So-Young International Inc (SY) 2022 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by for So-Young's fourth-quarter and full-year 2022 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. Vivian Xu. Please proceed, Ms. Xu.

Thank you. Thank you, operator, and thank you for joining So-Young's fourth-quarter and full-year 2022 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities and Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties that may cause actually 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.

Please also note that unless otherwise stated, all figures mentioned during this conference call are in RMB. Joining us today on call is Mr. Xing Jin, our Co-Founder, Chairman, and CEO; and Mr. [Nick Zhao], Senior Vice President of Finance.

At this time, I would like to turn the call over to Mr. Xing Jin. Sir, please.

(interpreted) Hello, everyone. Thank you for joining So-Young's fourth-quarter and full-year 2022 earnings call.

2022 was a remarkable year for all of us at So-Young. Despite multiple external headwinds, we have successfully stabilized our core business and substantially improved our profitability. In the fourth quarter, amidst the most severe challenges of the past three years as the COVID-19 pandemic seriously disrupted operations of many medical aesthetic institutions, while the slowdown of the Chinese economy made consumers more cautious, we managed to achieve quarterly revenue of RMB325 million, in line with our prior guidance.

In the meantime, we significantly scaled up our profit with non-GAAP net income of RMB38.8 million. We have continued to make strides since reaching breakeven in the third quarter, thanks to our optimized cost structure and improved efficiency. As of the end of 2022, our cash balance remained at close to RMB1.6 billion, which provide us with sufficient financial assurance to explore new business growth opportunities in the year ahead.

Next, I'd like to share some market trends we observed during the past year. In the future, we will look in these directions as we continue to invest resources, seize opportunities presented by change, and build new pillars of revenue for our business.

First, Chinese medical aesthetics user base is structurally upgrading as the ratio of non-surgical user continue to increase. Second, user demands are evolving with high-value users showing increased demand of premium, one-stop medical aesthetics. Finally, along with a long-term trend of consumption upgrade in China, the middle-class medical aesthetics customer group is expanding.

The growing middle-class demographic in China, and particularly urban middle-class females in the first- and second-tier cities, have formed a medical aesthetics consumption habit characterized by increased volume and frequency of consumption. Meanwhile, we have observed several important differences between the middle-class consumers and traditional medical aesthetics consumers.

First, these consumers generally have higher level of education and are more cautious with their choice of medical aesthetic services. They are more attuned to aesthetic factors, including the maturity and the reliability of service, doctors and institutions' qualifications, and product compliance.

Second, they mainly consume anti-aging, skin management, and shape management products with higher frequency. Third, they look for rational prices, not simply purchase cheapness. But they don't want to be charged an IQ tax. Fourth, the value of service quality and delivery.

Based on these changes in the market and meeting the needs of the consumer group, leveraging the resources and capabilities we have accumulated through the years, we launched So-Young Prime business at a small scale in first- and second-tier cities in the third quarter of 2022.

So-Young Prime is our self-operated asset, live service platform for non-surgical medical aesthetics. First, based on the big data gathered on our platform, which shows those most popular treatments of light medical aesthetic service for middle-class consumers, we invited experts to create an upgraded treatment plan with standardized operating procedures for treatments and service. So-Young is responsible for pricing and sales.

Second, we screen institutions that meet our standards, and we train and assesses their operating teams and doctors before allowing them into the So-Young Prime service network. These institutions are responsible for providing exclusive treatment rooms and a standardized service to So-Young Prime customers. We have stationed staff in these institutions to welcome So-Young Prime customer and ensure a high-quality service experience throughout the treatment.

Finally, we procure and certify the light medical aesthetics equipment and the consumables used in treatments. Injections and other consumables are stored in the [junior] medicine cabinet placed in each institution, and medical substance take out then check each item in front of the customer.

Enabled by innovation in the light medical aesthetics service model; quality control of service delivery; and our scale advantage in operations, user acquisition, and the supply chain, So-Young Prime providers provides the user with premium, junior, and low-price light medical aesthetics service.

Upon review at small scale on August 1 last year, So-Young Prime has quickly won recognition among users. So-Young Prime's user satisfaction, average order value, and the repeated purchase rate were all significantly higher than our existing [pump] business. As of the date, users visits to institution have continued to grow every month, even at the end of 2022 when national-wide COVID-19 infections peaked, as well as during the Chinese New Year.

Next, I would like to outline our business plan and objective for 2023. First, we will continue to strengthen and develop our existing community [promise] i.e., pump business, leveraging our established advantage in community operations, user operations, and doctor resources. We always aim to enhance user trust, increase user engagement, and build a trustworthy professional platform.

After nine years development, our pump business has accumulated and raised beauty diary content, transparent trade information, innovative user products and tools, and a tremendous volume of industry information. It has also boosted the efficiency of the medical aesthetics industry at scale, accumulated a high sticky user base numbered in the 10s of millions, and enabled numerous institutions to achieve significant growth and sound returns through operations with So-Young. And these will become cornerstones for our development and transformation in scale.

Second, we will continue to focus on expanding So-Young Prime's market penetration, building on our experience in the last year. Through optimizing the products on the supply side and growing our network of cooperating institutions, we will improve our capability to deliver standardized services, attract more customers, and drive repeat purchases.

So-Young Prime is our key deployment in the industrial Internet. It will comprehensively integrate production factors in the industry, reconstructed relationships of the players in supply chain, increase efficiency, lower costs, and automatically benefit consumers. It covers a broader and deeper range than a pure Internet business. And it will solve industry issue at a deeper level and construct higher barriers to entry.

Looking into 2023, external conditions are moving in a positive direction for the industry and our business. And the institution are gradually returning to normal operations. In the long run, there is still large room for growth in Chinese medical aesthetics consumption, particularly for light medical aesthetics. Our new business direction will help us diversify our revenue streams and build a healthier business model.

Operationally, we will continue our highly efficient marketing strategy, strictly control our expense, refine our operation, and seek profitable growth. We're persistent in the near term and confidence in the long-term. We will continue to put user first, and remain committed to becoming the most trusted medical aesthetics platform.

Now, let me invite our Senior Vice -- VP, of Finance, Nick, to review the financial results for the fourth quarter before taking your questions.

Hello, this is Nick. I will now take some time to go through the financials for the fourth-quarter and full-year 2022. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information for our comparative financial performances on a year-over-year basis.

For the fourth-quarter 2022, total revenue were RMB325.1 million compared to RMB449.5 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. The decrease was primarily due to, one, COVID-19 control measures and the surge of COVID-19 cases, especially in major areas in China, limited people visit to offline service providers; and, two, pressure on the overall Chinese consumer market.

Within the total revenue, information services and other revenues were RMB233.9 million, down 32.1% year over year. Reservation services revenues were RMB26.0 million, down 37.2% year over year. Sales in equipment and maintenance service revenues, which were from Wuhan Miracle Laser System, Inc., were RMB65.3 million compared with RMB63.8 million in the same period of 2021.

Cost of revenues were RMB88.2 million, down 30.6% year over year. The decrease were primarily due to our cost optimization measures and efficiency improvement programs. Total operating expenses were RMB212.6 million, down 42.8% year over year. Sales and marketing expenses were RMB98.4 million, down 35.6% year over year, primarily due to a decrease in expenses associated with our branding and user acquisition activities.

G&A expenses were RMB73.2 million, down 14.8% year over year. The change was primarily due to a decrease in share-based compensation expenses, partially offset by an increase in payroll costs and professional service fees.

R&D expense were RMB41.1 million, down 39.2% year over year, primarily due to a decrease in payroll costs. Income tax benefit were RMB2.4 million compared with income tax expenses of RMB10.1 million in the fourth quarter of 2021.

Net income attributable to So-Young International, Inc. were RMB31.3 million compared with a net loss attributable to So-Young International, Inc. of RMB27.7 million in the fourth quarter of 2021. Non-GAAP net income attributable to So-Young International, Inc., which excludes the impact of share-based compensation expenses and impairment of goodwill and intangible assets attributable to So-Young International, Inc., were RMB38.8 million compared with RMB62.9 million in the same period of 2021.

Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.29 and RMB0.29, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.26 and RMB0.26, respectively, during the fourth quarter of 2021.

For the full-year 2022, total revenues were RMB1.26 billion, down 25.7% year over year. Within total revenues, information service revenues were RMB888.5 million, down 31.9% year over year. Reservation services revenues were RMB128.7 million, down 55% -- 53.4% year over year. Sales in equipment and maintenance service revenues were RMB240.7 million.

Cost of revenues were RMB393.3 million, up 19.9% year over year due primarily to the consolidation of Wuhan Miracle. Total operating expenses were RMB967.4 million, down 30.8% year over year. Net loss attributable to So-Young International, Inc. were RMB65.6 million compared with net loss of RMB8.4 million in the fiscal year 2021.

Non-GAAP net loss attributable to So-Young International, Inc. were RMB22.2 million compared to a net loss of RMB139.5 million in fiscal year 2021. Basic and diluted losses per ADS attributable to ordinary shareholders were RMB 0.61 and RMB0.61 respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB 0.08 and RMB0.08, respectively, in fiscal year 2021.

With regard to some items on our key balance sheet, we have adequate liquidity in this quarter. As of December 31, 2022, we had a total cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments of RMB1.6 billion compared with RMB1.8 billion as of December 31, 2021. For the first quarter of 2023, we expect total revenues to be between RMB290 million and RMB310 million. The above outlook is based on the current market conditions that reflects the company's preliminary estimates of market and operating conditions and customer demand.

This concludes our key remarks. I will now turn the call to the operator and open the call for Q&A.

Thank you. We will now --

Operator, do we have any?

Yes, ma'am. Thank you. We will now begin the question-and-answer session. (Operator Instructions) Thomas Chong, Jefferies.

(spoken in Chinese) Thanks, management, for taking my questions. Can you share with us about your marketing strategies and expected user base in 2023? Thank you.

(interpreted) Thank you. As the market gradually recovers, we will ramp up our marketing strategy compared to 2022, yet we will still emphasize efficiency and accuracy and then make adjustments based on market conditions.

In addition to our existing marketing strategy, we will also focus on private domain operations in an effort to increase user engagement and repurchase rates. In 2022, we attempted private domain operations for So-Young Prime and developed an effective conversion path, with pride -- private domain clients contributing over 90% of So-Young Prime orders.

We will continue to optimize community content and our innovative user tools to generate more organic user traffic. But as we mentioned before, competition in the medical aesthetic industry is no longer merely for traffic. Professional platforms need a profound understanding of users and the industry to provide a good service experience and meet customer demands.

Thank you.

Thank you. Nelson Cheung, Citi.

Hey. (spoken in Chinese) So let me translate myself. Thanks, management, for taking my questions. My question is regarding management's view regarding the recovery trajectory of the medical aesthetic industry in 2023 and the growth driver for So-Young this year. Thank you.

(interpreted) We still hold a cautiously optimistic outlook for 2023, mainly depending on the recovery pace of the overall consumption environment and the medical aesthetics market. At the same time, we do see the marketing spend from institutions lagging behind the recovery on the user side.

First, on the user side, we see regional differences in the recovery of the medical aesthetics market. Due to the impact of the epidemic in the past few years and especially consideration of the surge in COVID-19 infections at the end of last year, a large number of treatments orders were backlogged. Therefore, in the Tier 1, Tier 2 cities, user orders have rebounced rapidly since the beginning of this year and have already recovered to the level of the same period of last year -- of 2021. In third- and fourth-tier cities, so user orders have recovered to the 2022 level, but not yet to the 2021 level.

On the institution side, we see that they are still cautious when budgeting their marketing spend mainly because of two factors. First, because the user orders in first- and second-tier cities rebounced rapidly post infection, institutions do not need to spend a lot on marketing at this stage. Second, the overall turbulence of the past few years has made institutions more cautious about spending. But overall, we do see institution spending gradually recovering.

Thank you.

Thank you. Chloe Wei, CICC.

(spoken in Chinese) So my first question is about -- could you please revisit some of the things that you're thinking about as far as the business volume in the short- to medium-term view, say, in the next three to five years? And also, can you give us just an update around, maybe, how you are thinking about the competitive landscape? Thank you.

(interpreted) As a new growth driver, So-Young Prime trajectory will mainly depend on the development of the non-surgical market, which will continue to expand in line with the growth of the -- with the middle-class female population.

We will expand the network on the supply side, cooperate with more institutions, enrich the product portfolio, boost the number of service outlets, ensure high-quality service delivery, and improve the user penetration rate and repurchase rate.

Non-surgical medical aesthetics users are used to consuming daily cosmetic and skin care products, which is area of expertise for the numerous small and medium institutions. But small and medium institutions are usually weak in equipment, SQ design, service delivery, and brand awareness. So-Young Prime forms a network, ensuring service delivery of high standard by empowering these institutions.

In addition to benefiting small and medium institutions, these initiatives could serve large medical aesthetical user group and increase convenience for consumption for them. That makes us distinctive from our competitors.

Therefore, only by connecting the supply chain and link the upstream, midstream, and downstream can we expand the medical aesthetics industry addressable market and provide the user with a better service experience, building a safe and a secure environment for customers and driving the overall growth of the industry.

For the second question, with environmental uncertainties [indices] in the consumption, the amount of recovery, there is plenty of space in the medical aesthetics market and industry outlook is clear.

We believe the medical aesthetics industry is driven by the supply side, and that is where we will put more emphasize in the future. We will also integrate the corporate action advantages we have accumulated in terms of institutions, doctors, and users; set standards for service quality and service delivery; and provide the user with a premium experience.

These comprehensive capabilities will enable us to build a strong competitive barrier compared with a pure Internet model. We will be able to solve issues at a deeper level and create more differentiation from our competitors.

In the past few years, we have provided user with a transparent and trusted information platform through our community e-commerce business, boosting the efficiency of the medical aesthetics industry at scale. In the future, we will continue to optimize our community content, innovative new user tools, leverage the scale advantage of the Internet, and provide a second complement of resources for offline service delivery. Of course, we may also cooperate with other traffic platforms.

We believe our integration capabilities across industrial chain and our investment in the service delivery experience will benefit user and drive the sustainability management of the whole industry. Thank you.

Thank you. Yu Zhou, Haitong Securities.

(spoken in Chinese) Let me translate it. Thank you for the opportunity. My question is, do you see any changes in medical aesthetic consumption demands on the user end after the COVID 19? Thank you.

(spoken in Chinese) Thank you for asking a question. First, as we mentioned in our prepared marks, user demands are evolving. Middle-class medical aesthetics consumer have different demands from the traditional consumption group, as they focus more on quality, safety, junior products, and rational prices. Demand for such a high-order valued SQ have increased. For example, SQs in those photoelectric and injection categories, with average order value over RMB5,000, are highly popular among users.

Secondly, as the market recovers, we believe the surgical market, which was procured in the past few years, will experience a wave of consumption as the economy recovers and the travels pick up. Also, with the rebound in outbound travel, users will rush to [the bad] overseas market for medical aesthetics consumptions.

Thank you. That's all.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

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

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.