So-Young International Inc.

Ladies and gentlemen, thank you for standing by for SoYoung's first quarter 2024 earnings conference call. At this time, all participants are in listen-only mode. After management give their prepared remarks, there will be an opportunity for questions and answers. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host for today's call, Ms. Mona Chiao. Please go ahead, ma'am.

Thank you, operator, and thank you, everyone, for joining Soyang's first quarter 2024 earnings conference call. Joining me today on the call is Mr. Xin Jing, our co-founder, chairman, and CEO, and Mr. Nick Zhang, 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 alternatives that may cause actual results to differ materially from our current expectations. Potential risks and alternatives include but are not limited to those outlying our public findings with SEC, including our annual report on Form 20F. Soyang does not undertake any obligation to update any forward-looking statements except as required under applicable law. At this time, I'd like to turn the call over to Mr. Xinjing

Hello, everyone. Welcome to today's financial phone call meeting. In the first quarter of this year, our business performed well, achieving a total income of RMB3.18 billion, exceeding the upper limit of income. At the same time, for the first time in five years, we have achieved a profit under the guise of NARGAP. New business blocks continue to grow rapidly. Medical product sales and maintenance services' income increased by 23.3% in the same quarter. Hello everyone, thank you for joining the call today.

Our business performed well in the first quarter, with total revenues reaching RMB 318.3 million, exceeding the upper ends of our guidance. At the same time, this marks the first time in five years that we achieved non-gap profitability in the first quarter. Our new businesses continue to grow rapidly, with revenue from self-serve medical products and maternity services increased 23.3% year-over-year. Our pipeline of upstream products continues to further diversify its offerings, while Soyang plans to maintain a healthy development.

We continue to advance the opening process of Lian Shuo Dian. In the first quarter, new businesses are opened and three new institutions are invested. The unit level is significantly ahead of the average level of the industry. The price advantage is obvious. In the first quarter, Xinyang Co., Ltd.' 's total number of service personnel has increased by 77%. Xinyang is steadily advancing the comprehensive development from products to institutions, assisting the industry to gradually rebuild the pricing system and value allocation, while realizing the high-performance medical services that medical consumers enjoy, and helping medical entrepreneurs to continue to develop. We have made significant progress in the expansion of our chain of clinics.

In the first quarter, we opened and began operations at three clinics, all of which boast unit area efficiencies well above industry average at a notable price advantage. In the first quarter, the cumulative clients served by our clinics increased 77% quarter-over-quarter. We've also made steady headway of vertical integration from products to institutions, driving restriction of pricing system and value allocation in the industry. This will provide consumers with medical, aesthetical, services that are more cost-efficient and help with sustainable development of medical and aesthetic practitioners. In terms of products, institutions, and SoYang platform, as we made steady progress in these initiatives, we are confident in the growth opportunities for us going forward.

We continue to promote a differentiated competitive strategy, and continue to consolidate our advantages in high-end projects. By customizing high-end customer service projects to meet the needs of high-end users, we also help institutions to increase profits. In the first quarter, our customer service price increased by 11.3%. In terms of traffic flow, we reduced the online low ROI traffic flow. Through in-store and out-of-store multiple channels, In our pop segment, we continued to advantage our differentiated strategy to solidify our advantage within the premium segments of the market. By offering customer size and high value services,

we are not only able to serve high-end users, but also assist institutions in boosting their profits. During the quarter, our order value increased by 11.3% year-over-year. In terms of traffic acquisition, we reallocated our budget away from low ROI online channels and instead focused on cultivating and returning a target user base within our private domains. We leveraged various channels within and outside of the SoYang platform and improved user engagement, aiming to enhance our monetization efficiency. As a result, in the first quarter, users' required through-profit domains increased by 19.7% quarter-over-quarter.

In terms of e-science business, based on the successful experience of our Beijing headquarters in the second half of 2023, we will continue to advance the transformation of cooperative stores into chain stores in the first quarter. In the first quarter, we will open three stores, The business situation is advancing according to the planned rhythm. By May of this year, the third batch of stores has also opened and officially started operation. In this process, we have established a complete standard work process from selection and assessment to opening. The opening speed is far above the industry level, creating a new record for the opening speed of the industry. Currently, we are in other 5-6 core cities, Turn into Soyang Prime, we capitalized on the success of the model clinic we opened at our headquarters in Beijing in the later half of 2023.

Building upon this momentum, we accelerated our strategy transition from partner institutions towards establishing a chain of clinics. During the quarter, we opened three clinics with operations firmly on track. By the end of this month, we expect to open and commence operations for our third batch of clinics. To efficiently drive this transition, we have established a comprehensive and standardized workflow system covering everything from site selection and evaluation to clinic opening and operations. This has enabled us to expand at a pace that significantly surpasses the industry average and set an industry record for the rollout of new clinics. We plan to expand our chain of clinics nationwide, starting with five to six core cities. At the same time, Soyang Prime continues to garner exceptionally high user satisfaction, with user satisfaction of over 4.9 out of 5 for each institution every month at an ever-increasing repurchase rate.

Lastly, I will provide a quick recap of the process

we have made in our upstream supply chain business. Sales of the career-bridged LRV continue to grow strongly over the quarter, increasing 80% year-over-year. In just one year, we have established a mature distribution network that covers 750 institutions through both direct and agency sales channels. Our recent launch of TrueLift a non-surgical anti-aging ultrasound device, has further diversified our product portfolio, with sales far exceeding expectations. The success of this product is a testament to the strength of our brand. Word of mouth, recognition among consumers, and domestic toll we are able to quickly bring new products to market and rapidly secure their market position through our expansive institutional network.

We believe that the Chinese medical market still has a great potential for growth. However, after 20 years of development, the public's impression of the medical industry is still not good. A few thousand dollars worth of hyaluronic acid sold at a cost of tens of dollars, many medical institutions still do not make money. Various signs show that the Chinese medical industry itself has structural problems. Xinyang will start from the perspective of building a medical industry platform to integrate medical industry top and bottom downstream resources, We recognize the immense potential for growth in China's medical aesthetics market.

However, the industry still contends with a less than favorable public perception, despite its development over the past two decades. While a HA injection that costs tens of RMB can be sought for solvent, many institutions within the sector struggle to turn a profit. Realities such as this point to structural issues. Soyang will address these issues by establishing an industry platform. By integrating the upstream, midstream, and downstream resources of the medical aesthetic industry, we aim to fundamentally reduce costs and increase efficiency and provide consumers with better and more cost-effective medical aesthetic services. This approach is designed to drive sustainable revenue and profit growth for the platform, while ultimately delivering greater long-term value to our shareholders. I will now turn the call over to our CFO, Nick, to review the financial results for this quarter before taking your questions.

Hello, this is Nick. Please be reminded that our announced quarter here will be in RMB. Please also refer to our earnings release for detailed information of our comparative financial performances year-over-year basis. Total revenues during the quarter were RMB 318.3 million, up 2.6% year-over-year, exceeding the high end of our guidance. Growth was primarily driven by sales of medical products and maintenance services, which increased 23.3% year-over-year to RMB 86.5 million, driven by the sales volume increase of cosmetic products and medical equipment. Information services and other revenues were RMB 208.7 million, a slight decrease of 0.7% year-over-year. Reservation service revenues decreased 22.3% year-over-year to RMB 23.1 million, primarily due to the policy change for commission rates and subsidies. Cost of revenues were RMB 117.3 million, up 3.2% year-over-year, primarily due to increased costs associated with the sales of cosmetic products and medical equipment. Within cost of revenues, cost of services and others were RMB 74.2 million, down 8.9% year-over-year, primarily due to a decrease in payroll costs. Cost of medical products sold and maintenance services were RMB 43.1 million, up 33.7% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic products and medical equipment. Total operating expenses were RMB 237.8 million, up 3.5% year-over-year. Sales and marketing expenses were RMB 113.3 million, up 0.7% year-over-year, primarily due to an increase in payroll costs associated with the expansion of our marketing team. G&A expenses for RMB 85 million, up 38.1% year-over-year, primarily due to an increase in payroll costs associated with the expansion of administrative employees to support the enhancement of our core and new strategic businesses. R&D expenses, or RMB 39.6 million, down 29% year over year, primarily attributable to improvements in employee efficiency. Income tax benefits, or RMB 2.6 million, compared with income tax benefits of RMB 4.3 million in the same period of 2023, Net loss attributable to Soyang was RMB 21.2 million compared with a net loss of RMB 11.9 million during the same period last year. Net net income attributable to Soyang was RMB 4.1 million compared with RMB 2.8 million net net loss attributable to Soyang in the same period of 2023. Basic and diluted loss per ADS attributable to ordinary shareholders for RMB 0.21 and RMB 0.21 respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB 0.12 and RMB 0.12 respectively during the same period of 2023. We have maintained a robust cash position with cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments totaling RMB 1.3 billion as of March 31, 2024, effectively flat when compared with December 31, 2023. For the second quarter of 2024, we expect total revenues to be between RMB 380 million and RMB 400 million. The above outlook is based on the current market conditions that reflects 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 the call for Q&A. Operator, we are ready to take questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phone. If you are using speaker equipment, please pick up your handset before pressing the star keys. To withdraw your question, please press star and then 2. Again, if you would like to ask a question today, please press star and then 1 now. The first question we have comes from Chloe Ray of CICC. Please go ahead.

Thank you for your question, Manager Cheng. First of all, our performance in the first quarter has exceeded our expectations. The new business looks very promising. So, I feel that the Manager Cheng's speech also reveals a more positive expectation than in the beginning of the year. So, I would like to ask Manager Cheng if he can share a change in the current industry trend and our outlook on the growth of previous year's income. So let me translate myself. Thanks, management, for taking my question. Congrats on the solid first quarter results. The top line well ahead of our expectation. So my question is about the full year outlook. From what we got from the prepared remarks, I believe our time has turned more positive. So is there some trend maybe management wants to share with us? And given the headwinds from the macro, how should we think about our full year top line growth? Thank you.

Thank you for your question. The development of the medical industry in the first quarter of 2024 is basically the same as our initial observation and judgment. First of all, the medical market in our country is gradually recovering with the recovery of the overall consumer market. In the first quarter, the total number of consumer goods in society increased by 4.7%. Medical consumption data also shows a gradual trend. The development of medical aesthetics industry in the first quarter is in line with our observation and expectation at the beginning of the year.

First, the Chinese medical aesthetics market is gradually recovering with the overall consumption market. As retail sales of consumer goods in China increased by 4.7% year-over-year in the fourth quarter, medical aesthetics consumption data has also reflected a gradual growth trade. Second, as the medical aesthetics user group tends to mature, user demands are more diversified. It's difficult to attract high-quality clients simply with low prices. More enriched products and services are required to cater to differentiated user demands.

Therefore, in 20 years, we will maintain the stability of our business strategy. Based on existing business, we will build a medical industry platform, optimize and integrate medical industry top-down and bottom-down resources, and increase the efficiency to provide high-quality, high-performance medical delivery services to users.

In 2024, we will maintain our strategies based on our existing business. We will establish a platform that vertically integrates upstream supply chains, mainstream operations, and downstream distribution channels to fundamentally optimize cost and enhance efficiency. This strategy approach will enable us to deliver superior and more cost-effective services to consumers.

Thank you. Next question. Thank you. The next question we have comes from Hee Jin Pang of CITIC Securities. Please go ahead.

Thank you for the opportunity. I would like to ask how the company sees the drop in traditional indicators. Second, what kind of competitive advantage does the pop-up industry have in its own industry? Hello, thank you for your question.

The first question is, from the point of view of online traffic, all industries are experiencing intense traffic competition. In addition to the app, we continue to use community content to support the media to improve community activity to attract more natural user traffic. On the other hand, we are still doing a lot of private operation to try to open the app and private domain. Through private domain storage and increasing the activity of users, we can open up new traffic pools. And this part of the data is not reflected in the MAU. But from recent GMV online payment orders and other trading data, it is basically stable. This also shows the effectiveness of this strategy. At the same time, it also reduces the cost of our traffic and increases profits. In terms of third-party traffic cooperation, we pay more attention to the accuracy and investment efficiency of traffic.

In terms of online traffic, all industries are experiencing intensified competition for traffic. For Soyang APP, we continue to boost engagement and attract more organic user traffic through operations of community content and self-media resources. In addition, through extensive private domain operations, We strive to connect Soyang APP with private domains, expanding its traffic pool as we increase private domain rotation rate and user engagement. This part of data is not reflected in our MEU, but judging from recent transition data such as GMWi and online orders, it has remained basically stable. It hints to the effectiveness of this strategy. It can also help lower traffic costs and enhance profits. Thirdly, in terms of cooperation with third-party traffic sources, we emphasize on traffic accuracy and placement ROI, reduce budget for channels with low ROI to further reduce placement costs and increase margins of our platform.

Second, we have the advantage of offline free medical institutions, including faith-based chains and shared hospitals, so we have greater creative space. For surgery-type customers, we organize offline face-to-face meetings to invite many famous doctors to focus on face-to-face treatment for users offline to help users save time and traffic costs, and face-to-face communication also improves users' decision-making efficiency. For high-end injection-type customers, we select high-quality doctors on the platform Compared to our peers, we have two coefficient advantages. First, we have high quality users and a high average order value.

Second, we benefit from our own offline medical aesthetic institutions, including Soyang Chain Clinics and Shared Hospitals, which provide us with greater room for innovation. For surgical customers, we organize offline consultations and invite multiple renowned doctors to participate. Centralized consultations help users save time and transportation costs. And face-to-face communication also improves users' decision-making efficiency. For high-end injection customers, we screen high-quality doctors on the platform and complete service deliveries within our own or cooperative institutions. With this approach, we have stronger control over the contract fulfillment and delivery process. While simultaneously commanding price power, and conducting refined user operations in a closed-loop manner, thus avoiding the risk of user attrition.

Thank you. The next question we have comes from Yibing of Haitong. Please go ahead.

Okay. Thank you, Guan Licheng. Congratulations to the company for achieving an excellent performance under such a big environment. I would like to ask about Xinyang Youxiang. Okay, thanks for management. I'll translate myself. My question is about the Soyang Prime. I want to ask, is the current progress of the opening new clinics under Soyang Prime in line with your expectation? And what's your mid-term to long-term plan for of Proprietary Chain Clinics. Thank you.

Hello, thank you for your question. At the beginning of this year, we planned to open 15 new chain clinics this year. By the end of the first quarter, we opened three new clinics. By the end of the quarter, we opened two new clinics. At present, the total number of clinics has reached six, which is in line with the overall expectation. At the same time, we have established a set of

We planned to open 15 clinics in 2024 at the beginning of the year. By the end of the first quarter, we opened three clinics. Since then, we added two more before today's earnings. Now we are opening six clinics in all, generally in line with our expectations. During the process, we have established a comprehensive and standardized workflow system, covering everything from site selection and evaluation to client opening and operations. This has enabled us to expand at a pace that significantly surpasses the industry average and set an industry record for the rollout of new clinics. 我们强调正品,强调性价比,透明无套路。

emphasizing on authentic products, cost performance, and transparency.

Our aim is to position standardized light medical aesthetical services as the fourth choice of everyday cosmetic conceptions. We expect to reach the scale of 100 to 150 clinics in the next three years.

We expect to reach the scale of 100 to 150 clinics in the next three years. We expect to reach the scale of 100 to 150 clinics in the next three years. We expect to reach the scale of 100 to 150 clinics in the next three years. While expanding our chain of clinics, we continue to build our operation team, combining our advantages in product supply, development, and innovation,

We are driving the build out of the standardized management system for light medical aesthetics institutions as well as an end-to-end online process management capabilities to improve operating and management efficiency for institutions. In the future, we will continue to improve efficiency per staff and efficiency per unit area for our chain of clinics, increase penetration of our proprietary supply chain products, improve margin of our chain clinics while providing users with more cost-effective services.

At the same time as improving efficiency, we pay more attention to the satisfaction of users. We know that the satisfaction of users is the basis for the survival of the chain. According to the data, the satisfaction of users of the chain is more than 98% in January to April.

User satisfaction is fundamental to chain operation. With that in mind, we emphasize more on user satisfaction. From January to April, user satisfaction in our chain of clinics reached 98% and in line with our expectations. Thank you.

The next question we have comes from Joey Tan of Jefferies. Please go ahead.

Thanks for the management for taking my question. And I have two questions. The first question is, can the management share on new progress for ops during supply chain business? And the second question is, with the cash reserve of Progress Network, will it be $1.3 billion? What is the future plan and usage? Thank you.

Hello, I will answer the first question. In terms of products, first of all, Elastic continues to maintain a strong market. On product side, first, Aravi maintains strong momentum.

with sales increasing 80% year-over-year and revenue increased 56.5% year-over-year in the fourth quarter. In addition, we spent just one year to establish a mature distribution network covering 715 institutions through both direct and agency self-channels. In the future, we will continue to integrate an upstream supply chain, help companies to increase profits, and return to users with products of sound cost performance, reaching win-win situation.

We continue to expand the product line. This year, we launched a product with improved surface and improved sound quality, and continued to enrich the product layout of light electricity. In the pre-sale stage, the sales volume exceeded expectations, and further verified our reputation and brand advantages in the C-end user group, as well as the ability to cover the network of B-end institutions, to quickly establish the ability of new products to compete in the market. In the future, as other products in our department are gradually listed, we believe that the income and profits of our upstream version will be expected to have very good continuous increases.

Second, we continue to expand our product pipeline. The launch of facelift product Trulift further diversifies our photoelectric category with sales far exceeding expectations. This is a testament to the strength of our broad word-of-mouth recognition among consumers as domestics how we are able to quickly bring new products to market and rapidly secure their market position through our expansive institutional network. We expect to add more products and continuously generate incremental revenue and profit growth from the supply chain business.

This is Nick. Let me answer the second question that Joey asked, which is about the future use and planning of our cash. First of all, we will continue to study the new business layout of our industry's upstream and downstream oil. This includes the layout of our upstream construction, as well as the layout of our downstream association. We will set a solid foundation for the strategic planning of our entire industry integration. We will use the cash for two purposes. First of all, we will continue expanding along upstream and downstream of the industry, including upstream product pipeline and downstream chain of clinics to lay solid ground for our integrated industry platform. And secondly, we will share repurchase plan or potential dividend to return values to our shareholders. Thank you.

Thank you, Sal. Ladies and gentlemen, we have reached the end of our question and answer session and our conference. Thank you for joining us today. You may now disconnect your lines.