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 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 meeting over to your host for today's call, Ms. Mona Qiao. Please proceed, Mona.

Thank you, operator, and thank you, everyone, for joining So-Young's 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 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 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.

Our business continued to develop robustly during the third quarter, with total revenue reaching RMB332 million, once again surpassing the upper ends 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, demonstrating the effectiveness of our continued investment across the industry value chain. 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 gross 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 the slowdown in consumer spending, our upstream business continued 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 developments in the medical aesthetic market. As anticipated, the Chinese medical aesthetic market is polarizing with two distinct trends. 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 trends as we accelerate and deepen our end-to-end integration across the industry value chain, especially in our upstream and clinic businesses. During the quarter, our new business segment continued to grow rapidly with revenue from the sales of medical products and maintenance services reaching RMB89.3 million, up 18.7% year-over-year. 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 recorded positive monthly operating cash flow in September. This demonstrates our sustainable operational capabilities supported by our user base and strong brand influence. To share a few key metrics, our customer retention rates were 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 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. Within 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 a 104% sequential revenue increase at an average customer spend of nearly RMB 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 featured on many traffic platforms such as Meituan and Tmall, further expanding our market coverage. Moreover, So-Young Clinic serves as the focal point in the process of vertical integration and has given us notable cost and price advantages. For our ultrasound program, leveraging private domain operations to reduce marketing costs and proprietary 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. We have also made great progress in our upstream business by building up 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 product, Elasty, saw 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 for our products. Additionally, we partnered with Lancy Group for upstream products. Together, we aim to co-develop the Natural Oriental Lightweight Face project, which is already being offered in 90% of Lancy's aesthetic institutions after just two months, showcasing the strong synergies of our business and leading product promotion capabilities. Our traditional POP business is providing 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, GMV facilitated by our platform grew by over 60% from the previous month. The per capita in-store GTV for the third quarter increased 22.9% year-over-year, reflecting the initial success of our upmarket shifting tactics in POP. We also enhanced our sales leads and conversion rates through commission risk reform and product optimization. Our POP business has served the medical aesthetic industry for 11 years, establishing a strong brand presence and becoming the 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 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 a multi-dimensional competitive advantage and become the most trusted medical aesthetic and healthcare service provider, fulfilling our mission of making medical aesthetics accessible for 100 million Chinese people. Now let me hand over to our CFO, Nick, who will go through the financial results. After that, we will open 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 of our comparative financial performances on a year-over-year basis. Total revenues during the quarter were 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, 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 RMB263.0 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 RMB19.6 million, primarily due to a decrease in consumer spending through our platform. Cost of revenues were RMB142.2 million, down 0.3% year-over-year, primarily due to a decrease in the cost of services 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 maintenance services were RMB43.5 million, up 11.3% year-over-year, primarily due to an increase in the costs associated with the sales of aesthetic injectables. Total operating expenses were RMB225 million, down 8.1% year-over-year. Sales and marketing expenses were RMB114.9 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 RMB69.9 million, up 39.1% year-over-year, primarily due to an increase in share-based compensation expenses. R&D expenses were RMB40.2 million, down 20.6% year-over-year, primarily attributable to improvements in staff efficiency. Income tax expenses were 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 net 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 were RMB0.2 and RMB 0.2, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB0.18 and RMB0.18, 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 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 clinical 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 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 Q&A.

The first question comes from Ivy Li with Haitong Securities. Please go ahead.

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.

In recent years, light medical aesthetic procedures have gained popularity due to their ease of operation, lower risks, and shorter recovery times, attracting more consumers. However, the current market is primarily made up of small and medium-sized institutions, which lack unified standards for quality control, resulting in inconsistent service quality. There are approximately 20,000 medical aesthetic institutions nationwide, over 95% of which are small institutions. No national chain clinic brands have emerged yet, indicating a significant opportunity for standardization and consolidation. As demand for light medical aesthetics continues to grow, we believe that nationwide chain clinic brands will develop in the future. South Korea is a clear example, where light medical aesthetic chains have matured with over ten well-known brands. If the Chinese market grows chain brands at a similar pace, we could see more than 2,000 light medical aesthetic chain clinics, offering considerable marketing opportunities. Our aim is to draw from successful overseas markets and make medical aesthetics accessible and affordable for everyone. This is also the primary reason for establishing our own chain of clinics. Currently, demand among Chinese medical aesthetic consumers is polarized. Customers seeking standardized procedures prioritize authenticity, compliance, and cost-effectiveness, while those looking for non-standard services prefer expert doctors and personalized solutions. To cater to this latter segment, we have launched the master injector team, a high-end customized service that has received positive user feedback and strong financial results. By targeting different consumer needs, we strive to provide exceptional experiences for various customer groups. We are optimistic about the growth potential of light medical aesthetic chain clinics and are boosting our competitiveness through vertical integration and cost optimization. By integrating our upstream supply chain and adopting a unified management and operational model, we aim to lower operating and procurement costs across our clinics, thus enhancing overall profitability. Given this promising market outlook, we are dedicated to expanding our presence in the light medical aesthetic market, aspiring to become a leading domestic clinical chain brand. Thank you.

The next question comes from Stacey Lee with Guosen Securities. Please go ahead.

We've noticed a decrease in the POP business, especially after the announcement of your chain expansion. Is there a change in strategy for POP? Thank you.

We continue to place significant importance on POP, which is a critical component of our operations. Similar to platforms like DiDi or JD.com, we maintain a mix of self-operated and third-party partners. The light 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 large internet platforms with higher volumes, which could impact user and institutional retention over the long term. We have gained valuable insights from product categories like Sam's Club and Pangdonglai and are developing our light medical aesthetic chain clinics to become new traffic drivers, attracting and retaining more users on our platform. This approach attracts more third-party medical institutions, offering diverse products to meet users' varied and personalized needs while helping these institutions achieve greater benefits. Ultimately, this positions the platform for rapid growth. 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 a 60% increase compared to June. Feedback from institutions has been positive. From the consumer perspective, we remain committed to providing cost-effective products, with September's GMV increasing by 60%. Additionally, with the implementation of commission reforms and product optimization measures, the number of leads and conversion rates from exposure to detailed pages have improved. For example, during September's promotional activities, the conversion rate of daily active users to detail pages increased by 4%, and the conversion rate from detail pages to transactions 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, moving from exposure-based charges to performance-based charges, with a greater emphasis on conversion effectiveness. Thank you.

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

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

Our original goal was to address the problem of information imbalance in the medical aesthetic industry through our community and platform, which would lower the costs and risks associated with decision-making. Despite the rapid growth and increasing popularity of medical aesthetics in recent years, we discovered that services are still costly and genuinely trustworthy institutions are scarce. We aim to serve 100 million Chinese consumers by delivering safe, convenient, and high-quality services at reasonable prices. Our objective is to establish a national chain clinic brand that builds long-term trust with consumers through high-quality, cost-effective services. By maintaining high customer retention, we can lessen marketing expenses, achieving significantly greater efficiency per employee and per square meter compared to traditional clinics while providing more value and benefits to our consumers. The success of the chain model is dependent on support from a central platform, which helps distribute central platform costs across a larger scale, enhancing cost efficiency. Our decision to implement the franchise model is intended to seize development opportunities within the light medical aesthetic sector, speed up the growth of our clinic network, and effectively manage costs. The operating data from our initial 10 self-operated clinics have already confirmed the viability of this model. We believe that incorporating franchise partners will accelerate expansion, strengthen brand influence, and secure resources and support from commercial property owners, customers, and government entities, allowing us to concentrate on developing and improving central platform capabilities. Based on our regular financial and operational forecasts, we are confident in achieving rapid growth and profitability at the individual store level for our franchised clinics. Our franchise model employs a fully managed approach to maintain high service standards and integrate deeply with the supply chain. The supervisors and doctors at all clinics are registered employees of So-Young, and information systems are clinically managed and overseen by headquarters to ensure standardized operations across all chain clinics. Furthermore, the asset-light franchise model provides financial benefits, enhancing profitability and sustainable growth potential for the company. Thank you.

Thank you. The next question is from the line of Harry Zhao with Deutsche Bank. Please go ahead.

As there is no response from the line of Harry Zhao, we will proceed to the next question, which will be from the line of Lusi Zhao with Penghua Funds. Please go ahead.

Thanks to the management team for addressing my question. The third quarter shows effective expense management, with sales and marketing expenses decreasing by about 20% compared to last year. How has the management team managed to achieve a lower expense ratio and better profitability?

Thank you, Lusi, 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 percentage points year-over-year and 0.2 percentage points quarter-over-quarter. Thank you.

Thank you.

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

Hello. Yeah, can you hear me?

Yes, you are audible now. You may proceed.

Let me translate for myself. I want to ask a question about the upstream business. What competitive advantages does So-Young have over traditional upstream companies to ensure success? Thank you.

We have clearly shown significant strengths in our upstream business. For example, Elasty has achieved a three-year compound annual growth rate of 170% in shipments within the highly competitive HA market. Moreover, as a newcomer in the ultrasound market, we have quickly gained recognition, with total shipments of our True Lift ultrasound device surpassing 200 units. This highlights the advantages of our ecosystem-based operations, enabling us to hold a strong position in a competitive industry. For upstream companies that lack marketing resources, we offer strategic brand positioning and promotional support to boost product visibility and reach among end consumers, medical aesthetic institutions, and doctors. This not only helps turn potential products into bestsellers but also aids upstream manufacturers in building a solid market presence and increasing their influence. Through our chain clinics, we have introduced several top-performing products, setting new benchmarks for industry marketing strategies. Currently, we operate 17 clinics across nine key cities, with plans to expand market coverage through a combination of self-operated and franchise models, further driving product sales and enhancing our competitiveness. Additionally, our role as the sole external shareholder of the Mevos International Congress of Medical Aesthetics, the largest industry event, will strengthen our upstream business by broadening our reach among institutions and doctors and fostering innovation in the industry. With our advantages in marketing, data access, and team expertise, we aspire to be a comprehensive upstream medical aesthetic manufacturer within a strong ecosystem. 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.