So-Young International Inc (SY) 2020 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by for So-Young's Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded. I'd 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 Fourth Quarter and Full Year 2020 Earnings Conference Call.

Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our current expectations. Potential risks and uncertainties include, but are not limited to, those outlined in our public filings with the SEC, including our annual report on Form 20-F. So-Young does not undertake any obligation to update any forward-looking statement, except as required under applicable law.

Joining us today on the call are Mr. Xing Jin, our Founder, Chairman and the CEO; and Mr. Min Yu, our CFO.

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

(foreign language)

[Interpreted] Thank you, everyone, for joining us for our fourth quarter and full year 2020 earnings call.

(foreign language)

[Interpreted] We ended 2020 with a solid quarter, as total revenues reached RMB 421 million (sic) [RMB 424 million] , an increase of 19% year-on-year, in line with our previous guidance. Although there wee small outbreaks of COVID-19 across some province in China during the quarter, the medical aesthetics industry as a whole and our business remained on track. In particular, our user base kept a strong growth momentum, with average mobile MAUs reaching 8.9 million in the fourth quarter, an increase of 142% from a year ago. The growth was mainly attributable to our efforts to continuously expand our content library that caters to users demands as well as the launch of innovative service based on advanced technologies, such as the VR Store and Live Diagnosis.

Our progress was well recognized among medical service providers, leading to new cooperation with many of them. In the fourth quarter, the number of paying medical service provider on So-Young's platform reached 4,746, up 40% from the prior year.

(foreign language)

[Interpreted] Due to the impact of the COVID-19 pandemic, 2020 was a challenging year for the medical aesthetics industry, especially for surgical treatments, as costs are generally much higher and people tend to take more time to consider different factors before making final decisions. As of date, the surgical category is on track to recover at a relatively slow pace. But in deepening their cooperation with So-Young, medical service providers with stronger operational capabilities and offered comprehensive services were able to outperform tough market conditions, thereby greater -- sorry, thereby greatly improving their customer acquisition performance.

Looking ahead, along with the tightening regulatory environment and the development of various parties throughout the value chain, we believe the industry will progress in a better and more orderly manner. With more trust and transparency among all service providers, demand from end users will eventually ensure the sustainable and healthy growth of the medical aesthetics industry.

(foreign language)

[Interpreted] Now I would like to share with you some takeaways and to do a recap of this past year.

(foreign language)

[Interpreted] Firstly, we continued to drive engagement and user growth with enriched high-quality content and invaluable information. Building on the success of our 2020 user growth, we are now recognized by a larger and wider user base for our service and trustworthy content. This group of users share similar attributes. They are more socially informed and knowledgeable, and has spent time researching to further evaluate their options and needs.

By the end of 2020, Beauty Diaries on So-Young's platform reached 4.7 million. And the average monthly views of the articles we distributed on various social platforms reached 1.32 billion for 2020, an increase of 150% from 2019. Meanwhile, with the successful launch of a series of monthly campaigns, such as So-Young Ambassador and user incentive programs, we continue to provide our content creators with excellent support on multiple levels, which helped grow our user base.

(foreign language)

[Interpreted] Overall, to attribute our continued success to our broad content library, engaging community experience and rising brand awareness, in 2020, we established our brand proposition as the most trusted platform in the medical aesthetics industry.

As part of our social responsibility and awareness initiatives, the So-Young Charity Fund was founded as the first charity relief program in China for victims of unlicensed or illegal medical procedures. This year, as [we're in] the blockbuster variety show Sisters Who Make Waves significantly raised So-Young's brand awareness and the brand image. The views of related Weibo trending topics reached 43.76 billion, while the organic traffic on our site surged by 228% year-over-year.

(foreign language)

[Interpreted] Secondly, we enhanced our service in medical service providers by helping them with better target customer acquisition strategies. Our service provider partners were heavily hit by the COVID-19 pandemic in the early 2020s, but gradually recovered during the year as the business reopened and improved. Those with limited cash flow and less capability in online marketing will need to find efficient solutions to reach their target audience.

In the second half of 2020, we rolled out a new membership product on our platform to help small and medium institutions acquire the potential users and more sales leads. To address the restricted foot traffic to off-line stores during the pandemic, we launched a VR Store product to highlight features of each store and their major products to attract and target a wider range of user interest. As for operational support, we created dedicated teams for surgical, nonsurgical and new business development based on the specialization and the focus of each hospital. Thanks to our strong user growth and renowned brand name, service providers are ever more aware of the value of our users and have partnered with us for increased visibility.

(foreign language)

[Interpreted] Thirdly, we continued to invest in R&D and had capitalized on advanced technology to serve our users. As the COVID-19 pandemic kept our users away from the in-person doctor consultations, we swiftly launched a series of online products to provide remote services with user-friendly technology.

For example, in 2020, we completed a total of over 550,000 live diagnoses and 70,000 live broadcastings. We continued to improve our algorithm to ensure the right content is distributed to the right users, while promoting high-quality original content. All these approaches effectively save time for users as well as medical professionals and shortens the consumer's decision process when choosing the appropriate treatment for their needs.

(foreign language)

[Interpreted] Now I would like to give you some updates on our strategies for 2021.

(foreign language)

[Interpreted] On the user front, as our user base has been growing quickly over the past few years, an increasing number of new users joining our communities may be inexperienced and have limited knowledge about medical aesthetic treatments. Therefore, we are in the process of refining our operations to address the needs of users at different levels and build loyalty and high retention rate over time.

(foreign language)

[Interpreted] We are continuously enhancing our community-based content offering, working closely with medical professionals to find new ways to reach new users and attract user interest by generating more diversified and high-quality content. Through So-Youngs' brand awareness and effective marketing campaigns, we promptly convert high-demand volume among e-users into real transactions.

For example, this March, we rolled out slim festival. Prior to this event, we partnered with key opinion leaders and resources who share their professional knowledge about how to slim down using healthy method and recommended on various medical slimming treatments. These social conversions influence a large number of users to consume content related to these hot and trending topics on our platforms. Therefore, during our slim festival, we were able to meet demand by promoting sought-after treatments that were well received.

(foreign language)

[Interpreted] On the business front, we believe that nonsurgical categories will continue their strong growth in 2021. In this area, we plan to strengthen our standardized service process to enhance service performance. We have also expanded the network coverage of our partner service providers and optimized our operations for key categories. At the same time, we will continue to strengthen our traditional advantage in the surgical sector. We are well recognized by consumers and medical service providers as the leading medical aesthetics information platform in China. And we will continue to leverage our multiyear operating experience and close relationships with top-tier doctors to provide high-quality services.

(foreign language)

[Interpreted] In summary, we believe that the Chinese medical aesthetics industry is on a (inaudible) growth trajectory. As a leading player in the sector, we have the responsibility to make it more professional and (inaudible) by promoting the development of industry norms and to provide our users with services of real value.

Looking forward, we will fully leverage our competitive edge in content offering, technology and user base, focus on user-centric process and continue to explore deeply into the medical aesthetics industry value chain, and became the most trusted platform in the broader consumer health care service industry.

(foreign language) I would now like to turn the call over to Min, who will go through the financials for the fourth quarter and full year.

Thanks, (inaudible). Please be reminded that all amounts quoted here will be in RMB term. Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

For the fourth quarter 2020, total revenues were RMB 424.6 million, up 18.6% year-over-year and in line with our guidance. The increase was primarily due to an increase in the number of paying medical service providers whose operations gradually recovered as the impact of COVID-19 continue to ease in China.

Within total revenues, information services revenue was RMB 335.9 million, up 27% year-over-year. Reservation services revenue was RMB 88.7 million, a decrease of 5.3% year-over-year. Cost of revenues was RMB 63.6 million, up 8.7% year-over-year.

Total operating expenses were RMB 331.2 million, up 48.6% year-over-year. Sales and marketing expenses were RMB 210.4 million, up 59.2% year-over-year, primarily due to an increase in expenses associated with marketing activities and payroll costs. G&A expenses were RMB 49.9 million, up 38.4% year-over-year, primarily due to increase in payroll costs associated with the expansion of administrative employees. Research and development expenses were RMB 70.9 million, up 29.6% year-over-year. The increase was primarily contributed -- contributable -- attributable to an increase in payroll costs.

Income tax expenses were RMB 13.0 million compared with income tax expenses of RMB 29 million during the same period last year. The change was mainly due to the decrease in taxable income.

Net income was RMB 37.7 million compared with a net income of RMB 69.9 million in the fourth quarter of 2019. Non-GAAP net income was RMB 62.2 million compared with RMB 86.4 million non-GAAP net income in the same period of 2019. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.60 -- RMB 0.36 and RMB 0.35, respectively, compared with RMB 0.68 and RMB 0.65, respectively, during the fourth quarter of 2019.

For the full year 2020, total revenues were RMB 1.29 billion, up 12.4% year-over-year. Within total revenues, information services revenue was RMB 962.1 million, up 15.4% year-over-year. Reservation services revenue was RMB 332.9 million, up 4.6% year-over-year. Cost of revenues was RMB 212.2 million, up 60 -- 6.8% year-over-year, due primarily to an increase in service costs related to online platform development.

Total operating expenses were RMB 1.14 billion, up 41.1% year-over-year. Net income was RMB 4.9 million compared with RMB 176.7 million in fiscal year 2019. Non-GAAP net income was RMB 97 million compared to RMB 280.9 million in fiscal year 2019. Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.05 and RMB 0.05, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB 1.64 and RMB 1.54 in fiscal year 2019.

Now for our balance sheet. As of December 31, 2020, we had total cash and cash equivalents, restricted cash and term deposits, term deposits and short-term investments of RMB 2.68 billion compared with RMB 2.84 billion as of December 31, 2019.

For the first quarter of 2021, So-Young expects total revenues to be between RMB 320 million and RMB 330 million, representing an 75.3% to 80.8% increase from the same period of 2020. The above outlook is based on the current market conditions and it reflects the company's preliminary estimates of market and operating conditions and customer demand. Particularly in view of the potential impact of COVID-19, the effects of which are difficult to analyze and predict, which are all subject to change.

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) The first question comes from Thomas Chong from Jefferies.

(foreign language) My question is more about 2021 and the outlook in the next couple of years. What is our strategy on surgical and nonsurgical treatments? And also, what are the similarities and differences between you and your competitors in terms of advertising and operation advantage?

(foreign language)

[Interpreted] First, on the nonsurgical categories, the #1 is to treatments with low average transaction value, we want to strengthen the leading position in the quantity, pricing as well as the coverage of the (inaudible). And then to those middle and high average transaction values, we're going to standardize our services and improve performance with So-Young [Pass] to target mid to high-end user groups. Then we will still through our So-Young Ambassador program and the new media team, which can enhance our partnerships with the upstream OEMs and increase the amount of content on nonsurgical treatments in our community and also drive more user engagement.

And lastly, we will promote more [shopping festivals], such as anti-aging and the slim festivals and other promotional activities to strengthen consumer awareness of our professional advantage in nonsurgical categories.

(foreign language)

[Interpreted] On the surgical categories, first of all, we want to -- we will expand the list of doctors by introducing a larger number of top-tier surgeons with our Emerald Doctor Lists, including doctors from public hospitals. And also, we will through features like So-Young doctor public account, Live Diagnosis and (inaudible), in this way, we could help doctors to improve efficiency while upgrading their IPs and also to highlight their differentiations.

Then in some sectors, like the eyelid surgeon -- eyelid surgery, rhinoplasty, breast and also some like the fat transfer, we will set up dedicated teams for each category. We will restart the overseas surgery business in Korea and Japan according to the pandemic situation overseas and the policy changes on traveling abroad.

(foreign language)

[Interpreted] In terms of marketing, we are the only platform positioned as a vertical for professional medical aesthetics. Our competitor are positioned as comprehensive e-commerce platform, which makes it too difficult for them to be seen as a focused platform, or they are too small in size and have difficulty to invest sustainably. In terms of operation, our dedicated team allowed us to fine-tune our service spread across different categories and regions. That's all. Thanks.

Our next question comes from Brian Gong from Citigroup.

(foreign language) I will translate myself. My question is about the [priority] of the plastic surgery and the medical aesthetics industry, especially after the Chinese New Year. And when does management expect to see the full recovery? And when it will translate into our revenue?

(foreign language)

[Interpreted] The uncertainties of the pandemic have led to weakened consumer confidence overall. However, thanks to our engaged user base, high-quality content and community building capabilities, we have effectively engaged repeated users and added new users on our platform. So you can see that the MAU during the fourth quarter was close to 9 million, and this maintained a growth momentum of more than 140%.

And with the continued increase of demand from our medical aesthetic screens, we could see that clinics and hospitals invest more in marketing, spending especially in the user acquisition. So in the fourth quarter, we actually grow our paying medical service provider number to over 4,500 members. And this is the highest growth compared to the several quarters last year. And this average [ad] budget of each customer also grow steadily in last year.

Surgical treatments were heavily hit by the pandemic due to the market high average transaction value. Overall, the industry is on the right path to recover. But we could see still some gaps in transaction scales as well as the transactions value for average customer compared with the peak period in the fourth quarter of 2019.

So it is -- based on some -- the situation in the earlier 2021, consumer demand grow, especially from the nonsurgical sector, we think that this will automatically drive the overall market growth healthy. That's all. Thanks.

Our next question comes from Leo Chiang from Deutsche Bank.

(foreign language) My question is in the face of fierce competition, what strategy will you adopt to compete with others in the industry? And in the long term, what are the entry barriers?

(foreign language)

[Interpreted] In summary, our competitive strategy is too differentiated from our peers, which includes 3 main points. The first is focus on teams, on excellent services, improve user experience. And secondly, combine e-commerce, community and AI technology to improve user decision-making efficiency. And the third is strengthen brand awareness and increase mind share of users and continue to build on our reputation as a professional medical aesthetics service platform.

(foreign language)

[Interpreted] On the first point, right now, currently, most institutions do use the online platform as a group buying channel to direct traffic into their off-line shops. Customer who are attracted by the low price offers are usually persuaded to upgrade their packages and pay for much higher services or treatment by sales consultant. Users often feel cheated and that the service quality is not guaranteed. We have observed that platform with this business model do achieve significant growth in orders -- in terms of orders or GMVs, but we just believe that in the long run, it also result in negative brand sentiment. We will continue to [provide] service quality and extend our service online to give greater security to the performance.

For nonsurgical category, we will continue to promote So-Young Pass to enhance the standardization of service and treatment. Through reviews from third-party investigation and the consumers, we were able to work selectively with the best-performing institutions and continuously improve user experience.

For medical aesthetic surgeries, we continuously researched and select top-tier plastic surgeons for our 2021 Emerald Doctor Lists. At the same time, we also provide top-tier doctors with shared facilities and opening -- and operating room in order to control overall quality on each treatment.

(foreign language)

[Interpreted] In terms of improving users' decision-making process, we are the only platform to have both e-commerce and community building capabilities. In addition, our AI tools have been user -- have been used over 1.5 billion times, including those for facial and skin mapping techniques. The combination of these 3 factors have allowed us to continuously improve the efficiency of user decision-making.

(foreign language)

[Interpreted] Lastly, our continuous brand building and campaigns on social media have also strengthened our brand awareness among users.

(foreign language)

[Interpreted] So this should be the most important (inaudible) for So-Young. That's all. Thank you.

Our next question comes from Vincent Yu from Needham & Company.

(foreign language) My first question is about the user growth and the [monetization]. In 2020, we have a very strong growth momentum in user growth. And what do we think about the trend in 2021? And what's the monetization, our expectation in '2021? And my second question is about the So-Young Pass. So how do we think -- can management share some details about our plan or strategy around the So-Young Pass, which seem to be a very important step for the user experience standardization?

(foreign language)

[Interpreted] We will maintain our 2020 user growth strategy in this year, execute more forcefully and focus on the acquisition of mid to high-end and premium users.

(foreign language)

[Interpreted] Users typically fall into a triangular distribution model in most mass consumer categories, with price-sensitive users accounting for the majority. However, for medical aesthetics services, user usually fall into a (inaudible)shape distribution structure, with mid to high-end and premium users forming the majority of the mainstream market. These price-insensitive users are willing to pay for quality service and a better result for the treatments. And the transaction value of treatments are usually above RMB 1,000. We have significant advantage among this user, and we'll continue to reinforce and expand our reach to them.

(foreign language)

[Interpreted] According to the third-party market research results, in terms of the users' perception of So-Young as a professional medical aesthetics platform, it's by far ahead of our peers. In this year, we will continue to invest in our branding and consolidated our advantage in users' mind share.

(foreign language)

[Interpreted] In addition, we are continuously improving the effectiveness of our user acquisition, target users through short-video platforms and social media channels, which has helped us acquire more premium users.

(foreign language)

[Interpreted] For monetization, we will insist on the principle of [faster] user experience first, by continuing to inspect our partner institutions' operations and regularly reviewing the uncertainties of drugs and medical services used by those off-line shops, strictly prevent fake transactions and reviews to avoid misleading consumers. At present, we believe we are the most compliant medical aesthetics platform in the market, and we will continue to comply and promote industry standards to strengthen our brand image. We expect -- we think that this may have some short-term impact on our revenue. But in the long term, we will still stick to the strategy because we believe this is the right one for long-term growth and it will bring more value-added service to our loyalty customers.

(foreign language)

[Interpreted] Unlike those our -- unlike the traditional service to our end customers, usually, those qualified institutions could register on our platform as they have the license or some follow all the restrictions. But for the So-Young Pass, it's actually rounded on behalf of ourselves. So this is actually use our branding to promote on our platform.

(foreign language)

[Interpreted] First of all, for those products shown on our So-Young Pass, they are standardized and more safe and also could be in the certain price. In this way, we kind of to solve our SOP process to working with those off-line institutions and hospitals and also working with those selectively -- selectively working with those off-line institutions, we kind of to set up the trust -- and set up the price, and this price is certain. In this way, we could -- to improve our user experience, especially from the online part.

(foreign language)

[Interpreted] We think that we actually go deeper into the cooperation with those off-line institutions, ranging from like the products designer and also the SOPs designer and also to control the whole quality of such services. And we think that we will, firstly, to test in several cities. And if it is successful and to be well received by our end users, we're going to expand it to the whole regions of China.

Our final question today comes (inaudible) from CICC.

(foreign language) So my question is regarding the reservation service. We can see a decline in reservation service revenue in both (inaudible) and relative ways. So how do you boost the sales of the reservations on your platform in the future to form a complete closed-loop business model?

(foreign language)

[Interpreted] In the short term, on the consumer side, we will continue to strengthen the guarantee of the reservation performance, in terms of like the advanced payment, insurance and the disputed mediation. On the merchant side, we will use online payments as tool to strengthen our traffic distribution and conversion, promoting merchants to guide users to place orders online.

(foreign language)

[Interpreted] Currently, I think that all the medical aesthetics e-commerce platform, including So-Young itself, actually adopt a good buying model, which is a relatively outdated e-commerce model. A better medical aesthetics e-commerce model must comprise of online and off-line marketing channels to form a closed-loop ecosystem, which should include the following characteristics: the first is streamlined products or services. And the second is to be the online management of inventory and reservation. And thirdly, but not the least important, is conduct a real-time communication between e-commerce platform and the medical service providers through technologies, tools like the SaaS or (inaudible). So we believe this closed-loop e-commerce model should provide consumer with a much better customer experience and help service providers and institutions improve operational [tools] efficiency.

And we think that we will gradually upgrade So-Young Pass to form a closed-loop sales model, which will make it easier for users to place orders, thanks to better user experience. Meanwhile, So-Young Pass feature a onetime purchase, multiple service model and have increased users' interest to our platform. And we believe that -- and right now, the So-Young Pass actually cover more than 10 cities and 10 -- or more than 11 cities and covered 10 hot categories. The most popular categories include like the [skin cleansing] and some laser projects. And the hottest cities mainly include top-tier cities like Beijing, Shanghai, Guangzhou and Shenzhen. That's all. Thanks.

All right, thank you. So ladies and gentlemen, we have reached the end of the question-and-answer session. So with that, we conclude our conference for today. Thank you for participating, [all] disconnect.

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