Ladies and gentlemen, thank you for standing by for So-Young’s Second Quarter 2024 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 conference over to your host for today's call, Ms. Mona Qiao. Please go ahead, Ms. Mona.

Thank you, operator, and thank you everyone for joining So-Young’s Second Quarter 2024 Earnings Conference Call. Joining me today on the call is Mr. Xing 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 US private securities and the litigation reform act of 1995. Forward-looking statements are subject to risks and alternatives that may cause actual results to differ materially from our current expectations. Potential risks and alternatives include, but are not limited to those outlined in our public filings with SEC, including our Annual Report on Form 20-F. So-Young does not undertake any obligation to update any forward-looking statements, except as required under applicable law. At this time, I would like to turn the call over to Mr. Xing Jin.

[Foreign Language] Hello everyone, welcome to today's earnings call. Our performance during the second quarter was solid, with total revenue of RMB407.4 million, exceeding the top-end of our guidance. Non-GAAP net profit was RMB22.2 million at 43.1% year-over-year, showcasing our high quality growth at the effectiveness of industry integration. [Foreign Language] We capitalized on industry trades, executed on our strategy and made impressive progress during the quarter. Specifically, our new businesses segments continue to grow rapidly with revenue from the sales of medical products and maintenance services reaching RMB106 million, up 22.6% year-over-year. Product shipments in our upstream supply chain business increased as our channel clinics expanded, both contributing significantly to growth. We are the only platform covering the upstream, midstream and downstream segments of the entire aesthetic medical industry and are leading the industry into a new era of high-quality and sustainable development. Leveraging the synergies created by the vertical integration, we are enhancing industry transparency and operational efficiency across the value chain. This closely aligns the industry value chain with evolving consumer needs, ensures a diverse reach of high-quality and affordable products, optimize the customer experience and redefine standards for medical aesthetic services. [Foreign Language] We continue to drive high-quality development in our POP segment and strengthen our competitive advantage in the mid-to high-end market by refining operations and deploying target user subsidies. With client demand for premium customized products growing, we adjust our strategy and upgraded SKUs, ensuring their authenticity and further enrich the categories offered by our leading partner institutions. We also strengthened support for high-quality institutional partners by integrating our POP business with our chain of clinics, to create deeper and greater synergies enabling us to better meet the evolving and diverse medical aesthetic needs of mid to high-end users. In the second quarter, GMV…

[Foreign Language] Despite this soft recovery in [consumption] (ph) as the macroeconomic challenge over the near term, we believe that the Chinese medical aesthetic market that still has enormous potential in the long term. As the industry begins reshuffling and enters a period of consolidation, leading brands like So-Young, with a unique ecosystem and full category advantage are well positioned to capitalize on the new opportunities, expand their market share and growth potential and solidify their position as market leaders. We believe our POP business is ideally suited to meet demands for non-standardized treatments, while our channel clinics can service standardized treatment. Supporting both of these businesses with a steady stream of exclusive products in our upstream business which will also benefit from [2C and 2B] (ph) opportunities and guaranteed sales offered by both downstream businesses. Combined, these three business segments create enormous synergies and from our year-end triangle, we strongly believe that vertically integrating the industry value chain will drive innovation, effectively ensure the quality of services and open up new growth opportunities for So-Young going forward. [Foreign Language] I will let our CFO, Nick, take over now to go through the second quarter's financial results. After that, we'll open up for questions.

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 performances on a year-over-year basis. Total revenues during the quarter were RMB407.4 million, down 1.1% year-over-year, exceeding the high-end of our guidance on the back of 22.6% year-over-year increase in sales of medical products and maintenance services. Information services and other revenues were RMB279.2 million, down 6.6% year-over-year, primarily due to a decrease in the number of medical service providers subscribing to information services in our platform. Reservation Services revenues decreased 16.9% year-over-year to RMB22.4 million, primarily due to policy changes for commission rates and subsidies. Cost of revenues were RMB155.1 million, up 3.1% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic products. Within cost of revenues, cost of services and others were RMB101.9 million, down 4.4% year-over-year primarily due to a decrease in costs associated with So-Young Prime. Cost of medical products sold and management services were RMB53.2 million, up 21.3% year-over-year, primarily due to an increase in costs associated with the sales of cosmetic products. Total operating expenses were RMB245.6 million, down 13% year-over-year. Sales and marketing expenses were RMB132.3 million, down 4.1% year-over-year, primarily due to a decrease in expenses associated with branding and user acquisition activities. G&A expenses were RMB70.8 million, down 23.3% year-over-year, primarily due to decreases in share-based compensation expenses and the professional consulting fees. R&D expenses were RMB42.5 million, down 18.5% year-over-year, primarily attributable to improvement in staff efficiency. Income tax benefit were RMB2.6 million compared with income tax benefit of RMB0.8 million in the same period of 2023. Net income attributable to So-Young was RMB18.9 million compared with a net loss of RMB2.6 million during the…

We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Chloe Wei with CICC. Please go ahead.

[Foreign Language] So let me translate myself. Firstly, congratulations on the solid results. The revenue continued to exceed the high-end and really strong bottom-line. And my question is about the overall trend. So entering the second half of this year, we have seen signs of slowdown in most consuming companies guidance, say the online platforms, tourisms and et cetera. So I understand that's mostly due to the macro headwind but can management share more color on the trends we have seen in July and August from the consumers and also from advertiser side. And looking into the second half, are there anything we would like to share with the market about how we plan to adapt to the new changes? Thanks.

[Foreign Language] The current state of the medical aesthetic industry isn't quite where we thought it would be at the beginning of the year. According to data from MDR, the retail sales of consumer goods in China increased by 3.7% year-over-year in the first six months of 2024, a deceleration compared to the first quarter of 2024 at the last quarter of 2023. Despite weak consumer confidence and discretionary spending, the medical aesthetic market continues to grow and offer significant structural opportunities. [Foreign Language] The market share of light medical aesthetic services is expanding, driven by strong consumer demand for minimally investors and convenient services. Meanwhile, the upstream supply chain is experiencing its surge in growth, fueled by innovation and supply chain optimizations that are propelling the industry's overall advancement. [Foreign Language] Our industry research highlights two key forecasts that will shape the future of the industry. First, we expect to see the standardization of light medical aesthetic services gain momentum. This will lead to emergence of large chain brands and enhanced market norms and efficiency, resulting in a more mature sector. Second, over the next four to five years, we anticipate that leading chains will dominate the market, significantly accelerating industry concentration. As top [brands] (ph) capture larger share of market, new opportunities will be created for investors and entrepreneurs to capitalize on this trade. We plan to begin franchising our chain of clinics in the second half of the year. This will not only contribute to the industry's expansion but also position us for success in rapidly evolving market.

Thank you.

The next question will come from Nelson Cheung with Citibank. Please go ahead.

[Foreign Language] Thank you very much for taking my question. My question is regarding the POP business and wondering what would be the company's outlook on the positioning of the POP business in your future development? And are there any new business strategy that can be shared with us? Thank you.

[Foreign Language] The POP business remains a vital component of our growth strategy, and we will continue to focus on its development. As we've said before, we believe that Chinese medical aesthetic market will become increasingly polarized. Consumer spending on standardized treatment is becoming more value-driven while spending on non-standardized treatment is becoming more selective, with consumers willing to pay a premium for the highest quality care. To adapt to this market landscape, our strategy is twofold. One, for standardized treatment, we leveraged the strength and service quality of our chain of clinics to meet client demand. And two, for non-standardized treatments, we will rely on a diverse array of treatments that our POP business facilities to satisfy their risk needs. [Foreign Language] We are moving towards a curated model, just like Costco and Sam's Club. By selecting high-quality institutions, leading doctors and premium SKUs in each vertical, we aim to simplify customer decision-making, increased SKU transaction value and ultimately strengthen our control over the supply side to enhance our pricing power. Additionally, for partners who are strong technically, but lack operational expertise, we offer comprehensive operational services management. A prime example of this is our master injector team which consists of injectable specialists each [boasting] (ph) an impressive track record of 10,000 treatments. We provide some with online operational support enabling them to focus exclusively on delivering service to customers. Demand for this service has grown rapidly and received widespread positive feedback. [Foreign Language] Going forward, our chain of clinics will create strong synergies with our POP business, as it growth to scale by identifying non-standardized treatment in demand by customers of our chain clinics and promoting like high-quality institutions and doctors from POP. We are maximizing both customer satisfaction and commercial value.

Thank you.

The next question will come from Patrick [indiscernible] with CITIC Securities. Please go ahead.

[Foreign Language] Okay, so let me just briefly translate for myself. Thank you for the management and thank you for taking my question. I'm [Zhang Patrick] (ph) CITIC Securities. So I'm just wondering more questions about the clinical chain business. So I'm wondering what factors might constrained speed of the clinical chain expansion? And what are the unique advantages that So-Young have in addressing these constraints, so that we can addressing these constraints more effectively than our competitors? And additionally, what are the current operating metrics for the chain of clinics. And -- for example, if our clinics have reached breakeven. And what is your -- the future business trends? Yeah, thank you very much.

[Foreign Language] In general, factors such as site selection, furniture and renovation, license application, staff recruitment, marketing and operational costs can impact how quickly new clinics can open up. Having said that, we've significantly improved new clinic opening efficiency by creating respective SOPs and implementing effective process management. This has helped us cut down the average time required to open up new clinics from about five months early to around three months now. [Foreign Language] However, we believe the following factors are what truly determine how quickly we can scale our channel clinics. One, the ability to acquire customers, if we cannot guarantee that we will simply incur losses. Two the ability to recruit a sufficient number of leading doctors and specialists. Three, the strength of our supply chain which is key to offering products at competitive price while keeping profit margins. Four, sufficient capital as the initial investment for each new clinic can cost millions of RMB. And five, the ability to obtain the necessary license. [Foreign Language] We are already positioned to address each of these factors. We have solid customer acquisition capabilities that leverage our strong brand recognition at the expensive user base already on our platform. This is further enhanced by our contact and online marketing capabilities. Our strong brand recognition, scale of our business and compliance with regulations give us a significant advantage when recruiting professionals when compared to small and medium-sized institutions. On the supply chain side, our initiatives over the past few years are already beginning to yield positive results. As more of our products receive certification we expect our competitive advantage in this vertical to positively impact our financial performance more meaningfully. [Foreign Language] By continuously enhancing our media platform capabilities through the So-Young Prime program over the past year, we are…

Thank you.

The next question will come from [indiscernible] with Jefferies. Please go ahead.

[Foreign Language] So let me translate myself. Thanks management for taking my questions. My question is how does So-Young upstream sector differentiate itself from other competitors? And could you elaborate on the management's perspective regarding the strategic position and the business plan for the upstream sector this year? Thank you.

[Foreign Language] Unlike traditional manufacturers that rely on linear R&D production to sales model, we capitalize our unique ecosystem and for category advantage to create synergies with our existing business lines. The integrated approach allow us to amplify the strength of our brand, reputation among customers and network coverage through institutional partners. As a result, we can rapidly build market competitiveness for new products and achieve customer targeting through our app at media metrics, while using our clinics to ensure a steady stream of sales, a capability that set us apart in the industry. [Foreign Language] For example, True Lift our non-surgical anti-aging ultrasound device generated tremendous pre-order volumes and sales volumes beyond expectations when it's launched not long ago. This performance showcased its potential to become a market hit and the capabilities of our team. Similarly, sales of the Korea brand ELASTY continue to grow. In addition, we have been actively expanding our pipeline with high growth potential. Our road map is robust with two new products ready for launch next year and three more in 2026, all targeting popular segments of injectables and energy-based devices. We are confident these products will make significant contributions to revenue growth. [Foreign Language] Leveraging our broad extensive consumer behavior data and experiments team, we are building for category upstream capabilities for our broader ecosystem. In the second half of the year, we will continue to expand our team which is currently composed of seasoned experts from a leading domestic and international manufacturers. We aim to grow this team to a total of 100 members by the end of the year.

Thank you.

The next question will come from Ivy Lian with Haitong Securities. Please go ahead.

[Foreign Language] Thank you for taking my question. I'll translate myself. With current gross margins around 60% and previously provide some insights into the expected trend for the gross margin going forward? Thank you.

Thank you for the question. Over the near-term, macroeconomic risks such as slowing global growth and inflationary pressures continue to weigh on consumer sentiment. As a result, consumer willingness and capability to spend may be constrained, increasing market uncertainty. This is reflected in our third quarter revenue guidance. As we transform our business beyond the POP business, our revenue structure is undergoing a shift alongside, which is impacting gross margin levels. While our traditional information and resolution services continue to enjoy high gross margin, the increasing share of medical product sales, which have stable but lower margins is affecting our overall margin profile. Furthermore, our chain of clinics, which is still in its early stages, has seen gross margin temporarily impacted by promotional activities. In the short-term, we expect gross margins will continue to be impacted by the expansion of our chain of clinics and medical product sales. However, as our upstream supply chain capability strengthen and operations across our clinics mature, we will anticipate a corresponding improvement in gross margin. Additionally, the introduction of our franchise model is expected to support gross margin through greater economies of scale, optimizing our profit structure even further. Thank you.

This concludes our question-and-answer session as well as our conference call for today. Thank you for attending today's presentation. You may now disconnect.