So-Young International Inc (SY) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Second Quarter 2021 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.

Thank you, operator, and thank you for joining So-Young's second quarter 2021 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 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 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 are Mr. Xing Jin, our Co-Founder, Chairman and CEO; and Mr. Min Yu, our CFO.

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

[Interpreted] Thank you all for joining our earnings call for the second quarter of 2021. We are very pleased to report another strong quarter. Revenue grew to RMB 452 million, exceeding the high-end of our guidance of RMB 450 million, an increase of 38% from the same period of 2020. Non-GAAP net income attributable to So-Young International Inc. reached RMB 74 million, an increase of 145% from the second quarter of 2020.

Average mobile MAUs were 10 million, up 48% year-over-year. Total number of users purchasing reservation services were 245,000, up 44% compared with the same period of 2020. The number of paying medical service providers on our platform was 4,899, up 31% from the second quarter of last year.

During the quarter, the number of users from purchasing reservation services in dental treatments were approximately 120% year-over-year to about 14,800, and the number of professional dental institutions on our platform grow to 2,950, increasing by the more than 3x from the same period last year.

In the second quarter, we announced the acquisition of a controlling interest in Wuhan Miracle Laser Systems. The first medical laser company listed on The National Equities Exchange and Quotations, or NEEQ exchange in China. The acquisition will further enhance our competitive advantages in the non-surgical, aesthetic segment and allow us to explore new corporations, opportunity with upstream equipment, device and medical drug providers.

Wuhan Miracle is mainly engaged in R&D production, sales and agent service for lasers and other photoelectric medical and aesthetics equipment. It has more than 10 product lines, including both self-owned and licensed own. Wuhan Miracle covers a broadest range of projects among photoelectric manufacturers and is able to solve diversified skin needs of different users.

According to its reported result, the revenue for the first half of 2021 increased by 119% year-over-year and net profit attributable to Wuhan Miracle for the first half of 2021 increased by 252% year-over-year. Our solid results in new strategy have enabled us to consistently improve our operations to meet the increasing changing demand from our end-users and business partners and expand our market share.

Innovative technologies in medical aesthetics are driving an increasing awareness of aesthetics treatments and service among consumers. Notably, the popularity of non-surgical procedures to maintain healthy appearance or promote anti-aging benefits is constantly growing.

In the second quarter, the revenue contribution of our non-surgical business increased to 46% of our total revenue, up from 40% in the second quarter last year. The reservation orders from non-surgical procedures increased by 40% year-over-year and the reservation orders from non-surgical procedures accounted for 70% of total orders.

Moving over to our operational strategy. Firstly, leveraging our community content and advantages in new media resources will continue to develop and launch fresh and highly successful products. In the second quarter, we have been stepping up efforts to recommend core products with good word of mouth to users on our platform, including for Fotona4D Photorejuvenation, (inaudible), which result in a year-over-year increase of over 100% for online orders. Online orders for Fotona4D even increased by 500% year-over-year.

On the non-surgical product side, we continued to optimize the online transaction experience, increasing the number of SKUs on our platform and provided a more transparent and attractive prices. We also launched an online consumer protection project such as in advance compensation and medical beauty insurance. At the end of June, over 140,000 non-surgical SKUs were available on our platform, an increase of 41% compared with the same period last year.

Secondly, we continue to stress into standardization of non-surgical procedures and enhanced our management and control of products, an increment to optimized user experience. The strategic investment in Wuhan Miracle will not only expand our service network for institutional clients, but clinics -- sorry, institutional clients, but also improve our fulfillment service and ensure that we are able to offer authentic products to customers. With acquisition, our service in the non-surgical categories will become more diversified, creating a competitive moat in the long term.

Lastly, to ensure our users have guaranteed only authentic products and don't have to worry about safety issues on aesthetics treatment and services, we will continue to deepen our cooperation with our network of medical device manufacturers in order to consistently screen drugs, medical device and service providers.

We'll continue to develop more popular categories, such as dental services. By working with institutional clients, we connected users with institution and offered them premium dental services by bringing a standardized system to enhance the service quality of these institutions.

On the regulatory front, over the past few months, regulatory authorities have expressed their views and opinions on various matters, such as antitrust, data security and medical aesthetics advertising and issued a series of policies and guidance for multiple industries. We have taken this opportunity to reflect on our practice and our role as an industry leader and engage in self-reflection and introspection.

First of all, since our inception, we have established a stringent review and approval process for our doctors and institutions as well as conducted a rigorous review mechanism for content and service offered in our platform. In addition, following the guidance issued by regularity bodies at various levels, we have established internal review process and continue to improve the online information we provided of medical aesthetic services.

At the same time, we have also been actively engaged in the self-discipline of China's medical aesthetics industry by promoting platform governance and assisting our institution partners with compliance audits and promoting a standardized and orderly development of the medical aesthetics industry.

To summarize, we believe the Chinese medical aesthetics industries is well on-track of steady growth. As a leader in the industry, we have the responsibility to make the industry better by promoting industry standards and providing authentic and truly valuable services for our users.

Looking forward, we will leverage our competitive advantages in content, technology and our large user base and continue to focus our efforts on user acquisition and expand our online presence into other segment of the industry. By making use of medical aesthetics as an entry point, So-Young will be built as the most trusted medical aesthetics and medical care platform in China.

Let me invite Min to give us an overview of our results for the quarter before the operator will open the Q&A.

Thanks, [Kass]. 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 performance on a year-over-year basis.

For the second quarter 2021, total revenues were RMB 451.8 million, up 37.7% year-over-year from RMB 328.2 million and exceeded the high-end of our prior guidance of RMB 450 million. The increase was primarily due to an increase in average revenue per paying medical service provider.

The number of paying medical service providers on the platform was 4,899, an increase of 31.2% from 3,735 in the second quarter of 2020. The total number of medical service providers subscribing to information services on So-Young's platform was 2,236 during the quarter, an increase of 8.8% from 2,056 in the second quarter of 2020.

Within total revenues, information services revenue were RMB 360 million, up 53.8% year-over-year from RMB 234.5 million. Reservation services revenues were RMB 91.9 million, a decrease of 2.8% from RMB 93.7 million in the second quarter of 2020.

Cost of revenues were RMB 58.8 million, up 15.9% year-over-year from RMB 50.7 million in the second quarter of 2020. Cost of revenues included share-based compensation expenses of RMB 3.8 million compared with RMB 6 million in the second quarter of 2020.

Total operating expenses were RMB 335.4 million, up 16.7% from RMB 287.4 million in the second quarter of 2020.

Sales and marketing expenses were RMB 206.7 million, up 11.6% from RMB 185.2 million a year ago, primarily due to an increase in payroll costs associated with the expansion of marketing employees. Sales and marketing expenses included share-based compensation expenses of RMB 1.6 million compared with RMB 1.6 million in the corresponding period of 2020.

General and administrative expenses were RMB 56.5 million, up 13.3% from RMB 49.8 million a year ago, primarily due to an increase in payroll costs associated with the expansion of an administrative employees. General and administrative expenses included share-based compensation expenses of RMB 7.2 million compared with RMB 14.2 million in the corresponding period of 2020.

Research and development expenses were RMB 72.1 million, up 37.9% from RMB 52.3 million a year ago. The increase was primarily attributable to an increase in payroll costs associated with the expansion of research and development employees. Research and development expenses from the second quarter of 2021 included share-based compensation expenses of RMB 3.6 million compared with RMB 6.2 million in the corresponding period of 2020.

Income tax expenses were RMB 11.1 million compared with RMB 2.8 million in the second quarter of 2020. Net income attributable to So-Young International Inc. was RMB 57.6 million compared with net income attributable to So-Young International Inc. of RMB 2.1 million in the second quarter of 2020.

Non-GAAP net income attributable to So-Young International Inc. was RMB 73.7 million compared with RMB 30.1 million in non-GAAP net income attributable to So-Young International Inc. in the same period of 2020.

Basic and diluted income per ADS attributable to ordinary shareholders were RMB 0.54 and RMB 0.53, respectively, compared with RMB 0.02 and RMB 0.02, respectively, during the same quarter -- during the second quarter of 2020.

Now for our balance sheet. As of June 30, 2021, we had a total cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments of RMB 2.26 billion compared with RMB 2.68 billion as of December 31, 2020.

For the third quarter of 2021, So-Young expects total revenues to be between RMB 430 million to RMB 450 million, representing a [19.6% to 25.1%] (corrected by the company after the call) increase from the same period in 2020. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of the market and operating conditions and customer demand.

This concludes our prepared remarks. I will now turn the call to the operator and open the call for Q&A. Operator, we are ready to take questions.

(Operator Instructions) Your first question comes from Thomas Chong of Jefferies.

(foreign language) Now I will translate myself. What are the companies view regarding the recent changes on the advertising guidelines regulating the beauty medical sector which were issued by the State Administration for Market Regulation and how it will affect the company business moving forward?

[Interpreted] We noticed that documents issued by regularity authorities since the beginning of this year have mainly been focused on supervising the practice of medical institutions in the medical aesthetics sector. We believe that such supervision is conductive to the long-term and healthy development of the entire industry.

And as an Internet medical aesthetics information service platform, since our inception, we have established a strict review and approval process for all the doctors and institutions we partner with as well as content and product review mechanism. We are committed to build strong governance across our platform and strive to curb any non-compliant activities.

In terms of having medical information featured on our platform, in order to cooperate with So-Young, medical institutions are required to submit their State-issued business license, medical institution practice license and other documents issued by government authorities, as well as pass our internal review and verification we also require doctors to provide their qualification certificates and verify practice license before information can be published on our platform.

In terms of publishing content, products and services, we have built a rigorous information display system equipped with risk control and anti-fraud systems. Information displayed by institutions must first meet our strict requirements and we have 2 additional review procedures, one automated and the other by manual inspection.

We have also a professional compliance team that closely monitors State policies and standards in real time, which we then compile to optimize our platforms' verification system and the standardization process. We also have a strict set of violation, information risk control model library. Because of professional internal risk control management and the platform governance, we think that this should be the operational strengths that differentiate us from our peers.

Last May, we initiated a self-discipline campaign for China's medical aesthetics industry to promote platform governance. Regarding the draft guidelines on regularity in advertising the medical aesthetic sector issued by the SAMR, we will provide our feedbacks through appropriate channels on the premise of protecting the legal rights and interest of consumers. Through a positive and constructive feedback, we aim to create a voice for medical aesthetics professionals and, at the same time, provide a better service to our customers and promote regulated and orderly environment for the development of the industry.

Meanwhile, we also believe that with strict regulation and further execution of specific rules, offline medical institutions are required to enhance their services capability and medical level, not blindly pursue traffic growth in marketing and user acquisition and even cheated consumers with fake or speciates. Institutions will be more cautious in selective marketing channels.

Also the enforcement guidance also clarify that online platform operators' duties to perform contract and do the verification and governments online platform compliance will be enhanced. In this regard, as the first mover in the industry to start and continuously self-discipline, we believe that So-Young will be benefited by the regulation in the long run.

In the long term, we believe that the regulations will prove highly conductive to the healthy development of the industry. For So-Young, we are committed to adhere to all regulations and we will continue to further improve our internal review mechanisms to full compliance and a regular sales governance. To lead by example, we will remain proactive in intercepting medical aesthetics promotional information that doesn't comply to the rules, in order to offer authentic information and online services and promote better care in the medical aesthetics industry.

The next question comes from Nelson Cheung of Citi.

(foreign language) So my question is regarding the business prospects. Can management share your views related to the impact of COVID on the business? And can you share more details about the growth trend going into the second half of this year? And my second question is related to the -- your progress on your So-Young Pass, the SY Pass?

[Interpreted] In July and August, China faced the double impact of COVID-19 resurfacing in the few cities and damages from flooding disasters. Operations of medical institutions were adversely affected in the first tier and second tier cities, such as Shanghai, Chengdu, Nanchang and Changzhou. As the situation got under control, medical institutions were able to resume operations and return to their regular growth trend.

Looking to the business growth in the second half of this year, firstly, policies in particular, regulations for medical aesthetics advertising, required institution to conduct self-inspection first in the near term for unqualified products and treatments from their offerings. Meanwhile, the enforcement guidelines also set clear requirements for online performing operators to fulfill the duties imposed by laws. As a result, institutions will be more cautious about marketing in the near term.

In the second half of this year, taking advantage of the rising popularity of non-surgical treatments, we will continue to implement our established strategy to grow the non-surgical categories, further penetrate and expand market share while maintaining our strength in the surgical category.

As of the end of August, So-Young Pass has extended its network to 36 cities from 11 Tier-1 and the number of institutions increased from 95 to over 160. The number of verified orders on So-Young Pass also increased by 40% in Q2 compared to Q1.

Your next question comes from Leo Chiang of Deutsche Bank.

(foreign language) My question is regarding to competition landscape. Can management share the latest competition landscape you have observed recently?

[Interpreted] At current level of market competition, we believe it is no longer purely about competing for user traffic, but whether platform can really address the pain point for users and improve user experience. From the perspective of both regulation and a better user experience, platform must be professional at all times and have in-depth knowledge of the industry.

As the popularity of non-surgical category increase in demand, we will continue to strengthen the operation of non-surgical category and implement our established strategy to expand market share on top of growing our entire medical aesthetics, user base.

Meanwhile, we are continuously strengthening our cooperation with other platform to empower the entire medical aesthetics industry. For instance, that we partnered with JD.com to establish JD Healthy Medical Aesthetics channel so that consumers can experience and have easy access to professional and premier medical aesthetic services.

Besides that, we also worked with AutoNavi to connect with other 1,000 institutions and established a consumer service for medical aesthetics users on their AMAP platform. So-Young Pass has also achieved more strategic co-operations with like Little Red Book, Pinduoduo, Xiaohongshu, and Weibo and we hope to explore popular treatments in medical aesthetics, build a premier shortlist of select products and expand our service scope to continuing powering more institutions.

Your next question comes from the line of Vincent Yu from Needham & Company.

(foreign language) I have 2 questions. One is to follow up on the impact on the regulation. So my question is more focused on how the regulation impacts the traditional industry structure and like traditional practices in this industry? And how we view this as a potential opportunity?

And second question is on the Miracle Laser acquisition. How shall we think about the strategy behind this acquisition? We're kind of cooperation we will have between this manufacturing company and the institutional clients? And also what kind of monetization model we are hoping to see for the future.

[Interpreted] First we believe that the regulation action against the non-compliant practice and strict regulatory requirements will benefit. It's a healthy development of the whole industry in the long run. With tightening of regulations, local regulation will further clarify and detail the approval system and the process for institution adapters. Meanwhile, the usage specifications for drugs and equipment will be strengthened, forming more effective protection for manufacturers and institution producing, distributing and using genuine and authentic products.

Beyond entry compliance, we are seeing that the stricter regulations were to some extent driving institutional base level from their marketing customer acquisition to internal operations, serves to improve service quality. Besides educating consumers to distinguish and select services, institutions need to retain clients with good service and skills. Institution won't survive long by focusing only on customer position and ignoring management and service quality.

Tightened market regulation had significant driving effect, standardization and going online for the entire medical aesthetics market, particularly the non-surgical medical aesthetics market.

Yes. I will try to answer your questions about our acquisition of Miracle Laser. As mentioned earlier in the prepared remarks in the previous part, Miracle Laser is one of the biggest manufacturer for laser medical machineries in China. And we think the synergies going forward between the platform of So-Young and further cooperation with the manufacturers -- with a branded manufacturers like Wuhan Miracle, will have a new complete service experience for users on the platform. And at the same time, we can make sure the services taken by the customers will have a very consistent experience.

It also will have certain cost-saving effect like we will provide our platform customers directly to the clinic or hospitals who have Wuhan Miracles medicine instruments or equipment directly. And we will like to share the revenues between that. And it will be a showcase attempt for us for the further co-operations with upstream manufacturers in medical aesthetic service industry. Going forward, we will see further co-operations with other branded manufacturers to provide consistent and of course, the consistent screening drugs and medical devices and service providers to our customers.

At the same time, Wuhan Miracle itself is a very well-run business. They have been listed in the NEED (sic) [NEEQ] exchange in China for almost 6 years, being highly compliant in terms of financial control and internal control. And they have been experiencing of course, and the industry as a whole has been hit by the COVID-19 in 2020, but they have recovered quite well in the first half of this year. And we feel very positive for its going forward growth after being acquired by us, and our co-operation will be adding more elements for the business going forward.

Our next question comes from the line of Shiqi Ge from CICC.

(foreign language) Congrats on your strong performance. We noticed that the absolute value of sales and marketing expenses have declined sequentially. Can you please comment on any marketing and promotion trends in the second half of this year?

[Interpreted] We are planning to execute more target brand advertisement and brand awareness among our users. At the same time, we will leverage the advantage of our platform and conduct performance-based marketing on third-party platforms with premium content to establish our brand as professional medical aesthetics platform.

For the full year, we forecast that sales and marketing expense as a percentage of our revenues will remain largely stable at no more than 50%.

There are no further questions. This concludes today's conference call. Thank you for participating. You may now all disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]