Ladies and gentlemen, thank you for standing by for So-Young’s Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management gives their prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host for today's call, Ms. Mona Qiao. Please go ahead, Ms. Mona.

Thank you, operator, and thank you everyone for joining So-Young’s Second 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 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 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 would like to turn the call over to Mr. Xing Jin.

Hello everyone, welcome to today's earnings call. Our performance during the second quarter was solid, with total revenue of RMB407.4 million, exceeding the high end of our guidance. Non-GAAP net profit was RMB22.2 million, reflecting a 43.1% year-over-year increase, demonstrating our robust growth and effective integration within the industry. We took advantage of industry trends, executed our strategy effectively, and made significant progress this quarter. Our new business segments are growing rapidly, with revenue from medical products and maintenance services reaching RMB106 million, which is a 22.6% year-over-year increase. Product shipments in our upstream supply chain business increased as our channel clinics expanded, both playing crucial roles in our growth. We are the only platform that covers the full spectrum of the aesthetic medical industry, and we are leading it into a new era of high-quality and sustainable development. By leveraging the synergies from our vertical integration, we are enhancing transparency and operational efficiency across the value chain. This approach aligns the industry value chain with the evolving needs of consumers, ensuring a diverse reach of high-quality and affordable products, optimizing the customer experience, and setting new standards for medical aesthetic services. We continue to drive high-quality development in our POP segment and reinforce our competitive advantage in the mid-to-high-end market by improving operations and offering targeted user subsidies. As the demand for premium customized products grows, we adjusted our strategy and upgraded SKUs to ensure authenticity while expanding our offerings through our leading partner institutions. We have also strengthened support for our high-quality institutional partners by integrating our POP business with our chain of clinics, enabling deeper synergy to better meet the diverse medical aesthetic needs of mid to high-end users. In the second quarter, GMV for medical aesthetic products and services reached RMB428 million across over 230,000 verified orders, marking increases of around 70% and 80%, respectively. We are continually optimizing our traffic acquisition strategy by reallocating budgets from low ROI online channels to our private domains. Improved multichannel private domain operations allow us to cultivate and retain a targeted user base, enhance user engagement, and improve monetization efficiency. In the second quarter, our use of private domains grew to 810,000, up 14% from the previous quarter. Currently, we have opened 14 clinics in commercial areas across eight major cities, including Beijing, Shanghai, Shenzhen, Hangzhou, Chengdu, Wuhan, Chongqing, and Changsha. All these clinics are fully operational and performing as expected, benefiting from our strong user base, brand reputation, and standardized fulfillment capabilities. The number of verified customers increased by 85% quarter-over-quarter, the repeat purchase rate exceeded 50%, and customer satisfaction reached an impressive 4.97 out of 5. We have also achieved significant operational efficiencies, with our Beijing clinics generating revenue of RMB6.2 million in June, a pretax profit of RMB1.3 million, and a profit margin of approximately 20%. The repeat purchase rate hit 67%, exceeding the industry average. Our experience provides us with valuable insights that we will apply to other new clinics to boost their growth. We are very optimistic about the future of light medical aesthetic clinics and plan to begin franchising our chain of clinics in the second half of this year to quickly expand our presence by replicating this successful standardized model in target cities. Lastly, regarding our supply chain business, by leveraging our brand's extensive consumer behavior data and experienced team, we are developing upstream medical aesthetic manufacturing capabilities for our broader ecosystem. With over a decade of operations, we have built a solid foundation based on comprehensive consumer behavior data and user demand insights, which support the development and customization of our products. Additionally, our extensive institutional coverage and strong customer marketing capabilities enable us to rapidly enhance the competitiveness of new products by utilizing our clinics for consistent sales. Our core team consists of professionals from top domestic and international manufacturers, each with 5 to 10 years of industry experience and expertise in product selection and sales. In the second half of the year, we will continue to strengthen this team with the aim of reaching 100 members by year-end. Furthermore, we have seen a steady increase in shipments of True Lift, our newly launched nonsurgical anti-aging ultrasound device, indicating its strong potential as a market hit.

Despite the soft recovery in consumption due to near-term macroeconomic challenges, we believe the Chinese medical aesthetic market has significant long-term potential. As the industry undergoes reshuffling and enters a consolidation phase, leading brands like So-Young, with their unique ecosystem and comprehensive category advantage, are well positioned to seize new opportunities, increase market share and growth potential, and establish themselves as market leaders. Our POP business is well equipped to cater to the demand for non-standardized treatments, while our channel clinics can provide standardized services. Supporting both segments with a consistent flow of exclusive products from our upstream business will also benefit from direct consumer and business opportunities, guaranteeing sales for both downstream operations. The combination of these three business segments generates significant synergies, and based on our year-end insights, we firmly believe that integrating the industry value chain will promote innovation, enhance service quality, and create new growth prospects for So-Young moving forward. I will now hand over to our CFO, Nick, to review the financial results for the second quarter. After that, we will open the floor for questions. Hello, this is Nick. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information on our comparative financial performances on a year-over-year basis. Total revenues during the quarter were RMB407.4 million, down 1.1% year-over-year, exceeding the high-end of our guidance on the back of a 22.6% year-over-year increase in sales of medical products and maintenance services. Information services and other revenues were RMB279.2 million, down 6.6% 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 16.9% year-over-year to RMB22.4 million, primarily due to policy changes for commission rates and subsidies. Cost of revenues was RMB155.1 million, up 3.1% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic products. Within cost of revenues, cost of services and others were RMB101.9 million, down 4.4% year-over-year primarily due to a decrease in costs associated with So-Young Prime. Cost of medical products sold and management services were RMB53.2 million, up 21.3% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic products. Total operating expenses were RMB245.6 million, down 13% year-over-year. Sales and marketing expenses were RMB132.3 million, down 4.1% year-over-year, primarily due to a decrease in expenses associated with branding and user acquisition activities. G&A expenses were RMB70.8 million, down 23.3% year-over-year, primarily due to decreases in share-based compensation expenses and professional consulting fees. R&D expenses were RMB42.5 million, down 18.5% year-over-year, primarily attributable to improvements in staff efficiency. Income tax benefit was RMB2.6 million compared with income tax benefit of RMB0.8 million in the same period of 2023. Net income attributable to So-Young was RMB18.9 million compared with a net loss of RMB2.6 million during the same period last year. Non-GAAP net income attributable to So-Young was RMB22.2 million compared with RMB15.5 million in the same period of 2023. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.18 and RMB0.18, respectively compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.02 and RMB0.02 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 RMB1.25 billion as of June 30, 2024. Moving to our outlook. Given the relatively soft macro conditions, especially regarding discretionary spending. For the third 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 pace of clinics opening and ramping up. As we are in the early stage 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 value chain will ideally position us for our long-term growth. These initiatives will enable us to capture a significantly larger share of the market and establish a solid foundation of profitability. As our clinics mature and market conditions stabilize, we expect our financial performance to gradually improve. This concludes our key remarks. I will now turn over to the call to the operator and open the call for questions.

We will now begin the question-and-answer session. The first question will come from Chloe Wei with CICC. Please go ahead.

Congratulations on the solid results. The revenue continued to exceed expectations, showing a strong bottom line. My question is about the overall trend. As we enter the second half of this year, we've noticed signs of slowdown in the guidance from most consumer companies, such as online platforms and tourism. I understand this is mainly due to macroeconomic challenges, but could management provide more insight into the trends we've observed in July and August, both from consumers and advertisers? Additionally, as we look to the second half, is there anything we can share with the market regarding our plans to adapt to these new changes? Thank you.

The current state of the medical aesthetic industry isn't where we expected it to be at the beginning of the year. Data from MDR shows that retail sales of consumer goods in China increased by 3.7% year-over-year in the first half of 2024, which is a slowdown compared to early 2024 and late 2023. Even with weak consumer confidence and spending, the medical aesthetic market continues to grow and presents substantial structural opportunities. The market share of light medical aesthetic services is expanding due to strong consumer demand for minimally invasive and convenient options. At the same time, the upstream supply chain is experiencing rapid growth, driven by innovation and improved supply chain processes that are advancing the industry as a whole. Our research indicates two key forecasts that will influence the industry's future. First, we expect the standardization of light medical aesthetic services to gain traction, leading to the development of large chain brands and improved market norms and efficiency, resulting in a more mature industry. Second, in the next four to five years, we anticipate that leading chains will become predominant in the market, significantly increasing industry concentration. As top brands grow their market shares, new opportunities will arise for investors and entrepreneurs. We plan to start franchising our chain of clinics in the latter half of the year, which will not only support the industry's growth but also position us for success in a swiftly changing market.

Thank you.

The next question will come from Nelson Cheung with Citibank. Please go ahead.

Thank you for taking my question. I would like to ask about the POP business and the company's outlook on its positioning in future development. Are there any new business strategies you can share with us? Thank you.

The POP business remains a vital part of our growth strategy, and we will continue to focus on its development. As we have mentioned previously, we anticipate that the Chinese medical aesthetic market will become more polarized. Consumer spending on standardized treatments is increasingly driven by value, while spending on non-standardized treatments is becoming more selective, with consumers willing to pay a premium for the highest quality care. To navigate this market landscape, our strategy is twofold. First, for standardized treatments, we leverage the strength and service quality of our chain of clinics to meet client demand. Second, for non-standardized treatments, we will utilize a diverse range of options that our POP business provides to address their needs. We are shifting towards a curated model, akin to Costco and Sam's Club. By selecting high-quality institutions, leading doctors, and premium SKUs in each category, we aim to simplify customer decision-making, increase SKU transaction values, and ultimately strengthen our control over the supply side to enhance pricing power. Additionally, for partners who excel technically but lack operational expertise, we provide comprehensive operational services management. A key example is our master injector team, which comprises injectable specialists, each boasting an impressive record of 10,000 treatments. We offer some with online operational support, allowing them to focus solely on delivering service to customers. Demand for this service has surged and received widespread positive feedback. Moving forward, our chain of clinics will create strong synergies with our POP business as it scales by identifying non-standardized treatments that are in demand by customers of our chain clinics and promoting high-quality institutions and doctors from POP. We are maximizing both customer satisfaction and commercial value.

Thank you.

The next question will come from Patrick with CITIC Securities. Please go ahead.

Okay, so let me just briefly translate for myself. Thank you to the management for taking my question. I'm Patrick from CITIC Securities. I have some questions regarding the clinical chain business. I would like to know what factors might limit the speed of the clinical chain expansion and what unique advantages So-Young has to overcome these constraints more effectively than our competitors. Additionally, could you provide the current operating metrics for the chain of clinics, such as whether they have reached breakeven? Also, what are your predictions for future business trends? Thank you very much.

In general, factors such as site selection, furniture and renovation, license application, staff recruitment, marketing, and operational costs can impact how quickly new clinics can open. However, we've significantly improved the efficiency of new clinic openings by establishing standard operating procedures and implementing effective process management. This has reduced the average time to open new clinics from about five months to around three months. Nevertheless, we believe several key factors truly determine the speed at which we can expand our channel clinics. First, the ability to acquire customers; without this, we risk incurring losses. Second, the ability to recruit a sufficient number of leading doctors and specialists. Third, a strong supply chain, which is essential for offering competitive prices while maintaining profit margins. Fourth, sufficient capital, as each new clinic can require millions in investment. Lastly, the ability to secure the necessary licenses. We are well-prepared to address these factors. Our strong customer acquisition capabilities, bolstered by our brand recognition and extensive user base, give us an edge. Our marketing strategies further enhance this strength. In recruiting professionals, our brand recognition and compliance with regulations provide a competitive advantage over smaller institutions. On the supply chain front, our initiatives in recent years are starting to show positive results, and as more products receive certification, we anticipate that this advantage will meaningfully impact our financial performance. By enhancing our media platform capabilities through the So-Young Prime program over the past year, we ensure standardized management across clinics in different regions. We believe standardized management relies on the breadth and depth of digitalization, where we have a natural advantage as an Internet company. We also have sufficient capital for new clinic deployment. The franchise model we plan to launch in the second half of the year will further facilitate expansion without needing to invest our own capital. Regarding license applications, obtaining licenses outside of Beijing and Shanghai is generally straightforward and quick, and our nationwide clinic setup has given us valuable experience in this area. For this earnings call, we have opened 14 clinics in prime commercial areas, all fully operational and performing as expected. Our Beijing clinic, operational for 15 months, is already profitable and has recouped its initial investment. Among the others, three have been operational for five months, while the remaining ten are under three months old and following a similar growth trajectory, although they will need a bit more time to reach breakeven. Typically, our clinics follow a well-defined growth pattern, usually entering a three-month trial period, followed by nine months of accelerated growth, with maturity reached around 12 months of operation. For instance, our Beijing clinic began operations in May and officially opened in August of last year, with revenue reaching RMB6.2 million in June this year and a pretax profit of RMB1.3 million and a profit margin of about 20%. This impressive performance validates our strategies for site selection, clinic openings, and operations, providing valuable insights for accelerating growth in new clinics. By leveraging our media platform, we've reduced overall costs while ensuring standardized service delivery, allowing us to outperform other institutions. In the future, we expect costs across our chain of clinics to decrease and profit margins to increase as procurement volume and use of our self-branded products rise. Looking ahead, our business plans focus on expanding clinics in target cities, particularly increasing clinic density within each city. By the end of 2024, we aim to open over 20 clinics. In the second half of the year, we will also initiate our franchise model with external partners to use our self-operated clinics as training and flagship centers, enabling rapid standardization and scaling. We anticipate a significant year-over-year increase in clinic numbers, which will strengthen our market position and create new revenue growth opportunities.

Thank you.

The next question will come from Jefferies. Please go ahead.

Thank you to management for addressing my questions. I would like to know how So-Young's upstream sector sets itself apart from its competitors. Additionally, could you provide insight into the management's viewpoint on the strategic direction and business plan for the upstream sector this year? Thank you.

Unlike traditional manufacturers that follow a linear R&D production to sales model, we take advantage of our unique ecosystem and category advantage to create synergies with our existing business lines. This integrated approach enhances our brand strength, customer reputation, and network coverage through institutional partners. Consequently, we can quickly boost market competitiveness for new products and effectively target customers through our app and media metrics, while leveraging our clinics to maintain a consistent sales flow, which distinguishes us in the industry. For instance, True Lift, our non-surgical anti-aging ultrasound device, saw remarkable pre-order volumes and sales that exceeded expectations upon its recent launch. This success highlighted its potential to become a market leader and showcased our team's capabilities. In a similar vein, sales of the Korea brand ELASTY are continuing to rise. Additionally, we are actively broadening our pipeline with high growth prospects. Our road map is strong, with two new products set for launch next year and three more in 2026, all aimed at popular segments within injectables and energy-based devices. We are confident that these products will play a significant role in driving revenue growth. By harnessing extensive consumer behavior data and our skilled team, we are enhancing our upstream capabilities within our larger ecosystem. In the latter half of the year, we plan to grow our team, which currently consists of experienced experts from top domestic and international manufacturers, to a total of 100 members by year-end.

Thank you.

Thank you for taking my question. I'll translate myself. With current gross margins around 60%, could you provide some insights into the expected trend for the gross margin going forward? Thank you.

Thank you for the question. Over the near-term, macroeconomic risks such as slowing global growth and inflationary pressures continue to weigh on consumer sentiment. As a result, consumer willingness and capability to spend may be constrained, increasing market uncertainty. This is reflected in our third-quarter revenue guidance. As we transform our business beyond the POP business, our revenue structure is undergoing a shift alongside, which is impacting gross margin levels. While our traditional information and resolution services continue to enjoy high gross margins, the increasing share of medical product sales, which have stable but lower margins, is affecting our overall margin profile. Furthermore, our chain of clinics, which is still in its early stages, has seen gross margins temporarily impacted by promotional activities. In the short-term, we expect gross margins will continue to be impacted by the expansion of our chain of clinics and medical product sales. However, as our upstream supply chain capability strengthen and operations across our clinics mature, we will anticipate a corresponding improvement in gross margin. Additionally, the introduction of our franchise model is expected to support gross margin through greater economies of scale, optimizing our profit structure even further. Thank you.

This concludes our question-and-answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.