So-Young International Inc. Q3 FY2022 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Third Quarter 2022 Earnings Conference Call. As a reminder, today's conference is being recorded. I will now like to turn the meeting over to your host for today's call, Ms. Vivian Xu. Please proceed.

Thank you, operator, and thank you for joining So-Young's third quarter 2022 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the 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. Joining us today on the call is Mr. Xing Jin, our Co-Founder, Chairman and CEO. At this time, I would like to turn the call over to Mr. Xing Jin. Yes, please?

Hello, everyone. Thank you for joining So-Young's third quarter 2022 Earnings Call. China's overall domestic consumer market remained under pressure in the third quarter, with repeated COVID-19 outbreaks in certain parts of the country. Despite this market uncertainty, we delivered solid financial performance during the quarter, and we have now achieved gradual sequential improvements in each of the first three quarters of 2022. Total revenues were RMB 320 million, representing a sequential increase of about 5% and in line with our previous guidance. Our progress was well recognized among medical service providers, and we established new cooperation agreements with more institutions, thanks to our device product offering. The number of paying medical service providers on So-Young's platform reached 6,199, up 28% from the prior year. On the user side, we continue to refine our operations to serve different cohorts of medical aesthetics consumers, leveraging our deep understanding of users and our edge in big data analysis. We made some progress on our user segmentation efforts, which enable us to cater to the demand of different consumer groups based on location and user characteristics. For new customers with a limited budget, we used popular promotions for new treatments to encourage them to place orders. For customers in the medium-price segment, we promoted well-known products to enhance their stickiness. In the third quarter, the number of user-verified orders on our platform grew 6% sequentially. In addition, we launched the So-Young Prime program targeting customers in the first and second-tier cities who account for the majority of medical aesthetics consumption. The So-Young Prime program is aimed at establishing clear and transparent industry standards, reducing consumers' trial and error costs, simplifying their decision-making process, and providing one-stop solutions for light medical aesthetic services, enabling our customers to pursue beauty with peace of mind. For categories with an order value of over RMB 8,000 launched during the quarter, such as ultrasonic skin remodeling essentials, the monthly online GMV increased by over 60% compared with the previous months. In terms of our operating strategy, So-Young Select had expanded to 19 major cities in China as of the end of October. As part of our long-term strategy for providing superior user experience, So-Young Select caters to our users' preference for high-quality branded medical service providers and enables providers to offer enhanced service and build their brand value. In the third quarter, with the rollout of So-Young Select, the promotional spend of service providers on our platform increased by over 25% quarter-over-quarter and about 20% year-over-year. We also saw gradual improvement in the conversion rate for the medical service providers on our platform. Meanwhile, under So-Young Select, we have also rolled out So-Young Select Doctor, which helps users choose premium doctors, providing useful information to facilitate their decision-making and driving user conversion. In terms of industry regulation, the recent national regulatory policies emphasize transparent pricing, consistent online and offline pricing, and cracking down on false advertising and misinformation that harms the interest of consumers. The regulatory requirements for online platforms are consistent with the self-regulatory actions So-Young has been implementing for years, indicating that our work is moving in the right direction. Regarding internal platform governance, we continue to promote self-regulation within the industry and strengthen the quality of the supply side in our ecosystem. We also took the initiative to identify and eliminate false transactions and false reviews and established and optimized our antifraud system and data prevention scheme, thereby promoting the healthier development of the industry. Looking at the overall Chinese medical aesthetic industry, it is under pressure in the near term, while the positive perspective is intact for the long term. Therefore, in the near term, we took stringent measures to cut costs and increase efficiency and achieve profitability on a quarterly basis. During the quarter, the non-GAAP net profit attributable to So-Young International Inc. reached RMB 9.9 million. We have maintained healthy financial conditions and sufficient cash reserves to ensure that the company remains strong, and we are able to make constant improvements. Going forward, we will work to better serve medical aesthetic consumers by investing in our business and evaluating user experience. Looking at the global medical aesthetics market, we are pleased to see that it continues to have strong growth potential. According to Frost & Sullivan, after the year-over-year decrease in 2020 due to the outbreak of the pandemic, the global medical aesthetics market grew by 13% year-over-year in 2021 and is expected to grow by 14% year-over-year in 2022, with a CAGR of approximately 13% from 2021 to 2025. In 2020, the number of medical aesthetic treatments per 1,000 people in China was about 21 compared with 82 and 48, respectively, in South Korea and the United States, which are more developed medical aesthetics markets. So the penetration rate of medical aesthetics in China still has plenty of room to grow. 2022 is a milestone anniversary for So-Young and marks a new beginning for us. We are confident that we will overcome the uncertainties of the current market environment and will leverage the best industry experience we have accumulated to place the user at the center of our business and build the most trusted medical aesthetic service platform. I will read the prepared remarks on behalf of Mr. Xing Jin and then open the Q&A.

Now I will go through the financials for the third quarter. Please be reminded that all amounts recorded here will be in RMB. Please also refer to our earnings release for detailed information on our corporate financial performance on a year-on-year basis. For the third quarter 2022, total revenues were RMB 323.3 million compared to RMB 431.5 million in the corresponding period of 2021, in line with our previous guidance. The decrease was primarily due to a decrease in average revenue per paying medical service provider, which was impacted by the resurgence of COVID-19 and remained under pressure from China's overall domestic consumer market. Within total revenues, information services and other revenues were RMB 235.7 million, down 26.7% year-over-year. Reservation services revenue was RMB 29.7 million, down 51.8% year-over-year. Sales of equipment and maintenance service revenue, which were from Wuhan Miracle Laser System Inc., were RMB 57.8 million compared with RMB 48.1 million in the same period of 2021. Cost of revenues was RMB 94 million, up almost 5% year-over-year. The increase was primarily due to the consolidation of Wuhan Miracle. To weather the storm, we adopted serious cost-saving measures such as reducing marketing activities and optimizing cost structure, etc., in order to maintain operating efficiencies. Total operating expenses were RMB 236.6 million, down 26.6% year-over-year. Sales and marketing expenses were RMB 124.8 million, down almost 35% year-over-year, primarily due to a decrease in expenses associated with branding and user acquisition activities. Research and development expenses were RMB 52 million, down 32% year-over-year, primarily due to a decrease in payroll costs. General and administrative expenses were RMB 59.8 million, up 9.4% year-over-year, primarily due to an increase in payroll costs and professional service fees. Income tax benefit was RMB 16.5 million compared with income tax expense of RMB 4.3 million in the third quarter of 2021. The increase in income tax benefit was primarily due to the refund of income tax of RMB 12.6 million in the third quarter of this year based on the final 2021 tax return filing results. Net income attributable to So-Young International Inc. was RMB 2.3 million compared to RMB 6.8 million in the third quarter of 2021. Non-GAAP net income attributable to So-Young International Inc., which includes the impact of share-based compensation expenses, was RMB 9.9 million compared with RMB 28.9 million in the same period of last year. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.02 and RMB 0.02, respectively, compared with RMB 0.06 and RMB 0.06, respectively, during the third quarter of 2021. With regards to some items on our key balance sheet, we held adequate liquidity in the quarter as of September 30, 2022. We had total cash and cash equivalents, restricted cash, term deposits, and short-term investments of RMB 1.6 billion compared with RMB 1.8 billion as of December 31, 2021. Net current assets were RMB 1.3 billion as of September 30, 2022 compared with RMB 1.3 billion as of December 31, 2021. Net assets were RMB 2.6 billion as of September 30, 2022 compared with RMB 2.1 billion as of December 31, 2021. For the fourth quarter of 2022, we expect total revenue between RMB 310 million and RMB 330 million. The above outlook is based on the current market conditions that reflect the company's preliminary estimates of the market and operating conditions and the customer demand. Today, the Board of Directors of the company authorized a share repurchase program, under which the company is authorized to repurchase an aggregate value of USD 15 million of these shares, including in forms of the ADS during the 12-month period beginning from November 18, 2022. This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A.

Our first question today will come from Thomas Chong of Jefferies.

Let me quickly translate myself. So recently, SAMR has released the guideline on taking down our first advertising and illegal pricing in the medical aesthetics industry. Can management comment on this regulation?

Thank you. As I have just mentioned, the guidelines focus on preventing false advertising and misinformation and emphasizing transparent pricing and consistent pricing online and offline. The regulatory requirements for online platforms are consistent with the self-regulatory actions So-Young has been implementing for years, indicating that all along, we have been a leader and training center in protecting the interests of our users. For our internal rules governing platform information, we have rolled out comprehensive and systematic initiatives. New information posted on the platform is effectively intercepted, and information storage is reviewed and impacted both by AI and on a 24/7 basis by professionals. Special inspections are also conducted periodically for information storage. We constantly upgrade our antifraud system and have developed strong capabilities in real-time computation, real-time policy configuration, and flexible verification, and anti-fraud measures, which all play a key role in identifying and blocking false comments and preventing false transactions. As the first platform to adopt and consistently drive self-discipline actions in the industry, we ensure consumers are fully informed about the products, including price, performance specifications, and disclosed products and services information in a comprehensive, authentic, and accurate manner. By doing this, we guarantee consumers' right to know and to choose, continue to promote industry self-discipline, and keep strengthening the quality of the supply side in our ecosystem. In the long term, government regulation will be beneficial for the healthy development of the whole industry and promote the medical nature of the aesthetics business.

Our next question today will come from Leo Chiang of Deutsche Bank.

So let me translate my question. My question is that your plan for marketing spend in Q4 and 2023, what is your estimate for the total number of users and your MAU?

Given the macroeconomic uncertainty, we will remain cautious with our marketing spending and focus our attention on efficiency as we have done so far this year. Subsequently, we may make adjustments based on evolving market conditions. For the current medical aesthetic market, I'd like to emphasize that the competition is no longer purely for traffic. Professional platforms with insights into the industry and users are needed both with respect to regulation and user experience. We need to provide users with good consumption value and experience. A medical aesthetics platform doesn't maintain users by entertaining them, but rather by satisfactorily solving their needs. First, we will continue to optimize community content, effectively recommend products and services to users, and provide diverse content, including information from doctors and product information. We will stick to our long-term goal of enhancing user trust and establishing the most trusted professional community, leveraging our advantages in content and community operations. We will perfect user experience for online products, enhance consumer protection, optimize consumer consumption experience on our platform, and drive users to make highly efficient buying decisions. Second, as our attention shifts from merely traffic incremental growth to operation and service of clients, we keep improving user service experience throughout the whole life cycle and guarantee their consumption experience throughout the process. As I just mentioned, to achieve that, first, we must create trust with our users. Trust has always been our primary goal to attract users to our platform. Second, products and information on our platform need to provide good consumer protections as well as help users make informed decisions. Third, for users who want to use one institution to satisfy their diverse needs, we provide services catering to multiple scenarios, so users can directly visit institutions with information acquired on our platform. For some users with higher service requirements, they can work with institutions through our So-Young Select program. And if users seek a standardized process for a specific product, they can choose institutions that provide such solutions. Finally, our platform offers upsell assistance with customer service cancellations and insurance for customer issues, ensuring a seamless experience throughout the entire process. So our mission is to make everyone more beautiful and healthier.

Our next question today will come from Nelson Cheung of Citi.

So I will translate myself. So would like to wonder whether management can share the industry outlook going into the fourth quarter this year and into 2023 next year. Could management elaborate more about the performance during the Double 11 this year?

In the third quarter, we saw repeated COVID-19 outbreaks in certain parts of China. Despite this market uncertainty, we delivered solid financial performance during the quarter, and the situation is gradually recovering in the first three quarters. As we enter the fourth quarter, the scope of the pandemic may further widen because of the weather and the corresponding preventive measures may strengthen as well. While there is uncertainty ahead, however, recently, China's National Health Commission released a new set of refined pandemic provisions and control policies, which are more scientific and precise. As the overall economic environment gradually normalizes, we believe our industry will return to the growth track over time. On the user front, as we discussed in the prepared remarks, the global medical aesthetic market has maintained steady growth in the past years, and there is significant upside in the penetration rate of the Chinese market. According to Frost & Sullivan, the global medical aesthetic market is expected to grow at a CAGR of around 13% from 2021 to 2025. In 2020, the number of medical aesthetic treatments per 1,000 people in China was just about 21 compared with 82 and 48, respectively, in South Korea and the United States, which are more developed medical aesthetics markets. There is clear growth potential for the Chinese market. When the general economic situation returns to normal, we believe consumer spending will also return to a growth track as well in our view. On the institutional front, as the impact of uncertain factors gradually eases, when they can operate normally, we believe their marketing budgets allocated to the So-Young platform will increase gradually. At present, we must commit to our long-term vision while making dynamic adjustments in the short term and execute our exceptional strategy, improving operations and providing high-quality user experience and forming closer relationships with industry partners. Users may pay more attention to daily necessities, like groceries. Overall performance of major online platforms has been relatively soft compared to last year, while the overall retail market is in a slow recovery stage. This is consistent with other consumer products and services. Despite the pressure on the overall consumption market, our daily online users during Double 11 remained flat compared to last year.

The next question today will come from Chloe Wei of CICC.

Okay, I will translate myself. This is Chloe from CICC. I think you've done a great job performing above the breakeven target. We continue to see strong subsidies in this quarter. I wonder, are there enough levers in the business in China to rationalize the competition? That will be the first. And secondly, we've heard some new vocabulary during the prepared remarks. Could the management team share some insights on the ongoing new businesses? How could that impact user engagement and P&L?

First, on industrial outlook, I believe Medical Aesthetics has a broad perspective to seize the opportunity and achieve growth. The key point is to serve users well and to combine more profoundly with the industry. Any peer platform must have a clear position for user service to define what kind of user demands it can serve. Through the years, we have built trust with our users; when users require medical aesthetics, we can truly solve it and enable a better consumption experience. We emphasize that medical aesthetics are both medicinal and consumptive. Therefore, users' consumption must be based on safety and the demand for beauty. The price advantage of an e-commerce platform will be the primary factor for consumers' decision-making. I believe we should think about serving users from their perspective and addressing their messages at different stages of consumption. Through professional community content and deeper integration with the industry, we have established diverse consumption scenarios to cater to user demand. For our institutional clients, we believe that the trust we've built with users makes them willing to serve users better. For the new initiatives, we are exploring new consumption scenarios for users and serving them with a range of diverse solutions. Ultimately, the goal is to better serve users. Well, we strongly suggest if you invest in Tier 1 or Tier 2 major cities, you should try out the So-Young Prime products; it will be a different and exciting experience for you.

Our next question today will come from Ingrid Zhang of UBS.

The question is more on the industry level. Based on the data, a shift in consumer demographics for medical aesthetics in terms of age, peers, income level, etc.

According to transactions on our platform, mega cities such as Beijing, Shanghai, Guangzhou, and Shenzhen have always led consumption levels, with the number of users placing orders and transaction activities at a higher level than in other cities in China. However, in 2022, new first-tier cities, including Chengdu, Hangzhou, Wuhan, Nanjing, and Chongqing, have also become major cities for medical aesthetics consumption. In terms of categories on our platform, non-surgery accounts for over 80% of total orders, with NTNG being one of the most favored categories. Most frequently purchased products, such as wipes, hyaluronic acid skin whitening, and skin rejuvenation, account for over 50% of total orders. This proportion is slightly higher than in 2021, indicating users' growing demands in the non-surgery categories. In response to user demand, we continue to optimize a number of SKUs for non-surgery categories to provide high-quality supply. We also launched some products based on the characteristics of certain categories, such as the So-Young pin card, which includes several anti-aging products to facilitate user choice. Additionally, please note that at the end of each year, we usually release a white paper in which we discuss new regulatory policies, industry trends, and other important topics.

And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I would like to turn the conference back over to Ms. Vivian Xu for any closing remarks.

Well, we are now approaching the end of the conference call. Thank you for your participation in today's conference. You may now disconnect. Have a good day. Thank you. Thank you. Bye.

Bye-bye.

And the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.