So-Young International Inc.

Thank you, operator. Hello, everyone, and thank you for joining us today.

So-Young's first quarter 2019 earnings release was distributed earlier today and is available on the company's IR website at ir.soyoung.com as well as on GlobeNewswire services.

On the call today from So-Young, we have Mr. Xing Jin, Co-Founder and Chief Executive Officer; and Mr.

Min Yu, Chief Financial Officer.

They will be available to answer your questions during the Q&A session that follows management's prepared remarks.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as will, expects, anticipates, future, intends, plans, believes, estimates, targets, going forward, outlook, and similar statements.

Such statements are based on management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties, or other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. Further information regarding these and other risks, uncertainties, or other factors are included in the company's filings with the US SEC.

The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise except as required under applicable law.

It is now my pleasure to introduce Mr. Min Yu.

Please go ahead, Min.

Thank you, Tip, and thank you, everyone, for joining our first earnings call as a public company. I will try to keep my comments here fairly short so that we can leave more time for Q&A.

We are very pleased to report robust growth across the board, which I believe largely reflects our continued strong growth momentum and increasing operational efficiencies. The market opportunity is massive and I am confident that we have the right strategy and team in place to ideally position ourselves to benefit from the enormous growth opportunities ahead.

What makes us attractive to users seeking medical aesthetic treatments in China is our ability to provide a unique value proposition with our reliable user experience. Transparent pricing, reviews and service provider credentials and convenience access to comprehensive media content, social community and online reservation functions.

This can be seen in our operational data for the quarter with average mobile MAUs increasing by 79% year-over-year to 1.92 million, total number of purchasing users increasing by 85% to 127,000 and the aggregate value of medical aesthetic treatment transactions facilitated by our platform increasing by 68% year-over-year to RMB 694 million. We also offer medical aesthetic service providers a similar unique value proposition with effective customer acquisition, differentiated branding and the improved operating efficiency.

This is also reflected in our results for the quarter with the number of paying medical service providers on our platform increasing by 37% year-over-year to more than 2,700 and the number of medical service providers subscribing to information services on our platform increasing by 139% -- 136% to 1,853.

We will continue to invest in enriching our content offerings, deploying AI across our platform, developing additional value-added services, diversifying user acquisition channels and expanding into adjacent consumption healthcare verticals to strengthen our competitive advantages and fortify our position as a clear market leader.

With that, let me now quickly go over our financials for the quarter. Please be reminded that all amounts quoted here will be in RMB terms.

Please also refer to our earnings release for detailed information of our comparative financial performance on a year-over-year basis.

So to start, total revenues were RMB 206 million, up 81% year-over-year. Within total revenues, information services revenue was RMB 143 million, up 103% year-over-year.

Reservation services revenue was RMB 64 million, up 46% year-over-year. Costs of revenues were RMB 66 million -- RMB 36 million up 146% year-over-year, due primarily to the RMB 14 million increase in payroll costs associated with an increase in operational staff headcount.

Gross profit was RMB 170 million up 72% year-over-year. Gross margin decreased to 82.3% from 87% during the same period of last year.

Total operating expenses were RMB 132 million, up 90% year-over-year.

Sales and marketing expenses were RMB 76 million, up 69% year-over-year, due primarily to share-based compensation expense, an increase in marketing and user acquisition campaigns to enhance our brand recognition and an increase in payroll costs associated with our expanding sales and marketing teams.

Research and development expenses were RMB 31 million, up 134% year-over-year. This increase was primarily due to the share based compensation expenses and increased payroll costs from our expanding R&D teams, who are developing technologies to further enhance their users and medical service provider experience.

General and administrative expenses were RMB 25 million, up 124% year-over-year, due primarily to an increase in payroll cost associated with our expanding the administrative team and share-based compensation expenses.

Income from operations was RMB 38 million compared with RMB 30 million during the same period of last year. Non-GAAP income from operations was RMB 44 million compared with RMB 30 million for the first quarter of 2018.

Income tax expenses were RMB 7 million compared with RMB 2.4 million during the same period of last year. The increase was primarily due to increase in taxable income during the quarter.

Net income was RMB 46 million compared with RMB 31 million during the same period of last year. Non-GAAP net income was RMB 52 million compared to RMB 31 million during the same period of last year.

Basic and diluted earnings per ADS attributable to ordinary shareholders were RMB 0.28 and RMB 0.25, respectively, compared with RMB 0.36 and RMB 0.33 in the first quarter of 2018, respectively.

Next moving on to the balance sheet. As of March 31, 2019, we had total cash and cash equivalents, restricted cash and short-term investments of RMB 1.28 billion.

Please note that this doesn't include the around USD 180 million we raised during our IPO earlier this month.

Now on to guidance. For the second quarter of 2019, we expect total revenues to be between RMB 260 million to RMB 280 million or USD 38.7 million to USD 41.7 million, which represents an increase of 71% to 84% year-over-year.

This forecast reflects the company's current and preliminary views on the market and operational conditions, which are 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.

My first one is around Q2 guidance. Wondering if you can elaborate on the revenue guidance at all.

What you're expecting between information and revenue services?

Actually we -- the current forecast for 2016 and 2018, the composition of -- to revenue-wise, including information services and the commission is very similar to that we see, is around the same ratio for the first quarter. Other than that, I probably won't be able to provide more informations on the distributions of that.

Okay. All right, I want to ask about sales and marketing expense a little bit.

How much of your sales and marketing expense was spent on marketing and user acquisition? And within that line item, seeing as in 2018 about 3/4 of marketing was spent on brand advertising, can you help us think about what you think the composition between brand and other user acquisition will be for 2019 and how that might differ from 2018's distribution?

Yes. For first quarter 2019, the RMB 75 million spent on sales and marketing, within that, RMB 48 million has been spent on customer acquisition.

That's -- half of that, around half of that has been spent on branding and the remaining will be on the traffic acquisition. The reason why seems the first quarter is low is because the first quarter usually is a low season for customer acquisition or advertisement for ourselves.

So we can see we spent relatively less, around 36% of the total revenue for sales and marketing.

And going forward, for the full year, we think last year in 2018, we -- within the RMB 233 million spent on customer acquisition, more than 70% has spent on branding. Just around 25%, 26% has been spent on traffic and acquisition.

For the full year of 2019, we expect that there are some structural change on that. We will spend relatively more on traffic acquisition and -- but still, branding will be the major cost for customer acquisition in the company's strategy.

Okay. And my last question, if possible.

Are you able to provide the number of total medical service providers on your platform where we can see the percentage of those paying?

You mean for the end of first quarter?

Yes. I think in 2018, it was 5,600.

That's not only the medical aesthetics service but other medical service providers. And I think at the end of the first quarter, it's around 6,000.

Congratulations on the successful IPO and the solid 1Q result. I have 2 questions.

My first question is regarding to the reservation service. So according to the results, we noticed that average ticket size per medical aesthetic treatment declined year-over-year and the PEG rate also declined year-over-year.

Can management share like what's the reason behind this and the trend going forward?

Yes. I think these -- the reservation revenue has been, especially I think the number of reservations or the people who reserve through us and they experience the services off-line has been increased quite substantial for that quarter, but the ARPU seems coming down.

The reason why is because first quarter, usually the low season for medical aesthetic services, especially for this year, because this year Chinese New Year has been, was 10 days earlier compared to last year 2018, which have an impact on the reservations for medical aesthetic services for users because usually in China they won't -- consumers won't do severe treatment or a serious life surgical treatment before Chinese New Year.

And February as a full month are very quiet because that's a holiday season in China. So that's the reason why it seems like the ARPU low.

And we do have a March campaign event for getting more people to consume and reserve through us. And this year's theme for March campaign is dental services.

So we will see -- it seems like, because the revenue we disclosed are the net revenue term, which will deduct all those like -- we use the red envelope or some of the marketing or discount for users being left out from the revenue line. So it seems like relatively lower PEG rate, but we didn't change any commission rates we agreed with our service providers, it's still 10% across the platform.

All right. My second question is, we noticed that the sales and marketing expense growth lower than MAU growth.

So it implies that our user acquisition efficiency is improving. Can management share what's the reason and the trend that we are seeing?

Yes. I think that's a very good question because our revenue line, especially for the first quarter more than 2/3, almost 70% is from us, our information service revenue.

The GNV term is -- we are not calling that GNV term because that means we facilitated a certain amount of the reservations. And we -- those among -- we only take 20% as reservation payment and the 10% after that is our revenue, but the major 80% has been paid off-line.

And I think that's -- but our sales marketing on these is not to only encourage people reserve through us, you should take as how much money we spent and how much customers or MAUs we acquired because from a -- that means efficiencies of our sales marketing strategy.

From that point of view, I think our growth in terms of MAUs have been more than our so-called GMV growth. And we do feel our sales and marketing strategy being quite successful especially since last year -- third quarter of last year.

And we do still see very strong customer growth or MAU growth in first quarter.

Yes, we also find our information service partner -- I think from a service provider's point of view, our information services has been -- the institution or medical aesthetic service providers, our medical service providers who pay for our information service has been growing more than 130% year-over-year. Yes, that's -- just want to be focused on that.

Congrats on a great quarter. So my question is around like when I was browsing the app we do see you guys have a so-called black card membership.

So it looks like to potentially can be a new like, revenue stream from the customer side. So my question around that, like can you give more insight on this membership program?

Second is how, like -- our like programs or other services on platform, what percentage of these kind of low pricing, high frequency kind of Botox shot or kind of service? And the last is, I do see Meituan is also pushing like this kind of only cheaper, but like high-frequency like Botox that kind of service on that platform on their apps.

So what do you see from that competition?

For the first question, for the black card, I think I will try to answer you and for the Botox or the dermal filler, these kinds of SKUs also being provided by Meituan, I think I will also leave to our CEO, Mr. Xing, for more explanation.

But for the black card, I think we, just for information, we just started to test for the membership not long time ago. And currently, we don't have a lot of revenues being contributed from these group of customers, but we do feel that will be an important tool for us to gather or keep tracking the loyal customers and provide better services to them.

We will start to apply more tools or services for those customers going forward. And just for the first quarter results and for the historical results in 2018, it's not very substantial from those group of customers yet.

And I will let Mr. Xing to answer the competition about for what we are currently facing from, as you think, from Meituan.

[Foreign Language]

Yes, I will do the translation.

[Foreign Language]

[Interpreted] Okay. I would do the translation on what has been said by Mr.

Xing. First of all, I think compared to those large traffic platforms like you have mentioned, Meituan, I think the key competitive advantage we have is our community.

So the community is not easy for any platform to accumulate such large amounts of UGC content. And it's also very important the platform has, itself has its own characteristic and the community environment, what can encourage people to share their own experiences.

And it's a gathering that group of young generation ladies or females who are interested in medical aesthetics to come to our platform, read information, find out who are the better service provider and the most appropriate services they can take and take the reservations off-line. And we, of course, as a platform, we help them to -- assist them to make that decision, making -- to go through the decision-making process and get the work done, get the reservations done.

And because of that, we do see our ARPU is -- our platform, especially for those with surgical services, where user have longer decision-making process and a relatively high risk, they are more willing to come to our platform and assist them to take the -- make that decision. And the ARPU, of course, we do see our ARPU is higher than the large traffic platforms.

For the large traffic platforms like Meituan, they treat medical aesthetics as one monetizing strategy or SKU they can monetize on their large traffic. And they do have large traffic, but they don't have so much -- so large operation team off-line to help them maintain the operations or to regulate those service providers on the platform.

We have more than 300 business development personnel currently and we also have another 200 to 300 operational personnel online for the content and community operation and community -- how to say, the verifying the informations. So we do -- but for, like Meituan, I think they are around 1/10 of the team like what we have.

So they don't have so much resources to cover or those service providers and provide as good as services or as an informative information like us on the platform to our users. So from these 3 perspectives, first of all, we have a very strong community feature, which make us in terms of competition with large traffic platforms, we have the advantage and that's a very large barrier.

And because of that, we are gathering higher value users. Our ARPU of users is higher than the general large traffic platform.

And we do have the strong off-line operation team, which provide better quality services to users, and of course, also better quality controls to service providers.

[Foreign Language]

[Interpreted] Other than the 3 points we mentioned earlier, we do have a more detailed operation on the doctor's level. Compared to other large traffic platform, they are mainly focused on the service providers or clinics or hospitals.

But we also have developed the tools for doctors who can -- on our platform to answer users' questions or have a video broadcasting diagnostics and trying to have better services for doctors and also as well as the customers who are using our platform. And another point is, as a vertical platform, we can focus on the service or the industry we are participating in.

We can promote our brand as a medical aesthetic service brand and further we will be -- provide health and -- beauty and health to our users. And it's also a more unique position for us and we can invest in our branding to find out those more dedicated or focused user phase.

Congratulations on the debut and well done for a good first quarter. From our perspective, it will be really good to understand if you were to take a step back and think about the longer-term opportunity that you have in medical aesthetics.

How would you characterize the runway that you guys have to grow in the Chinese market and kind of how do you describe that -- the transaction figures?

I think from an industry point of view, China's medical aesthetics market has been growing very fast. Historically, in the past 5 years at 25% CAGR to more than RMB 120 billion in 2018.

And we do feel this market still will grow at 24%, 25% CAGR in the next 5 years to reach more than RMB 360 billion in 2023.

And in this market, there are 2 very unique characteristics for the market for -- in China. First one, the market is very fragmented.

So the only 5% slightly than -- 7.2% of the market has been contributed by the top 5 service providers or the hospital chains in China. And more than 80%, 81% of the revenue generated from private-owned hospital and service providers rather than other like healthcare services industry in China mainly controlled by public hospitals.

So these 2 characteristics make the industry or service providers in this industry spend a lot of money in customer acquisition.

Last year, they spent almost -- more than 25% of that total industry revenue into customer acquisition, to acquire customers, which is around RMB 32 billion. Within the RMB 32 billion, RMB 18 billion has been spent online and mainly on search engines.

So as a vertical platform, like us, we do have very obvious competitive advantage especially on the customer acquisition efficiencies compared to search engines. So we are not fighting, we are gaining the market share from the search engines obviously in the past 5 years because the market or the surgical platform for medical aesthetics has been just as that, existed since 2014 and it's growing from 0 to more than RMB 1.3 billion on the total market size in the past 5 years.

And we do feel and we are very confident that this specific vertical platform business model industry will be growing at 58% to 60% CAGR in the next 5 years to reach around 25% of the total online customer acquisition spending of medical aesthetics market.

So as a market leader of So-Young, last year, in 2018, we already accounted for more than 50% of the vertical platform business. And we -- from, as said by Mr.

Xing, in the vertical business, if you are a successful leader platform, you usually will take more market share. For example, like Autohome, they are taking more than like 70%, 80% of the total market for auto sector.

And we are also seeing our market share expanding and we will see our market share will be reaching 70% to 80% in the next 3 years' time. So that's why we are very confident in terms of our growth, and of course, our industry itself is growing and taking the market shares from the search engine.

Sure, that's really useful. And I think just some kind of commentary around -- 2 kind of follow-up questions.

I think the first would be, how do you think about the clinics that you are serving in some ways and how do you think about the value proposition that you provide for them relative to what you charge them to provide that service?

Sorry, first question is what the service provider?

Yes. So basically like the clinics.

I mean they pay you an information service fee, and then of course, a booking fee as well. And kind of how do you think about the traffic that you can direct towards them or the customer that you can direct towards them?

And why do you think you present a better solution for them to acquire customers than another channels of acquisition?

Sure. I think for a very standard process like a new clinic start to operate with our platform, they will start for, like a commission-based services we provide, which means we divert our users and our user will reserve through us using that services or that specific clinic services and we take the 10% of reservation as our commission revenue.

And going forward, when these clinics start to accumulate more reservations, accumulate more UGC content related to them, they will start to promote themselves, trying to get more exposure of their services or their clinic on the platform to try to get more user's attention. So they will start to use our information services to promote their own branding and differentiate themselves, especially if they have certain uniqueness in certain services.

So we do feel once the user or service provider starts using information service, we provided to them, they will start to spend more because we do have a very effective or efficient customer acquisition result for them. For example, on my platform, we -- the average ROI for our user or service provider is materially higher than search engines because search engines these days become very expensive.

They are in a bidding process on keywords. So we divert 1 off-line visit to -- visitor to the service providers could be more than like 5x to 8x higher than what we can provide to users, service providers.

So we -- that's why we are very confident and we do see demand...

Sorry, just to clarify. Sorry, you said it was 5x to 8x higher on the search engines.

Is that what you're saying?

Yes. Our, I mean...

Versus what you can provide?

Yes. So the search engine, it's 5x to 8x higher in terms of customer acquisition cost compared to my platform.

Sure.

So that's why we are also seeing the service providers, they are shifting the budget from investing in search engines to the vertical platforms like us.

And is there any kind of commentary that you can provide around the type of customers that you provide? I mean one of the things we noticed was the retention rates that you guys have are somewhere around the 80s.

It'd be really useful to get some idea of how you think about providing that retention in terms of customers or the quality of customers that you send to the clinics. And are they different customers to what they could acquire elsewhere?

I think that you -- because on our platform, we can provide reservation services. So users can reserve through us to certain service providers, but the reservation is not compulsory, they can also just read those informations about that service provider or that doctor, and they can go directly off-line without booking through us or reserve through us and paying everything off-line.

But we do share the information services paid by those service providers because if they want to show them or get more exposure on our platform, they need to pay information services. So from -- we can't track that amount of users who are just reading information and go off-line directly without reserving through us.

And for those who make the reservation with us, we do have tracking their retention rate. So in annual term, the second year retention is around like 32%, 33% and the third year retention is around like 20%.

So that's for the reservation services.

But I also would like to take back your attention to the retention rates for service providers who pay us in terms of information services. In 2018, 87% from those who paid us in terms of information services in 2017 renewed information service with us, which means the 87% of the clinics paid us information services in 2017, still using our information services in 2018.

You asked what's the churn rate for the 13%. Only 2 scenarios for the 13% churn.

One is we find that quality is not good enough, so we kick them out from our platform. Second one is they just run out of the business, they close down.

So all the remaining service providers or clinics who use our information services will renew, 100% renew with us.

Yes, understand. And just one kind of final question on this.

I mean if you think about the evolution of the clinic market, is it -- will it be a risk to your business, if the clinic market doesn't consolidate in China? And actually, if we look forward to 5 years or 10 years that the top 5 is still, let's say, 5% to 10% in terms of concentration.

Do you think that poses a risk?

Yes. I think the concentrate -- the future of this market is very -- is fragmented.

So it's a very fragile market because medical aesthetic services is a perfect -- is very simple for doctors to have their own business. We do see our -- the market in China, the top 5 clinic chains only account for 7.2% in 2018 for the total market size.

And the market is growing like 25% every year. And we do see a lot of entrepreneurship from doctors itself because having medical aesthetic services clinics, they -- it's relatively easy for them to have their own business.

And I think the fragmented market trend or the future of that market will be consistent going forward. For example, like in the U.S., which is the biggest medical aesthetic service market in the world, the market is very fragmented and mainly focused by users, mainly comprised by the doctor's own entrepreneurship, or it's 1 doctor or 1- to 3-doctor clinics.

So -- and for the Korea, South Korea market is also very fragmented. There are not -- the concentration trend or the risk from concentration, we are not seeing that for the next 3 to 5 years' time.

Thank you, operator, and thank you, everyone, for joining the call today. This concludes our conference call.

If you have any further questions, please don't hesitate to contact us or the company directly. Thank you, again, for joining.

Goodbye.

Thank you.