Participants

Mona Qiao; IR; So-Young International Inc

Xing Jin; Chairman of the Board, CEO, Co-Founder; So-Young International Inc

Hui Zhao; CFO; So-Young International Inc

Ivy Lian; Analyst; Haitong International Securities Group Limited

Stacey Lee; Analyst; Guosen Securities

Nelson Cheung; Analyst; Citibank

Lucy Xiao; Analyst; Pangu Funds

Harry Xiao; Analyst; Deutsche Bank

Presentation

Operator

Ladies and gentlemen, thank you for standing by for So-Young's third-quarter, 2024 earnings conference call. (Operator instructions) 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 Qiao. Please proceed Mona.

Mona Qiao

Thank you operator and thank you everyone for joining So-Young third quarter, 2024 earnings conference call. Joining me today on the call is Mr. Xing Jin, 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 US private securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and alternative that may cause actual results to differ materially from our current expectations.
Potential risks and alternative include but are not limited to those outlined in our public filings with SEC, including our annual report on form 20-F. So-Young 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. Xing Jin.

Xing Jin

(spoken in foreign language)

Mona Qiao

Our business continued to develop robustly during the third quarter with total revenue reaching RMB332 million. Once again, surpassing the upper end of our guidance range. Net income attributable to So-Young was RMB20.3 million up 11.2% year over year, while non-GAAP net income attributable to So-Young came in at RMB22.2 million, up 133.1% year over year. Domestic in the effectiveness of our continued investment across the industry value chain.

Xing Jin

(spoken in foreign language)

Mona Qiao

In the third quarter, we made significant progress in our chain of clinics, expanding the number of stores to 17 currently from 8 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 to quarter with growth margins improving significantly. Notably, all eight of the new clinics opened during the quarter are generating positive operating cash flow and four are already profitable at the store level.
In addition, despite of this slowdown in consumer spending, our upstream business continue 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.

Xing Jin

(spoken in foreign language)

Mona Qiao

And anticipated the Chinese medical aesthetic market is polarizing with two district trends. On the one hand, nice 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 this industry trades and accelerating and deepening our end-to-end integration across the industry value chain.
Especially in our upstream and clinic businesses. During the quarter, our new business segments continues to grow rapidly with revenue from the sales of medical products and maintenance services, reaching RMB89.3 million up 18.7% year over year.

Xing Jin

(spoken in foreign language)

Mona Qiao

Now let me take a close look at our Q3 (inaudible) performance. We have made big progress with our chain of clinics, business with 17 clinics fully operational across nine cities as of today. Including Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Chengdu, Chongqing and Changsha. Among them 14 record positive monthly operating cash flow in September.
This domestic our sustainable operational capabilities supported by our user base and strong brand influence. To share a few key metrics, our customer retention rate 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 not significantly lower than the industry average. Highlighting the competitive advantage 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.

Xing Jin

(spoken in foreign language)

Mona Qiao

Wheeling 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 and Emerald at average customer spend 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 transferring platforms.
Our clinics are now on many traffic platforms such as Meituan and (inaudible). Further expanding our market coverage. More So-Young clinics serves as the focal point in the process of vertical integration and has given us no cost and price advantage, for outro program.
Leveraging private domain operations to reduce marketing costs and preparatory branded devices to lower consumable costs. Achieved remarkable results, if 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.

Xing Jin

(spoken in foreign language)

Mona Qiao

We have also made great progress in our upstream business by building up for category upstream medical aesthetic manufacturing capabilities for our broader ecosystem. As of the end of the third quarter, we partnered with more than 917 institutions for the sale of injectables.
Our injectable products [elastic] saw a 22% year over year increase in shipment reaching 43,000 units during the quarter. Sales of injectables grew by 21% year over year, further consolidating our competitive advantage in that stream sector and underscoring the strong demand of our products.
Additionally, we partnered with [Lucid] Group for upstream products. Together, we aim at cove the natural oriental lightweight based project. Which is already being offered in 90% of Lucid aesthetic institutions after just two months, showcasing the strong synergies of business creates and leading product promotion capabilities.

Xing Jin

(spoken in foreign language)

Mona Qiao

Our traditional POP businesses provide 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 still targeted advertising and traffic allocation. This has been highly recognized by institutions. Domesticating the effectiveness of advertising placements on our platform.
For consumers, we are committed to providing cost effective products. In September GMV facilitated by our platform grew by over 60% from the previous month. The per capita install GTV for the third quarter increased 2.9% 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 rate reform and product optimization.

Xing Jin

(spoken in foreign language)

Mona Qiao

Our POP business has served the medical aesthetics 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 RMB1 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 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 health care service provider. Fulfilling our mission of making medical aesthetic accessible for 100 million Chinese people.

Xing Jin

(spoken in foreign language)

Mona Qiao

I would like to hand over to our staff Hui Nick, who will go through the financial results. After that, we will open for questions.

Hui Zhao

Hello, this is Nick. Please be reminded that all amounts quoted here will be RMB. Please also refer to our earnings release for detailed information of our comparative financial performance with our year over year basis.
Total revenues during the quarter of RMB371.8 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 RMB18.7 million or 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 RMB263.0 million down 8% year over year. Primarily due to a decrease in the number of medical service providers subscribing to information services and our platform. Reservation services revenues decreased 18.9% year over year to RMB19.6 million. Primarily due to a decrease in consumer spending through our platform.
Cost of revenues to RMB142.2 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 RMB98.6 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 the maintenance services were RMB43.5 million, up 11.3% year over year. Primarily due to an increase in the cost associated with the sales of aesthetic injectables.
Total operation expenses for RMB225 million, down 8.1% year over year. Sales and marketing expenses were RMB114.9 million [sound] 20.1% year over year. Mainly due to a decrease in expenses associated with branding and user acquisition activities.
G&A expenses were RMB69.9 million, up 39.1% year over year, primarily due to increase in share-based compensation expenses.
R&D expenses or RMB40.2 million down 20.6% year over year, primarily attributable to improvements in efficiency. Income tax expenses or RMB2.1 million compared with income tax benefit of RMB2.2 million in the same period of 2023.
Net income attributable to So-Young was RMB20.3 million compared with a net income of RMB18.3 million during the same period last year. Non-GAAP and income attributable to So-Young was RMB22.2 million compared with RMB9.5 million in the same period of 2023.
Basic and diluted earnings per ADS attributable to ordinary shareholders and RMB0.2 and RMB0.2, respectively. Compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB0.18 and RMB0.18 receptivity, during the same period of 2023.
We have maintained a robust cash position with cash and cash equivalent, restricted cash and term deposits, term deposits and short term investments totaling RMB1.25 billion as of September 30, 2024.
Moving to our outlook for the fourth quarter of 2024, we expect total revenues to be between RMB350 million and RMB370 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 initiative, integrating the upstream and downstream of the aesthetic medical industry. We 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 clinics mature and market condition civilized, 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 Q&A operator. We are ready to take questions.

Question and Answer Session

Operator

(Operator instructions)
Ivy Lian, Haitong Securities.

Ivy Lian

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.
(spoken in foreign language)

Xing Jin

(spoken in foreign language)

Mona Qiao

In recent years, like medical aesthetic procedures have gained popularity due to their ease of operation, lower risk, and shorter recovery period, attracting a growing number of consumers. However, the current market is dominated by small and medium sized institutions.
Ranking 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 clinics 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 2000 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.

Xing Jin

(spoken in foreign language)

Mona Qiao

Currently demand among Chinese medical aesthetic consumers is polarized. Customers see standardized procedures focus on authenticity, compliance and cost effectiveness. Whereas those interested in nonstandard services for 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 resource. 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 and cost optimization. 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.

Ivy Lian

Thank you.

Operator

Stacey Lee, Guosen Securities. Please go ahead.

Stacey Lee

(spoken in foreign language)
We've observed a decline in the pop business particularly following the announcement of your train extension. Has there been a strategic shift for POP? Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

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, 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 drawn valuable insights from product category of Sam's Club and [Pong] and are developing our light medical aesthetic chain clinics with the aim for them to become new attract 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.

Xing Jin

(spoken in foreign language)

Mona Qiao

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 increased 50% compared to June.
Feedback from institutions have been positive from the consumer perspective, we remain committed to providing cost effective products. September's GMV 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 detail page have been shown improvement.
For example, during September's promotional activities, the conversion rate of DAU to detail page 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.

Stacey Lee

Thank you.

Operator

Nelson Cheung, Citibank.

Nelson Cheung

(spoken in foreign language)
So let me translate the question myself. My question is regarding the clinic business. So what are the considerations behind [Zan's] move to implement a franchise model alongside the expansion of international chain network? Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

Our original goal was to address the issue of information and a sanitary 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 the years. We found that a service remain expensive and truly trusted institutions are rare.
We have always aspired to the 100 million Chinese consumers offering a safe, convenient and high-quality services at reasonable prices. Our goal is to become a national chain clinic brand building long term trial 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.

Xing Jin

(spoken in foreign language)

Mona Qiao

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 daily life 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 these models feasibility. We believe that introducing franchise partners, we will further accelerate expansion, enhance brand 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 gradual financial and operational projections. We are confident in achieving rapid growth and profitability at the individual store level for our franchised clinics.

Xing Jin

(spoken in foreign language)

Mona Qiao

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 So-Young, registered employees and information system are managed and controlled by headquarters ensuring standardized operations across all chain clinics.
Additionally, the asset light franchise model offers financial advantage, providing greater profitability and sustainable growth potential for the company.

Nelson Cheung

Thank you.

Operator

Harry [Xiao], Deutsche Bank. Harry Xiao, 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 Pangu funds. Please go ahead.

Lucy Xiao

Sales management team will answer my question. The third quarter 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?
(spoken in foreign language)

Hui Zhao

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 [quarter] 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 adjustment 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 adjustment with our market conditions.
In terms of overall expense management, effective cost control has enhanced, enable us to maintain a well-managed expense ratio in Q3 2024, which stood at 60.5% down, 3% point year over year and 0.2% percentage point quarter over quarter. Thank you.

Lucy Xiao

Thank you.

Operator

Harry Xiao, Deutsche Bank. Harry Xiao, if you are speaking, you are not audible.

Harry Xiao

Hello? Yeah. Can you hear me?

Operator

Yes, you are audible now. You may proceed.

Harry Xiao

Oh, okay. (spoken in foreign language)
Let me just translate for myself. I want to ask a question about upstream business. What competitive advantages does So-Young have over traditional upstream companies to ensure success. Thank you.

Xing Jin

(spoken in foreign language)

Mona Qiao

We have already demonstrated clear advantage in the upstream business. For instance, elastic has achieved a three-year figure of 170% in shipments in the highly competitive HA market.
Additionally, as a new player in the ultrasound market, we have quickly risen to prominence with cumulative shipments of our true ultrasoft device reaching over 200 units. This underscores the ecosystem based operational advantage of our upstream business allowing us to maintain a favorable position in a highly competitive industry.

Xing Jin

(spoken in foreign language)

Mona Qiao

For upstream companies lacking marketing resources and capabilities. We provide target broad positioning and promotional support to enhance product visibility and expand coverage among consumers, medical, aesthetic institutions and doctors. This help 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 train 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 for the driving product sales and enhancing competitiveness.

Xing Jin

(spoken in foreign language)

Mona Qiao

Additionally, our participation as the only external shareholder of the 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 full category upspring medical aesthetic manufacturer with a robust ecosystem.

Harry Xiao

(spoken in foreign language)

Operator

Thank you. 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.