So-Young International Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 20, 2023

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for Soyang's Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After management gives their prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I would like to hand over to your host for today's conference, Ms.

Operator

Ming Xu. Please proceed, Ms. Xu.

Speaker 1

Thank you, operator, and thank you, everyone, for joining Sohuya's Q3 2023 earnings conference call. Joining me today on the call is Mr. Xin 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 U.

Speaker 1

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. Sohuya does not undertake any obligation to update any forward looking statement, except as required under applicable law.

Speaker 1

At this time, I would like to turn the call over to Mr. Xin Jin. Cass, please. Hello, everyone. Thank you for joining Sohuang's Q3 2023 earnings call.

Speaker 1

Our business remained resilient and delivered solid financial and operational results during the quarter despite microeconomic headwinds. Total revenues were RMB390 1,000,000, an increase of 19% year over year and in line with our previous guidance. Profitability also continued to improve, thanks to our careful management of costs. Net income attributable to Sohuya International Inc. Was RMB18.3 million compared with RMB2.3 million in the same period last year.

Speaker 1

I would like to start by sharing my thoughts on where the sector is going. We strongly believe that medical settings market going forward will head in 2 directions. The first is a gradual and stock population of high tier users who are less impacted by a weak macro environment and will continue to seek high quality services. In this scenario, low to mid tier users would increasingly gravitate towards products with the best quality to cost ratio. The second is a continuation of high speed growth of light matte prosthetics as the market continue to expand in size.

Speaker 1

We are adapting each of our business to be able to cater to both of the two scenarios. Taking this into account, we are adjusting our community part business with a focus towards high end service end users. During the quarter, we strengthened cooperation with select number of well respected doctors and institutions, further integrate internal resources and optimize the processes, all in an effort to provide the highest quality service and experience through our one stop solution. Offering premier content and enhancing the use of medical aesthetics service experience has helped well respected doctors and institutions avoid costly price wars while still generating reasonable premium. During the quarter, we worked with well respected doctors to promote the face contouring category.

Speaker 1

Online GMV for the face contouring category grew by 40% year over year during the quarter, while GMV for all surgical categories grew by 11% quarter over quarter. Average transaction value for non surgical products grew by 60% year over year and GMV grew by 70 2% year over year. In addition, by cooperating clinics with Biocare and investing in medical aesthetics MCNs, We have obtained a deep understanding of the mechanics, which is helping us transform Sohuang app into a high end platform that offers user a large selection of premium doctors to choose from and reducing the decision making costs. Suyen Prime is being just to serve consumers looking for the best cost ratio product. Korean Prime is a unique innovation for the light metal aesthetics industry and a critical step to standardize offline services.

Speaker 1

Since its launch in August of last year, the business has rapidly expanded and scaled with for field orders increasing by 23% sequentially during the quarter. Within for field orders, high intensified focused ultrasound under the ultrasonic ATH category, in particular, increased by 44 percent sequentially. As I mentioned in our last earnings call, as Sohuyaan Prime scales, our focus is on ensuring the best possible online to offline user experience, improving operational efficiency for our institutional network and refine operations. During the quarter, orders through Sohuang Prime from the more than 100 institutions we worked with contributed over 13% of fulfilled orders in house. To further standardize the management system for Light Medical Aesthetics Institutions, we built a flagship clinic on the 2nd floor of our head office to test our systems in real time.

Speaker 1

The team operating the clinic fully integrate with Sohuian Prime and has already seen monthly visits increase by more than sixfold over the past 3 months. Equally as important, the clinic has already achieved profitability. Lastly, our supply chain business is being positioned to capture opportunities if the light medical aesthetic market continue expanding rapidly. This is best encapsulated with the standout performance it had during the quarter and the remarkable growth it has generated. The supply chain business is a result of our initiative to improve opportunities and acquire deep industry insights that would allow us to expand upstream along the medical setting supply chain.

Speaker 1

Looking at the upstream medical lasers product category, following the acquisition of Wuhan Miracle, we built a new generation of ultrasonic AT engine equipment called the micro focused ultrasound device, which we are using to build out our direct to consumer business model. On the medical injection part, we established a team through elastic and achieved rapid growth in performance. Full year shipments expected to be 7x that of last year. In July, we also signed a strategic cooperation agreement with Xihong by Pharma for the exclusive distribution rights of 2 filler products. Cooperation agreements such as these fill gaps and greatly enhance our light medical aesthetics product portfolio.

Speaker 1

Distinct from the traditional upstream R and D production supply chain model used by manufacturers, we are able to add further value by developing synergies with our existing business and fully leverage our institutional network and expansive consumer reach. This allow us to quickly bring new products to market and rapidly make them uncompetitive. In the Q3, revenue from our supply chain business, which includes WuhanMiracle, reached RMB75 1,000,000, an increase of 19% year accounting for 20% of total revenue. We entered the injectable filler market just last year with a product designed for the highly competitive hyaluronic acid serum. Revenue for this serum keeps hitting new heights and has already become profitable on a single month basis in August September.

Speaker 1

This success directly reflects the enormous synergies we are able to create between the Sohuang platform and the high quality upstream products. Over the long term, the medical aesthetics industry in China still has plenty of room to grow with user penetration rates that are still very low. Markets beyond the 1st tier cities remain largely adapted. As standardization spread across the industry, our fully integrated capabilities and other competitive advantage will become more pronounced. Our focus will remain our 3 core business segments, where we will work to further integrate institutions, doctors and products in order to create sustainable, diversified revenue streams and create long term value for our shareholders.

Speaker 1

I will now turn the call over to our CFO, Nick, to review the financial results for the Q3 before taking questions.

Speaker 2

Okay. Hello, this is Nick. I will now go through our financial performances this quarter. Please be reminded that our 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.

Speaker 2

Total revenues during the quarter were RMB385.3 million, up 19.2% year over year and in line with our guidance. The increase was primarily due to an increase in revenues generated by Sohyun Prime and sales of medical products. Information services and other revenues were RMB285.9 million, up 24.1% year over year, primarily due to an increase in revenues generated by Sohyong Prime. Reservation services revenues decreased by 18.8% year over year to RMB24.1 million, primarily due to our operating strategy, which gives higher subsidies to end users. Revenue from sales of medical products and maintenance services were RMB75.2 million, up 19.2% year over year, primarily due to an increase in sales of cosmetic injectables.

Speaker 2

Cost of revenues were RMB142.6 million, up 51.7% Within cost of revenues, cost of services and others were Within cost of revenues, cost of services and others were RMB103.5 million, up 74.2 percent year over year, primarily due to an increase in costs associated with Sohyun Prime. Cost of medical products sold and maintenance services were RMB39.1 million, up 13% year year over year, primarily due to an increase in costs associated with the sales of cosmetic injectables. Total operating expenses were RMB244.7 million, up 3.4% year over year. Sales and marketing expenses were RMB143.8 million, up 15.3% year over year, primarily due to an increase in expenses associated with branding and user acquisition activities. G and A expenses were RMB50.2 million, down 16% year over year.

Speaker 2

The change was primarily due to the reversal of share based compensation expenses, partially offset by an increase in payroll costs associated with the expansion of administrative employees to support our business upgrade and the new strategic businesses. R and D expenses were RMB50.6 million, down 2.7% year over year, primarily due to improvements in self efficiency. Income tax benefits were RMB2.2 million compared with income tax benefits of RMB16.5 RMB16.5 million in the Q3 of 2022. Net income attributable to Sohuang was RMB18.3 million compared with a net income of RMB2.3 million during the same period last year. Non GAAP net income attributable to Sohuang was RMB9.5 million compared with RMB9.9 million non GAAP net income attributable to Sohyang in the same period of 2022.

Speaker 2

Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB0.18 and 0.18, respectively, compared with basic and diluted earnings per ADS attributable to ordinary shareholders of RMB0.02 and 0.0 2, respectively, during the same period of 2022. We have ample cash to on hand with a total cash and cash equivalents, restricted cash, term deposits and short term investments of RMB1.4 billion as of September 30, 2023 compared with RMB1.6 billion as of December 31, 2022. The decrease was primarily due to investments in building our supply chain product pipelines of RMB38 1,000,000 and share repurchases of approximately RMB121 1,000,000. For the Q4 of 2023, we expect total revenues to be between RMB380 1,000,000 and RMB400 1,000,000. The above outlook is based on our current market conditions that reflect the company's preliminary estimates of market and operating conditions and consumer demand.

Speaker 2

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

Operator

Thank And today's first question comes from Thomas Chong at Jefferies. Please go ahead. Hello, Thomas Chai. Your line is open.

Speaker 3

Hi, good evening. Thanks management for taking my questions. Can you share about the progress Sohyang Point has made and the expectation for Q4 and 2024? And my next question is about our estimate for marketing expenses in Q4 and next year? Thank you.

Speaker 1

Thank you for questions. I will take the first one. We launched Suyen Prime Test over a year ago. Since then, fulfilled orders have grown by 10 fold during the quarter when compared to to the same period last year. As our user base expands rapidly, which I believe demonstrate the transaction, its services are gaining among consumers.

Speaker 1

Within for build orders, high intensified focused ultrasound under the ultrasonic AT and T category, in particular, increased by 44% sequentially, generating strong word-of-mouth. As I mentioned during my prepared remarks, we built a model clinic for Hai. We call it a flagship store for Hai for light medical aesthetics procedures on the 2nd floor of our office. The team of facing the clinic are fully integrated with Sohyan Prime and are driving the development of a standardized management system for light medical aesthetics institutions and further improving the overall business model. We will continue to grow Dorian Prime user base, improve the service experience, capture emerging opportunities in the light medical service asset asset industries and create products and service with high quality to cost ratios.

Speaker 1

We will also expand the number of categories with cooperation with institutions and implement a standardized management system to strengthen our position as an all around partner for small and midsized life medical studies institutions. We plan on integrating Sohuian Prime with our supply chain business in the future. Products from the supply chain business can be directly through Suoyan Prime. Micro focused ultrasound device, the new generation of ultrasonic 18 inches equipment we launched in the Q4 has performed well in clinical applications. Going forward, Sohuyaan Prime will gradually introduce new products, further improve margins and create synergies with our supply chain business.

Speaker 2

Okay. I will respond to the question regarding the marketing expense. We have placed an absence on improving advertising efficiency this year. Conversion rate for user placing an order online improved in in the Q3 mainly due to our community content, strong brand image and new user acquisition methods such as a private domain operations. Looking ahead to Q4 and 2024, we will continue to leverage our community content, strong brand and other competitive advantages to further improve the user experience to increase user conversion rates.

Speaker 2

Lastly, we will also continue deploying a highly efficient marketing strategy, expand user acquisition channels, improve marketing ROI and carefully manage marketing costs to maintain our margin and improve the profitability of the company.

Operator

Thank you. And our next question comes from Nelson Chen with Citi. Please go ahead.

Speaker 4

Management for taking my questions. So how would management expect the medical effective market to develop in Q4, especially during the Double 11 period and also into the next year, 2024? Thank you.

Speaker 1

Thank you for asking. And first, as I mentioned in prepared remarks, I believe the medical settings market going forward will head in 2 directions. The first is gradual and stock population of high tier users who are less impacted by the weak macro environment and we will continue to seek high quality service. In this scenario, low to mid user will increasingly gravitate towards products with the best quality to cost ratio. The second is a continuation of high speed growth of like medical aesthetics and the medical and the market continues to expand in size.

Speaker 1

We are adapting each of our business to be able to counter to both of these scenarios. Based on the upper position, we will focus on our 3 business segments to create a consolidated professional medical aesthetics platform for all consumers. First, we are adjusting our community e commerce business with a focus towards high end services and users seeking high quality online medical setting services. 2nd, Sohuang Prime is being adjust to serve user growth, look for the best quality cost ratio products as we continue to explore standardized management system for live medical settings. 3rd, our supply chain business is being positioned to incrementally capture larger share of the Life Medical Aesthetics market as it continue to expand rapidly and to create synergies with other business segments.

Speaker 1

In addition, according to consumption data published by the National Bureau of Statistics, total retail sales of consumer goods during the 1st 10 months increased by 69% year over year and 76% year over year in October, indicating that the economy is gradually gaining recovery momentum. In summary, we remain confident with the growth perspective in medical aesthetics market as for 2024 and further into the future. Even though our business is occasionally impacted by volatile markets, it remains resilient. We will continue investing in acquiring high quality users and institutions to create value for the industry and are confident in our long term growth perspective prospects. Thank you.

Operator

Thank you. And our next Hello, Chloe, your line is open. Chloe Wei? I'm sorry, we're not able to hear your audio, so we'll move to the next question, which is from Gigi Ren with CITIC. Please go ahead.

Speaker 4

Let me translate my questions. As profitability has improved for 2 consecutive quarters, How do you expect margins to trend next quarter and going forward? Thank you.

Speaker 2

Thank you for your question. With a soft consumer sentiment, we will focus on driving revenue growth with the gradual diversification of revenue streams. Our supply chain business and Sohuun Prime is showing a solid performance each quarter and reflects this focus. The improvement in our profitability for the past 2 consecutive quarters reflects the improvements we have made in operating efficiency. We will continue to execute this strategy and remain confident that we will be able to maintain profitability next quarter.

Speaker 2

2023 is a critical year for our business transformation. We have made steady progress in laying a solid foundation for future growth and creating long term sustainable value for our shareholders. Looking forward to 2024, we will continue to grow revenue, improve operating efficiency and carefully manage costs. We will be well positioned to increase our competitiveness and maintain healthy cash flows as we leverage opportunities to generate returns for our shareholders. Thank you.

Speaker 4

Thank you.

Operator

Thank you. And our next question comes from Chloe Wei with CICC. Please go ahead.

Speaker 1

So I will translate myself. Mr. Xin Jin, what do you think of the future competitive landscape? And given the thoughts, how do we position ourselves in the long run? Thank you.

Speaker 1

Thank you for the question. We have been following new business models across different verticals within industry that are outside the traditional Internet business models. We are trying to find new ways to think about industry development and exploring value creation. 1st, looking midway upstream, we are seeing that major short video platform tap into medical aesthetics in the 3rd quarter. We believe these platforms as well as the major e commerce platform are mainly applying a low price group purchase model, which fits their operation models.

Speaker 1

Based on our expectation of industry population in the future, we are adopting a different operating strategy with our pop business to focus on the demand of high end users by providing them a better consumption experience, which will also improve our margins. Downstream at the institutional end of the spectrum, users are increasingly seeking products with a high quality to cost ratio, which our operations will be able to cater to add this base growth. We believe that chain stores of Life Medical Aesthetics will have a huge market growth space in the future. Domestic competitors in the vertical are few and far between. With only 2 brands going over 20 chain stores with limited standardized products and low margins.

Speaker 1

They are successful models already deployed outside China, which provides a premier consumption experience for low to mid tier users. We are working on deploying a standardized management system for light medical aesthetics institutions through a soyaan prime with high quality to cost product ratios for our users. This positions us an all around partner for a large number of small and mid sized light medical aesthetics institutions. Upstream competition is getting fierce in the injections category, but enormous market potential remains intact for medical lasers, particularly in the ultrasonic 18 engine category. Based on our observation, we customized and launched our ultrasonic 18 engine product called the Micro Focus Autosound Device during the Q4.

Speaker 1

For injections, we see enormous growth potential in the regenerative market driven by new materials and have expanded our offering in the In summary, in addition to developing the Internet business model, we're also employing growth potential along the industry supply chain with a focus on the long term. We are confident that our superior positioning in the market and our competitive advantages will appear to grow profit results going forward, driven by our integration and innovation along the industry value chain. Thank you. Thank you for asking.

Operator

Thank you. And ladies and gentlemen, we are approaching the end of today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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Earnings Conference Call
So-Young International Q3 2023
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