So-Young International Inc.

Ladies and gentlemen, thank you for standing by for SoYoung's second quarter 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 would now like to turn the meeting over to your host for today's call, Ms. Vivian Hsu. Please proceed, Ms. Hsu.

Thank you, operator, and thank you for everyone for joining Siyang's second quarter 2023 earnings conference call. Joining me today on the call is Mr. Xin Jing, our co-founder, chairman, and CEO, and Mr. Nick Zhao, CFO. 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 filings with SEC, including our annual report on Form 20F. SoYoung does not undertake any obligation to update any forward-looking statements except as required under applicable law. At this time, I would like to turn the call over to Mr. Xingqin. Cass, please.

Hello, everyone. Thank you for joining Soyang's second quarter 2023 earnings call. The total revenue reached RMB 4.12 billion, which is a 33.3% increase, exceeding the previous company's leading high end and creating a new high in single-segment revenue since 2022. In terms of profit, we will continue to improve. Under non-US general accounting standards, the net profit of listed companies is RMB 15.5 million,

We continue to regain solid growth momentum during the quarter, with both our financial and operational metrics climbing steadily. Total revenue exceeded the upper range of our guidance, increasing 33.3% year-over-year to RMB 412 million, a new quarterly high since the beginning of 2022. This translates into improving profitability, with non-GAAP net income attributable to soaring of RMB 15.5 million during the quarter, compared with the loss of RMB 22.7 million during the same period last year.

Next, I will introduce the situation of the pop-up business. In the second quarter, the community e-commerce business, which was severely affected by the epidemic, quickly recovered. After e-commerce institutions entered the regime, their confidence has improved and the budget for market sales has gradually increased. In the second quarter, the number of paid institutions and information service income on the platform has increased by 21% and 40% respectively. Consumption confidence of users is gradually recovering. While understanding the information and price of e-commerce products, users more hope

Let me now walk you through the progress we made during the quarter. Starting with our community e-commerce PowerMill business, this business faced significantly challenges during the pandemic controls in China, but has seen the pace of its recovery accelerate during the quarter. The resurgence of confidence among medical aesthetics institutions was driven by the restoration of regular operations at a promising yet gradual increase in spending on medical aesthetics procedures. The number of subscribing medical service providers and information service revenue increased sequentially by approximately 21% and 40%, respectively. As sentiment among our users, makes a graduate recovery, their preferences have shifted back towards seeking real-time interaction and customized services. Beyond simply acquiring product information and pricing details, demand has diversified, requiring additional customer support and services to facilitate the decision-making process.

In terms of product, we optimize the accuracy of the new app's recommendation technology and algorithmic capabilities. According to the behavior of the users in the station, it differentiates the operating group, so that the institution can find the target customer group more quickly and accurately, and help the institution improve the customer efficiency, thereby significantly increasing the conversion rate of orders. At the same time, relying on a strong user community and high-quality user content, XinYang User Center has strengthened the coverage and service of XinYang users in the public number, community, and other private traffic. In the future, as XinYang's diverse

Turning to our products, we also optimized the SoYang app to improve the user experience, particularly by enhancing algorithms and user recommendations and fine-tuning operations for different demographics based on their in-app behavior. These tweaks allow medical scientific institutions to identify and target specific users with greater speed and accuracy, significantly improving overall customer acquisition efficiency and conversion rates. At the same time, the combination of our high-quality user content and the powerful network effect our community creates has allowed us to significantly broaden the reach and improve services for users acquired through own channels, such as our WeChat public accounts and other communities. Looking ahead, as we continue to execute our diversified brand strategy, we will continue to acquire more users with our premium content, practical tools, and high-quality services.

non-surgical and light medical products are still the key products we are concerned about. We continue to build high-quality medical IPs to strengthen the promotion of popular products such as digital products, super-small, and anti-threat products, such as Photona, and we will also launch eye-catching activities in June. At the same time, we have strengthened the brand construction for the organization itself, enriching product supply, and the number of online non-surgical orders has increased by 26%,

In terms of services, our focus remains clearly on non-surgical medical procedures. We'll continue to build a network of premium doctors in this segment and strengthen the promotion of our heart SQs, such as the body controller and the photonic 4D solution. We also launched a seasonal beautiful eye campaign in June, To support these initiatives, we are looking closely with medical institutions to enhance their brand equity and enrich their product offerings. Online bookings and GME for non-surgical procedures increased by 26% and 52% year-over-year, respectively.

In terms of surgery, recently, Jin Yang introduced a public hospital doctor and launched the eye public doctor experience program. For surgical services,

We recently launched a program in partnership with public hospital where doctors create premium contents and act as ambassadors for eye procedures. Leveraging the strong relationship we have with premium doctors on the esteemed onboard list, we are working together to increase interest, content, and awareness of eye surgeries, a surgical category that is in high demand. Our approach includes in-depth analysis of user performance and real-life cases studies, coupled with the roll-out AI-powered eye testing tools, which recommended the latest trends in eye shapes.

Next, I would like to introduce the progress of Xinyao Youqiang. Xinyao Youqiang is a green-eye service that was built by us and the organization. Since its launch in August 2022, the scale has expanded steadily. Since Q2, Youxiang has already covered 28 cities, cooperated with more than 140 institutions, and cooperated with more than 450 doctors. As the business scale expands, we will pay more attention to ensuring the user-consumption experience, improve the efficiency of existing institutional network points, and distinguish from other products in the market. Youxiang also has a strict medical training and selection mechanism, and the ability to design professional treatment plans. Now I will move on to the progress of Soyang Prime. As a proprietary one-stop non-surgical medical aesthetic solution, Soyang Prime has steadily expanded in size and scale since its launch in last August.

As of end of the second quarter, Soyang Prime is now partnered with over 140 medical institutions and over 450 doctors in 28 cities, which reflects the progress we have made in ensuring a seamless user experience and enhancing the operational efficiency of collaborating institutions. Simply put, Soyang Prime's unique value proposition is quality and user experience. From the strategic screen of doctors' qualifications and their ability to accurately diagnose to their treatment plans and the certainty of their products, we want to ensure that the user experience is flawless. For field orders through Soyang Prime increased 83% sequentially during the quarter and it's increasingly contributes to revenue.

Although the progress is fast, the Yuxiang business is still in its early stages. We want to establish a brand image of Yuxiang professional clean and beautiful through a high-quality customer experience. While increasing the choice of users and expanding the range of products, we will deeply cooperate with medical resources to establish a new user mindset of people without me, people with me. While Soyang Prime has already demonstrated so much potential,

we have cognitive that it is still in the early stages of development. We have made significant progress, but there is still plenty of room to strengthen its reputation as a brand of premier and professional light medical aesthetics procedures. In addition to broadening and expanding product categories, we want to solidify the association, our close partnership with respected doctors, have with the uniqueness and specialization of our platform. As we have iterated multiple times in recent quarters, the light medical aesthetic service segment is critical for our future growth. Soyang Prime guarantees a high-quality user experience both online to offline through its unique operating model and meticulous creation of products and services.

Lastly, I would like to touch on our supply chain business, which includes Wuhan Miracle.

After years of research across the industry developed a deeper understanding of its dynamics, we believe it is the ideal time for Soyoung to develop new revenue streams along the medical-acetical industry value chain by offering upstream products.

The second quarter, including the supply chain in Qizi, has a revenue of 86.3 million yuan, which is 32% of the total growth. The total revenue contribution ratio is 21% and there is a good profit contribution. XinYang acquired the Wuhan flagship in 2021 and began to set up the light equipment market. Last year, it began to become a general agent in China by the Korean Elastic Company to enter the注射蒸汽市场. In July, we cooperated with Xihong Pharmaceuticals to obtain the exclusive agent rights of two products of Xu Guangzhen and Tong Yanzhen, which lasted for 10 years. During the quarter, revenue from our supply chain business was RMB 86.3 million, an increase of 32% year-on-year, accounting from 21% of total revenue and increasingly contributing to our bottom line.

We acquired Wuhan Miracle in 2021 to tap into the medical laser market as a first step. Last year, we expanded further upstream by securing the exclusive distribution rights for the Korea brand, RIV, for their injectable HA fillers. Last month, we secured exclusive 10-year distribution rights for Xihong, BiFarmas, Maestro Free, and new face filler products. We have only just begun to explore opportunities by moving upstream with these partnerships and based on their success so far, are confident they will significantly enhance our appeal to users and product portfolio in the light medical aesthetic segment. 总之,新养既有业务的稳定增长表现,

This allows us to invest in new businesses, including Xinya Youxiang, so as to seize the huge opportunity brought by long-term growth in the medical industry. At the same time, we will continue to use high-quality growth, economic operation, and high-quality customer strategy in the second half of the year as our goals, manage costs and expenses, and continuously improve financial performance.

In summary, our legacy business continues to see the pace of recovery pick-up pace, which puts us in a position to confidently allocate resources towards new high-quality growth ventures such as Soyang Prime and our supply chain business. We strongly believe these new ventures reflect the future of the industry and the tremendous opportunities its long-term goals will create. Our focus throughout the remainder of the year will be the further driving high-quality growth, refining operations strategies, enhancing customer acquisition channels, carefully managing costs, and consistently improving our financial performance to create value for all shareholders.

Next, let's have our CFO, Nick, introduce the financial situation of the second quarter. After that, we will start the Q&A session.

I will now turn the call over to our CF Nick to view the financial results for the second quarter before taking your questions.

Hello, this is Nick. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information about our comparative financial performances on a year-over-year basis. Total revenues during the quarter were RMB $412.1 million, up 33.3% year-over-year and exceeding the high end of our guidance. The increase was primarily due to the increase in average revenue per paying medical service provider and other revenues generated by Soyang Prime. Before I break down revenues further, I'd like to illustrate some financial statement presentation changes we made this quarter to better reflect the development of our strategic upstream supply chain business. Starting this quarter, Revenue from the sales of medical aesthetic injectable drugs, which had been included in information services and other revenues in previous quarters, is now combined with the sales of equipment and maintenance services revenues, and the new line item is now renamed sales of medical products and maintenance services. With this in mind, information services and other revenues will RMB $298.9 million up 40.2% year-over-year, primarily driven by an increase in average revenue per paying medical service provider and other revenues generated by Soyang Prime. Reservation services revenues decreased 12.1% year-over-year to RMB 26.9 million, primarily due to the operating strategy, which gave higher subsidies to end-users. Sales of medical products and maintenance services revenues were RMB 86.3 million, up 32.0% year-over-year, primarily due to an increase in sales of both equipment and injectable drugs. Cost of revenues were RMB 150.4 million, up 43.9% year-over-year. The increase was primarily due to an increase in cost associated with Soyang Prime and Wuhan Miracle. Once again, the financial reporting changes I mentioned before also apply to cost of revenues. Within cost revenues, cost of services and others will RMB 106.5 million, up 54.4% year-over-year, primarily due to an increase in cost associated with Soyang Prime. Cost of medical products, stock sold, and maintenance services will RMB 43.9 million, up 23.6% year over year, primarily due to an increase in cost associated with Wuhan Miracle. Total operating expenses were RMB 282.4 million, up 14.5% year over year. Sales and marketing expenses were RMB 137.9 million, up 13.3% year over year, primarily due to an increase in expenses associated with branding and user acquisition activities. G&E expenses were RMB 92.3 million, up 49.4% year-over-year, due to an increase in payroll costs associated with the expansion of administrative employees to support business upgrades and new strategic businesses. R&D expenses were RMB 52.1 million, down 17.4% year-over-year, primarily due to improvements in staff efficiency. Income tax benefits were RMB 0.8 million, compared with income tax benefits of RMB 0.1 million in the second quarter of 2022. Net loss. attributable to Soyoung was RMB 2.6 million, compared with net loss of RMB 32.3 million during the same period last year. Non-GAAP net income attributable to Soyoung was RMB 15.5 million, compared with RMB 22.7 million non-GAAP net loss attributable to Soyoung in the same period of 2022. Basic and diluted loss per ADS attributable to ordinary shareholders, were RMB 0.02 and 0.02, respectively, compared with basic and diluted loss per ADS, attributable to ordinary shareholders of RMB 0.3 and 0.3, respectively, during the same period of 2022. That increase in cash and cash equivalents, restricted cash, and term deposit, Short-term investments in this quarter is RMB 56.3 million, and the net cash inflow from operating activities this quarter is RMB 90.9 million. We have ample cash on hand with total cash and cash equivalents, restricted cash, and term deposits. Term deposits and short-term investments of RMB 1.5 billion as of June 30th compared with RMB 1.6 billion as of December 31, 2022. For the third quarter of 2023, we expect total revenue to be between RMB 380 million and RMB 400 million. The above outlook is based on our current market conditions that reflect the company's preliminary estimates of market and operating conditions and the customer demand. This concludes our key remarks. I will now turn the call to the operator and open a call for Q&A. Thank you. Operator, we are ready to take questions. Thank you.

Yes, sir. Thank you. If you would like to ask a question, please press star, then 1 on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Once again, ladies and gentlemen, that's star than one if you have a question. Today's first question comes from Thomas Chong at Jefferies. Please go ahead.

Hi, good evening. Thanks, management, for taking my questions. I have two questions. My first question is about what's the major driver behind the significant growth in revenue in Q2? And where do we expect the medical aesthetic market to trend in Q3 and the second half? 谢谢管理层介绍我的提问 我第一个问题是关于公司二季度收入大幅度的增长 主要的原因可以分享一下 然后我们应该怎么去看待 Q3 还有下半年的医美市场的一个情况 And my second question is about the reason for the significant narrowing of the net losses in both a year-on-year and on a sequential basis. Where should we expect the profitability trend in the second half?

Hello, thank you for your question. In the second quarter, we have achieved performance beyond our expected period, and we have returned to the trend of high income growth. The total income reached RMB 4.12 billion, and since 2022, we have created a new high income per quarter, with a growth of more than 30% in the same ratio and ratio. First of all, from the user's point of view, in the second quarter, we combined community content and quality packaging, and launched activities such as the June beauty season. to recommend hot products for users in the summer, including products such as eye-resistant, vertical, and vertical face mask. You can see that the number of verified users on the 2G platform has increased by 24%, and the number of verified GMV users has increased by 40%. User demand is constantly increasing. In addition, from the perspective of institutions, the investment in information is increasing, and the investment in information service products is gradually increasing. In the second quarter, we also optimized the application accuracy, technology, and algorithm and other multi-dimensional infrastructure capabilities to help institutions further improve the efficiency of accuracy customers and increase the operating efficiency of institutions. In the end, the diversification of income sources also helped the growth of this quarter. You can see that the income from the upstream supply chain in the second quarter increased by 32% compared to last year. Thanks, Thomas. Let me translate and get back to you soon. The Q2 results were better than expected, allowing us to regain a growth trajectory.

Total revenue was around $412 million, an increase of over 30% both year-over-year and sequentially, and a new quarterly high since early 2022. On the user front, we launched a seasonally Beautiful Eye campaign in June, leveraging content from our community and popular SKU to promote summer deals, including products for eye anti-aging, counter-rating, win-cost, and slimming, among others. The number of purchasing users increased by 24% year-over-year, and GMV increased by 40% year-over-year in Q2, as a result reflecting strong demand. On the institutional front, sentiment has improved as a gradual increase spending on information services products and overall marketing. During the quarter, we optimized our infrastructure for algorithms and user recommendations to help institutions improve user acquisition and operational efficiency. Lastly, we also benefited from an increasingly diverse stream of revenues. Revenue from our upstream supply chain business increased by 32% compared to the same period last year. contributing 21% of total revenue. Having only launched about one year ago, it's impressive to see Soyang Prime increasingly begin to contribute to revenue.

Looking forward to the third quarter and the second half of the year, we believe that the growth of the American market will change with the overall consumer environment, but the overall trend is steady. Although the market has uncertainty and volatility, Looking forward to Q2 and the second half of this year, we believe the medical aesthetics market will trend in line with the overall consumption environment.

gradually gain momentum and trending upwards. Despite uncertainties and volatility in the market, we will maintain growth momentum and adjust our strategy according to market dynamics. At the same time, we will continue to build a developed infrastructure that will allow us to expand both upstream and downstream on the value chain.

Next question, please.

Thank you. I think the increase in our net profit and the narrowing down of the net loss is mainly due to the combined impact of the increase in revenue and the improvement in our operational efficiency. The operating loss narrowed by over 35%. by year-over-year and sequentially. On a non-GAAP basis, we were profitable with net income of RMB 15.5 million during the quarter and net income of RMB 12.7 million in the first half of 2023. compared to a loss of RMB 22.7 million and a loss of RMB 17.9 million in the same period last year. Looking forward, we'll continue to grow revenue, improve operating efficiency, and create more profits for the company and our shareholders. Thank you.

Thank you. And our next question today comes from Li Ying with Haitong Securities. Please go ahead.

Hi. Good evening. Thanks for management taking my question. And I would like to say congratulations first on the growth momentum and the improved profitability in this quarter. And I have one question about MAU. What's the estimate for future MAU trend? Thank you. Thank you for giving me this opportunity to ask questions. First of all, congratulations to the company on a good growth in the second quarter and a significant improvement in the market. I have a small question. Could you please share the trend of the flow level of MAU in the future? What are the expectations?

Thank you. Hello, thank you. In the second quarter, we can see that our verification number of users has increased by 24%. The verification of GMV has increased by 40%. The demand for users continues to increase, and the conversion efficiency of MAU continues to increase.

Thank you. In Q2, the number of purchasing users increased by 24% year-over-year, while GM increased by 40% year-over-year. With demand gradually growing, conversion rates from MAU is also improving.

Based on the current user operation method of the company, we will look at the flow of the whole area later. There are three main sources of traffic. The traffic of the new app, the private traffic, and the traffic of other cooperation channels. We believe that the future traffic of the company will continue to increase.

The traffic on our platform is mainly generated from these three sources. Soyang app, private domains, and other operational channels. We are confident that traffic will continue to grow.

First of all, the traffic on the app is mainly generated Firstly, the MAU metrics disclosed in the early release reflects traffic from Soyang App, which is expected to continue being the primary source going forward.

We will continue to attract more organic user traffic through community content operations like the media and improving engagement with innovative tools.

and further expand to other businesses to improve traffic size and user conversion efficiency.

Secondly, for those traffic from private domains, we are developing strategies to improve user conversion, and we will leverage the experience we have gotten from Suyang Prime and apply this to other businesses as well.

The third part of traffic is the traffic brought by cooperation with other channels. For traffic from other channels, we will

maintain a cautious approach when it comes to spending on marketing. We are placing more of an emphasis on content operations and leverage our competitive advantage in rolling out content to drive conversion rates under in Little Red Book price show while at the same time acquiring more users through live broadcasting. We will also attempt to introduce links to our platform in channels to expand direct user conversion channels. Thank you. That's all.

Thank you. And our next question today comes from Katerina Xu with Citigroup. Please go ahead.

Hi. Thanks, management, for taking my question. This is Katrina from Citi asking on behalf of Nelson Jern. Can management share with us more about the progress of SoYang Prime in second quarter and the trend in the second half of the year. 感谢管理层给我这个机会去提问。 我是花旗的Katrina代表Nelson去问问题的。 能否请管理层跟我们分享一下 SoYang Prime在二季度的一个进展, 还有在下半年的一个趋势。 谢谢。

Hello, thank you for your question. From the beginning of last year to August this year, we have been operating for the first anniversary. In the past year, while we have expanded in size, we have also been continuously processing business processes and adjusting operation strategies. After a year of operation, we have covered 28 cities. Thank you for your question.

It has been just one year since the launch of Soyang Prime last August. Over the past one year, we streamlined the process and adjusted operational strategies while building Soyang Prime out to scale. With one year of operational history behind us, Soyang Prime now covers over 140 institutions in 28 cities, providing a premier service experience for a large number of users.

to create a brand image that is professional in the United States. Stable and efficient expansion of business size. In Q1 and Q2 of 2023, the number of orders delivered and sold by users increased by more than 80% and obtained a good user reputation. In the second quarter, the income generated by the discount business also played an important role in the growth of our total income.

As a one-stop non-surgical medical aesthetics solution, we established in cooperation with institutions, Soyang Prime is still in the early stages of development. We launched a series of promotional campaigns in Q2 to gain significant mile share among users, strengthen its brand and recognition as a professional non-surgical medical aesthetics platform, and steadily expand its size and reach. In each Q1 and Q2 of this year, fulfilled orders through Soyang Prime increased by over 80% sequentially, building upon sound word of mouth. In Q2, revenue generated by Soyang Prime began increasingly contributing towards revenue. 展望下半年,优祥旨在通过深耕在机构端的质量控制,

在业务规模扩张的同时,保障用户的旅游服务质量,提高合作机构的运营效率,让优响清一美专业品牌的形象更加深入人心。 Looking forward to the second half of this year, SoYang Prime will continue to strictly assess the quality of institutions and services on the platform as it grows in size, improves operational efficiency,

participating institutions and strengthen its professional non-surgical medical aesthetics brand image.

We are also exploring opportunities to build partnerships with upstream players

along the supply chain to reduce product operating costs, improving operational efficiency and extending synergies between our various sectors.

Thank you.

Thank you. And our next question today comes from Chloe Wei with CICC. Please go ahead.

Okay, thanks management for taking my question. So my question is for Nick, and could you give us some color on the reason for the year-over-year decrease in the growth margin, and as well as the trend, so as going on? Thank you for your question. The decrease in gross margin was mainly due to changes in our revenue mix.

In Q2 2023, our information and resolution services maintained high margins, The gross margin for sales of medical products and maintenance services is lower than our information and reservation services. Our Soyang Prime business is still in the early stage of development with a global gross margin. In addition, we launched promotional campaigns for Soyang Prime during this quarter, resulting in a decrease in gross margin. In the short term, we expect growth margins to remain at approximately a similar level as we continue to invest in Soyang Prime promotional activities and expand sales of medical products and maintenance services. As we build our supply chain capabilities and operational efficiency improvements for Soyang Prime upscale, growth margins will begin improving again. Thank you.

Thank you. We are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect and have a good day.