Earnings Call: Q2 2021

Sep 10, 2021

Earnings release

Good morning, ladies and gentlemen, and thank you for standing by for Sohyang's Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. After the management's 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. Vivian Shu. Please proceed. Thank you, operator, and thank you for joining Sohuang's Q2 2021 earnings conference call. Please note that the discussion today will contain forward looking statements made on the Safe Harbor provisions of the U. 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 statements, except as required under applicable law. Joining us today on call are Mr. Xin Jin, our Co Founder, Chairman and CEO and Mr. Ming Yu, our CFO. At this time, I would like to turn the call over to Mr. Xin Jin. Cash, please? Thank you all for joining our earnings call for the Q2 of 2021. We are very pleased to report another strong quarter. Revenue grew to RMB452 1,000,000, increasing the high end of our guidance of RMB450 1,000,000, an increase of 38% from the same period of 2020. Non GAAP net income attributable to Sohyang International Inc. Reached RMB74 1,000,000, an increase of 145 percent from the Q2 of 2020. Average mobile MAUs were 10,000,000, up 48% year over year. Total number of users purchasing reservation services were 245,000, up 44% compared with the same period of 2020. The number of paying medical service providers on our platform was 4,899, up 3.1% from the second quarter of last year. During the quarter, the number of users from purchasing reservation services in dental treatments grew approximately 120% year over year to about 14,800 and the number of professional dental institutions on our platform grew to 2,915, increasing by the more than 3 times from the same period last year. In the Q2, we announced the acquisition of a controlling interest in Wuhan Miracle Laser Systems, the first medical laser company listed on the National Equities Exchange and Quotations or NEQ Exchange in China. The acquisition will further enhance our competitive advantage in the non surgical aesthetic segment and allow us to explore new cooperation opportunity with upstream equipment, device and medical drug providers. WuhanMiracle is mainly engaged in R and D production, sales and agent service for lasers and other photoelectric medical and aesthetics equipment. It has more than 10 product lines, including both self owned and licensed owned. WuhanMiracle covers the broadest range of projects among photoelectric manufacturers and is able to solve diversified skin needs of different users. According to its reported result, the revenue for the first half of twenty twenty one increased by 119% year over year and net profit attributable to Wuhan Miracle for the first half of twenty twenty one increased by 2 52% year over year. Our solid results and new strategy have enabled us to consistently improve our operations to meet the increasing changing demand from our end users and business partners and expand our market share. Innovative technologies in medical aesthetics are driving an increasing awareness of aesthetic treatments and service among consumers. Notably, the popularity of non surgical procedures to maintain healthy appearance or promote anti aging benefits is constantly growing. In the second quarter, the revenue contribution of our non surgical business increased to 46% of our total revenue, up from 40% in the Q2 last year. The reservation orders from non surgical procedures increased by 40% year over year, and the reservation orders from non surgical procedures accounted for 70% of total orders. Moving over to our operational strategy. Firstly, leveraging our community content and advantages in new media resources. We'll continue to develop and launch fresh and highly successful products. In the Q2, we have been stepping up efforts to recommend core products with good word-of-mouth to users on our platform, including Fotona 4 d, photo rejuvenation, party and Accenture, which resulted in a year over year increase of over 100% for online orders. Online orders for Fotona 40 even increased by 500% year over year. On the non surgical product side, we continue to optimize the online transaction experience, increasing the number of FPUs on our platform and provided more transparent and attractive prices. We also launched an online consumer protection project, such as in advanced compensation and medical beauty insurance. At the end of June, over 140,000 non surgical SKUs were available on our platform, an increase of 41% compared with the same period last year. Secondly, we continue to strengthen the standardization of non surgical procedures and enhanced our management and control of products and equipment to optimize user experience. The strategic investment in Wuhan Miracle will not only expand our service network for institutional clients, but clinics sorry, institutional clients, but also improve our fulfillment service and ensure that we are able to offer authentic products to customers. With acquisition, our service in the non surgical categories will become more diversified, creating a competitive moat in the long term. Lastly, to ensure our users are guaranteed only authentic products and don't have to worry about safety issues on aesthetics, treatment and services. We will continue to deepen our cooperation with our network of medical device manufacturers in order to consistently screen drops medical device and service providers. We continue to develop more popular categories such as dental services. By working with institutional clients, we connected users with institution and offered them premier dental services by bringing a standardized system to enhance the service quality of these institutions. On the regulatory front, over the past few months, regulatory authorities and have expressed their views and opinions on various matters such as antitrust, data security and medical settings advertising and issued a series of policies and guidance for multiple industries. We have taken this opportunity to reflect on our practice and our role as an industry leader and engage in self reflection and introspection. First of all, since our inception, we have established a stringent review and approval process for all doctors and institutions as well as conducted rigorous review mechanism for content and service offering on our platform. In addition, following the guidance issued by regularity bodies at various levels, we have an established internal review process and continue to improve the online information we provided of Medical Aesthetics Services. At the same time, we have also been actively engaged in the self discipline of China's medical aesthetics industry by promoting platform governance and assisting our institution partners with compliance audits and promoting a standardized and orderly development of the medical aesthetics industry. To summarize, we believe the Chinese medical aesthetics industry is well on the track of steady growth. As a leader in the industry, we have the responsibility to make industry better by promoting industry standards and providing authentic and truly valuable services for our users. Looking forward, we will leverage our competitive advantages in content, technology and our large user base and continue to focus our efforts on user acquisition and expand our online presence into other segments of the industry. By making use of medical aesthetics as an entry point, Sohuya will be billed as the most trusted medical aesthetics and medical care platform in China. Let me invite Ming to give us an overview of our result for the quarter. And before the operator will open the Q and A. Thanks, K. S. 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. For the Q2 2021, total revenues were RMB451.8 million, up 37.7 percent year over year from RMB328.2 million and exceeded the high end of our prior guidance of RMB 450,000,000. The increase was primarily due to an increase in average revenue per paying medical service provider. The number of paying medical service providers on the platform was 4,899, an increase of 31.2 percent from 3,735 in the Q2 of 2020. The total number of medical service providers subscribing to information services on Sohuang's platform was 2,236 during the quarter, an increase of 8.8 percent from 2,0.56 in the Q2 of 2020. Within total revenues, information services revenue were RMB360 1,000,000 up 53.8 percent year over year from RMB234.5 million. Reservation services revenues were RMB91.9 million, a decrease of 2.8 percent from RMB93.7 million in the Q2 of 2020. Cost of revenues were RMB58.8 million, up 15.9% year over year from RMB50.7 million in the Q2 of 2020. Cost of revenues included share based compensation expenses of RMB3.8 million compared with RMB6 1,000,000 in the Q2 of 2020. Total operating expenses were RMB335.4 million, up 16.7 percent from RMB287.4 million in the Q2 of 2020. Sales and marketing expenses were RMB206.7 million, up 11.6 percent from RMB185.2 million a year ago, primarily due to an increase in payroll costs associated with the expansion of marketing employees. Sales and marketing expenses included share based compensation expenses of RMB1.6 million compared with RMB1.6 million in the corresponding period of 2020. General and administrative expenses were RMB56.5 million, up 13.3 percent from RMB49.8 million a year ago, primarily due to increase in payroll costs associated with the expansion of administrative employees. General and administrative expenses included share based compensation expenses of RMB7.2 million compared with RMB14.2 million in the corresponding period of 2020. Research and development expenses were RMB72.1 million, up 37.9 percent from RMB52.3 million a year ago. The increase was primarily attributable to increase in payroll costs associated with the expansion of research and development employees. Research and development expenses from the Q2 of 2021 included share based compensation expenses of RMB3.6 million compared with RMB6.2 million in the corresponding period of 2020. Income tax expenses were RMB11.1 million compared with RMB2.8 1,000,000 in the Q2 of 2020. Net income attributable to Sohyang International Inc. Was RMB57.6 million compared with net income attributable to Sohyang International Inc. Of RMB2.1 million in the Q2 of 2020. Non GAAP net income attributable to Sohyang International Inc. Was RMB73.7 million compared with RMB30.1 1,000,000 in non GAAP net income attributable to Sohyang International Inc. In the same period of 2020. Basic and diluted income per ADS attributable to ordinary shareholders were RMB0.54 and RMB0.53, respectively, compared with RMB0.02 and 2, respectively, during the same quarter during the Q2 of 2020. Now for our balance sheet. As of June 30, 2021, we had a total cash and cash equivalents, restricted cash and term deposits, term deposits and a short term investments of RMB2.26 1,000,000,000 compared with RMB2.68 billion as of December 31, 2020. For the Q3 of 2021, Sohyang expects total revenues to be between RMB430 1,000,000 to RMB450 1,000,000, representing a 66.6% to 69.7% increase from the same period in 2020. The above outlook is based on the current market conditions and reflects the company's preliminary estimates of the market and operating conditions and customer demand. This concludes our prepared 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. We will now begin the question and answer session. Your first question comes from Thomas Chong of Jefferies. Now I will translate myself. What are the companies' views regarding the recent changes on the advertising guidelines regulating the beauty medical sector, which were issued by the state administration for Market Regulation and how it will affect the company business moving forward? Thank you. Thank you. We noticed that documents issued by regularity authorities since the beginning of this year have mainly been focused on supervising the practice of medical institutions in the medical aesthetic sector. We believe that such supervision is conductive to their long term and healthy development of the entire industry. As an Internet medical settings information service platform, Since our inception, we have established a strategic review and approval process for all the doctors and institutions we partner with, as well as content and product review mechanisms. We are committed to build strong governance across our platform and strive to curb any non compliant activities. In terms of having medical information featured on our platform, in order to cooperate with Sohyang, medical institutions are required to submit their state issued business license, medical institution practice license and other documents issued by governance authorities. As well as past our internal review and verification, we also require doctors to provide their qualification certificates and verify practice license before information can be published on our platform. In terms of publishing content on products and services, we have built a rigorous information display system equipped with risk control and anti fraud systems. Information displayed by institutions must first meet our strict requirements and we have 2 additional review procedures, one automated and the other by manual inspections. We have also a professional compliance team that closely monitors state policies and standards in real time, which we then compile to optimize our platform's verification system and the standardization process. We also have a strict set of violation information risk control model library. Because of professional internal risk control management and the platform governance, we think that this should be the operational strength that differentiates from our peers. Last May, we initiated a self discipline campaign for China's medical aesthetics industry to promote platform governance. Regarding the draft guidelines on fabularity advertising in the medical aesthetic sector issued by the SAMR, we will provide our feedback through appropriate channels on the premise of protecting the legal rights and interest of consumers. Through positive and constructive feedback, we aim to create a voice for medical ethics professionals and at the same time, provide a better service to our customers and promote a regulated and orderly environment for the development of the industry. Meanwhile, we also believe that with strict regulation and further execution of specific rules, offline medical institutions are required to enhance their services capability and medical level, not blindly pursue traffic growth in marketing and user acquisition and even treated consumers with fake or special aids. Institutions will be more cautious selecting marketing channels. Also, the enforcement guidance also clarifies that online platform operators' duties to perform contract and do the verification and governance online platform compliance will be enhanced. In this regard, as the 1st mover in the industry to start and continuously self discipline, we believe that Sohuang will be benefited by the regulation in the long run. In the long term, we believe that the regulations will prove to be highly conductive to the healthy development of industry. For Sohuang, we are committed to adhere to all regulations, and we'll continue to further improve our internal review mechanism to full compliance and regular self governance. To lead by example, we will remain proactive in intercepting medical aesthetics promotional information that doesn't comply to the rules. In order to offer authentic information and online services and promote better care in the medical aesthetics industry. Your next question comes from Nelson Chong of Citi. Please ask your question. So let me translate myself into English. Thanks, management, for taking my question. So my question is regarding to the business prospects. Can management share your views related to the impact of COVID on your business? And can you share more details about the growth trend going into second half of this year? And my second question is related to your progress on the Sohuang pass, the SY pass. Yes. Thank you. In July August, China faced the double impact of COVID-nineteen resurfacing in a few cities and the damages from flooding disasters. Operations of medical institutions were adversely affected in the 1st year and second tier cities such as Shanghai, Chengdu, Nanjing and Zhengzhou. As the situation got under control, medical institutions were able to resume operations and return to their regular growth trend. Looking to the business growth in the second half of this year, firstly, policies in particular regulations for medical aesthetics advertising required institutions to conduct self inspection first in the near term and pull on qualified products and shipments from their offerings. Meanwhile, the enforcement guidelines also set clear requirements for online platform operators to fulfill the duties imposed by laws. As a result, institutions will be more cautious about the marketing in the near term. In the second half of this year, taking advantage of the rising popularity of non surgical treatment, we will continue to implement our established strategy to grow the non surgical categories, further penetrate and expand market share while maintaining our strength in the surgical category. As of the end of August, Sohuyaan Park has extended its network to 36 cities from 11 Q1 and the number of institutions increased from 95 to over 160. The number of verified orders on Sohyang Pass also increased by 40% in Q2 compared to Q1. Your next question comes from Leo Jiang of Deutsche Bank. Please ask your question. Let me translate myself. So thanks management for taking my question. My question is regarding to competition landscape. Can management share the latest competition landscape you have observed recently? Thank you. At current level of market competition, we believe it is no longer purely about competing for user traffic, but whether platform can really address a pain point for users and improve user experience. From the perspective of both regulation and better user experience, platform must be professional at all times and have in-depth knowledge of the industry. As the popularity of non surgical category increase in demand, we will continue to strengthen the operation of non surgical category and implement our established strategy to expand market share on top of growing our entire medical aesthetics user base. Meanwhile, we are continuously strengthening our cooperation with other platform to empower the entire medical aesthetics industry. For instance, we partner with JD dotcom to establish JD Healthy Medical Aesthetics channel so that consumers can experience and have easy access to professional and premier medical aesthetic services. Beside that, we also worked with AutoNavy to connect with other 1,000 institutions and established a consumer service for medical aesthetics users on the AMAP platform. Sohyang Pass has also achieved more strategic cooperations with like Little Red Book, Pinduoduo Kuaishou and Weibo. And we hope to explore popular treatments in medical aesthetics, build a premier shortlist of select products and expand our service scope to continue empowering more institutions. Your next question comes from the line of Vincent Yu from Needham and Company. Please ask your question. Management. Thank you for taking my question. I have two questions. One is to follow-up on the impact on the regulation. So my question is not like it's more focused on how the regulation impacts the traditional the industry structure and like the traditional practices in this industry and how we view this as a potential opportunity? And second question is on the reinsurance acquisition. How should we think about the strategy behind this position? What kind of cooperation we will have between this manufacturing company and the our institution clients? And also what kind of motivation model we are hoping to see for the future. Yes. Thank you. First, we believe that the regulation action against the noncompliant practice and strict regulatory requirements will benefit the healthy development of the whole industry in the long run. With timing of regulations, local regulation will further clarify and detail to detail the approval system and the process for institution adapters. Meanwhile, the usage specifications for drugs and equipment will be strengthened, forming more effective protection for manufacturers and institutions producing, distributing and using genuine and authentic products. Beyond entry compliance, we are seeing that the stricter regulation will, to some extent, drive institutions to raise the level from their marketing customer acquisition to internal operations such to improve service quality. Besides educating consumers to distinguish and select services, institutions need to retain clients with good service and skills. An institution won't survive for long by focus only on customer acquisition and ignoring management and service quality. Titan market regulation has significant driving effect on standardization and going online for the entire medical aesthetics market, particularly the non surgical medical aesthetics market. Yes. I will try to answer your questions about our acquisition of Miracle Laser. As mentioned earlier in the case remarks in the previous part, Merricom Laser is one of the biggest manufacturer for laser medical machineries in China. And we think the synergies going forward between the platform at Soyang and the further cooperation with the manufacturers with branded manufacturers like WuhanMiracle, we will have a new complete service experience for users on the platform. And at the same time, we can make sure the services taken by the customers will have a very consistent experience. It also will have certain cost saving effect like we will provide our platform customers directly to the clinic or hospitals who have Wuhan Miracles Medicine instruments or equipment directly and we will share the revenues between that. And it will be a showcase attempt for us for the further cooperations with upstream manufacturers in medical aesthetic service industry. Going forward, we will see further cooperations with other branded manufacturers to provide consistent and, of course, the consistent screening drugs and medical devices and service providers to our customers. At the same time, WuhanMirrorco itself is a very well run business. They have been listed in the in China for almost 6 years, being highly compliant in terms of financial control and internal control. And they have been experiencing, of course, the industry as a whole has been hit by the COVID-nineteen 2020, but they have been recovered quite well in the first half of this year. And we are very positive for its going forward growth in after being acquired by us and our corporation will be adding more elements for the business in the going forward. Okay. That's it. Thanks. Thank you. Our next question comes from the line of Xichi Jie from CITC. Please ask your question. Thanks management for taking my questions and congrats on your strong performance. We noticed that the absolute value of sales and marketing expenses have declined sequentially. Can you please comment on any marketing and promotion trends in the second half of this year? Thank you. We are planning to execute more targeted brand placement to strengthen brand awareness among our users. At the same time, we will leverage the advantage of our platform and conduct performance based marketing on 3rd party platforms with premium content to establish our brand as professional medical aesthetics platform.