So-Young International Inc.

Ladies and gentlemen, thank you for standing by for So Young's third quarter 2024 earnings conference call. At this time, all participants are in the listen-only mode. After management give 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. Mona Kiao. Please proceed, Mona.

Thank you, operator, and thank you, everyone, for joining Soyang's third quarter 2024 earnings conference call. Joining me today on the call is Mr. Xin Jin, our co-founder, chairman, and CEO, and Mr. Nick Zhao, CFO. Please note that the discussion today will contain four 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 outlined in our public filings with SEC, including our annual report on Form 20F. Soyeon does not undertake any obligation to update any forward-looking statements, except as required under applicable law. And this time, I'd like to turn the call over to Mr. Xin Jin.

Hello, everyone. Welcome to today's press conference. In the third quarter of 2024, our business will maintain steady development, get a total income of RMB3.72 billion, and once again exceed the income guide line. Achieve a net profit of RMB2035 million, which belongs to Xin Yang, and a growth of 11.2%. Our business continued to develop robustly during the first quarter with total revenue reaching RMB 332 million, once again surpassing the upper ends of our guidance range.

net income attributable to Soyang was RMB 20.3 million, up 11.2% year-over-year, while non-GAAP net income attributable to Soyang came in at RMB 22.2 million, up 133.1% year-over-year, demonstrating the effectiveness of our continued investment across the industry value chain.

In the third quarter, we made a major breakthrough in our joint business. The number of chain stores has increased from 8 in the second quarter to 17 in the current period, and has expanded to more cities. All chain stores are located in the top core of the market, further strengthening the market coverage and competitiveness. The turnover of chain stores in the third quarter has increased by 67%, and the profit margin has significantly increased. Currently, the 8 new chain stores in the third quarter have all achieved business cash turnover, of which 4 have achieved profit at the chain store level. The chain business is gradually becoming the core growth engine of the group. In addition, despite the slow consumption, the top-level business remains stable. Our business structure continues to optimize. POP business provides a solid foundation for the rapid development of the company's new business. It has a good co-efficiency effect with chain and top-level business. It provides us with important support in the comprehensive layout of the medical market.

In the third quarter, we made significant progress in our chain of clinics, expanding the number of stores to 17 currently from eight last quarter as we penetrated into more cities. All of our clinics are located in prime commercial areas, which further strengthens our market coverage and competitiveness. This business is gradually becoming the key growth driver for us. Its revenue grew by 67% quarter over quarter, with growth margins improving significantly. Notably, all eight of the new clinics open during the quarter are generating positive operating cash flow, and four are already profitable at the store level. In addition, despite this slowdown in consumer spending, our upstream business continues to deliver satisfactory performance. We continue to optimize the structure of our business, with our pop business serving as a solid foundation for the rapid development of these new businesses, creating strong synergies with our chain of clinics and upstream businesses. This provides critical support for our development in the medical aesthetic market.

Based on the development of the industry, the development of the Chinese medicine market, as we expect, presents a trend of two-level division. On the one hand, the demand of the general consumer is gradually released. They are more inclined to choose high-performance and convenient products. This trend has promoted the replacement upgrade and diversification of medical technology. On the other hand, while the middle and high-income groups with a certain consumption capacity are pursuing a new price, they are still willing to pay a price for high-quality and personalized services, leading the medical market to develop in a higher quality and high standard direction. We focus on these industry trends to further deepen the entire industrial chain, especially in upstream and chain business. As anticipated, the Chinese medical aesthetic market is polarizing with two distinct traits.

On the one hand, mass consumers are gradually releasing their demands for cost-effective and convenient medical aesthetic products and services. during the iteration of medical aesthetic technologies and project diversification. On the other hand, middle to high income consumers remain willing to pay a premium for high quality and personalized services while seeking cost effectiveness, pushing the medical aesthetic market towards higher quality and standards. We are closely following these industry traits as accelerating and deepening our end-to-end integrations across industry value chain. especially in our upstream and clinic businesses. During the quarter, our new business segment continues to grow rapidly, with revenue from the sales of medical products and maintenance services reaching RMB 89.3 million, up 18.7% year-over-year.

Let's take a closer look at our three-week business development. We have made positive progress in our joint business. As of now, we have set up 17 stores in 9 core cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Chengdu, Wuhan, Chongqing, Changsha, etc. In September, 14 of them achieved a positive monthly operating cash flow. This reflects the stability of store operations and shows the strong influence of Xinyang brands and the continued operating capabilities of platform users. In the third quarter, the customer flow rate remained at more than 60%. After the survey, the overall customer satisfaction of the chain store reached 4.98, 4.98, 5 full points. It reflects XinYang's business concept and efficient service and appointment ability with customers as the basis. In addition, our average customer cost is significantly lower than the industry average level. It fully reflects XinYang's competitive advantage in market promotion, organizational ability, and operating efficiency. Now, let me give you a closer look at our Q3 business performance.

We have made big progress with our chain of clinics business, with 17 clinics fully operational across nine core cities as of today. including Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Chengdu, Wuhan, Chongqing, and Changsha. Among them, 14 record positive monthly operating cash flow in September. This domesticates our sustainable operational capabilities, supported by our user base and strong brand influence. To share a few key metrics, our customer retention rates was maintained at 60%. the overall customer satisfaction at our clinics reached 4.98 out of 5, according to our data, reflecting our customer-centric operational philosophy and efficient service fulfillment capabilities. Moreover, average customer acquisition costs are now significantly lower than the industry average, highlighting the competitive advantages in marketing and operational efficiency, Our private domain user base continues to expand, now at around 900,000 users, which provides a solid foundation for us to expand in the future.

Specifically, several special projects in our joint business have achieved a strong growth and have shown a bright future. Especially, in the high-end business version, WanZhi Master Group's project has increased significantly. In the third quarter, the revenue has increased by 104%. The price of each unit is close to 50,000 yuan. The user rating and other indicators are both excellent, which proves that our strict strategy of selecting injection doctors has been highly recognized by medical consumers. At the same time, we are also actively expanding our cooperation with mainstream traffic platforms. Currently, XinYang Co., Ltd. has joined the US Group, TianMao, and other channels, and the market coverage has gradually expanded. In addition, XinYang Youth Clinic The project is a breakthrough point for our vertical integration strategy. It shows a significant cost advantage. For the over-the-counter project, we use enhanced remote operation to reduce sales costs and use free brand equipment to reduce cost-efficiency costs, which brings obvious price advantages. The first month of the online order of the project has exceeded 7,000 orders. In the future, we plan to open 5 core cities in Beijing, Shanghai, With our chain of clinics businesses, a number of key initiatives have delivered robust growth that I'd like to highlight. For example, our high-end master injector team project achieved 104%

sequential revenue increase, and average customer spends of nearly 50,000. Its customer satisfaction rates were also exceptional, proving that our tactic of carefully selecting injection doctors is highly appreciated by consumers. Additionally, we have actively expanded partnerships with mainstream platforms. Our clinics are now on many traffic platforms such as Meituan and Tmall, Further expanding our market coverage, moreover, SoYoung Clinic serves as the focal point in the process of vertical integration and has given us notable cost and price advantage. For our ultra-sized program, leveraging private domain operations to reduce marketing costs and preparatory branded devices to lower consumable costs achieved remarkable results. Its online orders exceeded 7,000 in the first month immediately after its launch. We plan to further expand our presence in five core cities, including Beijing, Shanghai, Guangzhou, Shenzhen, and Hangzhou, and accelerate the rollout of franchises in order to quickly replicate our successful standardized chain operations model to more cities, further scaling up our business.

In the upstream business, we continue to promote the strategic layout of the full-fledged ecological e-commerce supply chain. We have achieved practical progress in the third quarter. Until the third quarter, our service agents and direct customer numbers have accumulated more than 970. In terms of products, Elastic's three-week shipment volume of 430,000 units increased by 22% in the same ratio, and the upstream real income increased by 21% in the same ratio. further solidified our competitive advantage in the field of e-commerce, and verified the market's strong demand for our products. In addition, we have reached strategic cooperation with Langzhi Group on e-commerce products. The two sides will work together to build Nature East Qingbo Face Project in a short period of two months to cover 90% of e-commerce institutions under Langzhi Group. It fully shows that the two sides

We have also made great progress in our upstream business by building up four category upstream medical aesthetic manufacturing capabilities for our broader ecosystem. As of the end of the third quarter, we partnered with more than 970 institutions for this dose of injectables. Our injectable products elastic, so a 22% year-over-year increase in shipments. reaching 43,000 units during the quarter. Sales of injectables grew by 21% year-over-year, further consolidating our competitive advantage in the upstream sector and underscoring the strong demand of our products. Additionally, we partnered with Lansley Group for upstream products. Together, we aim to co-develop the natural oriental lightweight phase project. which is already being offered in 90% of Lanxess aesthetic institutions after just two months, showcasing the strong synergy of our business craze and leading product promotion capabilities.

Through accurate advertising and traffic allocation strategies, we have helped medical institutions achieve steady growth in order transfer revenue, and obtained high recognition from medical institutions. This fully proves the effectiveness of advertising and market promotion on our platform. In the face of C-end consumers, we strive to provide high-quality products for medical consumers. At the same time, the growth of GMV in September is more than 16% compared to August. Our traditional pop business is strong support for both our chain of clinics and upstream businesses.

Moving forward, we will focus more on improving the experience for both medical aesthetic institutions and consumers. Our platform continues to help medical aesthetic institutions improve order conversion and sales through targeted advertising and traffic allocation. This has been highly recognized by institutions, demonstrating the effectiveness of advertising placements on our platform. For consumers, we are committed to providing cost-effective products. In September, GM weight facilitated by our platform grew by over 60% from the period month. The per capita install GTV for the third quarter increased 22.9% year-over-year, reflecting the initial success of our upmarket shifting tactics in POP. We also enhance our sales leads and conversion rates through commission rates reform and product optimization.

In the past, our community e-commerce business has been growing in the medical field for 11 years and has deeply occupied the users' minds. In the past three years, our investment in the upstream supply chain has accumulated more than $1 billion in continuous market share. So far, we have set up 17 new youth clinics, The ability to thoroughly polish, organize culture and neutralize, gradually form a scale effect, bringing cost advantages, allowing consumers to enjoy the comfort, convenience, quality, and high-quality medical services. Looking forward to the future, Xinyang's strategic focus is very clear, which is to form a multi-dimensional ability advantage through upstream and downstream vertical integration, and strive to become the most trusted medical healthcare industry group, allowing 100 million Chinese people to easily

Our pop business has served the medical aesthetic industry for 11 years, establishing a strong brand presence and becoming top of mind for consumers. Over the past three years, we have invested over RMB 1 billion in building our upstream supply chain and expanding our product offerings. We have now opened 17 clinics leveraging our organizational culture and central platform capabilities. gradually growing it in scale to deepen cost advantage and ensure consumers enjoy reliable, convenient, high-quality, and high-cost effective services. Looking forward, our focus is clear. Through upstream, middle, and downstream integration, we aim to create multidimensional competitive advantage and become the most trusted medical aesthetic and healthcare provider. service provider, fulfilling our mission of making medical aesthetics accessible for 100 million Chinese people. Now let me hand over to our staff, or Nick, who will go through the financial results. After that, we will open for questions.

Hello, this is Nick. Please be reminded that our amounts quoted here will be RMB. Please also refer to our earnings release for detailed information of our comparative financial performance year-over-year basis. Total revenues during the quarter were RMB 371.8 million, down 3.5% year-over-year, exceeding the high end of our guidance. With the sales of medical products and maintenance services growing by an impressive 18.7% year-over-year, primarily due to an increase in the order volume for aesthetic injectables and medical equipment. Information services and other revenues were RMB 263.0 million, down 8% year-over-year, primarily due to a decrease in the number of medical service providers subscribing to information services on our platform. Reservation services revenues decreased 18.9% year-over-year to RMB 19.6 million, primarily due to a decrease in consumer spending through our platform. Cost of revenues were RMB 142.2 million down 0.3% year-over-year, primarily due to a decrease in the cost of service associated with the information service. Within cost of revenues, Cost of services and others were RMB 98.6 million, down 4.7% year-over-year, primarily due to a decrease in the cost of services associated with information services. Cost of medical products sold and maintenance services were RMB 43.5 million, up 11.3% year-over-year, primarily due to an increase in the cost associated with the sales of aesthetic injectables. Total operating expenses were RMB 225 million, down 8.1% year over year. Sales and marketing expenses were RMB 114.9 million, down 20.1% year over year, mainly due to a decrease in expenses associated with branding and user acquisition activities. G&A expenses were RMB 69.9 million, up 39.1% year-over-year, primarily due to increase in share-based composition expenses. R&D expenses were R&B 40.2 million, down 20.6% year-over-year, primarily attributable to improvements in staff efficiency. Income tax expenses were R&B 2.1 million, compared with income tax benefit of R&B 2.2 million in the same period of 2023. Net income attributable to Soyang was RMB 20.3 million, compared with a net income of RMB 18.3 million during the same period last year. Non-GAAP net income attributable to Soyang was RMB 22.2 million, compared with RMB 9.5 million in the same period of 2023. Basic and diluted earnings for ADS attributable to ordinary shareholders, or RMB 0.2 and RMB 0.2, respectively, compared with basic and diluted earnings for ADF, attributable to ordinary shareholders of RMB 0.18 and 0.18, 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 $1.25 billion as of September 30, 2024. Moving to our outlook, for the fourth quarter of 2024, we expect total revenues to be between RMB $350 million and RMB $370 million. This outlook also takes into account the uncertainties of the paces of clinic openings and ramping up. as we are in the early stages of our clinic expansion and our business transformation. That being said, we are confident our strategic initiatives integrating the upstream and downstream of the aesthetic medical industry will ideally position us for long-term growth. These initiatives will enable us to capture a significantly larger share of the market and establish a solid foundation for profitability. As our clinic matures and market conditions stabilize, we expect our financial performance to gradually improve. This concludes our key remarks. I will now turn over the call to the operator and open the call for QA. Operator, we are ready to take questions.

Certainly, sir. Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Ivy Lee with Haidong Securities.

Please go ahead. Okay. Good evening, management, and thank you for taking my question. I would like to ask about the industry. From your current perspective, what new changes or trends are emerging in the medical aesthetics industry? And I'll translate myself. Thank you very much for this opportunity. Congratulations to the company for continuing our high-quality growth in the third quarter. At this time, I would like to ask the management to see if there are any new changes in the medical industry or new trends that are worth noting. Yes, thank you. Hello, Evan.

Thank you for your question. I will answer your question. In recent years, because of the simple operation, low risk, short recovery, and other advantages, and are increasingly favored by consumers. However, the current market is still dominated by small and medium-sized institutions, lacking unified service standards and intelligence control, causing the level of service to be unparalleled. There are nearly 20,000 foreign and American institutions in the country, with more than 95% of them being small and medium-sized institutions. There has not yet been a national joint brand, the industry standardization and integration space is huge. As the demand for light American consumption continues to grow, we believe that the big light American chain brand will be born in the future. In Korea, the development of the light American chain has matured and formed more than 10 well-known chain brands. If the Chinese market develops according to the same proportion, the number of stores opening in the light American chain will exceed 2,000 in the future, and it will carry a huge market share. In recent years, light medical aesthetic procedures have gained popularity due to their ease of operation, lower risks, and shorter recovery periods, attracting a growing number of consumers.

However, the current market is dominated by small and medium-sized institutions, lacking unified standards and quality control, leading to inconsistent service quality. There are around 20,000 medical aesthetic institutions nationwide, with over 95% being small institutions. No national chain clinic brands have yet emerged in the market. indicating significant room for standardization and consolidation. With the continued growth in demand for light medical aesthetics, we believe nationwide chain claims will emerge in the future. South Korea serves as a prime example where the development of light medical aesthetic chains has already reached maturity. With over 10 well-known brands, if the Chinese market develops chain brands at a similar rate The total number of light medical aesthetic chain clinics could exceed 2,000, presenting significant marketing opportunities. Our goal is to benchmark against developed overseas markets and make medical aesthetic accessible and affordable to all. This is also the original intention behind establishing our own chain of clinics. 目前中国医美消费者的需求呈现明显的两极分化,

The users of standardized projects pay more attention to the right products, regulations, and cost-effectiveness. The users of non-standardized projects are more inclined to choose top-notch solutions and individualized solutions. For this type of users, we have launched Wanzhi Group. The high-end customized business, user reputation, and financial performance are very outstanding. By accurately positioning different demand levels, we are able to provide a comprehensive experience for all types of medical customers to meet their needs. We firmly look forward to the potential development of this version, and continue to improve competitiveness through vertical integration and cost optimization. By integrating the unified management and operation mode of the upstream supply chain, we will reduce the operation and purchase costs of each store, and further improve overall profitability. Based on this wide-ranging development prospects, XinYang is vigorously entering the green-and-white joint market, striving to become the leading joint brand in China.

Currently, demand among Chinese medical aesthetic consumers is polarized. Customers seeking standardized procedures focus on authenticity, compliance, and cost effectiveness, whereas those interested in non-standard services prefer top-tier doctors and personalized solutions. For this latter segment, we have introduced the master injector team, a high-end customized service, which has received excellent user feedback and financial results. By precisely targeting different consumer needs, we aim to deliver exceptional experiences to various customer groups. We are optimistic about the growth potential of light medical aesthetic chain clinics and are enhancing our competitiveness through vertical integration at cost By integrating our upstream supply chain and implementing a unified management and operational model, we aim to reduce operating and procurement costs across our clinics, thereby improving overall profitability. Given this promising market outlook, we are committed to expanding our footprint in the light medical aesthetic market, aiming to become a leading domestic clinical chain brand.

Thank you.

Thank you.

Thank you. The next question comes from Stacy Lee with Gowlion Securities. Please go ahead.

Hello, everyone. Thank you for the opportunity to ask this question. I would like to ask a small question about POP. Because I see that POP has a certain degree of reduction, especially after the closure of our institute. I would like to ask if POP has a general strategic change. We've observed a decline in the POP business, particularly following the announcement of your chain extension. Has there been a strategic shift for POP? Thank you.

Hello, Nancy. Let me answer your question. In our overall business strategy, POP is always an important component of our business. Its positioning is similar to that of DD platform or Jindong platform. It has its own business and third-party cooperatives. Among them, self-sufficiency business refers to XinYang QingYi Mei chain. This is to deal with the fierce market competition and traffic challenges. Compared with large traffic platforms, the quality of XinYang's traffic is higher, but it faces the risk of insufficient size. Long-term view may lead to the loss of users and institutional customers. We learn and borrow the brand strategy of Pantone, a three-mother member store, to develop the QingYi Mei chain. We hope that our own star medical products We continue to place significant importance on POP

which remains a critical component of our operations. Similar to platforms like DD or JD.com, we maintain a mix of self-operated and third-party partners. The large medical aesthetic chain clinics are our self-operated business, developed to address intense market competition and traffic challenges. While our traffic quality is high, we face the risk of insufficient traffic compared to big, internet platforms with higher traffic volume, which could potentially impact user and institutional retention over the long term. We have joined valuable insights from product category of Sam's Club and Pound Online and are developing our light medical aesthetic chain clinics with the aim for them to become new traffic drivers, attracting and retaining more users on our platform. This approach attracts more third-party medical institutions to join, offering more diverse products to meet users' diverse and personalized needs, and are helping these institutions achieve greater benefits. Ultimately, it positions the platform to rapid growth.

In September, the ROI increased by more than 16% compared to June. The feedback from the institutions continued to be good. From the perspective of consumers, we are determined to provide high-performance products. In September, the GMV rose by 16% compared to August. Next, with the fall of financing reform and product optimization measures, the number of business machines in our station has increased, and the conversion rate from exposure to commercial and commercial industry has increased steadily. In September, compared to June, Moving forward, we will place greater emphasis on the experience of institutions and consumers

On the institution side, our ROI for verified transactions improved steadily, with September showing an ROI increase of 60% from April to June. Feedback from institutions have been positive. From the consumer perspective, we remain committed to providing cost-effective products. September's GMW increased by 60%. Additionally, with the implementation of commission reforms and product optimization measures, the numbers of leads and the conversion rates from exposure to detailed pages have been showing improvement. For example, during September's promotional activities, the conversion rates of the AU to detailed pages increased by 4%. and the conversion rate from detail page to transaction increased by 20% compared to June. We are also adjusting our fee model, transitioning from the original advertising-based model to a service fee-based model, shifting from exposure-based charge on performance-based charge, placing great emphasis on conversion effectiveness.

Thank you.

Thank you.

Thank you. The next question is from the line of Nelson Chen with Citibank. Please go ahead.

So let me translate the question myself. My question is regarding the clinic business. So what are the considerations behind SoYang's move to implement a franchise model alongside the expansion of its national chain network? Thank you.

Hello, Nelson. Let me answer your question. From the beginning of the creation of XinYang, we hope to solve the problem of information asymmetry in the industry through a community and platform to reduce the risk and difficulty of consumer decision-making. With the rapid development and popularization of the medical industry for many years, we found that medical consumption is still expensive, and at the same time, the medical institutions that consumers truly trust are still at a disadvantage. We have always hoped that one day we can serve 100 million Chinese people, and let them enjoy safe, convenient, and high-quality medical services. We do not have to pay high and unreasonable prices, so we have become a national chain of brands. We uphold the principle of long-term development, establish long-term trust with consumers, Our original goal was to address the issue of

asymmetry in the medical aesthetic industry through our community and platform, reducing the decision-making costs and risks. Despite the rapid growth and popularization of medical aesthetic over years, we found that service remains expensive and truly trusted institutions are rare. We have always aspired to serve 100 million Chinese consumers, offering safe, convenient, and high-quality services at reasonable prices. Our goal is to become a national chain clinic-wide, building long-term trust with consumers through high-quality, cost-effective services. By maintaining high customer retention, we can reduce marketing expenses, achieving significantly greater efficiency per employee and per square meter than traditional clinics, while delivering more value and benefits to consumers.

From a business perspective, The success of the chain model needs to be built on the strong support of Zhongtai. This can be used to quickly expand the scale of Zhongtai's costs and further maximize the cost-effectiveness. At the moment, we have chosen to open the joint model to seize the development opportunity of the green and white industry, to accelerate the expansion of Xinyang's green and white chain map, and effectively control the cost. Xinyang's first dozen operating data We have already verified the feasibility of this model. We believe that through strategic integration of joint partners in the future, we will further accelerate the opening speed, expand brand influence, and gain more support from business, property, customer support, and government, so that Xinya can focus on the construction and improvement of medium-sized capacity. Based on our rigorous financial and operation calculations, we are full of confidence in the rapid growth and single-storied profit of our stores.

For the business itself, the success of chain model relies on central platform support, which helps spread central platform costs over an expanding scale, maximizing cost efficiency. Our decision to launch the franchise model aims to capture development opportunities which exist in daylight medical aesthetic sector, accelerate the expansion of our clinic network, and effectively control costs. The operating data from our initial 10 plus self-operated clinics have already validated this model's feasibility. We believe that introducing franchise partners will further accelerate expansion, enhance blind influence, and secure resources and support from commercial property owners, customers, and government agencies, allowing us to focus on building and enhancing central platform capabilities. Based on our regular financial and operational projections, we are confident in achieving rapid growth and profitability at the individual store level for our franchise clinics.

Our joint model uses full-time management to ensure high-standard service quality and deep integration of supply chain. All store managers and doctors are new employees. The information system is managed and controlled by the headquarters. Our franchise model used a fully managed approach to ensure high service standards and deep integration of the supply chain. The supervisors and doctors at all clinics are

Soyang's registered employees. And information systems are simply managed and controlled by headquarters, ensuring standardized operations across all chain clinics. Additionally, the asset-light franchise model offers financial advantage, promising greater profitability and sustainable growth potential for the company.

Thank you.

Thank you.

The next question is from the of Harry Zhao with Deutsche Bank. Please go ahead. Harry Zhao, your line has been unmuted. You may proceed with your question. As there is no response from the line of Harry Xiao, we will proceed to the next question, which will be from the line of Lucy Xiao with Pengua Funds. Please go ahead.

Thanks, management team, for answering my question. The third quarter ER indicates effective expense control with sales and marketing expenses down approximately 20% year over year. How has management team achieved a lower expense ratio and improved profitability? Thank you, Lucy, for your question.

We believe profitability fundamentally comes from business growth. Our clinic chain business has proven its growth potential, and by optimizing order and back office costs while maintaining expansion speed, there exists more room for profit. Additionally, the continuous expansion of our upstream product pipeline and the launch of new products will further enhance our profitability. As one of the very few companies to successfully achieve vertical integration in the industry, we leverage our comprehensive advantages and forward-looking strategies to maintain long-term competitiveness and high-quality growth in the market. The reduction in sales and marketing expenses is the result of adjustments to our marketing strategy. We recognize that the current medical aesthetics market is beyond pure traffic competition and requires a professional platform with a deep understanding of the industry and user needs, offering consumers excellent experience and addressing their genuine concerns. This has led us to focus more on refined operations and cost-effectiveness analysis, prioritizing the efficiency and precision of marketing investments and making timely adjustments based on market conditions. In terms of overall expense management, effective cost control has enabled us to maintain a well-managed expense ratio in Q3 2024, which stood at 60.5%, down 3% point year over year, and a 0.2% percentage point quarter over quarter. Thank you. Thank you.

Thank you. The next question is from Harry Shao with Deutsche Bank. Please go ahead. Harry Shao, if you are speaking, you are not audible.

Hello? Yeah, can you hear me?

Yes, you are audible now. You may proceed.

Oh, okay. Let me just translate for myself. I want to ask a question about upstream business. What competitive advantages does Soyoung have over traditional upstream companies to ensure success? Thank you.

Hello, Harry. Let me answer your question. At present, XinYang has shown significant advantages in its business. With the help of the Korean brand Elastic, we have reached 117% in the three-year recovery growth rate of our shipping volume in the highly competitive hypochloric acid channel. In addition, XinYang, as a newcomer, has successfully deepened the lead in the domestic super power market. We have already demonstrated clear advantage in the upstream business. For instance, Elasti has achieved a three-year CAGR of 170% in shipments in the highly competitive HA markets.

Additionally, as a new player in the Ultra-South market, we have quickly risen to prominence, with cumulative shipments of our TrueLift Ultra-South device reaching over 200 units. This underscores the ecosystem-based operational advantage of our upstream business, allowing us to maintain a durable position in a highly competitive industry.

For companies that lack sales resources and capacity, Xinyang, through accurate brand positioning and promotion, not only boosts its popularity, but also promotes the coverage of products in the channels between end-consumers, medical institutions and doctors, and helps potential products grow to burst prices, and helps top-end manufacturers to establish a stable market base in the medical industry and increase market influence. Through the chain of self-sufficiency, Xinyang has successfully built multiple burst prices, becoming the benchmark of the industry marketing strategy, For upstream companies lacking marketing resources and capabilities, we provide target-wide positioning and promotional support to enhance product visibility.

and expand coverage among end consumers, medical aesthetic institutions, and doctors. This helps potential products grow into best sellers and assist upstream manufacturers in establishing a solid market foundation and enhancing their influence in the industry. Through our self-operated chain clinics, we have launched several top-performing products, setting a new standard in terms of industry marketing strategies. Currently, we have opened 17 clinics in nine core cities, and we plan to accelerate our market coverage through a mix of self-operated and franchise models, further driving product sales and enhancing competitiveness.

In addition, the U.S. is the largest expo in the U.S. It is an important channel for upstream manufacturers, expansion agencies, and doctors to influence the community. As the only external shareholder of the U.S., will actively participate in the United States International Medical Association, strengthen our upstream business and the coordination of the United States and Russia, continue to expand the influence of the medical industry, promote industrial innovation and development. In the future, we hope to become an eco-friendly, full-fledged medical upstream manufacturer with a series of competitive advantages such as operational capability, data resources, and team configuration.

Additionally, our participation as the only external shareholder of the Mavros International Congress of Medical Aesthetics, the largest industry event, will strengthen our upstream business by expanding influence among institutions and doctors, promoting innovation in the industry. With our competitive edge in marketing, data resources, and team expertise, we aim to become a four-category upstream medical aesthetic manufacturer within a robust ecosystem.

This brings us to the end of our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.