to assist the cooperation organization. It has an independent positive drug store to ensure the experience of terminal users. After Xinya YouXia was launched, it gained the trust of many consumers. The reputation and resale rate are much better than our previous products. The institution also showed a very positive attitude. Since Q1, we have been in more than 25 cities and cooperated with more than 130 institutions. The number of orders delivered and sold by users has increased by 88% compared to Q4 in 2022. In the short term, our goal is to expand the number of network points of cooperatives and focus our efforts on some SKUs that are widely popular among consumers, such as laser, injection, and bamboo. We strive to improve our market share in these products to form a stronger taste advantage. We expect Xinya Youxiang to serve in more cities in 2023 and become an important driving force for our growth.

We launched Soyoung Prime late last year, a proprietary one-stop non-surgical medical aesthetics solution. Soyoung Prime covers every process from user acquisition to pricing and delivery. In order to guarantee service quality and enhance the user experience, our staff have their own service counters within our partner medical institutions. So Young Prime was launched to widespread praise from consumers and has already generated purchase rates significantly higher than any of the previous products launched on our platform. Medical institutions have been incredibly interested in signing on. By the end of the first quarter, we have partnered with over 130 institutions in more than 25 cities, During the first quarter, fulfilled orders through Soyoung Prime increased by 88% sequentially. Going forward, our near-term goal is to further expand Soyoung Prime's service network. This will solidify its position and strengthen its brand by focusing on popular SKUs such as medical-grade laser and injection treatments and body sculpting. This will also expand our market share for these categories and generate more buzz within the industry. With so much potential, we are confident that Soyang Prime will be a key growth driver for us this year as it expands into more cities.

Next, let's talk about the POP business. From the overall view of the medical market, after the epidemic, especially after the Spring Festival, the medical institutions' business are gradually recovering, but the recovery situation is not balanced. The recovery rate of the first and second-tier cities compared to the three- and fourth-tier cities is faster. The recovery rate of each project is faster than that of the surgery-type projects. The institutions are still relatively cautious about the investment of marketing costs. In the second quarter, we noticed that the business activity is improving. On the Xinyang platform, the online orders for non-surgery-type projects I will now move on to our pop business. With the effects of the pandemic receding and the Chinese New Year holiday period not behind us,

The medical aesthetics industry have been undergoing a gradual yet uneven recovery. First and second tier cities are recovering at a faster pace than tier three and below. Non-surgical procedures are also recovering at faster pace than surgical procedures. Medical institutions as a result remain cautious on increasing marketing spend during the first quarter, but they have gradually been increasing their activity as we get deeper into the second quarter. Non-surgical orders placed in April were 14% higher than the monthly average last quarter. For surgical procedures, the increase was 25%. With transactions on a platform accelerating, marketing spend by medical institutions increased is also significantly picking up in April.

For the changes in the market, in March, we began to speed up the promotion and sale of the Xinyang platform. The focus is on the large demand in the market, such as beauty, plastic surgery, and other projects. Through the optimization of the design of the Xinyang APP, we recommend the exposure of SKU, and combine the platform with the medical IP, the health insurance doctor, and the oral doctor, and improve the supplementation of surgical products, and other methods to attract old users to return. With the recovery clearly underway, we began to increase promotional campaigns across our platforms in March. Our focus was on SKUs that are in high demand.

namely skin care and body sculpting. By optimizing the design of the so-called SoYoung app, we now display recommendations for popular SKUs and popular doctors, as well as offer discounts on surgical procedures. This incentivizes users to return to the platform, increases engagement, and drives fulfilled orders and GMV growth. With the summer holiday season rapidly approaching, we will expand the number of medical institutions we partner with to increase the supply of key SKUs and strengthen user engagement and stickiness. 中国医美行业历经十年发展,医美消费人群规模不断扩张且潜力巨大,行业在发展的同时也在不断规范化。

After 10 years of rapid development,

The skill and growth potential of the Chinese medical aesthetics industry remains enormous. The industry is standardizing at its growth, shifting from product-driven to technology-driven. Our focus throughout 2023 will be on high-quality growth, empowering SME medical institutions, and providing better products to consumers through services such as SoYoungPrime. I am confident that this will strengthen our call competitiveness and improve our financial performance.

I will now turn the call over to our CFO, Nick, to review the financial results of the first quarter before taking your questions. Hello, this is Nick.

The investments we made in our infrastructure capacity and service expansion during the challenging environment last year are beginning to pay off and are reflected in our financial performance this quarter. Total revenues during the quarter were RMB 310.1 million, up 3.2% year-over-year, and exceeding the high end of our previous guidance. The increase was primarily due to an increase from the sales of equipment and maintenance services, and other services. The revenue is composed of three main streams, information services, reservation services, and revenue from sales of equipment and maintenance services. Information services and other revenues were RMB 217.8 million, up 9.2% year-over-year, primarily driven by an increase in other revenues from Soyoung Prime, As our CEO Mr. Jin outlined earlier, the industry's recovery has been uneven. Reservation services revenues continue to feel the impact of COVID-19 on surgical transactions, decreasing 29.9% year-over-year to RMB 29.7 million, but has also begun to rebound in April. Sales of equipment and maintenance services which were from Wuhan Miracle Laser System Inc., were RMB 62.6 million, up 7% year-over-year. Cost of revenues were RMB 113.7 million, up 6.7% year-over-year. The increase was primarily due to investments made in service providers to enhance operational efficiency and improve the quality of services. Total operating expenses were RMB 229.8 million, down 15.4% year over year. Sales and marketing expenses were RMB 112.5 million, down 11.6% year over year, primarily due to the increase in expenses associated with branding and user acquisition activities. G&A expenses were RMB 61.5 million, down 5.9% year-over-year due to operational efficiency improvement. R&D expenses were R&D 55.8 million, down 29.3% year-over-year, primarily due to a decrease in payroll costs. Income tax benefits were R&D 4.3 million, compared with income tax benefits of R&D 2.0 million in the first quarter of 2022. Net loss attributable to Soyang International Inc. were RMB 11.9 million compared with a net loss of RMB 66.8 million during the same period last year. With revenue growing once again, our non-GAAP net loss attributable to Soyang International Inc. narrowed significantly to RMB 2.8 million, a decrease of 94.3% year-over-year. This compares with RMB 48.3 million in the same period of 2022. Basic and diluted loss per ADS attributable to ordinary shareholders were RMB 0.12 and RMB 0.12 respectively compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB 0.62 and 0.62 respectively during the same period of 2022. We have ample cash on hand, with total cash and cash equivalents, restricted cash and term deposits, and short-term investments of RMB 1.5 billion as of March 31, 2023, compared with RMB 1.6 billion as of December 31, 2022. Looking ahead, we will continue to carefully monitor and control our expenditures and improve our operational efficiency. as we navigate this period of recovery, and leverage our ample cash position to strategically invest in our future. For the second quarter of 2023, we expect total revenues to be between RMB 380 million and RMB 400 million. The about outlook is based on the company's preliminary estimates of market and operating conditions and the customer demands. Please be reminded that all amounts quoted here are in RMB. Please also refer to our earnings release for detailed information of our comparative financial performances on a year-over-year basis. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A. Thanks.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Thomas Chong with Jefferies. Please go ahead.

Hello, thank you for your question. We see that the entire consumer environment is still in a stable stage.

One, the US consumer market is also warming up, showing a state of recovery. From the user's point of view, one, through joint institutions, optimize online products on the platform, focus on popular products, and increase the supply of products. Two, according to the needs of users, package product combinations, and use new and new products, increase the efficiency of institutional operations, shorten the decision-making of users. According to these two effective measures, we can see Consumption across the board is steadily improving with

consumption of medical aesthetics products gradually recovering as well. We launched a number of initiatives to attract additional users. This includes optimizing products on our platform for popular SKUs that have ample supply, and package together complementary products to improve operational efficiency and shorten the time it takes for consumers to make a decision during sales periods. The number of users placing orders in GMV during the quarter increased 23% and 27% sequentially, respectively. Orders placed on our platform in April also increased when compared to the average during the first quarter.

From the perspective of the institution, as we said last quarter, the investment of the institution has been carefully restored. In the first quarter, the investment of institutions is mainly focused on the leading institutions. With the recovery of user consumption, the average investment compared to Q1 of 2023 in April, we can see that the investment of institutions is also gradually increasing. Over time, the structure and behavior of Chinese consumers is changing. Consumers are focusing more and more on product experience and cost performance. We believe that users and institutions will change with the market,

As we discussed last quarter, medical institutions remain cautious on increasing marketing spend. During this quarter, the majority of marketing budget allocation came from top-tier medical institutions. With demand recovering, average marketing spend and the number of medical institutions are both gradually increasing in April. when compared with average last quarter. Over the long term, we expect the behavior of users to structurally change with an increasing focus being placed on the consumer experience and cost benefit. Both users and the medical institutions will change their consumption behavior, which we are strategically adapting to.

Thank you.

Are you ready for the next question? Thank you. The next question comes from Nelson Chung with Citibank. Please go ahead.

Hello, Mr. Manager. Thank you for accepting my question. Congratulations to Xinyang for having a very strong performance this quarter. My question is about our Yuxiang business. I don't know if Mr. Manager can share more about the progress of our Yuxiang business and some more detailed data. and some of this year's Yushan business. I don't know if we have any goals for this year's business in the next two or three years. So let me translate myself. Okay, management share with us the progress of Soyang Prime in Q1 and the outlook for the full year. Thank you.

Thank you. Hello, Yushan. As the main business of the company this year, while we are expanding, is to start with user experience, standardize the service process, strengthen the user's offline service link, and ensure high-quality service experience. From the product side, we will collaborate with medical experts to develop and upgrade the service program, and unify the number of standards to ensure that users can enjoy high-quality, authentic, and low-priced service. For example, in the anti-bacterial products, we will integrate with experts to develop unique innovation and innovation, and the improvement of supernova thinking. We are inspired by the focus on the outline of the United States and the pursuit of face-to-face youth. Secondly, we use the ability of supply chain accumulated at the product end and the advantages of community and media resources to diversify product choices, continue to strengthen the trust of users, and provide users with more excellent and fast choice.

Soyang Prime is the focus this year. While expanding its scale, we are at the same time working on enhancing the user experience, standardizing service processes, and strengthening the delivery of service offline. This will ensure a high-end consumer experience. On the product end, we partnered with doctors and experts to develop and upgrade the services and bundle them together. to offer an easy-to-use and cost-effective one-stop solution. For example, we jointly developed innovative anti-aging products that are exclusive to our platform. This includes a unique procedure using the Penicillin ultrasonic anti-aging cannon, which is specifically sought out by users. Leveraging our strong supply chain capabilities, we diversified our product offerings to strengthen user trust and choice.

From the coverage network, we train and test our operating team and doctors through three standard medical institutions. Since the first quarter, U-science has expanded to more than 25 cities and covered more than 130 network points. During this cooperation, we have expanded the business model of green assets to improve the cost and operation efficiency of the institutions, and also bring convenience and high-quality service experience to more users. In the first quarter, the number of customers who poured electricity into the unit increased by 88% compared to Q4 of 2022. The number of customers who poured electricity into the unit is constantly increasing. This year, we will continue to expand the scope of cooperation and service expansion with more institutions. We always bring institutions to ensure they meet our high standard. We have trained medical teams and streamlined processes.

As of the end of March, Soyang Prime has expanded to over 130 institutions in more than 25 cities. Its light asset model improved user acquisition cost and operating efficiency, and improved solid user experience makes it a unique value proposition. For few others, through Soyang Prime increased by 88%, compared with last quarter, a trend that has continued into April. This year, we will continue to expand its reach and service scope. Soyang Prime was developed with recent consumption trends in the light medical aesthetics market in mind. We are committed to maintaining a high-end user experience, helping the industry grow overall, leveraging our supply chain expertise.

Thanks.

The next question comes from Chloe Wei with CICC. Please go ahead.

Actually, we can see that the overall investment in the first quarter is not very much growth. Relatively speaking, it is still relatively cautious. But we can see that the guidance of the second quarter is still quite good. So I would like to ask the management level about the strategy of market marketing from the second quarter to the fourth quarter. What kind of outlook does it have? Yes, and my second question is for Nick. This is about the advertising business. So we can see that the number of customers who have paid for it has actually decreased in the previous few seasons. So I am more curious about how we can predict the situation of the number of customers who have paid for it in the second season. So let me translate myself. Thanks, management, for taking my question. I have two. So the first one is about can management maybe give us some color on the marketing strategy and maybe guide us through how will the marketing spend look like in the rest of the year? And my second question is for Nick. So the numbers of advertisers have decreased on a quarterly basis. So how do you expect the trend in Q2 and the second half of the year? Thank you.

Hello, let me answer the first question. As we mentioned last quarter, the company will pay more attention to market investment this year. In Q1 of 2023, the return rate of online orders of users increased by 7% compared to Q1 of 2021. Based on the recovery of new business and market, we will increase brand investment, continue to educate users, and jointly invest in marketing resources with medical institutions. As we mentioned last quarter, our focus is really on getting efficiency this year. The purchase rate for online orders this quarter was

seven percentage points higher than two years ago. With recovery underway, we'll be increasing marketing spend to educate users. We will support and advise medical institutions with their marketing spend. We will focus on platform operations this year to increase user engagement. We will also expand cooperation with other platforms to explore new user acquisition opportunities and content.

Okay, with regard to the paying medical institutions, we believe that the reduction of paying medical institutions is the result of cumulative impact of several factors. First of all, I think the Q1, the first impact is the sustainability impact. Q1 is traditionally slower in the marketing expenditures in our industry. Secondly, the challenging market situations in Q4 2022 resulted in significant shrink in the marketing budget from medical institutions. And thirdly, the infections after the open up of quarantine policy also caused a temporary and yet sharp reduction in users visits to institutions, which lead to institutions further reduction in marketing activities in Q1 With the gradual market recovery, we have seen the rebounds of institution marketing activities, and we would expect a turning point in Q2 with regard to the number of paying medical institutions on our platform. Thank you.

Okay, ready for the next question? Okay, the next question comes from Jessie Xu with Credit Suisse. Please go ahead.

Thank you for the opportunity to ask this question. Good evening, Chairman Jin, Chairman Zhao, Vivian, and Trista. I am Jessie Xu, a new member of the U.S. Treasury. I am very happy to see that while the company is recovering its revenue in the first quarter, We are very glad to see the significant narrowing of net loss in the quarter on top of revenue growth. So first, can you help us to better understand the factors and reasons behind the net loss in 1Q? and also how should we look at the bottom line trend in the second quarter and also the second half of the year. Thank you.

Thanks, Jessie. This is Nick. In the first quarter, our non-GAAP net loss attributable to Soyang International Inc. narrowed significantly compared with the same period last year with a year-on-year decrease of 94%. to RMB 2.75 million as we described earlier. The first quarter is typically slow for the medical aesthetic market as it coincides with the Chinese New Year and was impacted also by the rapid spread of COVID-19 after the open up of quarantine policy. As a result, revenue in the first quarter were impacted as well. As the impact of the pandemic recedes, we are deploying more people and marketing resources as the market recovers. So during the second quarter and throughout 2023, we will focus on enhancing user experience and improve institutional operational efficiency to kickstart revenue growth. We will also strictly control costs and expenses while improving the operational efficiency going forward. Thank you.

This concludes our question and answer session and the SoYoung International Incorporated first quarter 2023 earnings conference call. Thank you for attending today's presentation. You may now disconnect.