So-Young International Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 20, 2024

There are 5 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by for SoYoung's 4th Quarter and Full Year 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 now like to turn the meeting over to your host for today's call, Ms.

Operator

Vivian Xu. Please proceed, Ms. Xu.

Speaker 1

Thank you, operator, and thank you, everyone, for joining Sogoung's Q4 and full year 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 20F. Zohuang does not undertake any obligation to update any forward looking statements, except as required under applicable law.

Speaker 1

At this time, I would like to turn the call over to Mr. Xin Jin. Hello, everyone. Thank you for joining the call today. Despite the challenging market conditions, our business remained resilient as the new ventures we are developing continue to demonstrate significant growth potential.

Speaker 1

Total revenues increased by 20.1% year over year to RMB319.6 million during the quarter. Our legacy business reflected in revenues from information services and others increased by 15.8%, while new businesses reflecting revenues from sales of medical products and maintenance services increased by 50.6% during the quarter. By carefully managing cost, we regained profitability with net income attributable to Sohyang International Inc. Of RMB21.3 million in 2023, a significant turnaround from a net loss attributable to Sohyang International Inc. Of RMB65.6 million last year.

Speaker 1

In many ways, last year presented an even more challenging situation than the COVID-nineteen pandemic did. In this context, our financial results for the year are even more impressive and a testament to our students and adaptability in the face of evolving consumer behaviors and market practice. Looking back at 2023, it's evident that our differentiated strategy was key to maintaining stable growth, while e commerce platforms and short form video platforms prioritized the pricing of products to attach budget cautious low to mid tier users. We prioritized premium service to attract high tier users seeking quality services. This segment representing only 13% of frequent users drives 51% of market volume.

Speaker 1

We've consistently maintained a strong competitive advantage with the segment given our premium products and services. Throughout the year, we further strengthened this advantage by offering high tier users the personalized services they required for high quality procedures, which also drives support the probability of the partner institutions we cooperate with. Moving forward, we remain committed to the strategy as we build stronger relationship with more high labor doctors and institutions. Sohuya Prime made significant progress throughout the year with over 200,000 clinics visit facilities, generating over RMB100 1,000,000 in revenues for partner institutions. This translates to significant user acquisition cost savings of roughly RMB140 1,000,000.

Speaker 1

To further optimize our model, we piloted operations for a chain of clinics by establishing a model clinic for light medical aesthetics procedures on the 2nd floor of our headquarters last summer. The results have been impressive. This clinic has been exceptional growth with steadily expanding margins and monthly revenue increasing 13.8x during the second half of this year, a CAGR of 71%. Equally as important, it hit breakeven after only 3 months of formal operations. Building up this success, we are now actively expanding our network by turning partner institutions into a chain of clinics.

Speaker 1

Several are already under construction with the first ones already operational. We plan to open clinics in 6 to 7 cities throughout 20 24 and will explore franchise opportunities in the later half of this year. Our supply chain business also continues to create opportunities for us by leveraging synergies with our other business to expand upstream along the medical aesthetic supply chain, distinct from the traditional upstream R and D production supply chain model used by manufacturers. We are able to add further value by leveraging our institutional network and extensive consumer reach. This allow us to spot emerging trends and quickly bring new products to market and rapidly make them competitive.

Speaker 1

To date, we have 7 injectable products available on the market, 1 R and D center and 2 robust production lines. We approach each relationship with care by adopting a cautious and safe approach. Developing a healthy market for our Our cooperation with Korean band, Airabi, is a perfect example. We position their hyaluronic ACV as a mid market product and through the tier 4 selection of partner institutions, we distribute to grow sales significantly last year. Shipments of this product increased nearly 600 percent with over 120,000 medical injections sold thus far.

Speaker 1

More than 750 select partners institutions also gained from this, with 500 of our core institutions seeing revenue increase by 20% last year as a result. A single SDU can generate revenue of RMB2 1,000,000 for them in one campaign. We plan to add a new IRavi product to our portfolio this year and are looking at other opportunities in the NEH category. Our current portfolio of 7 products addresses demand across various segments within the highly demanded collagen category, including PLA and others, Building a strong upstream presence along the medical aesthetics supply chain requires strategic investment and lead time. Through 3 years of focused efforts, we have built stronger synergies between our product development pipeline, sales team and our platform.

Speaker 1

As we secure additional product certifications, we are confident in our ability to consistently generate incremental revenue and profit growth over the long term. We are currently undergoing a strategic business transformation with a strong focus on the development and growth of our new ventures. While these new initiatives are making promising progress and generating rapid growth, they are still in their investment phase. We are confident that these new business will become significant contributors to revenue in the coming quarters. The medical side sector in China still presents significant growth potential.

Speaker 1

It's all adopting the right strategy. As the industry move towards greater standardization, our comprehensive vertically integrated capabilities and the competitive strength are set to become increasingly evident. We will continue to adjust the business to create greater synergies between our business and institutions, doctors and products. This strategy focus will allow us to build more drivers and build more diverse and sustainable revenue sources and a solid profit structure, ultimately delivering long term value to our shareholders. I will now turn the call over to our CFO, Nick, to review the financial results for the Q4 before taking your questions.

Speaker 1

Nick, please.

Speaker 2

Hello. This is Nick. Please be reminded that all amounts quoted here will be in RMB. Please also refer to our earnings release for detailed information of our comparative financial performance on a year over year basis. Total revenues during the quarter were RMB390.6 million, up 20.1% year over year and in line with our guidance.

Speaker 2

The increase was primarily due to the increase in revenues generated by Sohyang Prime and the sales of cosmetic injectables. Information services and other revenues were RMB268.1 million, up 16.8% year over year, primarily due to an increase in revenues generated by Sohuang Prime. Reservation services revenues decreased 20.7 percent year over year to RMB20.6 million, primarily due to the operating strategy, which gave higher subsidies to end users. Sales of medical products and maintenance service revenues were RMB101.9 million, up 50.6% year over year, primarily due to an increase in sales of cosmetic injectables. Cost of revenues were RMB137 point 6 million, up 56.0 percent year over year.

Speaker 2

The increase was primarily due to an increase in costs associated with the Sohyun Prime and the sales of cosmetic injectables. Within cost of revenues, cost of services and others were RMB94.1 million, up 73.6% year over year, primarily due to an increase in costs associated with Sohyang Prime. Cost of medical products sold and maintenance services were RMB43.6 million, up 28.1% year over year, primarily due to an increase in costs associated with sales of cosmetic injectables. Total operating expenses were RMB257.8 million, up 21.3% year over year. Sales and marketing expenses were RMB126.2 million, up 28.3% year over year, primarily due to an increase in payroll costs and expenses associated with the branding and user acquisition activities.

Speaker 2

G and A expenses were RMB86.7 million, up 18.4% year over year, primarily due to an increase in payroll costs associated with the expansion of administrative employees to support our business upgrade and new strategic businesses. R and D expenses were RMB RMB45.0 million, up 9.6 percent year over year, primarily attributable to an increase in payroll costs. Income tax benefits were RMB10.8 million, which was primarily due to the impact of additional deductions for research and development expenditures compared with income tax benefits of RMB2.4 million in the Q4 of 2022. Net income attributable to Sohuang was RMB17.5 million compared with a net income of RMB31.3 million during the same period last year. Non GAAP net income attributable to Sohuang was RMB35.3 million compared with RMB38.8 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 RMB0.29 and RMB0.29, respectively, during the same period of 2022. For the full year 2023, total revenue were RMB1.5 billion, up 19.1% year over year. Within total revenues, information services and other revenues were RMB1.1 billion, up 22.2 percent year over year. Reservation services revenues were RMB101.3 million, down 21.3 percent year over year. Sales of medical products and maintenance services revenues were RMB333.5 million, up 28.7 percent year over year.

Speaker 2

Cost of revenues were RMB544.3 million, up 38.4 percent year over year, primarily due to an increase in costs associated with Sohyang Prime and the sales of cosmetic injectables. Total operating expenses were RMB1.0 billion, up 4.9% year over year. Net income attributable to Sohyang International Inc. Were RMB21.3 million compared with net loss of RMB65.6 million in the fiscal year 2022. Non GAAP net income attributable to SohYa International Inc.

Speaker 2

Was RMB57.6 million compared to net loss of RMB22.2 million in the fiscal year 2022. Basic and diluted earnings for ADS attributable to ordinary shareholders were RMB RMB0.21 and RMB0.21, respectively, compared with basic and diluted losses per ADS attributable to ordinary shareholders of RMB0.61 and RMB0.61, respectively, in fiscal year 2022. We have ample cash on hand with total cash and cash equivalents, restricted cash and term deposits. Term deposits and short term investments of RMB1.3 billion as of December 31, 2023, compared with RMB1.6 billion as of December 31, 2022. The decrease was primarily due to share repurchases of RMB125.6 million in 2023 and RMB111.3 million increase in term deposits with maturities longer than 1 year.

Speaker 2

I'd like to reiterate that our new businesses are currently in a critical phase of development as we support them in their early stages of growth. They are critical pieces to the foundation we are building for future growth and recognize that we are just at the start of this journey. We, however, are extremely confident that they will increasingly contribute to revenue growth in the quarters ahead. With this in mind, for the Q1 of 2024, we expect total revenues to be between RMB290 1,000,000 and RMB 310,000,000. The above outlook is based on the current market conditions that reflects the company's preliminary estimates of market and operating conditions and the customer 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. Operator, we are ready to take questions. Thank you.

Operator

You. And our first question will come from Katrina Chu of Citigroup.

Speaker 1

I'll translate myself. Thanks management for taking my question. My question is about the overall outlook of the medical aesthetic market in 2024 and also the market landscape of the medical aesthetic in Q1 of 2024? Thank you. According to data from China National Bureau of Statistics, retail sales of consumer goods are gradually recovering, increasing of 6.7% year over year in January February 2024.

Speaker 1

Consumption data from our medical aesthetics platform is also reflecting this trend with a gradually improving macroeconomic environment and our differentiated strategy taking hold. We remain optimistic about the growth perspective of the medical aesthetics industry in 2024 and over the long term. The Chinese methothetics industry is maturing. Structural changes in consumer behavior are driving tremendous shift in demand. As consumers mature, the market is trading away from low frequency and high transaction value towards high frequency, high quality and the diversification.

Speaker 1

As a result, e commerce platform and medical institutions are shifting their focus upstream and towards acquiring diverse traffic. Competing on pricing will no longer be an option to attract the premium users. The odd model will lower the value proposition of products and services and lead to a smaller share of wider market. In 2024, these market shifts will continue. As a result, we will focus on refining our 3 business and further consolidate the positioning of our platform in the market.

Speaker 1

We will do this by upgrading our community power business and adding high end customized services targeting to top tier users by adopting a differentiated operating strategy from our peers. Sohuya Prime will focus on offering the best quality to cost ratio for mid tier users and our upstream business will support both of these platforms and user growth, capturing opportunities in the light medical aesthetics market and expanding margins. Thank you.

Operator

And our next question comes from Vi Han of FIG Securities.

Speaker 3

I'd like to ask what are your thoughts on the recent suspension of medical aesthetics live broadcasting? And where do you think the regulation trend are going forward? Thank you.

Speaker 1

The medical aesthetics market continues to be regulated strongly. For any new marketing models that are deployed, regulators will require an observation period where they can stop any behavior that breaks the medical ad law. We believe medical asset marketing will continue to be restricted to a few channels approved by regulators, such as search engines and e commerce. This regulatory trend actually benefit us indirectly as the value proposition of our existing legal marketing channels become more pronounced. We maintain our belief that a healthy market is a foundation for long term growth and value creation for companies.

Speaker 1

We will focus our attention on the supply side of the market going forward by integrating the core production advantage we have accumulated in terms of institutions, doctors and users. This will also allow us to set standards for service quality and delivery, ensuring users receive a premier experience. These comprehensive capabilities will enable us to build a strong competitive barrier. Unlike pure Internet business model, we are in a position to solve issues at deeper level, creating a differentiated model from our competitors.

Speaker 3

Thank you.

Speaker 1

Thank you.

Operator

And next we have a question from Chloe Wei of CICC.

Speaker 4

Let me translate myself. So my question is concerning Sohuang Prime. Could management maybe share some more about the P and L contribution, revenue and margins and what we have in 2023 and what we should expect in 2024? Also, could management share some color on the playbook in different cities in China since we are looking at more chain clinics in operation by the end of 2024. How should we expect the pace and investments?

Speaker 4

Thank you.

Speaker 1

In last year, Suyuan Prime completed his strategic transformation into SS Life and operational model, which help us to take the lead in the surgery and light medical aesthetic sector. The model clinic we opened last August is a logical next stop of our previous cooperation with institutions and products. We gathered an experienced clinic operating team to promote development of a standardized management system Light Medical Aesthetics Institution that takes advantage of our supply chain innovative capabilities. Our model clinics keep breakeven after only 3 months for formal operation, which reflects our strong reputation among medical aesthetics users and strengthened our confidence to begin exploring franchising opportunities. In 2024, we plan on opening more than 10 clinics in 6 cities nationwide.

Speaker 1

Each location has been selected based on data from our cooperation with institution, strict operational requirements, profitability and deep market research. That's all. Thank you.

Operator

And next the next question comes from Joey Tan of Jefferies.

Speaker 3

This is Joy from Jefferies. On behalf of Thomas Chong, My question is, can management share with us the outlook for the upstream supply chain business? Thank you.

Speaker 1

Thank you for your question. We plan to launch a new Solari product in 2024 and also add a new anti age product sourced through our supply chain business. In addition, from 2025, in the light demanded collagen category, we will launch various products including PWLA, which will establish a strong presence for us in this vertical. With 3 years of operational experience, the synergies between our product development pipeline, sales team and platform are now rapidly strengthened. We expect to add more products and continuously generate incremental revenue and profit growth from the supply chain business.

Speaker 1

Thank you.

Operator

Next, we have a question from Yib Lee from Haitong Securities.

Speaker 3

Let me translate myself. Thank you and good evening management. I'm here have a question about the profit margin And I would like to know what's the reason for the year over year decrease in gross margin and where will margins trend going forward? Thank you.

Speaker 2

Okay, I will translate myself. The decrease in gross margin was mainly due to the changes in revenue mix. In Q4 2023, our sales of information and reservation services maintained high margins compared to those for sales of medical products and maintenance, which was lower, while revenue from new business such as Sohyang Prime have already demonstrated their potential, it is still in the early stages of development with lower gross margin. As we strategically expand our presence along the medical aesthetic value chain, each of those new businesses are expected to increasingly contribute to our bottom line. As the synergies created by our presence both upstream and downstream strengthen, the profitability of our business overall is expected to improve in the mid to long term.

Speaker 2

Thank you.

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Key Takeaways

  • 20.1% year-over-year revenue growth in Q4 to RMB390.6 million and a full-year net income turnaround to RMB21.3 million versus a RMB65.6 million loss in 2022.
  • Information services revenues rose 16.8% in Q4, while new ventures—medical product sales and maintenance—grew 50.6%, driven by cosmetic injectables and Sohyang Prime.
  • Sohyang Prime’s model clinic reached breakeven in three months and achieved a 13.8× monthly revenue increase in H2 2023, with plans to open clinics in six to seven cities in 2024 and explore franchising.
  • The upstream supply chain now offers seven injectable products, an R&D center and two production lines, supporting a 600% shipment increase of partner product Airabi and paving the way for new collagen and anti‐age launches.
  • For Q1 2024, the company guides total revenues of RMB290–310 million, reflecting confidence in market recovery and continued growth of its new ventures.
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Earnings Conference Call
So-Young International Q4 2023
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