424B4 1 d649858d424b4.htm 424(B)(4) 424(B)(4)
Table of Contents

Filed pursuant to Rule 424(b)(4)
Registration No. 333-230760

PROSPECTUS

So-Young International Inc.

 

LOGO

13,000,000 American Depositary Shares

Representing 10,000,000 Class A Ordinary Shares

 

This is an initial public offering of 13,000,000 American depositary shares, or ADSs, by So-Young International Inc. 13 ADSs represent 10 of our Class A ordinary shares, par value US$0.0005 per share.

Prior to this offering, there has been no public market for the ADSs or our shares. Our ADSs have been approved for listing on the Nasdaq Global Market under the symbol “SY.”

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

 

Investing in our ADSs involve risks. See “Risk Factors” beginning on page 18.

PRICE US$13.80 PER ADS

 

     Price to
Public
     Underwriting
Discounts and

Commissions(1)
     Proceeds
to us
 

Per ADS

   US$ 13.80      US$ 0.966      US$ 12.834  

Total

   US$ 179,400,000      US$ 12,558,000      US$ 166,842,000  

 

(1)

See “Underwriting” for additional disclosure regarding underwriting compensation payable by us.

We have granted the underwriters the right to purchase up to an additional 1,950,000 ADSs to cover over-allotments within 30 days after the date of this prospectus at the initial public offering price less the underwriting discounts and commissions.

Neither the United States Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs against payment in U.S. dollars in New York, New York on or about May 6, 2019.

Upon the completion of this offering, our outstanding shares will consist of Class A ordinary shares and Class B ordinary shares, and we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Xing Jin, our co-founder, chairman of the board of directors and chief executive officer, will beneficially own all of our then issued Class B ordinary shares and will be able to exercise 84.7% of the total voting power of our issued and outstanding shares if the underwriters do not exercise their over-allotment option, or 84.4% if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to thirty votes and is convertible into one Class A ordinary share at any time by the holders thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any person who is not the Founder or an Affiliate of the Founder (as such terms defined in our post-offering amended and restated articles of association), such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share.

Upon the completion of this offering, our directors, executive officers and principal shareholders will continue to have substantial control over our company. Our directors, executive officers and principal shareholders will be able to exercise 96.2% of the total voting power of our issued and outstanding shares if the underwriters do not exercise their over-allotment option, or 95.8% if the underwriters exercise their over-allotment option in full.

 

Deutsche Bank Securities     CICC

Canaccord Genuity*

 

ICBC International*

 

Needham & Company*

(* in alphabetical order)

   

Prospectus dated May 1, 2019.


Table of Contents

LOGO


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

THE OFFERING

     13  

SUMMARY CONSOLIDATED FINANCIAL DATA

     16  

RISK FACTORS

     18  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     62  

USE OF PROCEEDS

     64  

DIVIDEND POLICY

     65  

CAPITALIZATION

     66  

DILUTION

     69  

ENFORCEABILITY OF CIVIL LIABILITIES

     71  

CORPORATE HISTORY AND STRUCTURE

     73  

SELECTED CONSOLIDATED FINANCIAL DATA

     77  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     79  

INDUSTRY

     103  

BUSINESS

     109  

REGULATION

     134  

MANAGEMENT

     159  

PRINCIPAL SHAREHOLDERS

     167  

RELATED PARTY TRANSACTIONS

     170  

DESCRIPTION OF SHARE CAPITAL

     171  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     184  

SHARES ELIGIBLE FOR FUTURE SALES

     196  

TAXATION

     198  

UNDERWRITING

     206  

EXPENSES RELATED TO THIS OFFERING

     214  

LEGAL MATTERS

     215  

EXPERTS

     216  

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     217  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the ADSs offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters has done anything that would permit this offering or possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus or any filed free writing prospectus must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the United States.

Until May 26, 2019 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

i


Table of Contents

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in our ADSs discussed under “Risk Factors,” before deciding whether to buy our ADSs. This prospectus contains information from an industry report, dated December 2018 and updated in March 2019, commissioned by us and prepared by Frost & Sullivan (Beijing) Inc., or Frost & Sullivan, an independent market research firm, to provide information regarding our industry and our market position in China.

Our Mission and Vision

Our mission is to bring beauty and health to everyone. Our founders set up So-Young to transform the fast-growing yet opaque medical aesthetics market in China by providing transparent information, which ultimately allowed us to build a one-stop destination where users can conveniently find quality services.

Our vision is to become the most trusted technology company in the broader consumption healthcare service industry, and transform this market in the same way we have been doing for the medical aesthetics sector in China.

Business Overview

So-Young is No. 1 and the most popular online destination for discovering, evaluating and reserving medical aesthetic services in China.

 

   

audience reach: over 240 million average monthly views of our rich media content distributed through social media networks and our targeted media platforms in the fourth quarter of 2018;

 

   

user engagement: our So-Young mobile app accounted for 84.1% of total daily user time spent on online medical aesthetic service mobile apps in 2018, according to Frost & Sullivan;

 

   

transaction value facilitated: we facilitated medical aesthetic treatment transactions in the aggregate value of RMB2.1 billion (US$306.6 million) through our platform in 2018, representing 33.1% of total amounts paid for medical aesthetic treatment booked online in that year, according to Frost & Sullivan; and

 

   

trustworthiness: we ranked top in terms of both brand awareness and customer stickiness in a survey of 1,000 respondents conducted in October 2018.

Our business model comprises three integrated components: (i) our original, reliable and professional content and its distribution through major social media networks and our targeted media platforms in China, (ii) our highly engaged social community characterized by signature user-generated content, and (iii) our transparent and user-friendly online reservation services for medical aesthetic treatment. With reliable and comprehensive content, as well as a multitude of social functions on our platform, users seeking medical aesthetic treatment can discover products and services, evaluate their quality, and reserve desired treatment. Because of our highly engaged user base, we believe that we are a more effective customer acquisition channel for medical aesthetic service providers, compared to other online channels. According

 

1


Table of Contents

to Frost & Sullivan, customer acquisition spending by medical aesthetic service providers on online medical aesthetic service platforms as a percentage of total customer acquisition spending on all online channels rapidly increased from 0.9% in 2014 to 7.0% in 2018, and is expected to reach 25.6% by 2023.

We leverage our popular and professional media content to reach and attract a vast audience. Our vibrant and trustworthy social community allows our users to discover the latest medical aesthetic treatment trends and helps them make purchase decisions. The personal experience shared by users who had undergone medical aesthetic treatment further builds the trust that is critical for others who wish to have similar treatment. We had a large depository of over 2 million day-by-day, case-based blogs called Beauty Diaries, as of December 31, 2018. We believe our business model, which connects a user’s innate desire to be more beautiful with a personal, emotionally-attached discovery and assessment process on our platform, is highly effective in facilitating users’ decision making and enhancing user experience. We also encourage users to rate, review and share their treatment experience on our platform. We believe the user-generated content, ratings and reviews on our platform incentivize medical aesthetic service providers to offer high-quality and diversified treatment with transparent pricing.

 

LOGO

Our Value Propositions for Users

 

   

reliability: we offer users a reliable experience through our pursuit of quality and trustworthy content offerings and our medical aesthetic service providers that are carefully selected;

 

   

transparency: we provide transparency on medical aesthetic treatment details, such as pricing, reviews and service provider credentials; and

 

2


Table of Contents
   

convenience: our comprehensive media content, social community and online reservation function guide users to a seamless medical aesthetic service journey, from discovery, interaction and evaluation, to reservation, review and aftercare.

Our Value Propositions for Medical Aesthetic Service Providers

 

   

effective customer acquisition: leveraging our user base with high propensity to spend, as well as our data insight and technological strengths, we are able to match medical aesthetic service providers with targeted users cost-effectively;

 

   

differentiated branding: we empower medical aesthetic service providers, especially small and medium sized market participants, to introduce their brands and build credibility through authentic user-driven evaluations; and

 

   

operating efficiency: we provide Software as a Service, or SaaS, and professional training programs for medical service providers, to help them better manage client information, increase conversion rate and upgrade their service offerings.

Our DNA for innovation defines who we are, brought about our earlier success, and will continue to serve as a bedrock for our future growth. Leveraging our strong brand image, extensive audience reach, trust of our users, highly engaged social community and data insights, we are well positioned to expand both along the medical aesthetic industry value chain and into the massive, fast-growing consumption healthcare service market. We have built a proven track record by launching a series of services aimed at medical aesthetic service providers, and by achieving early advantages in expanding into the dental, dermatology, ophthalmology, gynecology, and physical examination services in China.

We generate revenues primarily through information service fees and reservation service fees charged to medical aesthetic service providers. Our total revenues increased rapidly by 428.2% from RMB49.1 million in 2016 to RMB259.3 million in 2017, and further by 138.0% to RMB617.2 million (US$89.8 million) in 2018. Our net income was RMB55.1 million (US$8.0 million) in 2018, compared to a net loss of RMB81.0 million in 2016 and a net income of RMB17.2 million in 2017.

Our Industry

Growth of Medical Aesthetic Service Industry in China

Medical aesthetic services are elective medical procedures that specialize in improving cosmetic appearance, thereby improving people’s quality of life and psychological well-being. The medical aesthetic service industry in China is large and rapidly growing. According to Frost & Sullivan, the total revenues of the medical aesthetic services industry reached RMB121.7 billion (US$17.7 billion) in 2018, representing a CAGR of 23.6% from 2014. The total revenues of this industry are expected to reach RMB360.1 billion (US$52.4 billion) by 2023, with an accelerated CAGR of 24.2% from 2018 to 2023. With such growth rate, China has become one of the fastest growing medical aesthetic service markets in the world, ranked the second in terms of market size in 2017, and is poised to become the largest market in the world by 2021.

The medical aesthetic service industry in China is highly fragmented and competitive. According to Frost and Sullivan, there were approximately 10,000 medical aesthetic service providers in 2018. In addition, the medical aesthetic service industry in China is largely driven

 

3


Table of Contents

by private institutions as they actively create a competitive niche in their treatment and closely follow aesthetic trends. Among private institutions, the top five players merely represented 7.4% of the total market.

Online Customer Acquisition by Medical Aesthetic Service Industry in China

Medical aesthetic service providers in China acquire their customers through offline channels, such as beauty salons and outdoor advertisement, as well as online channels, which include online medical aesthetic platforms, search engines and general online e-commerce platforms. According to Frost & Sullivan, medical aesthetic service providers spent RMB31.3 billion (US$4.6 billion) on customer acquisition in 2018, representing 25.8% of the total revenues in this industry.

 

LOGO

 

Source: Frost & Sullivan

In particular, online customer acquisition spending in China’s medical aesthetic service industry amounted to RMB18.1 billion (US$2.6 billion) in 2018, and is expected to continue to grow rapidly at a CAGR of 22.2% from 2018 to 2023, reaching RMB49.3 billion (US$7.2 billion) by 2023.

Online Medical Aesthetic Service Platform in China

Online medical aesthetic service platforms are where users can discover, evaluate and reserve medical aesthetic services for treatment offline. Online medical aesthetic service platforms emerged in recent years and quickly gained market share from traditional online customer acquisition channels as such platforms effectively facilitated the direct interaction between consumers and medical aesthetic service providers. According to Frost & Sullivan, customer acquisition spending on online medical aesthetic platforms accounted for 0.9% of total customer acquisition spending through online channels in 2014 and 7.0% in 2018, and is expected to reach 25.6% by 2023. Customer acquisition spending on online medical aesthetic service platforms increased from RMB64.5 million (US$9.4 million) in 2014 to RMB1.3 billion

 

4


Table of Contents

(US$0.2 billion) in 2018, and is expected to grow to RMB12.6 billion (US$1.8 billion) in 2023, representing a CAGR of 58.2% from 2018.

 

LOGO

 

Source: Frost & Sullivan

Consumption Healthcare Service Industry in China

Consumption healthcare services, such as medical aesthetic services, refer to elective medical services that are primarily for improving people’s quality of life and not aimed at treating serious diseases. China enjoys a large and fast-growing consumption healthcare service industry. According to Frost & Sullivan, total revenues from consumption healthcare services industry in China was RMB560.7 billion (US$81.6 billion) in 2018, and is expected to grow at a CAGR of 20.0% from 2018 to 2023, reaching RMB1,395.5 billion (US$203.0 billion) by 2023. Similar to the medical aesthetic service industry, consumption healthcare service providers observe increasing spending on online customer acquisition channels to gain customers as the industry is also highly competitive and fragmented.

Our Competitive Strengths

We believe the following strengths have contributed to our success:

 

   

market leader in terms of audience reach, user engagement, transaction value facilitated and trustworthiness, according to Frost & Sullivan and a survey of 1,000 respondents conducted in October 2018, with powerful business model;

 

   

market trailblazer and technology innovator, being the first to introduce a social community focused on medical aesthetic services and the first to utilize artificial intelligence technology in analyzing facial features for evaluating virtual medical aesthetic needs and predicting treatment effects online, according to Frost & Sullivan;

 

   

most trusted platform, according to a survey of 1,000 respondents conducted in October 2018, with highly engaged community of users;

 

   

reliable professional content distributed through social media;

 

5


Table of Contents
   

platform of choice for approximately 4,000 medical aesthetic service providers as of December 31, 2018; and

 

   

visionary management team with proven execution capability.

Our Strategies

Going forward, we will continue to be laser-focused on enhancing the credibility, transparency and comprehensiveness of the information and services featured on our platform. We believe these unique competitive advantages are key to reinforcing our brand reputation, user loyalty and leadership position. Such established brand awareness, industry standing and platform capabilities position us well to expand into the broader consumption healthcare market.

We plan to achieve our vision, and ultimately our mission, through the following key strategies:

 

   

drive transparency in the industry through enriched content offering;

 

   

proactively deploy artificial intelligence and other technological innovations;

 

   

strengthen collaboration with medical aesthetic service providers through more value-added services;

 

   

continue to raise brand awareness and expand user acquisition channels; and

 

   

expand into other consumption healthcare verticals and tap into new user segments.

Our Challenges

Our ability to realize our mission and execute our strategies is subject to risks and uncertainties, including those relating to:

 

   

our limited operating history in the evolving online medical aesthetic service industry, which makes it difficult to evaluate our future prospects;

 

   

our ability to manage the growth and increased complexity of our business, to control our costs and expenses, and to execute our strategies effectively;

 

   

consumer claims, regulatory or professional investigations and litigations regarding the medical information and services being offered on our platform;

 

   

characterization of our business as engaging in medical, drug and/or medical device advertisement distribution in China without proper licenses or permits;

 

   

our ability to anticipate user preferences and provide high-quality and reliable content in a cost-effective manner;

 

   

our ability to attract users and medical service providers to continue to contribute content that is high-quality, reliable or otherwise valuable to our users;

 

   

unfavorable market perception of the overall medical aesthetic industry;

 

   

our ability to maintain the strength of our brand and reputation;

 

   

uncertainties, changes and developments in the regulatory framework in China with respect to the provision of online medical aesthetic services and information;

 

6


Table of Contents
   

potential liabilities for infringement, misappropriation or other violations of third-party intellectual property rights or other allegations based on the content available on our platform or services we provide; and

 

   

our ability to prevent our medical service providers from breaching their contractual obligations and failure to pay the full amount of fees owed to us.

Recent Developments

The following sets forth our selected unaudited financial data and certain operating data for the three months ended March 31, 2019. The financial data included in this prospectus has been prepared by, and is the responsibility of our management. We cannot assure you that our results for the three months ended March 31, 2019 will be indicative of our financial results for the full year ending December 31, 2019 or for future periods. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” included elsewhere in this prospectus for information regarding trends and other factors that may affect our results of operations.

 

   

Revenues. Our revenues for the three months ended March 31, 2019 increased by 81.2% year-over-year to reach RMB206.1 million (US$30.0 million), consisting of information services revenues of RMB142.6 million (US$20.7 million) and reservation services revenues of RMB63.5 million (US$9.3 million), as compared to revenues of RMB113.7 million for the three months ended March 31, 2018, consisting of information services revenues of RMB70.2 million and reservation services revenues of RMB43.5 million. Average mobile MAUs increased by 78.7% from 1.08 million in the first quarter of 2018 to 1.92 million in the first quarter of 2019. Total number of purchasing users increased by 84.9% from 68.9 thousand in the first quarter of 2018 to 127.3 thousand in the first quarter of 2019. The number of paying medical service providers on our platform increased by 37.4% from 1,966 in the first quarter of 2018 to 2,701 in the first quarter of 2019. The number of medical service providers subscribing to information services on our platform increased by 136.4% from 784 in the first quarter of 2018 to 1,853 in the first quarter of 2019. The aggregate value of medical aesthetic treatment transactions facilitated by our platform increased by 68.4% from RMB412.3 million in the first quarter of 2018 to RMB694.4 million in the first quarter of 2019.

 

   

Costs. Our costs of revenues increased by 146.2% from RMB14.8 million for the three months ended March 31, 2018 to RMB36.5 million (US$5.3 million) for the three months ended March 31, 2019, primarily due to the increase in our payroll costs by RMB14.2 million, which was driven by the increase in our operational staff headcount.

 

   

Gross profit. As a result of the foregoing, our gross profit increased by 71.5% from RMB98.9 million for the three months ended March 31, 2018 to RMB169.6 million (US$24.7 million) for the three months ended March 31, 2019. Our gross margin decreased from 87.0% in the first quarter of 2018 to 82.3% in the first quarter of 2019, primarily because we significantly expanded our operational staff headcount, which we believe had better positioned us to manage our future growth. We currently do not expect our gross margin for the rest of 2019 to experience any significant decrease from the level in the first quarter of 2019.

 

   

Sales and marketing expenses. Our sales and marketing expenses increased by 68.7% from RMB44.8 million for the three months ended March 31, 2018 to RMB75.5 million (US$11.0 million) for the three months ended March 31, 2019, primarily due to the

 

7


Table of Contents
 

increase in our expenses associated with marketing and user acquisition activities, as well as the increase in payroll costs from the expansion of our sales and marketing team and share-based compensation expenses.

 

   

Research and development expenses. Our research and development expenses increased by 133.5% from RMB13.4 million for the three months ended March 31, 2018 to RMB31.3 million (US$4.6 million) for the three months ended March 31, 2019, primarily contributed by the increase in payroll costs in connection with the expansion of our research and development team and share-based compensation expenses, as we continue to develop our technology capacity to further enhance users’ and medical service providers’ experience.

 

   

General and administrative expenses. Our general and administrative expenses increased by 123.7% from RMB11.1 million for the three months ended March 31, 2018 to RMB24.8 million (US$3.6 million) for the three months ended March 31, 2019, primarily contributed by the increase in payroll costs in connection with the expansion of our administrative team and share-based compensation expenses.

 

   

Income from operations. As a result of the above, our income from operations increased by 28.1% to RMB38.0 million (US$5.5 million) for the three months ended March 31, 2019 from RMB29.6 million for the three months ended March 31, 2018.

 

   

Net income. Our net income increased by 49.9% to RMB45.9 million (US$6.7 million) for the three months ended March 31, 2019 from RMB30.6 million for the three months ended March 31, 2018.

Corporate History and Structure

We commenced our operations in November 2013 through Beijing So-Young Technology Co., Ltd., or Beijing So-Young, a limited liability company established under the laws of the PRC, to provide medical aesthetic information.

In April 2014, we incorporated So-Young International Inc., or So-Young Cayman, in the Cayman Islands as our holding company. In May 2014, So-Young Cayman established a wholly owned subsidiary, So-Young Hong Kong Limited, in Hong Kong, which in turn established So-Young Wanwei Technology Consulting Co., Ltd., or Beijing Wanwei, a wholly owned PRC subsidiary in July 2014.

Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain other businesses, Beijing Wanwei entered into a series of contractual arrangements, as amended and restated, with Beijing So-Young and its shareholders, through which we obtained control over Beijing So-Young and its subsidiaries. As a result, we are regarded as the primary beneficiary of Beijing So-Young and its subsidiaries. We treat them as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. We refer to Beijing Wanwei as our wholly foreign owned entity, or WFOE, and to Beijing So-Young as our variable interest entity, or VIE, in this prospectus. For more details and risks related to our variable interest entity structure, please see “Corporate History and Structure—Contractual Arrangements with our VIE and Its Shareholders” and “Risk Factors—Risks Related to Our Corporate Structure”.

 

8


Table of Contents

The following diagram illustrates our corporate structure as of the date of this prospectus, including our significant subsidiaries and other entities that are material to our business, as of the date of this prospectus:

 

LOGO

 

Note:

(1)

Shareholders of Beijing So-Young are Mr. Hui Shao, Mr. Xing Jin, and Mr. Tao Yu, holding 59.7%, 37.8%, and 2.5%, respectively, of the equity interest in Beijing So-Young. Mr. Hui Shao, Mr. Xing Jin and Mr. Tao Yu are our beneficiary owners; Mr. Shao is our director; Mr. Jin is our co-founder, director and chief executive officer, and Mr. Yu is our co-founder and chief information officer.

Upon the completion of this offering, our outstanding shares will consist of Class A ordinary shares and Class B ordinary shares, and we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Xing Jin, our co-founder, chairman of the board of directors and chief executive officer, will beneficially own all of our then issued Class B ordinary shares and will be able to exercise 84.7% of the total voting power of our issued and outstanding

 

9


Table of Contents

shares if the underwriters do not exercise their over-allotment option, or 84.4% if the underwriters exercise their over-allotment option in full. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote, and each Class B ordinary share is entitled to thirty votes and is convertible into one Class A ordinary share at any time by the holders thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

Upon the completion of this offering, our directors, executive officers and principal shareholders will continue to have substantial control over our company. Our directors, executive officers and principal shareholders will be able to exercise 96.2% of the total voting power of our issued and outstanding shares if the underwriters do not exercise their over-allotment option, or 95.8% if the underwriters exercise their over-allotment option in full.

Implication of Being an Emerging Growth Company and Foreign Private Issuer

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements compared to those that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.00 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers. Moreover, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq listing standards. See “Risk Factors—Risks Related to the ADSs and This Offering—As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq

 

10


Table of Contents

corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we comply fully with the Nasdaq corporate governance listing standards.”

Corporate Information

Our principal executive offices are located at 3/F, Wangjing SOHO-Tower 3A, Chaoyang District, Beijing, 100102, People’s Republic of China. Our telephone number at this address is +86 10 5707-6564. Our registered office in the Cayman Islands is located at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands.

Investors should submit any inquiries to the address and telephone number of our principal executive offices. Our main website is www.soyoung.com. The information contained on our website is not a part of this prospectus. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

Conventions that Apply to this Prospectus

Unless otherwise indicated or the context otherwise requires, references in this prospectus to:

 

   

“ADRs” are to the American depositary receipts that evidence our ADSs;

 

   

“ADSs” are to our American depositary shares, with every 13 ADSs representing 10 Class A ordinary shares;

 

   

“CAGR” are to compound annual growth rate;

 

   

“China” or the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Hong Kong, Macau and Taiwan;

 

   

“Class A ordinary shares” are to our Class A ordinary shares, par value US$0.0005 per share;

 

   

“Class B ordinary shares” are to our Class B ordinary shares, par value US$0.0005 per share;

 

   

“consultation message” are to each message sent between a user and a medical service provider on our platform, with each text sent counting as one distinct message;

 

   

“Existing Class A ordinary shares” are to our Class A ordinary shares, par value US$0.0005 per share, existing prior to the completion of this offering;

 

   

“Existing Class B ordinary shares” are to our Class B ordinary shares, par value US$0.0005 per share, existing prior to the completion of this offering;

 

   

“mobile MAUs” are to the sum of (i) the number of unique mobile devices that have accessed our platform through our So-Young mobile app at least once during a month, and (ii) the number of unique Weixin users that have accessed our platform through our Weixin mini programs at least once during a month. The numbers of our mobile MAUs are calculated using internal company data that has not been independently verified, and we treat each distinguishable device and Weixin user account as a separate user for purposes of calculating mobile MAUs, although inaccuracy may result from the possibility that some individuals may use more than one mobile device, may share the same mobile device with other individuals, and/or may use both our mobile app and Weixin mini programs to access our platform;

 

11


Table of Contents
   

“monthly UVs” of soyoung.com, are to the number of unique IP address that various internet browsers apply to access our website, from either PC end or mobile end, at least once during a month. The numbers of our monthly UVs of soyoung.com are calculated using internal company data that has not been independently verified, and we treat each distinguishable IP address as a separate user for purposes of calculating monthly UVs, although inaccuracy may result from the possibility that some individuals may have more than one IP address and/or share the same IP address with other individuals to access our platform;

 

   

“online medical aesthetic platform service market” are to the business activities of online medical aesthetic service platforms, where users can discover, evaluate and reserve medical aesthetic services for treatment offline, such as So-Young;

 

   

“RMB” and “Renminbi” are to the legal currency of China;

 

   

“So-Young,” “we,” “us,” “our company” and “our” are to So-Young International Inc., its subsidiaries and its consolidated affiliated entity;

 

   

“shares” or “ordinary shares” are to our ordinary shares, par value US$0.0005 per share, and upon and after the completion of this offering, are to our Class A and Class B ordinary shares, par value US$0.0005 per share;

 

   

“US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States.

Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.

Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.8755 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2018. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On April 12, 2019, the noon buying rate for Renminbi was RMB6.7039 to US$1.00.

 

12


Table of Contents

THE OFFERING

 

Offering price

US$13.80 per ADS.

 

ADSs offered by us

13,000,000 ADSs (or 14,950,000 ADSs if the underwriters exercise their over-allotment option in full).

 

ADSs outstanding immediately after this offering

13,000,000 ADSs (or 14,950,000 ADSs if the underwriters exercise their over-allotment option in full).

 

Ordinary shares outstanding immediately after this offering

A total of 77,113,419 ordinary shares, comprised of 65,113,419 Class A ordinary shares and 12,000,000 Class B ordinary shares (or 78,613,419 ordinary shares if the underwriters exercise their over-allotment option in full, comprised of 66,613,419 Class A ordinary shares and 12,000,000 Class B ordinary shares). Class B ordinary shares issued and outstanding immediately after the completion of this offering will represent 15.6% of our total issued and outstanding shares and 84.7% of the then total voting power (or 15.3% of our total issued and outstanding shares and 84.4% of the then total voting power if the underwriters exercise their over-allotment option in full).

 

The ADSs

13 ADSs represent 10 Class A ordinary shares, par value US$0.0005 per share.

 

  The depositary will hold Class A ordinary shares underlying your ADSs. You will have rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  We do not expect to pay dividends in the foreseeable future. If, however, we declare dividends on our Class A ordinary shares, the depositary will pay you the cash dividends and other distributions it receives on our Class A ordinary shares after deducting its fees and expenses in accordance with the terms set forth in the deposit agreement.

 

  You may turn in your ADSs to the depositary in exchange for Class A ordinary shares. The depositary will charge you fees for any exchange.

 

  We may amend or terminate the deposit agreement without your consent. If you continue to hold your ADSs after an amendment to the deposit agreement, you agree to be bound by the deposit agreement as amended.

 

13


Table of Contents
  To better understand the terms of the ADSs, you should carefully read the “Description of American Depositary Shares” section of this prospectus. You should also read the deposit agreement, which is filed as an exhibit to the registration statement that includes this prospectus.

 

Ordinary Shares

We will issue 10,000,000 Class A ordinary shares represented by the ADSs in this offering (assuming the underwriters do not exercise their option to purchase additional ADSs). Our ordinary shares will be divided into Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering. Holders of Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. In respect of matters requiring a shareholder vote, each Class A ordinary share will be entitled to one vote, and each Class B ordinary share will be entitled to 30 votes. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any non-affiliate of such holder, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share. See “Description of Share Capital.”

 

Over-allotment option

We have granted to the underwriters an option, exercisable within 30 days from the date of the final prospectus, to purchase up to an aggregate of 1,950,000 additional ADSs at the initial public offering price less the underwriting discounts and commissions.

 

Use of proceeds

We expect that we will receive net proceeds of approximately US$162.9 million from this offering, or approximately US$187.9 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

  We intend to use the net proceeds from this offering (i) to invest in technology and research and development, (ii) for brand promotion and user acquisition efforts, (iii) for horizontal and vertical business expansions, (iv) to enhance our content offering, and (v) for general corporate purposes and working capital. See “Use of Proceeds” for more information.

 

Lock-up

We, our directors and executive officers, our existing shareholders and option holders have agreed with the

 

14


Table of Contents
 

underwriters not to sell, transfer or dispose of any ADSs, ordinary shares or similar securities for a period of 180 days after the date of this prospectus. See “Shares Eligible for Future Sales” and “Underwriting.”

 

Listing

Our ADSs have been approved for listing on the Nasdaq Stock Market LLC under the symbol “SY.” Our ADSs and shares will not be listed on any other stock exchange or traded on any automated quotation system.

 

Payment and settlement

The underwriters expect to deliver the ADSs against payment therefor through the facilities of the Depository Trust Company on May 6, 2019.

 

Depositary

Deutsche Bank Trust Company Americas

The number of ordinary shares that will be outstanding immediately after this offering:

 

   

is based on 67,113,419 ordinary shares outstanding as of the date of this prospectus, assuming (i) the re-designation or conversion of all outstanding ordinary shares and preferred shares (other than ordinary shares held by Beauty & Health Limited) into 55,113,419 Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering and (ii) the re-designation or conversion of all ordinary shares held by Beauty & Health Limited into 12,000,000 Class B ordinary shares immediately prior to the completion of this offering;

 

   

includes 10,000,000 Class A ordinary shares in the form of ADSs that we will issue and sell in this offering, assuming the underwriters do not exercise their over-allotment option to purchase additional ADSs;

 

   

excludes 5,055,908 Class A ordinary shares issuable upon exercise of our outstanding options; and

 

   

excludes Class A ordinary shares reserved for future issuances under our share incentive plan.

 

15


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated statements of comprehensive income/(loss) data for the years ended December 31, 2016, 2017 and 2018, summary consolidated balance sheet data as of December 31, 2017 and 2018 and summary consolidated statements of cash flow data for the years ended December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Summary Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     For the Year Ended December 31,  
     2016     2017     2018  
     RMB     RMB     RMB     US$  
     (in thousands, except for share and per share data)  

Summary Consolidated Statements of Comprehensive (Loss)/Income Data:

        

Revenues:

        

Information services

     19,869       143,613       415,119       60,377  

Reservation services

     29,221       115,692       202,107       29,395  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     49,090       259,305       617,226       89,772  

Cost of revenues(1)

     (25,192     (44,799     (91,563     (13,317
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     23,898       214,506       525,663       76,455  

Operating expenses:

        

Sales and marketing expenses(1)

     (62,206     (127,462     (306,360     (44,558

General and administrative expenses(1)

     (18,043     (29,725     (75,442     (10,973

Research and development expenses(1)

     (17,932     (32,557     (94,726     (13,777
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     (98,181 )      (189,744 )      (476,528     (69,308
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Income from operations

     (74,283 )      24,762       49,135       7,147  
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Income before tax

     (81,036 )      13,221       58,254       8,473  

Income tax benefit/(expense)

           3,981       (3,171     (461
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

     (81,036 )      17,202       55,083       8,012  

Accretions of convertible redeemable preferred shares to redemption value

     (21,487     (28,521     (104,211     (15,157
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to ordinary shareholders of the Company

     (102,523     (11,319     (49,128     (7,145
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

     (81,036 )      17,202       55,083       8,012  

Other comprehensive income/(loss):

        

Foreign currency translation adjustment

     2,323       (2,203     34,439       5,009  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income/(loss)

     2,323       (2,203 )      34,439       5,009  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive (loss)/income

     (78,713 )      14,999       89,522       13,021  

Accretions of convertible redeemable preferred shares to redemption value

     (21,487     (28,521     (104,211     (15,157
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to ordinary shareholders of the Company

     (100,200 )      (13,522 )      (14,689     (2,136
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per ordinary share:

        

Basic

     (3.81     (0.42     (2.00     (0.29

Diluted

     (3.81     (0.42     (2.00     (0.29
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of ordinary shares used in computing loss per share, basic and diluted

     26,882,387       26,882,387       24,555,427       24,555,427  

 

16


Table of Contents

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the Year Ended December 31,  
     2016     2017     2018  
     RMB     RMB     RMB     US$  
    

(in thousands)

 

Cost of revenues

     (96     (89     (1,423     (207

Sales and marketing expenses

     (262     (490     (1,018     (148

General and administrative expenses

     (1,158     (1,675     (10,112     (1,471

Research and development expenses

     (168     (405     (13,306     (1,935
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (1,684     (2,659     (25,859     (3,761
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents our summary consolidated balance sheet data as of December 31, 2017 and 2018.

 

     As of December 31,  
     2017     2018  
     RMB     RMB     US$  
    

(in thousands)

 

Summary Consolidated Balance Sheet Data:

      

Cash and cash equivalents

     440,859       563,383       81,941  

Term deposits and short-term investments

     81,258       643,539       93,599  

Total current assets

     552,438       1,278,451       185,942  

Total assets

     568,385       1,340,536       194,970  

Total liabilities

     140,927       302,156       43,946  

Total mezzanine equity

     594,421       1,395,949       203,031  

Total shareholders’ deficit

     (166,963     (357,569     (52,007

The following table presents our summary consolidated cash flow data for the years presented:

 

    For the Year Ended December 31,  
    2016     2017     2018  
    RMB     RMB     RMB     US$  
    (in thousands)  

Summary Consolidated Cash Flow Data:

       

Net cash (used in)/generated from operating activities

    (40,756     90,877       198,985       28,941  

Net cash (used in)/generated from investing activities

    (108,345     7,032       (569,372     (82,811

Net cash provided by financing activities

    122,690       324,671       485,414       70,601  

Effect of exchange rate changes on cash and cash equivalents

    180       (114     7,497       1,090  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

    (26,231     422,466       122,524       17,821  

Cash and cash equivalents at beginning of year

    44,624       18,393       440,859       64,120  
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

    18,393       440,859       563,383       81,941  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

RISK FACTORS

An investment in our ADSs involves significant risks. You should carefully consider all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business and Industry

We have a limited operating history in the evolving online medical aesthetic service industry, which makes it difficult to evaluate our future prospects.

We launched our online medical aesthetic service business in November 2013 and have a limited operating history. We have limited experience in most aspects of our business operation, such as our service platform and the production of medical aesthetic-related content on our platform. In addition, we have limited experience in serving our users and medical service providers. As our business develops and as we respond to competition, we may continue to introduce new service offerings and make adjustments to our existing services and to our business operation in general. Any significant change to our business model that does not achieve expected results may have a material and adverse impact on our financial condition and results of operations. It is therefore difficult to effectively assess our future prospects.

The online medical aesthetic platform service industry may not develop as expected. Prospective users and medical service providers may not be familiar with the development of online medical aesthetic service markets and may have difficulties distinguishing our services from those of our competitors. Convincing prospective users and medical service providers of the value of using our services is important to the success of our business.

You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly evolving market in which we operate and our limited operating history. These risks and challenges include our ability to, among other things:

 

   

manage our future growth;

 

   

offer personalized and competitive online medical aesthetic services;

 

   

increase the utilization of our service by existing and new users;

 

   

maintain and enhance our relationships with medical service providers and our other partners;

 

   

navigate the evolving regulatory environment;

 

   

enhance our technology infrastructure to support the growth of our business;

 

   

improve our operational efficiency;

 

   

attract, retain and motivate talented employees;

 

   

cope with economic fluctuations; and

 

   

defend ourselves against legal and regulatory actions.

 

18


Table of Contents

Our historical growth rates may not be indicative of our future growth. If we are unable to manage the growth and increased complexity of our business, fail to control our costs and expenses, or fail to execute our strategies effectively, our business and prospects may be materially and adversely affected.

We have experienced rapid growth in our business and operations since our inception. Our total revenues increased by 428.2% from RMB49.1 million in 2016 to RMB259.3 million in 2017, and further by 138.0% to RMB617.2 million (US$89.8 million) in 2018. Our gross profit increased significantly by 797.6% from RMB23.9 million in 2016 to RMB214.5 million in 2017, and further by 145.1% to RMB525.7 million (US$76.5 million) in 2018. Our gross margin improved from 48.7% in 2016 to 82.7% in 2017, and further improved to 85.2% in 2018. However, our historical growth rates may not be indicative of our future growth, and we may not be able to generate similar growth rates in future periods. Our revenue growth may slow, or our total revenues may decline for a number of possible reasons, including decreasing consumer spending, changes in regulations and government policies, increasing competition, slowing down of China’s medical aesthetic industry, emergence of alternative business models, and general economic conditions. If our growth rate declines, investors’ perceptions of our business and business prospects may be adversely affected and the market price of our ADSs could decline.

We may be subject to consumer claims, regulatory or professional investigations and litigations regarding the medical information and services offered on our platform, which could materially and adversely affect our brand, reputation, and results of operations.

We have implemented a screening procedure through verifying the qualifications and required licenses of medical service providers and paying regular visits to medical service providers, and also have recorded the contact person details of such medical service providers. However, we cannot assure you that all the information of the medical service providers we have is updated in a timely manner. Pursuant to the PRC Consumer Protection Law, under the circumstances where the users suffer injuries or damages due to the service reserved on our platform, they may bring claims or legal proceedings against us as a platform service provider if we fail to provide the real names, addresses and valid contact details of the medical service providers in the event that users request such information for purposes of seeking compensation from the medical service providers. Furthermore, if we know or should have known that medical service providers on our platform use our platform to infringe upon the legitimate rights and interests of users but we fail to take necessary measures, we may be subject to joint and several liability with the medical service providers. Users may also seek refunds in such situations.

We do not provide any medical treatment ourselves. Medical service providers make their own decisions regarding the medical services provided to our users. Any incorrect decisions on the part of our service providers may result in undesirable or unexpected outcomes, including complications, injuries and potentially death in the most extreme cases. We may be subject to complaints, claims or legal proceedings initiated by our users as a result of any negative physical reaction to services reserved on our platform. We have implemented a strict procedure to verify the qualifications and required licenses of the medical service providers we partner with. However, we cannot assure you that all our medical service providers are fully licensed and qualified as required by PRC law. Pursuant to the PRC E-Commerce Law that became effective on January 1, 2019, we are required to verify the identities of our medical service providers, including but not limited to verification of business licenses and other required qualifications or licenses, and shall take necessary steps if we find out or should have found out that services provided by a service provider do not comply with the requirements of health and safety protections. If we are deemed to have failed to verify the service providers’ qualifications

 

19


Table of Contents

and licenses, or failed to otherwise perform our obligations as a platform with respect to services that are pertinent to the life and health of consumers provided through our platform, we may be subject to potential sanctions under PRC law, including suspension of certain business activities, rectification, compensation, and administrative penalties, and may face civil and criminal liabilities. See “Regulation—Regulations on Consumer Protection” and “Regulation—Regulations on E-commerce.”

In addition, as medical aesthetic service focuses on improving our users’ physical appearance, users may have varying expectations of the magnitude of improvement that may result from the medical aesthetic services. Users who are dissatisfied with the services received may request refunds and other compensation from us, complain on our platform and other social media platforms and/or file legal claims against us. We have experienced complaints from our users in the past, and we cannot assure you that we will be able to successfully manage users’ expectation and prevent their complaints, allegations and other claims in the future. Such complaints, allegations and other claims, regardless of merits, may have a material adverse effect on our reputation, business, results of operations, financial condition and prospects. Although we sometimes offer complimentary services, refunds and/or other insignificant amount of monetary compensations to address users’ complaints, the amounts of which have been immaterial historically, we cannot assure you that we can successfully address all user complaints in the future. Moreover, we require all platform users to have full legal capacity, and minors to be accompanied by their legal guardians, when they use medical services reserved or accessed through our platform. However, we cannot assure you that we can prevent all medical service providers from performing medical procedures on minors without parental consent, or prevent all minors from obtaining medical treatment from service providers without providing parental consent. Such non-compliance by users who are minors or by medical service providers could materially and adversely affect our brand image and reputation.

We may be subject to regulatory or professional investigations and litigations. Any complaint, claim or legal proceeding, regardless of merit, could adversely affect our brand image and reputation. In addition, any legal proceeding that may be brought against us could divert management resources and incur extra costs. A settlement or successful claim against us can result in legal costs, damages, compensation and reputational damage to use and may adversely affect our business, results of operations, financial condition and prospects.

Characterization of our business as engaging in medical, drug and/or medical device advertisement distribution in China without proper licenses or permits.

As the leading online platform for medical aesthetic services as measured by audience reach, user engagement, transaction value facilitated and trustworthiness, according to Frost & Sullivan, we dedicate ourselves to providing transparent information. The information available on our platform includes but is not limited to information provided by medical service providers, including their registration or practicing license details, contact information, the services they provide, the price of such services and reviews and Beauty Diaries associated with the service providers contributed by users. We also connect our users with medical service providers on our platform. We have adopted internal control and platform regulation measures seeking to ensure the authenticity and pertinence of the medical aesthetic information available on our platform. and endeavor to prevent the information disseminated on our platform from being considered medical, drug or other medical device advertisements.

We believe it is improbable that PRC governmental authorities will deem the content or the format of the information disseminated from and displayed on our platform to constitute

 

20


Table of Contents

medical, drug or other medical device advertisements, and we have not been subject to any regulatory authority’s inquiries or investigations in connection with the content or format of information disseminated from and displayed on our platform. However, as advertisement is currently defined vaguely and broadly under the relevant PRC laws and regulations and the available regulatory interpretations, we cannot assure you that the information provided by medical aesthetic services providers on our platform will not be deemed by relevant authorities as advertisement.

If certain information listed on our platform is considered medical advertisement, it will subject us to regulations that may have material impacts on our operations. Medical, drug and/or medical devices advertisement must be approved by relevant PRC authorities before they are distributed, and distributors, among other obligations, are required to review the applicable licenses and permits of the medical service providers, ensure the content displayed is fair and accurate, and take steps to monitor the content of advertisements displayed on their platforms. In addition, distributors are required to label advertisements from other information so that consumers will not be misled. Furthermore, we may be required to scale back, rearrange or alter the content or format of information displayed on our platform, thereby affecting the fundamental of our business model. As a result, compliance with laws and regulations applicable to the advertisement industry could materially and adversely affect our business prospects, results of operations and financial condition. In addition, we will also be subject to increased liability under these laws and regulations and may incur additional costs, such as fines or other penalties, if we fail to comply. Such liabilities and costs could have a material adverse effect on our business, financial condition, results of operations and prospects. See “Regulation—Regulations on Advertising.” Moreover, we may be subject to additional taxes applicable to the advertisement industry.

If we fail to anticipate user preferences and provide high-quality and reliable content in a cost-effective manner, we may not be able to attract and retain users to remain competitive.

Our success depends on our ability to maintain and grow user engagement on our platform. To attract and retain users and compete against our competitors, we must continue to offer high-quality and reliable content to provide our users with a superior online medical aesthetic service experience. To this end, we must continue to produce original content and source new professional and user-generated content in a cost effective manner. Given that we operate in a rapidly evolving industry, we need to anticipate user preferences and industry changes and respond to such changes timely and effectively. If we fail to continue to offer high-quality and reliable content to our users that cater to the needs and preferences, we may suffer from reduced user traffic and engagement, and our business, financial condition and results of operations may be materially and adversely affected.

In addition to content generated by our users and medical service providers, we rely on our in-house team to generate creative ideas for original content and to supervise the original content origination and production process, and we intend to continue to invest resources in content production. We face competition for qualified personnel in a limited pool of high-quality creative talent. If we are not able to compete effectively for talents or attract and retain top talents at reasonable costs, our original content production capabilities would be negatively impacted. Any deterioration in our in-house content production capability, inability to attract creative talents at reasonable costs or losses in personnel may materially and adversely affect our business and operating results.

 

21


Table of Contents

If our users and medical service providers do not continue to contribute content that is high-quality, reliable or otherwise valuable to our users, we may experience a decline in user traffic and user engagement.

In addition to content produced by ourselves, our ability to provide users with interesting, reliable and industry-specific content depends on information and content contributed by our users and medical service providers. We believe that one of our competitive advantages is the quality, quantity and open nature of the content on our platform, and that access to reliable, rich and industry-specific content is one of the main reasons users visit So-Young. We seek to foster a broader and more engaged user community, and we encourage influencers, such as social media celebrities and key opinion leaders, and medical service providers to use our platform to share interesting and high quality content.

If our users and medical service providers do not continue to contribute content to our platform as a result of any factors, such as government policy changes and use of alternative communication channels or if their content is not high-quality, reliable or otherwise valuable to users, we may be unable to provide users with attractive content and our user base and user engagement may decline. If we experience a decline in the number of users or the level of user engagement, our business and operating results could be materially and adversely affected.

Our business may be materially and adversely affected by an unfavorable market perception of the overall medical aesthetic industry.

Medical aesthetic services have been gaining popularity in recent years. However, we believe that existing and potential users of the medical aesthetic service industry remain cautious about the risks inherent in medical aesthetic services and are therefore sensitive to any negative review, comment or allegations on the industry in general. Any such allegations, negative news or research results regarding accident, ineffectiveness of services, health risks or inadequate services standard by any medical aesthetic service provider, regardless of merits, may lead to deterioration in consumer confidence in and market perception of the medical aesthetic service industry, and could lead to reduced demand for medical aesthetic services. Moreover, market perception of the medical aesthetic industry may be adversely affected by external factors beyond our control, including restrictive government policies and guidance. As a participant to the industry, we could consequently be exposed to reputational harm and our business, results of operations, financial condition and prospects may be adversely affected.

We depend significantly on the strength of our brand and reputation. Any failure to maintain and enhance, or any damage to, our brand image or reputation could materially and adversely affect our business, results of operations, financial condition and prospects.

Our reputation and brand recognition, which depend on cultivating awareness, trust and confidence among our current or potential users, is critical to the success of our business. We believe a well-recognized brand is crucial to increasing our user base and, in turn, facilitating our effort to monetize our services and enhancing our attractiveness to our users and service providers. Our reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits and other claims in the ordinary course of our business, perceptions of conflicts of interest and rumors, including complaints made by our competitors, among other things, could substantially damage our reputation, even if they are baseless or satisfactorily addressed.

In addition, any perception that the quality of our medical aesthetic services may not be the same as or better than that of other medical aesthetic service platforms can damage our

 

22


Table of Contents

reputation. Any negative media publicity about any of the services available on our platform or product or service quality problems at other online medical aesthetic service platforms, including at our competitors, may also negatively impact our reputation and brand. Negative perceptions of medical aesthetic products and services, or the industry in general, may reduce the number of users coming to our platform and the number of transactions conducted through our platform, which would adversely impact our revenues and liquidity position.

We are subject to uncertainties, changes and developments in the regulatory framework in China with respect to the provision of online medical aesthetic services industry.

As the online medical aesthetic service industry in China is at a relatively early stage of development, applicable laws and regulations may be adopted from time to time to address new issues and may require additional licenses and permits other than those we currently have obtained. As a result, substantial uncertainties exist with regard to the implementation and interpretation of and compliance with current and any future laws and regulations applicable to our business. We cannot assure you that we will be able to meet all the applicable regulatory requirements, or comply with all the applicable regulations and guidelines at all times. Failure to do so could result in sanctions, fines, penalties or other disciplinary actions, including, among other things, limitations or prohibitions on our future business activities, which may harm our reputation, and consequently materially and adversely affect our financial condition and results of operations.

We have been, and may continue to be, subject to liabilities for infringement, misappropriation or other violations of third-party intellectual property rights or other allegations based on the content available on our platform or services we provide.

We have historically been and may continue to be subject to intellectual property infringement claims or other allegations by third parties for services we provide or for information or content displayed on, retrieved from or linked to our platform, or distributed to our users, which may materially and adversely affect our business, financial condition and prospects. We allow users and medical service providers to upload written materials, images, videos and other content on our platform and download, share, link to and otherwise access audio, video and other content on our platform. In addition, we regularly distribute articles, images, audios, videos and other content on our platform and our social media accounts. Although we have set up comprehensive procedures to enable copyright owners to provide us with notice of alleged infringement, given the volume of content available on our platform, it is not possible for us to identify and remove or disable all potentially infringing content that may exist. As a result, third parties may take action and file claims against us if they believe that certain content available on our platform violates their copyrights, rights of reputation, image rights or other intellectual property rights. We have been involved in litigation based on allegations of infringement of third-party intellectual property, including rights of reputation and image rights, due to the content available on our platform. We paid (or are obligated to pay) an aggregate of RMB6.9 million (US$1.0 million) to plaintiffs in alleged intellectual property right infringement lawsuits against us between January 1, 2016 and December 31, 2018, as a result of settlements or adverse judgments. As of December 31, 2018, a total of 26 lawsuits against us in connection with our platform were still pending, with the aggregate amount of damages sought under these pending cases being approximately RMB11.3 million (US$1.6 million).

The validity, enforceability and scope of protection of intellectual property rights in internet-related industries, particularly in China, are uncertain and still evolving. Companies in the internet, technology and media industries own, and are seeking to obtain, a large number of patents, copyrights, trademarks and trade secrets, and they are frequently involved in litigation

 

23


Table of Contents

based on allegations of infringement, misappropriation or other violations of intellectual property rights or other related legal rights. We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, copyrights or other intellectual property rights held by third parties. Although we have, through our own in-house team or by cooperating with third parties, invested significant time and resources in registering our trademarks and other intellectual property rights, we cannot assure you that we have registered all the trademark rights necessary in our daily operation with competent governmental authorities. As we face increasing competition and as litigation becomes more common in China in resolving commercial disputes, we may need to resort to litigation to enforce our intellectual property rights and we also face a higher risk of being the subject of intellectual property infringement claims. Pursuing or defending intellectual property litigation is costly and can impose a significant burden on our management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. Any claims against us, even if they do not result in liability, may harm our reputation. Any resulting liability or expenses, or changes required to our platform to reduce the risk of future liability, may have adverse effect on our business, financial condition and prospects.

Although we have not been subject to claims or lawsuits with respect to copyright infringement outside of China, we cannot assure you that we will not become subject to copyright laws or legal proceedings initiated by third parties in other jurisdictions, such as the United States, as a result of the ability of users to access our content in the United States and other jurisdictions, the ownership of our ADSs by investors in the United States and other jurisdictions, or the extraterritorial application of foreign law by foreign courts. In addition, as a publicly listed company, we may be exposed to increased risk of litigation. If a claim of infringement brought against us in the United States or other jurisdictions is successful, we may be required to, upon enforcement, (i) pay substantial statutory or other damages and fines, (ii) remove relevant content from our platform or (iii) enter into royalty or license agreements that may not be available on commercially reasonable terms or at all. In these cases, our business, financial condition and prospects may be adversely affected.

We may not prevent our medical service providers from breaching their contractual obligations and failing to pay the full amount of fees owed to us, which could materially and adversely affect our financial condition and results of operations.

We charge reservation service fees from the medical service providers on our platform when our users use their services as a result of sales leads generated from our platform, as long as the service provider is active on our platform. In most cases, users make reservations with the medical service providers directly on our platform. However, in some circumstances, users may decide to purchase different or additional services during their on-site visits. In these cases, our medical service providers are under contractual obligations to make supplemental payments to us based on the actual transaction value. We have implemented rigorous monitoring procedures and comprehensive platform rules to prevent our medical service providers from underreporting transaction value and failing to pay the full amount of reservation service fees due to us. For example, we reach out to users after their visits and confirm the actual services they have purchased, and we impose monetary and other penalties in accordance with our platform rules against any medical service provider who is found to have misreported the transaction value or underpaid fees. However, we cannot assure you that we can prevent all our medical service providers from breaching their contractual obligations to us and failing to pay the full amount of reservation service fees owed to us. If there is an increase in the level of underpayment or nonpayment by our medical service providers, our business, financial condition and results of operation can be materially and adversely affected.

 

24


Table of Contents

We face significant competition; if we are unable to compete effectively, we may lose our market share, and our results of operations and financial condition may be materially and adversely affected.

As the market for online medical aesthetic services is relatively new, rapidly evolving and intensely competitive, we expect competition to continue and intensify in the future. We face competition from leading search engines, other online medical aesthetic service platforms and general online e-commerce platforms. We expect competition to intensify in the future as current competitors diversify and improve their service offerings and as new participants enter the market. We cannot assure you that we will be able to compete effectively or efficiently with current or future competitors. They may be acquired by, receive investment from or enter into strategic relationships with established and well-financed companies or investors, which would help enhance their competitiveness. Furthermore, the current competitors and new entrants in the online medical aesthetic industry may also seek to develop new service offerings, technologies or capabilities that could render some of the services we offer obsolete or less competitive, and some of them may adopt more aggressive pricing policies or devote greater resources to marketing and promotional campaigns than we do. The Chinese medical aesthetic service market faces competition from developed markets such as South Korea, Japan, Hong Kong and Taiwan. The failure of Chinese service providers to compete effectively against their overseas counterparts may materially and adversely impact our financial results. The occurrence of any of these circumstances may hinder our growth and reduce our market share, and thus our business, results of operations, financial condition and prospects would be materially and adversely affected.

Our current level of information and reservation services fee rates may decline in the future as a result of competitive and other industry-related factors, and any material reduction in our fee rates may reduce our profitability and materially and adversely affect our business.

We may experience pressure on our information and reservation services fee rates as a result of the competition we face in the online medical aesthetic service industry, as well as macroeconomic factors that are beyond our control. We derive substantially all of our revenues from information and reservation services fees paid by medical aesthetic service providers on our platform.

As the online medical aesthetic industry in China is experiencing significant growth and intensifying competition, we expect that average fee rates for certain medical aesthetic treatment and procedures to decrease. We believe that any downward pressure on these fee rates would likely continue and intensify as more players enter the market and as the Chinese online medical aesthetic market faces increasing competition from other geographic markets, including South Korea, Japan, Hong Kong and Taiwan. A decline in the industry average fee rates in China could in turn lower our fee rates. If our information or reservation services fee rates decrease significantly, our business, results of operations and financial condition may be materially and adversely affected.

Fraudulent or illegal activities on our platform could negatively impact our brand and reputation and cause the loss of users. As a result, our business may be materially and adversely affected.

We may be subject to fraudulent or illegal activities on our platform, sometimes through sophisticated schemes or collusion. Our resources, technologies, fraud detection tools and risk management system may be insufficient to accurately detect and timely prevent fraud and misconduct. A significant increase in fraudulent activities could negatively impact our brand and

 

25


Table of Contents

reputation, result in losses suffered by users and medical service providers, and reduce user activity on our platform. We may need to adopt additional measures in the future to prevent and reduce fraud, which could increase our costs. High-profile fraudulent activities could also lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional expenses and costs. If any of the foregoing were to occur, our reputation and financial performance could be materially and adversely affected.

Our failure to obtain and maintain approvals, licenses or permits applicable to our business could have a material adverse impact on our business, financial conditions and results of operations.

Our business is subject to governmental supervision and regulation by the relevant PRC governmental authorities, including the Ministry of Commerce, or MOFCOM, the Ministry of Industry and Information Technology, or MIIT, national and local health commissions, the National Radio and Television Administration or NRTA, the National Medical Products Administration, or the NMPA, and other governmental authorities in charge of the relevant categories of services offered by us. Together, these government authorities promulgate and enforce regulations that cover many aspects of the operation of online medical aesthetic business, including entry into this industry, the scope of permissible business activities, licenses and permits for various business activities, and foreign investment.

We have not obtained certain approvals, licenses and permits that may be required for some aspects of our business operations. For example, our platform offers live video broadcasting, video recordings of live streaming videos and original short videos created by ourselves and our service providers. According to the PRC Administrative Provisions on Internet Audio-Visual Program Services, a provider of online audio-visual service is required to obtain a license for online transmission of audio-visual programs, or Audio-Visual License. See “Regulations—Regulations on Internet Audio-Visual Program Services.” We have not obtained the Audio-Visual License for providing internet audio-visual program services and content through our platform in China and we may not be eligible for the Audio-Visual License, because the current PRC laws and regulations require an applicant to be a wholly state-owned or state-controlled entity. In addition, because uncertainty remains regarding the interpretation of relevant concepts including “online publications” under the current PRC laws and regulations, the provision of our self-produced content, including articles on medical aesthetic services, on our online platform may be considered “online publishing” and we may be required to obtain an Internet Publishing License, which we currently do not have. See “Regulations—Regulations on Internet Publishing.”

As of the date of this prospectus, we have not received any notice of warning or been subject to penalties or other disciplinary action from the relevant governmental authorities for lack of approvals and permits. However, we cannot assure you that we will not be subject to any warning, investigations or penalties in the future. If the PRC government deems us as operating without proper approvals, licenses or permits, promulgates new laws and regulations that require additional approvals or licenses or impose additional restrictions on the operation of any part of our business, we may be required to apply for additional approvals, license or permits, or subject to various penalties, including fines, termination or restrictions of the part of our business or revoking of our business licenses, which may adversely affect our business and materially and adversely affect our business, financial conditions and results of operations.

 

26


Table of Contents

Any change, disruption or discontinuity in the features and functions of major social networks in China could significantly limit our ability to continue growing our user base, and our business may be materially and adversely affected.

Our success depends on our ability to attract new users and retain existing users. We leverage social networks in China as a tool for user acquisition and engagement. We distribute a substantial part of our content through these social network platforms. To the extent that we fail to leverage such social networks, our ability to attract or retain users may be severely harmed. If any of these social networks makes unfavorable changes to its functions or support, or cease to offer its functions or support to us, we may not be able to locate alternative platforms of similar scales to provide similar functions or support to us. Furthermore, we may fail to establish or maintain relationships with additional social network operators to support the growth of our business. Any interruption to or discontinuation of our relationship with the major social network operators in China may severely and negatively impact our ability to continue growing our user base and result in material adverse effect on our business, financial condition and results of operations.

Our expansion plans, including our plans to expand into new business lines and geographic areas, are subject to uncertainties and risks, and we may not be able to successfully manage our expanded operations.

To serve our expanding user base and our users’ evolving medical service needs, we continuously expand into new geographic areas and offer new services. Expansion into diverse locations and business categories involves new risks and challenges. Our lack of familiarity with these new geographic areas and service offerings may make it more difficult for us to anticipate user demand and preferences.

We have mainly focused on service providers in the major urban centers in China, and we plan to expand our nationwide network coverage to penetrate further into China’s smaller cities. We also plan to expand further into international markets. There is no assurance that our geographic expansion strategies will be successful. As we enter markets and countries that are new to us, we must tailor our services and business model to the unique circumstances of such markets and countries, which can be complex, difficult and costly, and divert management and personnel resources. In addition, we may face competition from platforms that may have more experience with operations in such markets and countries. In addition, laws and business practices that favor local competitors or prohibit or limit foreign ownership of certain businesses, or our failure to adapt our practices, systems, processes and business models effectively to user preferences of each country into which we expand, could slow our growth. Certain markets in which we operate have, or certain new markets in which we may operate in the future may have, lower margins than our more mature markets, which could have a negative impact on our overall margins as our revenues from these markets grow over time.

We also plan to continue to introduce and expand new services on our platform. Expansion into diverse new products and service categories involves new risks and challenges. Our lack of familiarity with these new service offerings and lack of relevant customer data may make it more difficult for us to anticipate customer demand and preferences and manage legal, operational, competitive and other risks. We cannot assure you that we will be able to recoup our investments in introducing these new service categories. If we fail to execute our expansion strategies effectively or address the challenges and risks we encounter when executing our expansion strategies, our business and results of operations could be materially and adversely affected.

 

27


Table of Contents

We have incurred net losses in the past, and we may again incur losses in the future.

While we generated net income in 2017 and 2018, we incurred a net loss in 2016. We anticipate that our operating costs and expenses will increase in the foreseeable future as we continue to grow our business, attract users, further enhance and develop our service offerings, enhance our technology capabilities and increase our brand recognition. These efforts may prove more costly than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. There are other external and internal factors that could negatively affect our financial condition. For example, the transaction volume achieved on our platform may be lower than expected, which may lead to lower-than-expected revenues. Furthermore, we have adopted a share incentive plan in the past and may adopt new share incentive plans in the future, which have caused, and will result in, significant share-based compensation expenses to us. We generate all of our total revenues from information and reservation services fees charged to medical aesthetic service providers we partner with. Any material decrease in our information or reservation services fees would have a substantial impact on our financial condition. As a result of the foregoing and other factors, we may again incur net losses in the future.

Any failure to protect our content and other intellectual property could harm our business and competitive position.

We believe that trademarks, trade secrets, copyright and other intellectual property we use are critical to our business. We rely on a combination of trademark, copyright and trade secret protection laws in China, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our brand. Protection of intellectual property rights in China may not be as effective as in the United States or other jurisdictions, and as a result, we may not be able to adequately protect our intellectual property rights, which could adversely affect our revenues and competitive position. In addition, any unauthorized use of our intellectual property by third parties may adversely affect our revenues and our reputation. In particular, we may have difficulty addressing the threats to our business associated with piracy of our content, particularly our original content. Our content may be potentially subject to unauthorized consumer copying and illegal digital dissemination without an economic return to us. We adopt a variety of measures to mitigate risks associated with piracy, including by litigation and through technology measures. We cannot assure that such measures will be effective.

In addition, while we typically require our employees who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that we regard as our own. In addition, such agreements may be breached. Accordingly, we may be forced to bring claims against third parties, or defend claims that they may bring against us related to the ownership of such intellectual property.

Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce or defend intellectual property or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and an adverse determination in any such litigation could result in substantial costs and diversion of resources and management attention.

We may be held liable for information or content displayed on, retrieved from or linked to our platform, which may materially and adversely affect our business and operating results.

As we serve as a social platform for our users, we may be held liable for content that is posted, made available through or linked to our platform. Although we have required our

 

28


Table of Contents

in-house content-generating team, users and service providers to post only legally compliant and inoffensive materials and have set up screening procedures, our requirements and screening procedures may fail to eliminate all potentially noncompliant content. As the live video broadcasting communications on our platform are conducted in real time, we are generally unable to examine the content generated before they are streamed. Therefore, it is possible that some of the live content on our platform may engage in illegal, obscene, incendiary or subversive conversations or activities, including posting of inappropriate or illegal content that may be deemed unlawful under PRC laws and regulations. In addition, we may fail to fully screen and prevent medical service providers from posting inauthentic user pictures and reviews on our platform. If the PRC authorities find that we have not adequately managed or supervised the content on our platform, they may impose legal sanctions on us, including, in serious cases, suspending or revoking the licenses needed to operate our platform. Moreover, we may face potential claims for libel or slander in connection with our platform content, or a third party may find content on our platform offensive or indecent and take other legal action against us. Any such claim, with or without merit, could be time-consuming and costly to defend, and may result in litigation and divert management’s attention and resources. If we incur costs or liability as a result of these events, our business, financial condition and operating results could be adversely affected.

Privacy concerns relating to our services and the use of user information could negatively impact our user base or user engagement. If we fail to protect the confidential information of our users, whether due to cyberattacks, computer viruses, physical or electronic break-ins, or other reasons, we may be subject to liabilities imposed by relevant laws and regulations, and our reputation and business may be materially and adversely affected.

Concerns about the collection, use, disclosure or security of personal information or chat history or other privacy-related matters, even if unfounded, could damage our reputation, cause us to lose users, customers and service providers and subject us to regulatory investigations, all which may adversely affect our business. We collect contact information, browsing history and other personal data from our users in order to better understand our users and their needs and to support our big data analytical capabilities for more targeted services. Due to the volume and sensitivity of the personal information and biometric data we collect and manage, the security features of our platform and information systems are critical. We have adopted security policies and measures, including encryption technology, to protect our proprietary data and user information. We also conduct a rigorous data-masking process before providing user information to medical aesthetic professionals. While we strive to comply with applicable data protection laws and regulations, as well as our privacy policies pursuant to our terms of use and other obligations we may have with respect to privacy and data protection, any failure or perceived failure to comply with these laws, regulations or policies may result in inquiries and other proceedings or actions against us by government agencies or others, as well as negative publicity and damage to our reputation and brand, each of which could cause us to lose users and service providers and have an adverse effect on our business and operating results.

In addition, any systems failure or compromise of our security that results in the unauthorized access to or release of the data of our users or service providers could significantly harm our reputation and brand. We expect to continue expending significant resources to protect against security breaches. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of services we offer and increase the size of our user base. Our practices may also become inconsistent with new laws or regulations concerning data protection, or the interpretation and application of existing consumer and data protection laws or regulations, which is often uncertain and in flux. In addition to the possibility of fines, such inconsistency could result in substantial costs or

 

29


Table of Contents

requirement that we change our practices, which could have an adverse effect on our business and operating results. See also “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

We rely on proper operation and maintenance of our online platform. Any deficiencies, malfunction, capacity restraint, operation interruption or undetected programming failure or flaws could harm our reputation and adversely affect our business.

We conduct our business activities through our online platform. Therefore, the satisfactory performance, reliability and availability of our online platform are critical to our success and our ability to attract and retain users. The reliability and availability of our online platform depends on telecommunications carriers and other third-party providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are unable to enter into and renew agreements with these providers on acceptable terms, or if any of our existing agreements with such providers are terminated as a result of our breach or otherwise, our ability to provide our services to our users could be adversely affected. In addition, service interruptions can prevent users from accessing our platform and making transactions, and frequent interruptions could frustrate users and discourage them from using our platform, which could cause us to lose users and adversely affect our operating results.

In addition, our platform and internal systems rely on software that is highly technical and complex, and depend on the ability of such software to store, retrieve, process and manage immense amounts of data. The software on which we rely has contained, and may now or in the future contain, undetected programming errors or flaws. Some errors may only be discovered after the code has been released for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for users using our platform or disruptions to the operations of our medical service providers, delay introductions of new features or enhancements, result in errors or compromise our ability to support effective user service and enjoyable user engagement. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation and loss of users, which could adversely affect our business, results of operations and financial conditions.

Failure or poor performance of third-party software, infrastructure or systems on which we use could adversely affect our business. In particular, our users use third-party payment service providers to make payments on our platform. If these payment services are restricted or curtailed in any way or become unavailable to us or our users for any reason, our business may be materially and adversely affected.

We use third parties to provide and maintain certain infrastructure that is important to our business. If such services become limited, restricted, curtailed or less effective or more expensive in any way or become unavailable to us for any reason, our business may be materially and adversely affected. The infrastructure of our third-party service providers may malfunction or fail due to events out of our control, which could disrupt our operations and have a material adverse effect on our business, financial condition, results of operations and cash flows. Any failure to maintain and renew our relationships with these third parties on commercially favorable terms, or to enter into similar relationships in the future, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Historically, we had engaged in collecting payments on behalf of third parties, which may be deemed as having provided payment settlement services, thereby exposing us to potential penalties. We have since begun to cooperate with several third parties for the billing, payment

 

30


Table of Contents

and escrow functions on our platform. The commercial banks and third-party online payment service providers that we work with are subject to the supervision by the People’s Bank of China, or the PBOC. The PBOC may publish rules, guidelines and interpretations from time to time regulating the operation of financial institutions and payment service providers that may in turn affect the availability of services provided by such entities for us. For example, in November 2017, the PBOC published a notice (the “PBOC Notice”) on the investigation and administration of illegal offering of settlement services by financial institutions and third-party payment service providers to unlicensed entities. We believe that our partnership with the commercial banks and third-party online payment service providers are not in violation of the PBOC Notice, but we cannot assure you that the PBOC or other governmental authorities will hold the same view with ours. If required by the PBOC or new legislation, the commercial banks or the payment service providers may modify or suspend the services they offer to us, and we may be required to obtain additional license and incur additional expenses. If the PBOC or other governmental authorities deem our cooperation with the commercial banks and payment service providers as in violation of relevant laws and regulations, we may be subject to penalties, fines, legal sanctions or suspension of the relevant functions on our platform. See “Regulations—Regulations on Payment Services.”

If major mobile application distribution channels change their standard terms and conditions in a manner that is detrimental to us, or suspend or terminate their existing relationship with us, our business, financial condition and results of operations may be materially and adversely affected.

We currently cooperate with Apple’s app store and major PRC-based Android app stores to distribute our So-Young mobile application to users. As such, the promotion, distribution and operation of our application are subject to such distribution platforms’ standard terms and policies for application developers, which are subject to the interpretation of, and frequent changes by, these distribution channels. If these third-party distribution platforms change their terms and conditions in a manner that is detrimental to us, or refuse to distribute our application, or if any other major distribution channel with which we would like to seek collaboration refuses to collaborate with us in the future on commercially favorable terms, our business, financial condition and results of operations may be materially and adversely affected.

Our future growth depends on the further acceptance of the internet and particularly the mobile internet as an effective platform for assessing medical aesthetic services and content.

While the internet and the mobile internet have gained increased popularity in China as platforms for medical aesthetic products and content in recent years, many users have limited experience in accessing medical aesthetic services online. For example, users may not consider online content to be reliable sources of medical aesthetic information. If we fail to educate users about the value of our content, our platform and our services, our growth may be limited and our business, financial performance and prospects may be materially and adversely affected. The further acceptance of the internet and the mobile internet as an effective and efficient platform for medical aesthetic services and content is also affected by factors beyond our control, including negative publicity around online medical aesthetic services and potential restrictive regulatory measures taken by the PRC government. If online and mobile networks do not achieve adequate acceptance in the market, our growth prospects, results of operations and financial condition could be harmed.

 

31


Table of Contents

Real or perceived inaccuracies in our operating metrics may harm our reputation and negatively affect our business.

We rely on certain key operating metrics, such as mobile MAUs and purchasing users, to evaluate the performance of our business. Our operating metrics may differ from estimates published by third parties or from similarly titled metrics used by other companies due to differences in methodology. We calculate these operating metrics using internal company data that have not been independently verified. If we discover material inaccuracies in the operating metrics we use, or if they are perceived to be inaccurate, our reputation may be harmed and our evaluation methods and results may be impaired, which could negatively affect our business. If investors make investment decisions based on operating metrics we disclose that are inaccurate, we may also face potential lawsuits or disputes.

Our success depends on the continuing service of our key employees, including our senior management members and other talent. If we fail to hire, retain and motivate our key employees, our business may suffer.

Our key executives have substantial experience and have made significant contributions to our business, and our continued success is dependent upon the retention of our key management executives, as well as the services provided by our staff and a number of other key managerial, marketing, business development, customer service, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. Growth in our business is dependent, to a large degree, on our ability to retain and attract such employees.

Competition for well-qualified employees in all aspects of our business is intense. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees and key senior management, our business, results of operations, financial condition and prospects may be adversely affected.

We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.

We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide services on our platform.

Given the nature of the medical aesthetic industry, our business could be significantly and adversely affected by health epidemics, including effects of Ebola virus disease, H1N1 flu, H7N9 flu, avian flu or Severe Acute Respiratory Syndrome, or SARS. In addition, our business operations could be disrupted if any of our employees is suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic disease, since it could require our employees to be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these epidemics harms the Chinese economy in general.

 

32


Table of Contents

From time to time we may evaluate and potentially consummate investments and acquisitions or enter into alliances, which may require significant management attention, disrupt our business and adversely affect our financial results.

We may identify strategic partners to form strategic alliances or invest in or acquire additional assets, technologies or businesses that are complementary to our existing business. These investments may involve minority stakes in other companies, acquisitions of entire companies or acquisitions of selected assets.

Any future strategic alliances, investments or acquisitions and the subsequent integration of the new assets and businesses obtained or developed from such transactions into our own may divert management from their primary responsibilities and subject us to additional liabilities. In addition, the costs of identifying and consummating investments and acquisitions may be significant. We may also incur costs and experience uncertainties in completing necessary registrations and obtaining necessary approvals from relevant government authorities in China and elsewhere in the world. The costs and duration of integrating newly acquired assets and businesses could also materially exceed our expectations. Any such negative developments could have a material adverse effect on our business, financial condition, results of operations and cash flow.

Our operating results may fluctuate from period to period, which makes our operating results difficult to predict and could cause our revenue, expenses and profitability to differ from our past performance and/or expectations during certain periods.

The performance of our businesses is subject to seasonal fluctuations. Our business is typically the slowest during the Chinese New Year, which generally falls in the first quarter of the year. In contrast, our business is the strongest and we experience highest volume of sales and platform activities in the fourth quarters of a year. As a result, we believe that comparisons of our operating results over any interim periods in the past may not be an accurate indicator of our future performance. Overall, the historical seasonality of our business has been relatively mild due to our rapid growth but seasonality may increase in the future. Due to our limited operating history, the seasonal trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.

We have limited business insurance coverage.

The insurance industry in China is still in an early stage of development, and insurance companies in China currently offer limited business-related insurance products. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain property insurance, product liability insurance or key-man insurance. We consider this practice to be reasonable in light of the nature of our business and the insurance products that are available in China and in line with the practices of other companies in the same industry of similar size in China. Any uninsured risks may result in substantial costs and the diversion of resources, which could adversely affect our results of operations and financial condition.

We may not be able to obtain additional capital when desired, on favorable terms or at all.

Since we launched our business, we have raised substantial financing to support the growth of our business. We may require additional capital to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances, including to improve our brand awareness, develop new services or further improve existing services, expand into new geographic areas and acquire complementary businesses and technologies.

 

33


Table of Contents

However, additional funds may not be available when we need them on reasonable terms, or at all. Our ability to retain our existing financial resources and obtain additional financing on acceptable terms is subject to a variety of uncertainties, including but not limited to:

 

   

our market position and competitiveness in the online medical aesthetic service industry;

 

   

our future profitability, overall financial condition, results of operations and cash flows;

 

   

general market conditions for capital raising activities by online medical aesthetic platforms and other internet companies in China; and

 

   

economic, political and other conditions in China and internationally.

If we are unable to obtain adequate financing or financing on satisfactory terms, our ability to continue to pursue our business objectives and respond to business opportunities, challenges or unforeseen circumstances could be significantly limited, and our business, results of operations, financial condition and prospects could be adversely affected. In addition, our future capital needs and other business reasons could require us to sell additional equity or debt securities or obtain a credit facility. The sale of additional equity or equity-linked securities could dilute our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations or our ability to pay dividends to our shareholders.

Changes in the level of consumer confidence and spending in China or a general downturn in the Chinese and global economy could materially and adversely affect us.

Our business, financial condition and results of operations are sensitive to changes in overall economic conditions that affect consumer spending in China. The medical aesthetic industry is sensitive to general economic changes. Any slowing in growth rate or decrease in per capita disposable income in China may negatively impact spending by consumers on medical aesthetic services. Many factors outside of our control, including inflation and deflation, interest rates, volatility of equity and debt securities markets, taxation rates, employment and other government policies can adversely affect consumer confidence and spending. While the economy in China has grown significantly over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing.

Moreover, there is considerable uncertainty in the global economic condition as well as concern about the economic effects of the tensions between China and the United States. Any prolonged slowdown in the global or Chinese economy may lead users to delay or reduce use of our services, and consumer demand for our services may not grow as we expect, which could materially and adversely affect our business, financial condition and results of operations. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.

Increases in labor costs in the PRC and enforcement of stricter labor laws and regulations may adversely affect our business and results of operations.

China’s overall economy and the average wage in China have increased in recent years and are expected to grow. The average wage level for our employees has also increased in recent years. We expect that our labor costs, including wages and employee benefits, will increase. Unless we are able to pass on these increased labor costs to those who pay for our services, our results of operations may be materially and adversely affected.

 

34


Table of Contents

In addition, we have been subject to stricter regulatory requirements in terms of entering into labor contracts with our employees and paying various statutory employee benefits, including pensions, housing funds, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. Pursuant to the PRC Labor Contract Law and its implementation rules, employers are subject to stricter requirements in terms of signing labor contracts, paying minimum wages, paying remuneration, determining the term of employee’s probation and unilaterally terminating labor contracts. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the PRC Labor Contract Law and its implementation rules may limit our ability to effect those changes in a desirable or cost-effective manner, which could adversely affect our business and results of operations.

As the interpretation and implementation of labor-related laws and regulations are still evolving, our employment practices may violate labor-related laws and regulations in China, which may subject us to labor disputes or government investigations. We cannot assure you that we have complied or will be able to comply with all labor-related law and regulations. If we are deemed to have violated relevant labor laws and regulations, we could be required to provide additional compensation to our employees, and our business, financial condition and results of operations will be adversely affected.

We have granted, and may continue to grant, share options and other forms of share-based incentive awards, which may result in significant share-based incentive expenses.

We have adopted the Second Amended and Restated 2018 Share Plan, or the Plan, in March 2019 for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. Under the Plan, the maximum aggregate number of shares that may be issued pursuant to all awards is 7,700,000 ordinary shares plus an annual increase of 2% of our total outstanding share capital as of December 31 of the immediately preceding calendar year on the first day of each fiscal year, beginning in 2020, or such lesser number of Class A ordinary shares as determined by our board of directors, provide that the aggregate number of shares initially reserved and subsequently increased during the term of the Plan shall not be more than 10% of our total outstanding share capital on December 31 immediately preceding the most recent increase. As of the date of this prospectus, options to purchase 5,055,908 ordinary shares are granted and outstanding under the Plan.

We believe the granting of share incentive awards is of significant importance to our ability to attract and retain employees, and we will continue to grant share incentive awards to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.

We have identified a material weakness in our internal controls as of December 31, 2018, and if we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which to address our internal controls. In the course of auditing our consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal controls. A material weakness is a deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or

 

35


Table of Contents

detected on a timely basis. Our material weakness relates to our lack of a sufficient number of financial reporting personnel with the appropriate level of knowledge and experience in the application of U.S. GAAP and Securities and Exchange Commission, or SEC, rules and regulations commensurate with our reporting requirements. Although we have begun to implement measures to address the material weakness, implementation of those measures may not fully remediate the material weakness in a timely manner. In the future we may determine that we have additional material weaknesses, or our independent registered public accounting firm may disagree with our management assessment of the effectiveness of our internal controls.

If we fail to establish and maintain adequate internal controls, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could limit our access to capital markets, adversely affect our results of operations and lead to a decline in the trading price of the ADSs. Additionally, ineffective internal controls could expose us to an increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list or to other regulatory investigations and civil or criminal sanctions. We could also be required to restate our historical financial statements.

Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Foreign ownership of certain telecommunication businesses and certain other businesses, such as provision of online medical aesthetic information and services, is subject to restrictions under current PRC laws and regulations. Specifically, foreign ownership of online medical aesthetic information and service provider may not exceed 50%, and the major foreign investor is required to have a record of good performance and operating experience in managing value-added telecommunications business. We are an exempted company incorporated in the Cayman Islands. Beijing So-Young Wanwei Technology Consulting Co., Ltd., or So-Young Wanwei, is our PRC subsidiary and a wholly foreign-owned enterprise under PRC laws. To comply with PRC laws and regulations, we conduct our businesses in China through Beijing So-Young Technology Co., Ltd., or Beijing So-Young, our consolidated affiliated entity, and its subsidiaries, based on a series of contractual arrangements by and among So-Young Wanwei, Beijing So-Young and its shareholders. For a description of these contractual arrangements, see “Corporate History and Structure.” As a result of these contractual arrangements, we exert control over our consolidated affiliated entity and consolidate its financial results in our financial statements under U.S. GAAP.

In the opinion of our PRC counsel, Han Kun Law Offices, the ownership structure of So-Young Wanwei and Beijing So-Young does not result in any violation of PRC laws and regulations currently in effect, and the contractual arrangements between So-Young Wanwei, Beijing So-Young and its shareholders as governed by PRC law will not result in any violation of PRC laws or regulations currently in effect. However, we have been further advised by our PRC counsel that there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations. Thus, the PRC government may ultimately take a view contrary to the opinion of our PRC counsel. If the PRC government otherwise find that we are in violation of any existing or future PRC laws or regulations or lack the necessary permits

 

36


Table of Contents

or licenses to operate our business, the relevant governmental authorities would have broad discretion in dealing with such violation, including, without limitation:

 

   

revoking the business licenses and/or operating licenses of such entities;

 

   

imposing fines on us;

 

   

confiscating any of our income that they deem to be obtained through illegal operations;

 

   

terminating or placing restrictions or onerous conditions on our operations;

 

   

placing restrictions on our right to collect revenues; and

 

   

shutting down our servers or blocking our mobile apps and websites.

Any of these events could cause significant disruption to our business operations and severely damage our reputation, which would in turn materially and adversely affect our business, financial condition and results of operations. If occurrences of any of these events results in our inability to direct the activities of our consolidated affiliated entity in China that most significantly impact their economic performance, and/or our failure to receive the economic benefits from our consolidated affiliated entity, we may not be able to consolidate the entity in our consolidated financial statements in accordance with U.S. GAAP.

We rely on contractual arrangements with our consolidated affiliated entity and its shareholders for our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with consolidated affiliated entity and its shareholders to operate our business in China. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated affiliated entity. For example, our consolidated affiliated entity and its shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our consolidated affiliated entity in China, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our consolidated affiliated entity, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our consolidated affiliated entity and its shareholders of their obligations under the contracts to exercise control over our consolidated affiliated entity. The shareholders of our consolidated affiliated entity may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portion of our business through the contractual arrangements with our consolidated affiliated entity. If any dispute relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Risk Factors—Risks Related to Our Business and Industry—Any failure by our consolidated affiliated entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.” Therefore, our contractual arrangements with our consolidated affiliated entity may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.

 

37


Table of Contents

Any failure by our consolidated affiliated entity or its shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.

If our consolidated affiliated entity or its shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and contractual remedies, which we cannot assure you will be sufficient or effective under PRC law. For example, if the shareholders of our consolidated affiliated entity were to refuse to transfer their equity interests in our consolidated affiliated entity to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they were otherwise to act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.

All the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal guidance as to how contractual arrangements in the context of a consolidated affiliated entity should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our consolidated affiliated entity, and our ability to conduct our business may be negatively affected. See “Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system could adversely affect us.”

The shareholders of our consolidated affiliated entity may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders of our consolidated variable entity are Mr. Hui Shao, Mr. Xing Jin and Mr. Tao Yu. Mr. Hui Shao is our director, Mr. Xing Jin is our co-founder and chief executive officer, and Tao Yu is our co-founder and chief information officer. Nevertheless, conflicts of interest may arise between the roles of them as shareholders, directors or officers of our company and as shareholders of our consolidated affiliated entity. These shareholders may breach, or cause our consolidated variable entity to breach, or refuse to renew, the VIE Contractual Arrangements we have with them and our consolidated variable entity, which would have a material and adverse effect on our ability to effectively control our consolidated variable entity and receive economic benefits from such entity. For individuals who are also our directors and officers, we rely on them to abide by the laws of the Cayman Islands, which provide that directors and officers owe fiduciary duties to our company, including duties to act in good faith and in what they believe to be the best interest of our company and not to use their positions for personal gain. The shareholders of our consolidated affiliated entity have executed powers of attorney to appoint So-Young Wanwei or a person designated by So-Young

 

38


Table of Contents

Wanwei to vote on their behalf and exercise voting rights as shareholders of our consolidated affiliated entity. We cannot assure you that when conflicts arise, these shareholders will act in the best interest of our company or that conflicts will be resolved in our favor. If we cannot resolve any conflicts of interest or disputes between us and these shareholders, we would have to rely on legal proceedings, which may be expensive, time-consuming and disruptive to our operations. There is also substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our consolidated affiliated entity may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated affiliated entity owes additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities within ten years after the taxable year when the transactions are conducted. We could face material and adverse tax consequences if the PRC tax authorities determine that the contractual arrangements in relation to our consolidated affiliated entity were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust income of our consolidated affiliated entity in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our consolidated affiliated entity for PRC tax purposes, which could in turn increase its tax liabilities without reducing our WFOE’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our consolidated affiliated entity for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our affiliated entity’s tax liabilities increase or if it is required to pay late payment fees and other penalties.

We may lose the ability to use and enjoy assets held by our consolidated affiliated entity that are material to the operation of certain portion of our business if the entity goes bankrupt or becomes subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our consolidated affiliated entity, the entity holds certain assets that are material to the operation of our business, including permits, domain names and most of our IP rights. If our consolidated affiliated entity goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our consolidated affiliated entity may not, in any manner, sell, transfer, mortgage or dispose of its assets or legal or beneficial interests in the business without our prior consent. If our consolidated affiliated entity undergoes a voluntary or involuntary liquidation proceeding, the independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

Uncertainties exist with respect to the interpretation and implementation of the newly enacted PRC Foreign Investment Law and how it may impact the viability of our current corporate structure, corporate governance and business operations.

On March 15, 2019, the National People’s Congress approved the Foreign Investment Law, which will come into effect on January 1, 2020 and replace the trio of existing laws regulating

 

39


Table of Contents

foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. However, since it is relatively new, uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment” refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.

We may rely on dividends paid by our PRC subsidiary to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.

We are a holding company, and we may rely on dividends to be paid by our PRC subsidiary for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to the holders of the ADSs and our ordinary shares and service any debt we may incur. If our PRC subsidiary incurs debt on their own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us.

Under PRC laws and regulations, wholly foreign-owned enterprises in the PRC, such as So-Young Wanwei, may pay dividends only out of their accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its after-tax profits each year, after making up previous years’ accumulated losses, if any, to fund certain statutory reserve funds, until the aggregate amount of such a fund reaches 50% of its registered capital. At the discretion of the board of directors of the wholly foreign-owned enterprise, it may allocate a portion of its after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends. Any limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.

 

40


Table of Contents

Risks Related to Doing Business in China

Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.

Substantially all of our revenues are derived from China. Accordingly, our results of operations, financial condition and prospects are influenced by economic, political and legal developments in China. Economic reforms begun in the late 1970s have resulted in significant economic growth. However, any economic reform policies or measures in China may from time to time be modified or revised. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among different economic sectors.

The PRC government exercises significant control over China’s economic growth through strategically allocating resources, controlling the payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Although the PRC economy has grown significantly in the past decade, that growth may not continue, as evidenced by the slowing of the growth of the PRC economy since 2012. Any adverse changes in economic conditions in China, in the policies of the PRC government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position.

Uncertainties with respect to the PRC legal system could adversely affect us.

The PRC legal system is based on written statutes and court decisions have limited precedential value. The PRC legal system is evolving rapidly, and the interpretations of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.

From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. However, since PRC judicial and administrative authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of a judicial or administrative proceeding than in more developed legal systems. Furthermore, the PRC legal system is based, in part, on government policies and internal rules, some of which are not published in a timely manner, or at all, but which may have retroactive effect. As a result, we may not always be aware of any potential violation of these policies and rules. Such unpredictability towards our contractual, property (including intellectual property) and procedural rights could adversely affect our business and impede our ability to continue our operations.

You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in the prospectus based on foreign laws.

We are an exempted company incorporated under the laws of the Cayman Islands, while we conduct substantially all of our operations in China, and substantially all of our assets are located in China. In addition, all our senior executive officers reside within China for a significant portion of the time and most are PRC nationals. As a result, it may be difficult for our

 

41


Table of Contents

shareholders to effect service of process upon us or those persons inside China. In addition, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the Cayman Islands and many other countries and regions. Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter not subject to a binding arbitration provision may be difficult or impossible.

Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.

The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and China’s foreign exchange policies, among other things. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. Since October 1, 2016, Renminbi has joined the International Monetary Fund’s basket of currencies that make up the Special Drawing Right (SDR) along with the U.S. dollar, the Euro, the Japanese yen and the British pound. In 2018, the Renminbi has depreciated significantly against the backdrop of a surging U.S. dollar and persistent capital outflows of China. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and we cannot assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.

Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from this offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.

Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any material hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign currency.

Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our

 

42


Table of Contents

Cayman Islands holding company may rely on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiary in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiary and consolidated affiliated entity to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi.

In light of the recent flood of capital outflows of China due to the weakening RMB, the PRC government has imposed more restrictive foreign exchange policies and stepped up scrutiny of major outbound capital movement including overseas direct investment. More restrictions and substantial vetting process are put in place by SAFE to regulate cross-border transactions falling under the capital account. If any of our shareholders regulated by such policies fails to satisfy the applicable overseas direct investment filing or approval requirement timely or at all, it may be subject to penalties from the relevant PRC authorities. The PRC government may at its discretion further restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

The M&A Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China.

The Regulations on Mergers and Acquisitions of Domestic Companies by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements in some instances that the Ministry of Commerce, or the MOC, be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes, including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

 

43


Table of Contents

PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and variable interest entity, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

We are an offshore holding company conducting our operations in China through our PRC subsidiary, our variable interest entity and its subsidiaries. We may make loans to our PRC subsidiary, variable interest entity and its subsidiaries, or we may make additional capital contributions to our PRC subsidiary, or we may establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, or we may acquire offshore entities with business operations in China in an offshore transaction.

Most of these activities are subject to PRC regulations and approvals. For example, loans by us to our wholly owned PRC subsidiary to finance its activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE. If we decide to finance our wholly owned PRC subsidiary by means of capital contributions, these capital contributions are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System and registration with other governmental authorities in China. Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, total principal amount of loans provided by us to each PRC domestic company every year cannot exceed a certain amount. Further, we are not likely to finance the activities of our consolidated affiliated entity by means of capital contributions due to regulatory restrictions relating to foreign investment in PRC domestic enterprises engaged in internet information services and related businesses.

SAFE promulgated Circular on the Reforming of the Management Method of the Settlement of Foreign Currency Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective June 2015, in replacement of the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses. According to SAFE Circular 19, the flow and use of the RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Although SAFE Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign-invested enterprise to be used for equity investments within China, it also reiterates the principle that RMB capital converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in China in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or SAFE Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in SAFE Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to issue loans to non-associated enterprises, the repayment of inter-enterprise loans or the repayment of banks loans that have been transferred to a third party. Violations of SAFE Circular 19 and SAFE Circular 16 could result in administrative penalties. SAFE Circular 19 and SAFE Circular 16 may significantly limit

 

44


Table of Contents

our ability to transfer any foreign currency we hold, including the net proceeds from this offering, to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China.

In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or with respect to future capital contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds we received from our initial public offering and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiary to liability or penalties, limit our ability to inject capital into our PRC subsidiary, limit our PRC subsidiary’s ability to increase its registered capital or distribute profits to us, or may otherwise adversely affect us.

The SAFE promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Round-Trip Investment through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing with such PRC residents or entities’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests. On February 13, 2015, SAFE issued SAFE Circular No. 13, which took effect on June 1, 2015, pursuant to which, the power to accept SAFE registration was delegated from local SAFE to local qualified banks where the assets or interest in the domestic entity was located. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75.

If our shareholders who are PRC residents or entities do not complete their registration with the local SAFE branches, our PRC subsidiary may be prohibited from distributing their profits and proceeds from dividends, any reduction in capital, share transfer or liquidation to us, and we may be restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.

We have used our best efforts to notify PRC residents or entities who directly or indirectly hold shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations. However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we compel our beneficial owners to comply with SAFE registration requirements. We cannot assure you that all shareholders or beneficial owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’s ability to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.

 

45


Table of Contents

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their position as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Our directors, executive officers and other employees who are PRC residents and who have been granted share-based awards may follow SAFE Circular 37 to apply for the foreign exchange registration before our company becomes an overseas listed company. In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Company, or SAFE Circular 7. Under SAFE Circular 7 and other relevant rules and regulations, PRC residents and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in stock incentive plan in an overseas publicly-listed company, subject to a few exceptions, are required to register with SAFE or its local branches and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company or another qualified institution selected by such PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of its participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of share-based awards, the purchase and sale of corresponding shares or interests and fund transfers. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. We and our PRC employees or employees who reside in the PRC for a continuous period of not less than one year and who have been granted share-based awards will be subject to SAFE Circular 7 and other relevant rules and regulations upon the completion of this offering. Failure of our PRC share-based award holders to complete their SAFE registrations may subject these PRC residents to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiary, limit our PRC subsidiary’s ability to distribute dividends to us, or otherwise materially adversely affect our business.

If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with its “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to PRC enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises.

 

46


Table of Contents

According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that So-Young International Inc. is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax at a rate of 10% on gains realized on the sale or other disposition of ADSs or ordinary shares at a rate of 10%, if such income is treated as sourced from within the PRC. Furthermore, if PRC tax authorities determine that we are a PRC resident enterprise for enterprise income tax purposes, dividends paid to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% (which, in the case of dividends, may be withheld at source by us), if such dividends or gains are deemed to be from PRC sources. These rates may be reduced by an applicable tax treaty, but it is unclear whether non-PRC shareholders of So-Young International Inc. would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that So-Young International Inc. is treated as a PRC resident enterprise. Any such PRC tax may reduce the returns on your investment in the ADSs.

We face uncertainty with respect to indirect transfer of equity interests in PRC resident enterprises by their non-PRC holding companies.

We face uncertainties regarding the reporting on and consequences of previous private equity financing transactions involving the transfer and exchange of shares in our company by non-resident investors. In February 2015, the State Administration of Taxation issued the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises, or Bulletin 7. Pursuant to Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10%, for the transfer of equity interests in a PRC resident enterprise. Bulletin 7 does not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange. On October 17, 2017, the SAT issued the Announcement of the State Administration of Taxation on Issues of Tax Withholding regarding Non-resident Enterprise Income Tax, or Bulletin 37, which came into effect on December 1, 2017. The Bulletin 37 further clarifies the practice and procedure of the withholding of nonresident enterprise income tax.

 

47


Table of Contents

There is uncertainty as to the application of Bulletin 37 or previous rules under Bulletin 7. We face uncertainties on the reporting and consequences of private equity financing transactions, share exchanges or other transactions involving the transfer of shares in our company by investors that are non-PRC resident enterprises. Our company may be subject to filing obligations or taxes if our company is the transferor in such transactions, and may be subject to withholding obligations if our company is the transferee in such transactions, under Bulletin 37 and Bulletin 7.

The audit report included in this prospectus is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

Our independent registered public accounting firm that issues the audit reports included in our prospectus filed with the U.S. Securities and Exchange Commission, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board, or the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with applicable professional standards. Because our auditors are located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions, if any, the SEC and PCAOB will take to address the problem.

Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditors’ audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.

The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditors’ audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.

Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

 

48


Table of Contents

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms were to receive matching Section 106 requests, and were required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they failed to meet specified criteria, the SEC retained authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. We cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

In the event the Chinese affiliates of the “big four” become subject to additional legal challenges by the SEC or PCAOB, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our common stock may be adversely affected.

If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the ADSs from Nasdaq Stock Market LLC or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of the ADSs in the United States.

The enforcement of the PRC Labor Contract Law and other labor-related regulations in the PRC may adversely affect our business and results of operations.

The Standing Committee of the National People’s Congress enacted the Labor Contract Law in 2008, and amended it on December 28, 2012. The Labor Contract Law introduced specific provisions related to fixed-term employment contracts, part-time employment, probationary periods, consultation with labor unions and employee assemblies, employment without a written contract, dismissal of employees, severance, and collective bargaining to enhance previous PRC labor laws. Under the Labor Contract Law, an employer is obligated to sign an unlimited-term labor contract with any employee who has worked for the employer for ten consecutive years. Further, if an employee requests or agrees to renew a fixed-term labor

 

49


Table of Contents

contract that has already been entered into twice consecutively, the resulting contract, with certain exceptions, must have an unlimited term, subject to certain exceptions. With certain exceptions, an employer must pay severance to an employee where a labor contract is terminated or expires. In addition, the PRC governmental authorities have continued to introduce various new labor-related regulations since the effectiveness of the Labor Contract Law.

Under the PRC Social Insurance Law and the Administration of Housing Fund, employees are required to participate in pension insurance, work-related injury insurance, medical insurance, unemployment insurance, maternity insurance, and housing funds and employers are required, together with their employees or separately, to complete the social insurance registration and housing fund registration and pay the social insurance premiums and housing funds for their employees. If we are deemed to have failed to make adequate social insurance and/or housing fund contributions or complete the social insurance registration and housing fund registration, we may be subject to fines and legal sanctions, and our business, financial conditions and results of operations may be adversely affected. These laws designed to enhance labor protection tend to increase our labor costs. In addition, as the interpretation and implementation of these regulations are still evolving, our employment practices may not be at all times be deemed in compliance with the regulations. As a result, we could be subject to penalties or incur significant liabilities in connection with labor disputes or investigations.

Risks Related to Our ADSs and This Offering

An active trading market for our ADSs may not develop and the trading price for our ADSs may fluctuate significantly.

Our ADSs have been approved for listing on the Nasdaq Stock Market LLC. We have no current intention to seek a listing for our ordinary shares on any stock exchange. Prior to the completion of this offering, there has been no public market for our ADSs or our ordinary shares, and we cannot assure you that a liquid public market for our ADSs will develop. If an active public market for our ADSs does not develop following the completion of this offering, the market price and liquidity of our ADSs may be materially and adversely affected. The initial public offering price for our ADSs was determined by negotiation between us and the underwriters based upon several factors, and we can provide no assurance that the trading price of our ADSs after this offering will not decline below the initial public offering price. As a result, investors in our securities may experience a significant decrease in the value of their ADSs.

The trading price of our ADSs is likely to be volatile, which could result in substantial losses to investors.

The trading price of our ADSs is likely to be volatile and could fluctuate widely due to multiple factors, some of which are beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:

 

   

variations in our revenues, earnings, cash flow and data related to our user base or user engagement;

 

   

announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;

 

50


Table of Contents
   

announcements of new service offerings and expansions by us or our competitors;

 

   

announcements of new laws and regulations or interpretations of existing laws and regulations that affect our business;

 

   

changes in financial estimates by securities analysts;

 

   

detrimental adverse publicity about us, our services or our industry;

 

   

additions or departures of key personnel;

 

   

release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and

 

   

actual or potential litigation or regulatory investigations.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

We have adopted a dual-class voting structure such that our ordinary shares consist of Existing Class A ordinary shares and Existing Class B ordinary shares. Holders of Existing Class A ordinary shares and Existing Class B ordinary shares have the same rights other than voting and conversion rights. Each holder of Existing Class A ordinary shares is entitled to ten votes per share and each holder of our Existing Class B ordinary shares is entitled to one vote per share on all matters submitted to them for a vote. Each Existing Class A ordinary share is convertible into one Existing Class B ordinary share, whereas Existing Class B ordinary shares are not convertible into Existing Class A ordinary shares. Upon any transfer of Existing Class A ordinary shares by a holder thereof to any other person or entity, such Existing Class A ordinary shares are automatically and immediately converted into the equal number of Existing Class B ordinary shares. As the date of this prospectus, Mr. Xing Jin, our chief executive officer, together with his affiliates, beneficially owns all of our issued Existing Class A ordinary shares.

Immediately prior to the completion of this offering, we expect to amend our dual-class share structure such that our ordinary shares will consist of Class A ordinary shares and Class B ordinary shares. In respect of matters requiring the votes of shareholders, holders of Class A ordinary shares will be entitled to one vote per share, while holders of Class B ordinary shares will be entitled to thirty votes per share based on our proposed dual-class share structure. We will sell Class A ordinary shares represented by our ADSs in this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary share

 

51


Table of Contents

by a holder thereof to any person who is not the Founder or an Affiliate of the Founder (as such terms are defined in our post-offering amended and restated articles of association), such Class B ordinary share shall be automatically and immediately converted into one Class A ordinary share.

Immediately prior to the completion of this offering, Mr. Xing Jin, our co-founder, chairman of the board of directors and chief executive officer, will beneficially own all of our issued Class B ordinary shares. These Class B ordinary shares will constitute approximately 15.6% of our total issued and outstanding share capital immediately after the completion of this offering and 84.7% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering due to the disparate voting powers associated with our dual class share structure, assuming the underwriters do not exercise their over-allotment option. As a result of the dual-class share structure and the concentration of ownership, Mr. Jin will have considerable influence over matters such as decisions regarding mergers and consolidations, election of directors and other significant corporate actions, and may take actions that are not in the best interest of us or our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. The ADSs sold in this offering will be freely tradable without restriction or further registration under the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. There will be 13,000,000 ADSs (equivalent to 10,000,000 Class A ordinary shares) outstanding immediately after this offering, or 14,950,000 ADSs (equivalent to 11,500,000 Class A ordinary shares) if the underwriters exercise their option to purchase additional ADSs in full. In connection with this offering, we, our directors and executive officers, our existing shareholders and holders of our share-based awards have agreed not to sell any ordinary shares, ADSs or similar securities for 180 days after the date of this prospectus without the prior written consent of the underwriters, subject to certain exceptions. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory

 

52


Table of Contents

Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs. See “Underwriting” and “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling our securities after this offering.

Because we do not expect to pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We currently intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

Our board of directors has complete discretion as to whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.

We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that would improve our results of operations or increase our ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.

The approval of the China Securities Regulatory Commission may be required in connection with this offering under PRC law.

The M&A Rules, which were adopted in 2006 by six PRC regulatory agencies, including the CSRC, and amended in 2009, purport to require offshore special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain CSRC approval prior to publicly listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and if CSRC approval is required, it is uncertain whether it would be possible for us to obtain

 

53


Table of Contents

the approval and any failure to obtain or delay in obtaining CSRC approval for this offering would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies.

Our PRC counsel, Han Kun Law Offices, has advised us that, based on its understanding of the current PRC laws and regulations, we will not be required to submit an application to the CSRC for the approval of the listing and trading of our ADSs on Nasdaq Stock Market LLC because (i) the CSRC currently has not issued any definitive rule or interpretation concerning whether offerings like ours under this prospectus are subject to this regulation, (ii) our wholly owned PRC subsidiary were established by foreign direct investment, rather than through a merger or acquisition of a domestic company as defined under the M&A Rules and (iii) no explicit provision in the M&A Rules classifies the respective contractual arrangements among our PRC subsidiary, our consolidated affiliated entity and its respective shareholders as a type of acquisition transaction falling under the M&A Rules.

However, we cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel, and hence we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. If the CSRC or other relevant PRC regulatory authorities subsequently determine that a prior CSRC approval is required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory authorities. These regulatory agencies may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from this offering into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of the ADSs. The CSRC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of the ADSs offered hereby. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory agencies later promulgate new rules or explanations requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such approval requirement could have a material adverse effect on the trading price of the ADSs.

Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

We have adopted amended and restated memorandum and articles of association that will become effective immediately prior to the completion of this offering. Our post-offering memorandum and articles of association will contain provisions which could limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the

 

54


Table of Contents

price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.

You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors owed to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors owed to us under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than the memorandum and articles of association and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our post-offering memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or our controlling shareholders than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Law of the Cayman Islands and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital—Differences in Corporate Law.”

Certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. All of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and

 

55


Table of Contents

officers. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforceability of Civil Liabilities.”

The depositary for our ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except under limited circumstances, which could adversely affect your interests.

Under the deposit agreement for the ADSs, if you do not give instructions for voting the Class A ordinary shares underlying your ADSs, the depositary will give us a discretionary proxy to vote those Class A ordinary shares at the shareholders’ meeting if:

 

   

we have timely instructed the depositary to disseminate a notice of meeting and provided the depositary with a notice of meeting and related voting materials;

 

   

we have instructed the depositary that we wish a discretionary proxy to be given;

 

   

we have informed the depositary that as of the instruction date we reasonably don’t know of any substantial opposition as to a matter to be voted on at the meeting; and

 

   

a matter to be voted on at the meeting would not have a material adverse impact on shareholders’ interests.

The effect of this discretionary proxy is that you cannot prevent our Class A ordinary shares underlying your ADSs from being voted at the shareholder meeting if the circumstances described above are met. This may make it more difficult for shareholders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.

The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require a claim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our Class A shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.

If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.

If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs,

 

56


Table of Contents

including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.

Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.

The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct how the Class A ordinary shares which are represented by your ADSs are voted.

Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. If we instruct the depositary to ask for your instructions, then upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the underlying Class A ordinary shares which are represented by your ADSs in accordance with your instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting.

Under our post-offering memorandum and articles of association that will become effective immediately prior to completion of this offering, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting will be ten days. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the Class A ordinary shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our post-offering memorandum and articles of association that will become immediately effective prior to the completion of this offering, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure

 

57


Table of Contents

that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the Class A ordinary shares underlying your ADSs are voted and you may have no legal remedy if the Class A ordinary shares underlying your ADSs are not voted as you requested.

As our initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$10.67 per ADS (assuming no exercise of outstanding options to acquire ordinary shares), representing the difference between our pro forma as adjusted net tangible book value per ADS of US$3.13 as of December 31, 2018, after giving effect to this offering, and the initial public offering price per share of US$13.80 per ADS. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options. All of the ordinary shares issuable upon the exercise of currently outstanding share options will be issued at a purchase price on a per ADS basis that is less than the initial public offering price per ADS in this offering. See “Dilution” for a more complete description of how the value of your investment in the ADSs will be diluted upon the completion of this offering.

You may experience dilution of your holdings due to inability to participate in rights offerings.

We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

58


Table of Contents

We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.

Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including: (i) the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; (ii) the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act; (iii) the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and (iv) the selective disclosure rules by issuers of material nonpublic information under Regulation FD.

We will be required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of Nasdaq Stock Market LLC. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.

We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result, if we elect not to comply with such auditor attestation requirements, our investors may not have access to certain information they may deem important.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

We are now a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and Nasdaq Stock Market LLC, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies.

We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer

 

59


Table of Contents

an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of being a public company, we increased the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we comply fully with the Nasdaq corporate governance listing standards.

As a Cayman Islands exempted company listed on Nasdaq Stock Market LLC, we are subject to the Nasdaq corporate governance listing standards. However, Nasdaq Stock Market LLC rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq Stock Market corporate governance listing standards. We do not currently plan to utilize the home country exemption for corporate governance matters immediately upon the listing of our ADSs on the Nasdaq Stock Market LLC. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.

We will be a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.

Upon the completion of this offering, we will be a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Xing Jin, our co-founder, chairman of the board of directors and chief executive officer, will own more than 50% of our total voting power. For so long as we remain a controlled company under that definition, we are permitted to elect to rely, and may rely, on certain exemptions from corporate governance rules. For example, we may rely on the exemption from the corporate governance rule that a majority of our board of directors must be independent directors. As a result, you may not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

We may be a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. investors owning our ADSs or ordinary shares.

We will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (a) 75% or more of our gross income for such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income (the “asset

 

60


Table of Contents

test”). Although the law in this regard is unclear, we intend to treat our VIE (including its subsidiaries) as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Assuming that we are the owner of our VIE (including its subsidiaries) for United States federal income tax purposes, and based upon our current and expected income and assets, including goodwill (taking into account the expected proceeds from this offering) and projections as to the market price of our ADSs following the offering, we do not presently expect to be a PFIC for the current taxable year or the foreseeable future.

While we do not expect to become a PFIC, because the value of our assets for purposes of the asset test may be determined by reference to the market price of our ADSs, fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years. In addition, the composition of our income and assets will also be affected by how, and how quickly, we use our liquid assets and the cash raised in this offering. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the stock of our VIE for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because PFIC status is a factual determination made annually after the close of each taxable year, there can be no assurance that we will not be a PFIC for the current taxable year or any future taxable year.

If we are a PFIC for any taxable year during which a U.S. Holder (as defined in Taxation—U.S. Federal Income Tax Considerations) holds ADSs or ordinary shares, certain adverse United States federal income tax consequences could apply to such U.S. Holder. See “Taxation—U.S. Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

61


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current expectations and views of future events. The forward looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” Known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

 

   

our mission, goals and strategies;

 

   

our ability to retain and increase the number of users and expand our service offerings;

 

   

our future business development, financial conditions and results of operations;

 

   

expected changes in our revenues, costs or expenditures;

 

   

the trends in, expected growth and the market size of online medical aesthetics industry, both in the PRC and globally;

 

   

our expectations regarding demand for and market acceptance of our services;

 

   

our expectations regarding our relationships with users and service providers;

 

   

our proposed use of proceeds;

 

   

competition in our industry;

 

   

general economic and business conditions in the market we have business; and

 

   

relevant government policies and regulations relating to our industry.

These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may later be found to be incorrect. Our actual results could be materially different from our expectations. Important risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Prospectus Summary—Our Challenges,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business,” “Regulation” and other sections in this prospectus. You should read thoroughly this prospectus and the documents that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus contains certain data and information that we obtained from various government and private publications. Statistical data in these publications also include projections based on a number of assumptions. The medical aesthetic, online medical aesthetic and consumption healthcare industries may not grow at the rate projected by market data, or at all. Failure of this market to grow at the projected rate may have a material and adverse effect

 

62


Table of Contents

on our business and the market price of our ADSs. In addition, the rapidly evolving nature of the online medical aesthetic industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we refer to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

63


Table of Contents

USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$162.9 million, or approximately US$187.9 million if the underwriters exercise their over-allotment option in full, after deducting underwriting discounts and the estimated offering expenses payable by us.

The primary purposes of this offering are to create a public market for our shares for the benefit of all shareholders, retain talented employees by providing them with equity incentives, and obtain additional capital. We plan to use the net proceeds of this offering as follows:

 

   

approximately 30% to invest in technology and research and development;

 

   

approximately 20% for brand promotion and user acquisition efforts;

 

   

approximately 20% for horizontal and vertical business expansions;

 

   

approximately 10% to enhance our content offering; and

 

   

the balance for general corporate purposes and working capital needs and potential strategic investments and acquisitions, although we have not identified any specific investments or acquisition opportunities at this time.

The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have significant flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. See “Risk Factors—Risks Related to Our ADSs and This Offering—We have not determined a specific use for a portion of the net proceeds from this offering and we may use these proceeds in ways with which you may not agree.”

Pending any use described above, we plan to invest the net proceeds in short-term, interest-bearing, debt instruments.

In using the proceeds of this offering, we are permitted under PRC laws and regulations as an offshore holding company to provide funding to our PRC subsidiary only through loans or capital contributions and to our VIE only through loans, subject to satisfaction of applicable government registration and approval requirements. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and variable interest entity, which could materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

64


Table of Contents

DIVIDEND POLICY

Our board of directors has complete discretion on whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.

We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future after this offering. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiary in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiary to pay dividends to us. See “Regulation—Regulations on Foreign Exchange—Regulations on Dividend Distributions.”

If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the ordinary shares underlying our ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

65


Table of Contents

CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2018:

 

   

on an actual basis ;

 

   

on a pro forma basis to reflect (i) the automatic conversion and re-designation of all of our issued and outstanding preferred shares into ordinary shares on a one-for-one basis immediately upon the completion of this offering; (ii) the re-designation of 12,000,000 ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and (iii) the re-designation of all of the remaining ordinary shares into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and

 

   

on a pro forma as adjusted basis to reflect (i) the automatic conversion and re-designation of all of our issued and outstanding preferred shares into ordinary shares on a one-for-one basis immediately upon the completion of this offering; (ii) the re-designation of 12,000,000 ordinary shares into Class B ordinary shares on a one-for-one basis immediately prior to the completion of this offering; (iii) the re-designation of all of the remaining ordinary shares into Class A ordinary shares on a one-for-one basis immediately prior to the completion of this offering; and (iv) the issuance and sale of 10,000,000 Class A ordinary shares in the form of ADSs by us in this offering at the initial public offering price of US$13.80 per ADS, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, assuming the underwriters do not exercise the overallotment option.

Unaudited pro forma basic and diluted net loss per ordinary share reflects the effect of the conversion of preferred shares as follows, as if the conversion occurred as of the beginning of the period or the original date of issuance, if later.

You should read this table together with our consolidated financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of December 31, 2018  
     Actual      Pro Forma      Pro Forma As
Adjusted
 
     (in thousands, except for share and per share data)  
     RMB      US$      RMB      US$      RMB      US$  

Mezzanine equity:

                 

Series A convertible redeemable preferred shares (US$ 0.0005 par value; 8,000,000 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     30,440        4,427                              

Series B convertible redeemable preferred shares (US$ 0.0005 par value; 10,476,190 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     99,075        14,410                              

 

66


Table of Contents
     As of December 31, 2018  
     Actual      Pro Forma      Pro Forma As
Adjusted
 
     (in thousands, except for share and per share data)  
     RMB      US$      RMB      US$      RMB      US$  

Series C-1 convertible redeemable preferred shares (US$ 0.0005 par value; 1,030,126 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     17,769        2,584                              

Series C convertible redeemable preferred shares (US$ 0.0005 par value; 4,902,554 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     161,101        23,431                              

Series D convertible redeemable preferred shares (US$ 0.0005 par value; 9,750,676 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     422,035        61,382                              

Series D+ convertible redeemable preferred shares (US$ 0.0005 par value; 3,497,954 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     178,035        25,894                              

Series E convertible redeemable preferred shares (US$ 0.0005 par value; 6,164,979 shares authorized, issued and outstanding as of December 31, 2018; none outstanding on a pro forma basis as of December 31, 2018; and none outstanding on a pro forma as adjusted basis)

     487,494        70,903                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mezzanine equity

     1,395,949        203,031                              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

67


Table of Contents
     As of December 31, 2018  
     Actual     Pro Forma     Pro Forma As
Adjusted
 
     (in thousands, except for share and per share data)  
     RMB     US$     RMB     US$     RMB     US$  

Shareholders’ (deficit)/equity:

            

Class A Ordinary shares (US$ 0.0005 par value; 12,000,000 shares authorized, issued and outstanding as of December 31, 2018; and 55,113,419 shares issued and outstanding on a pro-forma basis as of December 31, 2018; and 65,113,419 shares outstanding on a pro forma as adjusted basis)

     37       5       185       27       219       32  

Class B Ordinary shares (US$ 0.0005 par value, 144,177,521 shares authorized as of December 31, 2018; 11,290,940 shares issued and outstanding as of December 31, 2018; and 12,000,000 shares outstanding on a pro-forma basis as of December 31, 2018; and 12,000,000 shares outstanding on a pro forma as adjusted basis)

     35       5       37       5       37       5  

Additional paid-in capital

                 1,395,799       203,009       2,515,894       365,922  

Accumulated deficit

     (394,039     (57,311     (394,039     (57,311     (394,039     (57,311

Accumulated other comprehensive income

     36,398       5,294       36,398       5,294       36,398       5,294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ (deficit)/equity

     (357,569 )      (52,007 )      1,038,380       151,024       2,158,509       313,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

     1,038,380       151,024       1,038,380       151,024       2,158,509       313,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

68


Table of Contents

DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares on an as-converted basis.

Our net tangible book value as of December 31, 2018 was US$151.0 million, or US$2.25 per ordinary share on an as-converted basis as of that date and US$1.73 per ADS. Net tangible book value represents the amount of our total consolidated tangible assets, less the amount of our total consolidated liabilities. Dilution is determined by subtracting net tangible book value per ordinary share on an as-converted basis, after giving effect to the additional proceeds we will receive from this offering, from the initial public offering price of US$17.94 per ordinary share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Because the Class A ordinary shares and Class B ordinary shares have the same dividend and other rights, except for voting and conversion rights, the dilution is presented based on all issued and outstanding ordinary shares, including Class A ordinary shares and Class B ordinary shares.

Without taking into account any other changes in net tangible book value after December 31, 2018, other than to give effect to our sale of the ADSs offered in this offering at the initial public offering price of US$13.80 per ADS, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2018 would have been US$313.8 million, or US$4.07 per ordinary share and US$3.13 per ADS. This represents an immediate increase in net tangible book value of US$1.82 per ordinary share and US$1.40 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$13.87 per ordinary share and US$10.67 per ADS to investors purchasing ADSs in this offering. The following table illustrates such dilution:

 

     Per Ordinary Share      Per ADS  

The initial public offering price

   US$ 17.94      US$ 13.80  

Net tangible book value as of December 31, 2018

   US$ 6.48      US$ 4.98  

Pro forma net tangible book value after giving effect to the conversion of our preferred shares

   US$ 2.25      US$ 1.73  

Pro forma as adjusted net tangible book value after giving effect to the conversion of our preferred shares and this offering

   US$ 4.07      US$ 3.13  

Amount of dilution in net tangible book value to new investors in this offering

   US$ 13.87      US$ 10.67  

 

69


Table of Contents

The following table summarizes, on a pro forma as adjusted basis as of December 31, 2018, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per ordinary share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of ordinary shares does not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the over-allotment option granted to the underwriters.

 

     Ordinary Shares
Purchased
    Total Consideration     Average
Price Per
Ordinary
Share
     Average
Price Per
ADS
 
     Number      Percent     Amount      Percent  

Existing shareholders

     67,113,419        87.0   US$ 191,619,111        51.6   US$ 2.86      US$ 2.20  

New investors

     10,000,000        13.0   US$ 179,400,000        48.4   US$ 17.94      US$ 13.80  
  

 

 

    

 

 

   

 

 

    

 

 

      

Total

     77,113,419        100.0   US$ 371,019,111        100.0     
  

 

 

    

 

 

   

 

 

    

 

 

      

The discussion and tables above assume no exercise of any outstanding share options outstanding as of the date of this prospectus. As of the date of this prospectus, there are 5,055,908 ordinary shares issuable upon exercise of outstanding share options at a weighted average exercise price of US$0.1 per share. To the extent that any of these options are exercised, there will be further dilution to new investors.

 

70


Table of Contents

ENFORCEABILITY OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands exempted company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws than the United States and provides less protection for investors. In addition, Cayman Islands companies do not have standing to sue before the federal courts of the United States.

Substantially all of our assets are located outside the United States. In addition, most of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon us or these persons, or to enforce judgments obtained in U.S. courts against us or them, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. It may also be difficult for you to enforce judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

We have appointed Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711 as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York in connection with this offering under the federal securities laws of the United States or the securities laws of any State in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York in connection with this offering under the securities laws of the State of New York.

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States.

Maples and Calder (Hong Kong) LLP has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty; and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the

 

71


Table of Contents

Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.

Han Kun Law Offices, our counsel as to PRC law, has advised us that there is uncertainty as to whether the courts of China would (i) recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in each respective jurisdiction against us or our directors or officers predicated upon the securities laws of the United States or any state in the United States.

Han Kun Law Offices has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in China will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes relating to contracts or other property interests, the PRC court may accept a course of action based on the laws or the parties’ express mutual agreement in contracts choosing PRC courts for dispute resolution if (i) the contract is signed and/or performed within China, (ii) the subject of the action is located within China, (iii) the company (as defendant) has seizable properties within China, (iv) the company has a representative organization within China, or (v) other circumstances prescribed under the PRC law. The action may be initiated by a shareholder through filing a complaint with the PRC court. The PRC court will determine whether to accept the complaint in accordance with the PRC Civil Procedures Law. The shareholder may participate in the action by itself or entrust any other person or PRC legal counsel to participate on behalf of such shareholder. Foreign citizens and companies will have the same rights as PRC citizens and companies in an action unless the home jurisdiction of such foreign citizens or companies restricts the rights of PRC citizens and companies. However, it would be difficult for foreign shareholders to establish sufficient nexus to the PRC solely by virtue of holding our ADSs or ordinary shares.

In addition, it will be difficult for U.S. shareholders to originate actions against us in China in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to China for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law.

 

72


Table of Contents

CORPORATE HISTORY AND STRUCTURE

Corporate History

We commenced our operations in November 2013 through Beijing So-Young Technology Co., Ltd., or Beijing So-Young, a limited liability company established under the laws of the PRC, to provide medical aesthetic information.

In April 2014, we incorporated So-Young International Inc., or So-Young Cayman, in the Cayman Islands as our holding company. In May 2014, So-Young Cayman established a wholly owned subsidiary, So-Young Hong Kong Limited, in Hong Kong, which in turn established So-Young Wanwei Technology Consulting Co., Ltd., or Beijing Wanwei, a wholly owned PRC subsidiary in July 2014.

Due to the restrictions imposed by PRC laws and regulations on foreign ownership of companies engaged in value-added telecommunication services and certain other businesses, Beijing Wanwei entered into a series of contractual arrangements, as amended and restated, with Beijing So-Young and its shareholders, through which we obtained control over Beijing So-Young and its subsidiaries. As a result, we are regarded as the primary beneficiary of Beijing So-Young and its subsidiaries. We treat them as our consolidated affiliated entities under U.S. GAAP, and have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP. We refer to Beijing Wanwei as our wholly foreign owned entity, or WFOE, and to Beijing So-Young as our variable interest entity, or VIE, in this prospectus. For more details and risks related to our variable interest entity structure, please see “—Contractual Arrangements with our VIE and Its Shareholders” and “Risk Factors—Risks Related to Our Corporate Structure.”

 

73


Table of Contents

The following diagram illustrates our corporate structure as of the date of this prospectus, including our significant subsidiaries and other entities that are material to our business, as of the date of this prospectus:

 

LOGO

 

Note:

(1)

Shareholders of Beijing So-Young are Mr. Hui Shao, Mr. Xing Jin, and Mr. Tao Yu, holding 59.7%, 37.8%, and 2.5%, respectively, of the equity interest in Beijing So-Young. Mr. Hui Shao, Mr. Xing Jin and Mr. Tao Yu are our beneficiary owners; Mr. Shao is our director, Mr. Jin is our co-founder, director and chief executive officer, and Mr. Yu is our co-founder and chief information officer.

Contractual Arrangements with Our VIE and Its Shareholders

The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Beijing Wanwei, our VIE Beijing So-Young and its shareholders. These contractual arrangements enable us to (i) exercise effective control over our VIE; (ii) receive substantially all of the economic benefits of our VIE; and (iii) have an

 

74


Table of Contents

exclusive option to purchase all or part of the equity interests in and assets of our VIE when and to the extent permitted by PRC law.

Agreements that provide us effective control over our VIE

Pursuant to the powers of attorney, each shareholder of VIE irrevocably authorized our WFOE to act on the behalf of such shareholder with respect to all matters concerning the shareholding of the shares in VIE, including without limitation, attending shareholders’ meetings of VIE, exercising all the shareholders’ rights and shareholders’ voting rights, and designating and appointing the legal representative, directors, supervisors, general managers and other senior management members of Beijing So-Young.

Pursuant to the equity pledge agreements, the shareholders pledge 100% of their equity interest in VIE to our WFOE to guarantee the performance by VIE and its shareholders of their obligations under the exclusive business cooperation agreement, the exclusive option agreements and the power of attorney. If events of default defined therein occur, upon giving written notice to the shareholders, our WFOE may exercise the right to enforce the pledge to the extent permitted by PRC laws, unless the event of default has been successfully resolved to the satisfaction of our WFOE. The shareholders of our VIE agree that, without our WFOE’s prior written consent, during the term of the equity interest pledge agreement, they will not place or permit the existence of any security interest or other encumbrance on the equity interest in VIE or any portion thereof. As of the date of this prospectus, we have completed registering the equity pledge with the relevant office of the PRC State Administration of Market Regulation in accordance with the PRC Property Rights Law.

Spousal Consent Letter.    The spouse of each shareholder of VIE has each signed a spousal consent letter. Under the spousal consent letter, the signing spouse unconditionally and irrevocably approved the execution by her spouse of the power of attorney, equity interest pledge agreement and exclusive option agreement, and that her spouse may perform, amend or terminate such agreements without her consent. The signing spouse confirms she will not assert any rights over the equity interests in VIE held by her spouse. In addition, in the event that the spouse obtains any equity interest in VIE held by her spouse for any reason, she agrees to be bound by and sign any legal documents substantially similar to the contractual arrangements entered into by her spouse, as may be amended from time to time.

Agreements that allow us to receive economic benefits from our VIE

Exclusive Business Cooperation Agreement.    On November 1, 2018, Beijing So-Young and our WFOE entered into an exclusive business cooperation agreement. Pursuant to the exclusive business cooperation agreement, our WFOE has the exclusive right to provide Beijing So-Young with comprehensive technical support, consulting services and other services. Without prior written consent of our WFOE, Beijing So-Young agrees not to directly or indirectly accept the same or any similar services provided by any third party regarding the matters contemplated by this agreement. Beijing So-Young agrees to pay our WFOE service fees, which will be determined by our WFOE based on various factors, including but not limited to the complexity, cost and value of the services provided by our WFOE. Our WFOE will have exclusive and proprietary ownership, rights and interests in any and all intellectual properties arising out of or developed during the performance of this agreement. The agreement may be terminated in accordance with the provisions of this agreement.

Agreements that provide us with the option to purchase the equity interests in our VIE

Exclusive Option Agreement.    Pursuant to the exclusive option agreement entered into on November 1, 2018, each shareholder of Beijing So-Young has irrevocably granted our WFOE an

 

75


Table of Contents

exclusive option to purchase, or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholder’s equity interests in Beijing So-Young. The purchase price shall be RMB10 (US$1.5), the amount of registered capital contributed by such shareholder of Beijing So-Young in Beijing So-Young or the minimum price required by PRC law. If our WFOE exercises the option to purchase part of the equity interest held by a shareholder, the purchase price shall be calculated proportionally. Without our WFOE’s prior written consent, Beijing So-Young shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its material assets or beneficial interest, create or allow any encumbrance on its material assets or other beneficial interests, provide any loans to any third parties except for payables incurred in the ordinary course of business other than through loans, enter into any material contract with a value of more than RMB500,000 (US$72.7 thousand) (except those contracts entered into in the ordinary course of business), merge with or acquire any other persons or make any investments, or distribute dividends to the shareholders. Each shareholder of Beijing So-Young has agreed that, without our WFOE’s prior written consent, he or she will not dispose of his or her equity interests in Beijing So-Young or create or allow any encumbrance on their equity interests. Moreover, without our WFOE’s prior written consent, no dividend will be distributed to Beijing So-Young’s shareholders, and if any of the shareholders receives any profit, interest, dividend or proceeds of share transfer or liquidation, the shareholder must give such profit, interest, dividend and proceeds to our WFOE or its designated person(s). These agreements will remain effective until all equity interests of Beijing So-Young held by its shareholder have been transferred or assigned to our WFOE or its designated person(s).

In the opinion of Han Kun Law Offices, our PRC legal counsel:

 

   

the ownership structures of our WFOE and our VIE, both currently and immediately after giving effect to this offering, will not result in any violation of PRC laws or regulations currently in effect; and

 

   

the contractual arrangements among our WFOE and our VIE and its shareholders governed by PRC law, both currently and immediately after giving effect to this offering, are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect.

However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to or otherwise different from the above opinion of our PRC legal counsel. If the PRC government finds that the agreements that establish the structure for operating our online medical aesthetic service business do not comply with PRC government restrictions on foreign investment in our businesses, we could be subject to severe penalties including being prohibited from continuing operations. See “Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with our consolidated affiliated entity and its shareholders for our business operations, which may not be as effective as direct ownership in providing operational control.”

 

76


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated statements of comprehensive income (loss) data for the years ended December 31, 2016, 2017 and 2018, selected consolidated balance sheet data as of December 31, 2017 and 2018 and selected consolidated statements of cash flow data for the years ended December 31, 2016, 2017 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP. Our historical results are not necessarily indicative of results expected for future periods. You should read this Selected Consolidated Financial Data section together with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

 

     For the Year Ended December 31,  
     2016      2017      2018  
     RMB      RMB      RMB      US$  
     (in thousands, except for share and per share data)  

Selected Consolidated Statements of Comprehensive (Loss)/Income Data:

           

Revenues

 

  

Information services

     19,869        143,613        415,119        60,377  

Reservation services

     29,221        115,692        202,107        29,395  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     49,090        259,305        617,226        89,772  

Cost of revenues(1)

     (25,192      (44,799      (91,563      (13,317
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     23,898        214,506        525,663        76,455  

Operating expenses:

           

Sales and marketing expenses(1)

     (62,206      (127,462      (306,360      (44,558

General and administrative expenses(1)

     (18,043      (29,725      (75,442      (10,973

Research and development expenses(1)

     (17,932      (32,557      (94,726      (13,777
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     (98,181      (189,744      (476,528      (69,308
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss)/Income from operations

     (74,283      24,762        49,135        7,147  
  

 

 

    

 

 

    

 

 

    

 

 

 

(Loss)/Income before tax

     (81,036      13,221        58,254        8,473  

Income tax benefit/(expense)

            3,981        (3,171      (461
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss)/income

     (81,036      17,202        55,083        8,012  

Accretions of convertible redeemable preferred shares to redemption value

     (21,487      (28,521      (104,211      (15,157
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss attributable to ordinary shareholders of the Company

     (102,523      (11,319      (49,128      (7,145
  

 

 

    

 

 

    

 

 

    

 

 

 

Net (loss)/income

     (81,036      17,202        55,083        8,012  

Other comprehensive income/(loss):

           

Foreign currency translation adjustment

     2,323        (2,203      34,439        5,009  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income/(loss)

     2,323        (2,203      34,439        5,009  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive (loss)/income

     (78,713      14,999        89,522        13,021  

Accretions of convertible redeemable preferred shares to redemption value

     (21,487      (28,521      (104,211      (15,157
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive loss attributable to ordinary shareholders of the Company

     (100,200      (13,522      (14,689      (2,136
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loss per ordinary share

           

Basic

     (3.81      (0.42      (2.00      (0.29

Diluted

     (3.81      (0.42      (2.00      (0.29
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of ordinary shares used in computing loss per share, basic

     26,882,387        26,882,387        24,555,427        24,555,427  

Weighted average number of ordinary shares used in computing loss per share, diluted

     26,882,387        26,882,387        24,555,427        24,555,427  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

77


Table of Contents

 

Note:

(1)

Share-based compensation expenses were allocated as follows:

 

     For the Year Ended December 31,  
     2016     2017     2018  
     RMB     RMB     RMB     US$  
     (in thousands)  

Cost of revenues

     (96     (89     (1,423     (207

Sales and marketing expenses

     (262     (490     (1,018     (148

General and administrative expenses

     (1,158     (1,675     (10,112     (1,471

Research and development expenses

     (168     (405     (13,306     (1,935
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     (1,684     (2,659     (25,859     (3,761
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents our selected consolidated balance sheet data as of December 31, 2017 and 2018.

 

     As of December 31,  
     2017     2018  
     RMB     RMB     US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

      

Cash and cash equivalents

     440,859       563,383       81,941  

Term deposits and short-term investments

     81,258       643,539       93,599  

Total current assets

     552,438       1,278,451       185,942  

Total assets

     568,385       1,340,536       194,970  

Total liabilities

     140,927       302,156       43,946  

Total mezzanine equity

     594,421       1,395,949       203,031  

Total shareholders’ deficit

     (166,963     (357,569     (52,007

The following table presents our selected consolidated cash flow data for the years presented:

 

    For the Year Ended December 31,  
    2016     2017     2018  
    RMB     RMB     RMB     US$  
    (in thousands)  

Selected Consolidated Cash Flow Data:

   

Net cash (used in)/generated from operating activities

    (40,756     90,877       198,985       28,941  

Net cash (used in)/generated from investing activities

    (108,345     7,032       (569,372     (82,811

Net cash provided by financing activities

    122,690       324,671       485,414       70,601  

Effect of exchange rate changes on cash and cash equivalents

    180       (114     7,497       1,090  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

    (26,231     422,466       122,524       17,821  

Cash and cash equivalents at beginning of year

    44,624       18,393       440,859       64,120  
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

    18,393       440,859       563,383       81,941  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

78


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of various factors, including those we describe under “Risk Factors” and elsewhere in this prospectus. See “Special Note Regarding Forward-Looking Statements”.

Overview

So-Young is No. 1 and most popular online destination for discovering, evaluating and reserving medical aesthetic services in China as measured by audience reach, user engagement, transaction value facilitated and trustworthiness, according to Frost & Sullivan.

Our business model comprises three integrated components: (i) original, reliable and professional content and its distribution through major social media networks and our targeted media platforms in China, (ii) highly engaged social community characterized by signature user-generated content, and (iii) transparent and user-friendly online reservation services for medical aesthetic treatment. With reliable and comprehensive content, as well as a multitude of social functions on our platform, users seeking medical aesthetic treatment can discover products and services, evaluate their quality, and reserve desired treatment.

We believe our business model, which connects a user’s innate desire to be more beautiful with a personal, emotionally-attached discovery and assessment process on our platform, is highly effective in facilitating users’ decision making and enhancing user experience. We also encourage users to rate, review and share their treatment experience on our platform. We believe the user-generated content, ratings and reviews on our platform incentivize medical aesthetic service providers to offer high-quality and diversified treatment with transparent pricing, while developing differentiated yet nationwide branding and reputation on our platform.

We monetize through information services fees and reservation services fees primarily from medical aesthetic service providers. Leveraging our rich content that effectively serves our engaged user base, we offer targeted information services, in the forms of pictures, videos or links, primarily to help our service providers increase their exposure, customer acquisition and reservation volume. We also earn reservation services fees primarily from medical aesthetic service providers on treatment booked through our platform by our users, as well as subsequent treatment that users purchase from such service providers and are recorded on our platform, as long as the sales leads were generated on and the service provider is still active on our platform. We enter into agreements with medical service providers in which we agree on the terms of information and/or reservation services offered. Agreements for information services typically have one-year terms and can be terminated by both parties. We can also modify the services at our discretion. Medical service providers who use our information services are obliged to comply with relevant laws and regulations and ensure the credibility and reliability of all information provided to us and/or distributed on our platform. We charge information service fees primarily (i) at a fixed fee per each day’s content display, (ii) based on a contractual rate per unit of output, such as per click, etc. and (iii) at a fixed fee per article posted on our social media accounts. These fees also vary according to the geographical location of the medical service providers and their target users in China, as well as the desirability of the online location where the content is displayed. These information services may be sold in combination

 

79


Table of Contents

as a bundled arrangement or separately on a stand-alone basis. For reservation services, the term of agreement is typically one year, and both parties can terminate the agreement with advanced written notice. Medical service providers are obliged to ensure that any treatments that can be reserved through our platform are fully licensed and comply with relevant laws and regulations, and that the descriptions of the treatments are accurate and truthful. Medical service providers also commit to offering the most competitive prices on our platform. We typically charge a reservation services fee rate of approximately 10% of the amount paid by consumers.

We have grown rapidly while at the same time significantly improving our cost efficiency as our revenue growth significantly outpaced the increase in our cost and expenses. Our total revenues increased by 428.2% from RMB49.1 million in 2016 to RMB259.3 million in 2017, and further by 138.0% to RMB617.2 million (US$89.8 million) in 2018. Our gross profit increased significantly by 797.6% from RMB23.9 million in 2016 to RMB214.5 million in 2017, and further by 145.1% to RMB525.7 million (US$76.5 million) in 2018. Our gross margin improved from 48.7% in 2016 to 82.7% in 2017, and further improved to 85.2% in 2018.

Key Factors Affecting Our Results of Operations

Our business and operating results are primarily affected by the general factors affecting China’s medical aesthetic industry, including the increase in per capita disposable income and the growth in medical aesthetic spending in China. In addition, they are also affected by factors driving online media and social community in China, such as the growing number of online users, the improved telecommunications infrastructure and the increasing adoption of mobile payment. Furthermore, our business and operating results are influenced by PRC governmental policies and initiatives affecting the online medical aesthetic service and content distribution industries. Changes in any of these general factors could affect the demand for content and services on our platform and our results of operations.

Despite the general factors mentioned above, we believe our results of operations are more directly affected by the following specific factors.

 

   

The size of our user base, the level of user engagement and the audience reach of our content.

 

   

The quality, integrity and diversity of our content.

 

   

The effectiveness and the formats of our information services for medical aesthetic service providers, including our ability to apply relevant technologies to enhance targeted information distribution and service provider exposure.

 

   

Our ability to increase transaction volume for medical aesthetic service providers.

 

   

The efficiency of our sales and marketing activities.

 

   

The diversity of our monetization channels, including the vertical expansion along the medical aesthetic industry value chain and the horizontal expansion into the massive consumption healthcare service market.

We focus on (i) attracting and engaging users and (ii) increasing the number of paying medical service providers on our platform. We measure our effectiveness in attracting and engaging users primarily through tracking mobile MAUs and number of purchasing users, who made verified transactions with service providers. Average mobile MAUs increased by 115.1% from 456.6 thousand in 2016 to 982.1 thousand in 2017, and further increased by 42.1% to 1.4 million in 2018. Total number of purchasing users increased by 112.9% from 71.6 thousand in 2016 to 152.4 thousand in 2017, and further increased by 105.3% to 313.0 thousand in 2018.

 

80


Table of Contents

We measure our effectiveness in increasing the number of paying medical service providers by tracking the number of service providers that pay for information services and/or reservation services, which increased by 63.6% from 1,309 in 2016 to 2,141 in 2017, and further increased by 52.1% to 3,256 in 2018.

Key Components of Results of Operations

Revenues

The following table sets forth the components of our revenues by amounts and percentages of our total revenues for the years presented:

 

     For the Year Ended December 31,  
     2016      2017      2018  
     RMB      %      RMB      %      RMB      US$      %  
    

(in thousands, except for percentages)

 

Revenues:

                    

Information services

     19,869        40.5        143,613        55.4        415,119        60,377        67.3  

Reservation services

     29,221        59.5        115,692        44.6        202,107        29,395        32.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     49,090        100.0        259,305        100.0        617,226        89,772        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Information services revenues. We generate revenues primarily from information services by placing information of medical aesthetic service providers on our platform. We also generate a small portion of our revenues by placing information of other consumption healthcare service providers, beauty salons and certain beauty product sellers on our platform or in our content distributed through social media networks.

Reservation services revenues. We generate revenues from reservation services primarily from medical aesthetic service providers on treatment booked through our platform by our users, as well as subsequent treatment that users purchase from such service providers and are recorded on our platform, as long as the sales leads were generated on and the service provider is still active on our platform. We typically charge a reservation services fee rate of approximately 10% of the amount paid by consumers. We also generate a small portion of reservation service revenues from other consumption healthcare service providers and beauty salons. See “Business—Monetization—Reservation Services.”

Cost of revenues

Cost of revenues primarily consists of payroll costs, event organization costs, servers and bandwidth costs, payment processing fee paid to third party online platform, tax related surcharges, rental expenses and other direct costs related to the operation of business.

Gross profit and gross margin

The following table sets forth our gross profit and gross margin for the years presented:

 

     For the Year Ended December 31,  
     2016     2017     2018  
     (in thousands, except for percentages)  

Gross profit

     RMB23,898       RMB214,506       RMB525,663     US$ 76,455  

Gross margin

     48.7     82.7     85.2  

 

81


Table of Contents

Operating expenses

We classify our operating expenses into three categories: sales and marketing expenses, general and administrative expenses and research and development expenses. The following table sets forth the break-down of our total operating expenses and as percentages of our total revenues for the years presented:

 

     For the Year Ended December 31,  
     2016      2017      2018  
     RMB     %      RMB     %      RMB     US$     %  
     (in thousands, except for percentages)  

Operating expenses

         

Sales and marketing expenses

     (62,206     126.7        (127,462     49.2        (306,360     (44,558     49.6  

General and administrative expenses

     (18,043     36.8        (29,725     11.5        (75,442     (10,973     12.2  

Research and development expenses

     (17,932     36.5        (32,557     12.6        (94,726     (13,777     15.3  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     (98,181     200.0        (189,744     73.3        (476,528     (69,308     77.1  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Sales and marketing expenses. Sales and marketing expenses primarily consist of marketing and user acquisition activities expenses, payroll costs and share-based compensation expenses. In terms of absolute amount, we expect our sales and marketing expenses to grow in the foreseeable future.

The following table sets forth the break-down of our sales and marketing expenses and as percentages of our total revenues for the years presented:

 

     For the Year Ended December 31,  
     2016      2017      2018  
     RMB     %      RMB     %      RMB      US$      %  
     (in thousands, except for percentages)  

Sales and marketing expenses

                  

Marketing and user acquisition activities expenses

     (48,721     99.2        (94,495     36.4        233,010        33,890        37.8%  

Payroll costs

     (10,554     21.5        (28,350     10.9        60,553        8,807        9.8%  

Others

     (2,931     6.0        (4,617     1.9        12,797        1,861        2.0%  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (62,206 )      126.7        (127,462 )      49.2        306,360        44,558        49.6%  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

General and administrative expenses. General and administrative expenses primarily consist of payroll costs, general office expenses, share-based compensation expenses and professional service fees related to past financing transactions.

Research and development expenses. Research and development expenses primarily consist of payroll costs, share-based compensation expenses and rental expenses incurred associated with research and development.

Taxation

Cayman Islands

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or

 

82


Table of Contents

estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.

Hong Kong

Under the current Hong Kong Inland Revenue Ordinance, from the year of assessment 2018/2019 onwards, the subsidiaries in Hong Kong are subject to profits tax at the rate of 8.25% on assessable profits up to HK$2,000,000; and 16.5% on any part of assessable profits over HK$2,000,000. We had no taxable income generated from operations in Hong Kong in 2016 and 2017, while we generated income from operations in 2018. Additionally, payments of dividends by our subsidiary incorporated in Hong Kong to the Company is not subject to any Hong Kong withholding tax.

PRC

Generally, our PRC subsidiary, consolidated variable interest entity and its subsidiaries are subject to enterprise income tax on their taxable income in China at a statutory rate of 25%. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.

Beijing So-Young Technology Co., Ltd., our variable interest entity, was a “High and New Technology Enterprise,” or HNTE in 2017. Beijing So-Young Wanwei Technology Consulting Co., Ltd., our WFOE, was a HNTE in 2018. They were subject to the preferential tax rate of 15% in 2017 and 2018, respectively.

Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between China and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and receives approval from the relevant tax authority. If our Hong Kong subsidiary satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. See “Risk Factors—Risks Related to Our Corporate Structure—We may rely on dividends paid by our PRC subsidiary to fund cash and financing requirements. Any limitation on the ability of our PRC subsidiary to pay dividends to us could have a material adverse effect on our ability to conduct our business and to pay dividends to holders of the ADSs and our ordinary shares.”

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”

 

83


Table of Contents

Results of Operations

The following table sets forth a summary of our consolidated results of operations for the years presented, both in absolute amount and as a percentage of our revenues for the years presented. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The results of operations in any particular period are not necessarily indicative of our future trends.

 

    For the Year Ended December 31,  
    2016     2017     2018  
    RMB     %     RMB     %     RMB     US$     %  
    (in thousands, except for percentages)  

Revenues

             

Information services

    19,869       40.5       143,613       55.4       415,119       60,377       67.3  

Reservation services

    29,221       59.5       115,692       44.6       202,107       29,395       32.7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    49,090       100.0       259,305       100.0       617,226       89,772       100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues

    (25,192     (51.3     (44,799     (17.3     (91,563     (13,317     (14.8

Gross profit

    23,898       48.7       214,506       82.7       525,663       76,455       85.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

             

Sales and marketing

    (62,206     (126.7     (127,462     (49.2     (306,360     (44,558     (49.6

General and administrative

    (18,043     (36.8     (29,725     (11.5     (75,442     (10,973     (12.2

Research and development

    (17,932     (36.5     (32,557     (12.6     (94,726     (13,777     (15.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (98,181     (200.0     (189,744 )      (73.3 )      (476,528     (69,308     (77.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Income from operation

    (74,283     (151.3     24,762       9.4       49,135       7,147       8.1  

(Loss)/Income before tax

    (81,036     (165.1     13,221       5.1       58,254       8,473       9.4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit/(expense)

                3,981       1.5       (3,171     (461     (0.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (81,036     (165.1     17,202       6.6       55,083       8,012       8.9  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2018 compared to year ended December 31, 2017

Revenues

Our revenues increased by 138.0% from RMB259.3 million in 2017 to RMB617.2 million (US$89.8 million) in 2018, primarily resulted from the expansion of our user base and increased level of user engagement. Average mobile MAUs increased by 42.1% from 1.0 million in 2017 to 1.4 million in 2018. Total number of purchasing users increased by 105.3% from 152.4 thousand in 2017 to 313.0 thousand in 2018.

Our revenues from information services increased by 189.1% from RMB143.6 million in 2017 to RMB415.1 million (US$60.4 million) in 2018. This increase was primarily attributable to the increase in the number of paying medical service providers on our platform from 2,141 in 2017 to 3,256 in 2018, especially the increase in the number of medical service providers subscribing to information services on our platform from 1,295 in 2017 to 2,229 in 2018, as well as the increase in average information service spending by subscribing medical service providers. Such increases were in turn driven by our expanding and increasingly engaged user base as well as the increased effectiveness of our customer acquisition solution.

Our revenues from reservation services increased by 74.7% from RMB115.7 million in 2017 to RMB202.1 million (US$29.4 million) in 2018. This increase was primarily attributable to a

 

84


Table of Contents

73.3% increase in aggregate value of medical aesthetic treatment transactions facilitated by our platform from RMB1.2 billion in 2017 to RMB2.1 billion (US$306.6 million) in 2018. The increase in transaction value was primarily driven by the increase in the number of purchasing users from 152.4 thousand in 2017 to 313.0 thousand in 2018, which in turn drew an increasing number of medical service providers to our platform. We also expanded our reservation function in terms of types of medical aesthetic treatment available and number of medical aesthetic service providers in various cities.

Cost of revenues

Our cost of revenues increased by 104.4% from RMB44.8 million in 2017 to RMB91.6 million (US$13.3 million) in 2018. The increase was primarily due to the increase in our payroll costs by RMB26.6 million, which was driven by the increase in our operational staff headcount from 183 as of December 31, 2017 to 346 as of December 31, 2018.

Gross profit

As a result of the foregoing, our gross profit increased by 145.1% from RMB214.5 million in 2017 to RMB525.7 million (US$76.5 million) in 2018. Our gross margin improved from 82.7% in 2017 to 85.2% in 2018.

Operating expenses

Sales and marketing expenses. Our sales and marketing expenses increased by 140.4% from RMB127.5 million in 2017 to RMB306.4 million (US$44.6 million) in 2018. The increase was primarily due to (i) an increase of RMB138.5 million in our expenses associated with marketing and user acquisition activities as we continued to enhance our brand recognition, (ii) an increase of RMB32.2 million in payroll costs from the expansion of our sales and marketing team and (iii) an increase of RMB0.5 million in share-based compensation expenses.

General and administrative expenses. Our general and administrative expenses increased by 153.8% from RMB29.7 million in 2017 to RMB75.4 million (US$11.0 million) in 2018. The increase was primarily due to (i) an increase of RMB12.3 million in payroll costs in connection with the expansion of our administrative team (ii) an increase of RMB8.4 million in share-based compensation expenses and (iii) an increase of RMB14.7 million in professional services fees that was incurred for financing activities in 2018. Our general and administrative expenses grew faster in 2018 than in the earlier periods, primarily because of our relatively short operating history and the rapid development of our internal operations capabilities in an effort to accommodate anticipated future growth.

Research and development expenses. Our research and development expenses increased by 191.0% from RMB32.6 million in 2017 to RMB94.7 million (US$13.8 million) in 2018, primarily due to (i) an increase of RMB43.2 million in payroll costs in connection with the expansion of our research and development team and (ii) an increase of RMB12.9 million in share-based compensation expenses. Our research and development expenses grew faster in 2018 than in the earlier periods, primarily due to our commitment to developing our technology capacity to further enhance users’ and medical service providers’ experience on our platform.

(Loss)/Income from operations

As a result of our strong revenue growth, our income from operations increased by 98.4% from RMB24.8 million in 2017 to RMB49.1 million (US$7.1 million) in 2018.

 

85


Table of Contents

Income tax expense

We recorded income tax expense of RMB3.2 million (US$0.5 million) in 2018, compared to income tax benefit of RMB4.0 million in 2017, primarily attributable to the increase of our taxable income during 2018.

Net (loss)/income

As a result of the foregoing, our net income increased by 220.2% from RMB17.2 million in 2017 to RMB55.1 million (US$8.0 million) in 2018.

Year ended December 31, 2017 compared to year ended December 31, 2016

Revenues

Our revenues increased significantly by 428.2% from RMB49.1 million in 2016 to RMB259.3 million in 2017, primarily resulted from the expansion of our user base and its increased level of engagement. Average mobile MAUs increased by 115.1% from 456.6 thousand in 2016 to 982.1 thousand in 2017. Total number of purchasing users increased by 112.9% from 71.6 thousand in 2016 to 152.4 thousand in 2017.

Our revenues from information services increased by 622.8% from RMB19.9 million in 2016 to RMB143.6 million in 2017. This increase was primarily attributable to the increase in the number of paying medical service providers on our platform from 1,309 in 2016 to 2,141 in 2017, especially the increase in the number of medical service providers subscribing to information services on our platform from 467 in 2016 to 1,295 in 2017, which were in turn driven by our larger and more engaged user base as well as the increased effectiveness of our customer acquisition solutions.

Our revenues from reservation services increased by 295.9% from RMB29.2 million in 2016 to RMB115.7 million in 2017. This increase was primarily attributable to a 192.2% increase in value of medical aesthetic treatment transactions facilitated by our platform from RMB416.4 million in 2016 to RMB1.2 billion in 2017, which is primarily driven by the increase of the number of purchasing users from 71.6 thousand in 2016 to 152.4 thousand in 2017. We also expanded our reservation function in terms of types of medical aesthetic treatment available and number of medical aesthetic service providers. In addition, we deployed a subsequent order reporting system for service providers in 2017 to pay reservation services fees for the subsequent treatment received by our users. Such system allowed us to more effectively monitor all treatment received by our users for which medical aesthetic service providers are obligated to pay us in the form of reservation fees.

Cost of revenues

Our cost of revenues increased by 77.8% from RMB25.2 million in 2016 to RMB44.8 million in 2017. The increase was primarily due to the increase in (i) payroll costs by RMB12.3 million, which resulted from an increase in our operational staff headcount from 95 as of December 31, 2016 to 183 as of December 31, 2017, and (ii) event organization costs by RMB2.2 million, which resulted from increased spending on annual events.

Gross profit

Our gross profit increased significantly by 797.6% from RMB23.9 million in 2016 to RMB214.5 million in 2017. Our gross margin improved from 48.7% in 2016 to 82.7% in 2017, mainly because of our rapid business expansion and economies of scale.

 

86


Table of Contents

Operating expenses

Sales and marketing expenses. Our sales and marketing expenses increased by 104.9% from RMB62.2 million in 2016 to RMB127.5 million in 2017. The increase was primarily due to (i) an increase of RMB45.8 million in our expenses associated with marketing and user acquisition activities, as we continued to enhance our brand recognition, (ii) an increase of RMB17.8 million in payroll costs from the expansion of our sales and marketing team and (iii) an increase of RMB0.2 million in share-based compensation expenses.

General and administrative expenses. Our general and administrative expenses increased by 64.7% from RMB18.0 million in 2016 to RMB29.7 million in 2017. The increase was primarily due to (i) an increase of RMB4.4 million in payroll costs from the expansion of our administrative team, (ii) an increase of RMB0.5 million in share-based compensation and (iii) an increase of RMB1.7 million in professional services fees that was incurred for financing activities in 2017.

Research and development expenses. Our research and development expenses increased by 81.6% from RMB17.9 million in 2016 to RMB32.6 million in 2017, primarily due to (i) an increase of RMB13.9 million in payroll costs in connection with the expansion of our research and development team and (ii) an increase of RMB0.2 million in share-based compensation.

(Loss)/Income from operations

As a result of the strong revenue growth and economies of scale, we had income from operations of RMB24.8 million in 2017, compared to loss from operations of RMB74.3 million in 2016.

Income tax benefit

We recorded an income tax benefit of RMB4.0 million in 2017, which resulted from the utilization of prior year tax loss carryforward.

For the year ended December 31, 2016, we recorded zero income tax expense, mainly attributable to the full allowance of the deferred tax assets mainly due to historical operating losses.

Net (loss)/income

As a result of the foregoing, we had a net income of RMB17.2 million in 2017, compared to a net loss of RMB81.0 million in 2016.

 

87


Table of Contents

Selected Quarterly Results of Operations

The following table sets forth our unaudited condensed consolidated quarterly results of operations for each of the eight quarters from January 1, 2017 to December 31, 2018. You should read the following table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. We have prepared this unaudited condensed consolidated quarterly financial data on the same basis as we have prepared our audited consolidated financial statements. The unaudited condensed consolidated quarterly financial data include all adjustments, consisting only of normal and recurring adjustments, that our management considered necessary for a fair statement of our financial position and results of operation for the quarters presented.

 

    For the Three Months Ended,  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
 
    (Unaudited)  
    (in RMB thousands)  

Revenues

               

Information services

    10,592       23,336       48,187       61,498       70,210       103,091       114,740       127,078  

Reservation services

    16,965       26,526       35,848       36,353       43,490       49,065       53,617       55,935  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    27,557       49,862       84,035       97,851       113,700       152,156       168,357       183,013  

Cost of revenues(1)

    (7,304     (9,266     (12,082     (16,147     (14,789     (21,131     (24,014     (31,629
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    20,253       40,596       71,953       81,704       98,911       131,025       144,343       151,384  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

               

Sales and marketing expenses(1)

    (23,488     (33,273     (39,203     (31,498     (44,760     (89,311     (108,413     (63,876

General and administrative expenses(1)

    (4,926     (6,459     (6,634     (11,706     (11,097     (13,095     (23,443     (27,807

Research and development expenses(1)

    (6,291     (7,563     (8,933     (9,770     (13,423     (20,800     (34,551     (25,952
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    (34,705 )      (47,295 )      (54,770 )      (52,974 )      (69,280     (123,206     (166,407     (117,635
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss)/Income from operations

    (14,452 )      (6,699 )      17,183       28,730       29,631       7,819       (22,064     33,749  

(Loss)/Income before tax

    (18,587 )      (14,516 )      16,329       29,995       33,032       9,989       (26,370     41,603  

Income tax benefit/(expenses)

    1,636       1,281       (1,552     2,616       (2,416     (1,119     1,154       (790
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income

    (16,951 )      (13,235 )      14,777       32,611       30,616       8,870       (25,216     40,813  

Accretions of convertible redeemable preferred shares to redemption value

    (6,773     (6,848     (6,924     (7,976     (18,802     (21,506     (28,120     (35,783
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss)/income attributable to ordinary shareholders of the Company

    (23,724 )      (20,083 )      7,853       24,635       11,814       (12,636     (53,336     5,030  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

88


Table of Contents

 

Note:

(1)

Share-based compensation expense were allocated in cost of revenues and operating expenses as follows:

 

    For the Three Months Ended,  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
 
    (Unaudited)  
    (in RMB thousands)  

Cost of revenues

    35       24       17       13       15       584       571       253  

Sales and marketing expenses

    130       131       121       108       156       316       358       188  

General and administrative expenses

    417       422       421       415       401       2,405       2,817       4,489  

Research and development expenses

    104       105       101       95       106       483       12,142       575  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    686       682       660       631       678       3,788       15,888       5,505  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly trends

We have experienced continued growth in our revenues for the eight quarters from January 1, 2017 to December 31, 2018. Driven by the continued expansion of our user base, increased level of user engagement as well as the increase in the number of paying medical aesthetic service providers, our revenues from information services and reservation services both increased continuously and substantially during these periods.

The general increase in our costs during these periods was mainly attributable to the expansion of our business as well as the resultant increase in our operational staff headcount and payroll costs. The decrease in the cost of revenues from the fourth quarter of 2017 to the first quarter of 2018 was because of the decrease in event organization costs.

Our quarterly operating expenses also increased for most quarters during these periods, which was mainly due to the increase in our expense associated with marketing and user acquisition activities and the increase in our payroll costs. The decrease in our quarterly operating expenses from the third quarter of 2017 to the fourth quarter of 2017 and from the third quarter of 2018 to the fourth quarter of 2018 was primarily because of seasonality factors. We typically reduce our marketing and user acquisition activities in the months leading to the first quarters, during which our business tend to be the slowest as a result of the Chinese New Year. In contrast, our operating expenses tend to peak during the second and the third quarters as we built up our marketing efforts in preparation for the various shopping festivals in China during the fourth quarters.

Our results of operations are subject to fluctuations and changes in market conditions, including seasonal factors. Our business is typically the slowest during the Chinese New Year, which generally falls in the first quarter of the year, while we generally experience strongest sales and platform activities in the fourth quarter of the year. The impact of fluctuations and changes of market conditions, however, was not apparent historically due to the rapid growth of our business historically. Due to our limited operating history, the trends that we have experienced in the past may not apply to, or be indicative of, our future operating results.

 

89


Table of Contents

Liquidity and Capital Resources

The following table sets forth a summary of our cash flows for the years presented:

 

     For the Year Ended December 31,  
     2016     2017     2018  
     RMB     RMB     RMB     US$  
     (in thousands)  

Net cash (used in)/generated from operating activities

     (40,756     90,877       198,985       28,941  

Net cash (used in)/generated from investing activities

     (108,345     7,032       (569,372     (82,811

Net cash provided by financing activities

     122,690       324,671       485,414       70,601  

Effect of exchange rate changes on cash and cash equivalents

     180       (114     7,497       1,090  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (26,231     422,466       122,524       17,821  

Cash and cash equivalents at the beginning of the period

     44,624       18,393       440,859       64,120  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

     18,393       440,859       563,383       81,941  
  

 

 

   

 

 

   

 

 

   

 

 

 

To date, we have financed our operating and investing activities primarily through net cash generated from operating activities and historical equity financing activities. As of December 31, 2016, 2017 and 2018, our cash and cash equivalents were RMB18.4 million, RMB440.9 million and RMB563.4 million (US$81.9 million), respectively. Our cash and cash equivalents primarily consist of cash on hand and demand deposits.

We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated working capital requirements and capital expenditures for at least the next 12 months. After this offering, we may decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.

As of December 31, 2018, 58.6% and 41.4% of our cash and cash equivalents were held in China and overseas, respectively, of which 18.5% were denominated in U.S. dollars and 81.5% were denominated in Renminbi. As of December 31, 2018, 16.7% and 83.3% of our short-term investments were held in China and overseas, respectively, of which 71.8% were denominated in Renminbi. As of December 31, 2018, 40.5% of our cash and cash equivalents were held by our VIE and its subsidiaries. Although we consolidate the results of our variable interest entity and its subsidiaries, we only have access to the assets or earnings of our variable interest entity and its subsidiaries through our contractual arrangements with our variable interest entity and its shareholders. See “Corporate History and Structure—Contractual Arrangements with Our VIE and Its Shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “—Holding Company Structure.”

In utilizing the proceeds we expect to receive from this offering, we may make additional capital contributions to our PRC subsidiary, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiary, or acquire offshore entities with operations in China in offshore transactions. However, most of these uses

 

90


Table of Contents

are subject to PRC regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of this offering to make loans to or make additional capital contributions to our PRC subsidiary and variable interest entity, which could materially and adversely affect our liquidity and our ability to fund and expand our business” and “Use of Proceeds.”

We expect that a substantial majority of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.

Operating activities

Net cash generated from operating activities in 2018 was RMB199.0 million (US$28.9 million). The difference between net cash generated from operating activities and net income of RMB55.1 million (US$8.0 million) in the same period was substantially due to (i) the increase of RMB71.0 million (US$10.3 million) in contract liabilities that primarily refer to the prepayment of information service fees from medical aesthetic service providers, (ii) the increase of RMB39.3 million (US$5.7 million) in accrued expenses and other current liabilities that primarily include accrued professional service fees and advanced payment from users in the form of unearned reservation services fees for treatment that have not been completed, (iii) an increase in tax payable of RMB31.7 million (US$4.6 million), and (iv) the increase of RMB29.2 million (US$4.2 million) in salary and welfare payables. Such difference is partially offset by an increase of RMB33.4 million (US$4.9 million) in prepayment and other current assets, primarily in the form of prepaid fees paid to user acquisition channels and an increase of RMB21.8 million (US$3.2 million) in deferred tax assets.

Net cash generated from operating activities in 2017 was RMB90.9 million. The difference between net cash generated from operating activities and net income of RMB17.2 million in the same period was substantially due to (i) the increase of RMB41.4 million in contract liabilities that primarily refer to the prepayment of information service fees from medical aesthetic service providers, (ii) the increase of RMB14.2 million in accrued expenses and other current liabilities that primarily include accrued professional service fees and advanced payment from users in the form of unearned reservation services fees for treatment that have not been verified to have been completed, (iii) the increase of RMB21.6 million in salary and welfare payables, and (iv) an increase in tax payable of RMB9.2 million. Such difference is partially offset by (i) an increase of RMB11.0 million in prepayment and other current assets, primarily in the form of prepaid fees paid to user acquisition channels, (ii) an increase in deferred tax assets of RMB9.1 million, and (iii) an increase of RMB6.5 million in trade receivables.

Net cash used in operating activities in 2016 was RMB40.8 million. The difference between net cash used in operating activities and net loss of RMB81.0 million in the same period was primarily due to (i) the increase of RMB15.8 million in accrued expenses and other current liabilities, primarily including advanced payment from users in the form of unearned reservation

 

91


Table of Contents

services fees for treatment that have not been performed, as well as payment collected on behalf of and payable to service providers, (ii) the increase of RMB12.9 million in salary and welfare payables, and (iii) the increase of RMB7.5 million in the amortization of non-cash marketing services contributed by certain shareholder. Such difference is partially offset by an increase of RMB2.6 million in receivables from online payment platforms.

Investing activities

Net cash used in investing activities in 2018 was RMB569.4 million (US$82.8 million), primarily due to purchase of short-term investments and term deposits of RMB1,130.2 million (US$164.4 million) and cash paid for long-term investment of RMB20.7 million (US$3.0 million), offset by proceeds from maturities of short-term investments and term deposits of RMB587.6 million (US$85.5 million).

Net cash generated from investing activities in 2017 was RMB7.0 million, primarily due to proceeds from maturities of short-term investments of RMB40.7 million and proceeds from repayment of the loans of RMB9.0 million, partially offset by purchase of short-term investments of RMB27.6 million and cash paid for long-term investments of RMB12.1 million.

Net cash used in investing activities in 2016 was RMB108.3 million, primarily due to purchase of short-term investments of RMB121.1 million and cash paid for advances to related party of RMB15.3 million, partially offset by proceeds from maturities of short-term investments of RMB30.0 million.

Financing activities

Net cash provided by financing activities in 2018 was RMB485.4 million (US$70.6 million), primarily due to proceeds from issuance of preferred shares, net of issuance cost.

Net cash provided by financing activities in 2017 was RMB324.7 million, primarily due to proceeds from issuance of preferred shares, net of issuance cost.

Net cash provided by financing activities in 2016 was RMB122.7 million, primarily due to proceeds from issuance of preferred shares, net of issuance cost.

Capital expenditures

Our capital expenditures are primarily incurred for purchases of electronic equipment, furniture and office equipment, as well as leasehold improvements. Our capital expenditures were RMB0.9 million in 2016, RMB0.2 million in 2017 and RMB6.4 million (US$0.9 million) in 2018. We intend to fund our future capital expenditures with our existing cash balance. We will continue to make capital expenditures to meet the expected growth of our business.

 

92


Table of Contents

Contractual obligations

The following table sets forth our contractual obligations as of December 31, 2018:

 

     Payment due by December 31,  
     Total      2019      2020      2021      2022      2023 and
thereafter
 
     (RMB in thousands)         

Operating lease obligations(1)

     267,797        47,966        49,567        45,309        45,615        79,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     267,797        47,966        49,567        45,309        45,615        79,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Note:

(1)

Operating lease obligations consist of the obligations under the lease agreements covering various facilities.

Other than as shown above, we did not have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2018.

Off-Balance Sheet Commitments and Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.

Critical Accounting Policies

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements.

We prepare our financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experiences and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates. Some of our accounting policies require a higher degree of judgment than others in their application and require us to make significant accounting estimates.

The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and accompanying notes and other disclosures included in this prospectus. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.

 

93


Table of Contents

Principle of consolidation

Our consolidated financial statements include the financial statements of our Company, our subsidiaries, our consolidated VIE and subsidiaries of VIE for which we are the primary beneficiary. All transactions and balances among our Company, our subsidiaries, our consolidated VIE and their respective subsidiaries have been eliminated upon consolidation.

We set up a joint venture named So-Young Medical Cosmetology (Beijing) Management Consulting Co., Ltd. in May 2016, and owned 70% of equity interest. We assessed this investment in Medical Cosmetology under ASC Topic 810, “Consolidation” (“ASC 810”) and concluded that Medical Cosmetology is not a variable interest entity as none of the criteria of ASC 810-10-15-14 was met. As such, Medical Cosmetology is not within the scope of ASC 810-20 and should be evaluated for consolidation under the voting interest model. Because of the existence of substantive participating rights of the 30% equity investor, including the joint approval of material operating decisions, such as appointment of key management and determination of key management’s compensation consistent with ASC 810-10-25-11, we do not have unilateral rights over this investment. Therefore, we do not consolidate Medical Cosmetology but account for this investment using equity method in accordance with FASB Accounting Standards Codification 323, Investments—Equity Method and Joint Ventures.

Revenue recognition

We adopted ASC Topic 606, “Revenue from Contracts with Customers,” for all periods presented. Consistent with the criteria of Topic 606, we recognize revenue to depict the transfer of the promised goods or services to the customers in an amount that reflects the consideration to which we expect to receive in exchange for those goods or services.

Under ASC 606, we determine revenue recognition through the following steps:

 

   

identification of the contract, or contracts, with a customer;

 

   

identification of the performance obligations in the contract;

 

   

determination of the transaction price, including the constraint on variable consideration;

 

   

allocation of the transaction price to the performance obligations in the contract; and

 

   

recognition of revenue when (or as) we satisfy a performance obligation.

The following is a description of the accounting policy for our principal revenue streams.

Information service

We generate revenue from offering information services primarily to help medical aesthetic service providers better introduce their services, and increase their customer base. We help the service providers introduce their services through information display, in formats such as profile pages and banners, to increase exposure on the platform. We also place content of participating service providers on social platforms in the forms of pictures, videos or links.

We generate our information service revenue primarily (i) at a fixed fee per each day’s content display, (ii) based on a contractual rate per unit of output, such as per click, etc., and (iii) at a fixed fee per each article posted on our social media accounts. These information services may be sold in combination as a bundled arrangement or separately on a stand-alone basis.

 

94


Table of Contents

Service providers can choose to sign up arrangements through our online information service system or sign up offline arrangements. Advance payment is required when signing up the arrangement. In the case of signing up online arrangements, the service providers are required to purchase “So-Young tokens,” or the Token, in the service provider account as the information service is priced in token in the on-line platform. The Token will be locked in the individual service provider account when a service provider places an order online and will be deducted from the service provider account when service is performed. On a recurring basis, we offer free Tokens to service providers to as certain percentage of purchased Tokens. The free Tokens function the same way as the purchased Tokens, which represent an advance payment from customers. Token is the virtual currency of our platform that are interchangeable and not tied directly to any specific revenue transaction because the Tokens are fungible. As such, we value the Tokens based on an average pricing method to determine the transaction price for the specific information services provided to the service provider. The Tokens are not transferable or refundable and are generally consumed in three months after purchased or given for free. The value of expired Tokens has been immaterial. In the case of signing up off-line arrangements, the service providers are required to make cash advance payment for each individual contract. Contract consideration is determined and fixed in cash at the inception of contract.

The fees for the information services above are recognized in the period when information service is delivered as evidenced in a manner satisfying the types of engagements selected by the service providers, such as display of content, clicks on content, and/or post of articles on our platform. Arrangements involving multiple performance obligations primarily consist of combinations of the above information services. For arrangements that include a combination of these services, we use an estimate of the standalone selling price for these services in order to allocate any potential discount to all performance obligations in the arrangement. The estimate of standalone selling price is based on a standalone selling price basis. We believe the use of the estimation approach and allocation of the transaction price on a relative standalone selling price basis to each performance obligation result in revenue recognition in a manner consistent with the underlying economics of the transaction and the allocation principle included in ASC 606.

We also provide other services, which are also presented under information service, primarily comprising (i) service fee received from financial institutions for sales facilitation, (ii) service fee for training courses provided to service providers, and (iii) service fee for offline event organization, etc. Revenue is recognized when these services are rendered. For the years ended December 31, 2016 and 2017 and 2018, the revenues derived from other services are not significant.

Barter transactions

We entered into agreements with service providers whereby we provided information service as the consideration for sharing advertising space purchased by the service providers from other third party providers. In general, the service provider would share certain percentage of the purchased advertising space with us. In exchange, we would provide the Tokens with the same value of the shared advertising space to the service provider based on the service provider’s purchase price with the third party and the shared percentage of the advertising space. Revenue from the barter transactions is recognized when information service is provided as discussed above and the expense related to the shared advertising space is recognized over the duration of display. We use the fair value of the goods or services received when measuring the non-cash consideration for information service revenue earned. We will only measure the non-cash consideration indirectly by reference to the standalone selling price of the goods or

 

95


Table of Contents

services surrendered if the fair value of the goods or services received is not reasonably estimable. We recognized revenue from barter transactions amounted to zero, RMB0.9 million and RMB15.1 million for the years ended December 31, 2016, 2017 and 2018, respectively. The expense recognized from barter transaction for the years ended December 31, 2016, 2017 and 2018 were zero, RMB1.9 million and RMB19.7 million, respectively.

Reservation service

We earn reservation service fees primarily from medical aesthetic service providers when a medical or beauty treatment is performed for our user through reservation from our platform. Such fees are generally determined as an agreed percentage of the value of service actually provided by service providers. As per our agreements with service providers, we collect reservation service fees for all services provided to a user as long as (i) the user was brought to the particular service provider through our platform, and (ii) the service provider is still active on our platform. This includes the situations where the user visits the service provider directly without online ordering, chooses treatment services or site that is different from the online reservation, adds more services during the time of visit, and visits the service provider for other treatment in the future. The service providers are obligated to report the completed transactions in above situations to us. In the event that the service providers fail to report such transaction to us in time, we would charge the service providers a penalty in addition to the reservation service fee.

In order to list available services and related prices on our online platform, service providers are required to sign agreements with us and pay a non-refundable upfront fee to us. However, the agreement does not have binding effect as the service provider can cancel the agreement at their discretion without any penalty. Although the upfront fee is not a material amount, it provides the service provider a renewal right to make optional purchase of the reservation service. The agreement is in substance a day-to-day contract with performance obligation of facilitating of each successful sales of service by service providers to our users.

Reservation service fees are in the form of a fixed fee per transaction or an agreed percentage of the value of service actually provided by the service providers. The consideration for each sales facilitation service is determined when the contract is placed. Following ASC 606-10-32-40, we recognize revenue for each completed transaction based on the value of service actually provided by the service providers as reservation service fee relates specifically to the facilitation for that transaction.

We do not control the underlying services provided by the service providers before they are provided to users, as we are not responsible for fulfilling the promise of service to users and have no inventory risk before the service is provided. In addition, we have no discretion in establishing prices of the service provided by service providers. Reservation service revenues are recognized on a net basis at the point of a successful transaction, which is when the user accepts the service.

We provide various incentives for the users to reserve service on our platform. These incentive programs mainly include loyalty program (So-Young points) and coupons, which are both redeemed mainly to reduce the transaction price. We have considered the guidance under ASC 606 to account for these incentives and determined to record them as a reduction to the revenue upon redemption.

Fair Value of options

Share-based compensation expenses arise from share-based awards, including share options for the purchase of ordinary shares. We account for share-based awards granted to

 

96


Table of Contents

employees in accordance with ASC 718 Stock Compensation. For share options for the purchase of ordinary shares granted to employees classified as equity awards, the related share-based compensation expenses are recognized in the consolidated financial statements based on the fair value of the awards on the grant date, which is calculated using the binomial option pricing model. The determination of the fair value is affected by the share price as well as assumptions regarding a number of complex and subjective variables, including the expected share price volatility, actual and projected employee share option exercise behavior, risk-free interest rates and expected dividends. The fair value of the ordinary shares is assessed using the income approach/discounted cash flow method, with a discount for lack of marketability, given that the shares underlying the awards were not publicly traded at the time of grant. We account for forfeitures in the period they occur as a reduction to expense.

The fair value of the options granted is estimated on the dates of grant using the binomial option pricing model with the following assumptions used.

 

     2014      2015      2016      2018  

Risk-free interest rate(1)

     2.70%        2.16%        1.57% – 1.62%        2.59% – 2.93%  

Expected volatility(2)

     59.94%        55.00%        51.52% – 53.54%        47.40% – 50.18%  

Expected dividend yield(3)

     0.0%        0.0%        0.0%        0.0%  

Expected multiples(4)

     2.2        2.2        2.2        2.2 – 2.8  

Fair value of underlying ordinary share

     US$0.12        US$0.43        US$1.42 – US$1.44        US$4.71 –US$10.19  

 

Notes:

(1)

We estimate risk-free interest rate based on the daily treasury long term rate of U.S. Department of the Treasury with a maturity period close to the contract term of the options.

(2)

We estimate expected volatility based on the annualized standard deviation of the daily return embedded in historical share prices of comparable companies with a time horizon close to the expected expiry of the term.

(3)

We have never declared or paid any cash dividends on our capital stock, and we do not anticipate any dividend payments on our ordinary shares in the foreseeable future.

(4)

We estimate the exercise multiple as the ratio of fair value of underlying shares over the exercise price as at the time the option is exercised, based on a consideration of research study regarding exercise pattern based on historical statistical data.

Fair Value of ordinary shares

The following table sets forth the fair value of our ordinary shares estimated at the grant dates of share options with the assistance from an independent valuation firm.

 

Date of Valuation

   Fair Value Per Share
(US$)
     DLOM     Discount Rate  

2014-4-24

     0.12        25     30

2015-5-4

     0.43        25     27

2016-6-13

     1.42        20     24

2016-8-16

     1.44        20     24

2018-4-1

     4.71        15     20

2018-6-20

     6.02        10     20

2018-8-23

     7.16        10     19

2018-12-31

     10.19        10     18

In determining the grant date fair value of our ordinary shares for purposes of recording share-based compensation in connection with employee stock options, we, with the assistance of an independent valuation firm, evaluated the use of income approach to estimate the enterprise value of our company and income approach (discounted cash flow, or DCF method)

 

97


Table of Contents

was relied on for value determination. The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.

The major assumptions used in calculating the fair value of ordinary shares include:

 

   

Weighted average cost of capital, or WACC: The WACCs were determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systematic risk factors.

 

   

Discount for lack of marketability, or DLOM: DLOM was quantified by the Finnerty’s Average-Strike put options mode. Under this option-pricing method, which assumed that the put option is struck at the average price of the stock before the privately held shares can be sold, the cost of the put option was considered as a basis to determine the DLOM.

The income approach involves applying appropriate WACCs to estimated cash flows that are based on earnings forecasts. Our revenues and earnings growth rates, as well as major milestones that we have achieved, contributed to the increase in the fair value of our ordinary shares from 2014 to 2018. However, these fair values are inherently uncertain and highly subjective. The assumptions used in deriving the fair values are consistent with our business plan. These assumptions include: no material changes in the existing political, legal and economic conditions in China; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts. These assumptions are inherently uncertain. The risk associated with achieving our forecasts were assessed in selecting the appropriate WACCs, which ranged from 30% to 18%.

The option-pricing method was used to allocate equity value to preferred and ordinary shares. This method involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board of directors and management.

The increase in the fair value of the ordinary shares from US$10.19 per share as of December 31, 2018 to US$12.43 per share as of February 1, 2019, the latest date on which share-based awards were granted by us, and further to US$16.64, the midpoint of the estimated range of the initial public offering price (the “Midpoint Price”), was primarily attributable to the following factors:

 

   

Substantially enhanced liquidity and marketability of the ordinary shares. The discount for lack of marketability decreased from 10% as of December 31, 2018 to 6% as of February 1, 2019, and further to 0.0% upon completion of this offering. The historical valuations of the Ordinary Shares reflected the illiquidity of the ordinary shares on the relevant grant dates, and the uncertainty of the initial public offering. The Midpoint Price assumes a successful initial public offering in the near term and represents an estimate of the fair value of the unrestricted, freely tradable shares that would be sold in the public offering market without liquidity and marketability discounts. The Midpoint Price further does not take into account the probability of alternative outcomes that could yield lower valuations, such as an acquisition at differing valuations or that we may continue as a private, stand-alone entity.

 

   

Organic growth of our business. Our revenues and net income continued to grow during this period. We have provided the financial data for the three months ended March 31,

 

98


Table of Contents
 

2019 in the Recent Development section. The revenues and net income for the first quarter ended March 31, 2019 were RMB206.1 million (US$30.0 million) and RMB45.9 million (US$6.7 million), respectively, which exceeded the quarterly revenues and net income in the fourth quarter of 2018, respectively.

 

   

The improvement in global capital markets sentiment in the first quarter of 2019. The New York Stock Exchange Composite Index, the Nasdaq Composite Index, the Nasdaq China US Internet Tiger Index and the Shanghai Stock Exchange A Share Index, increased by 12%, 16%, 23% and 24%, respectively, from December 31, 2018 to March 31, 2019. In February 2019, the U.S. government announced the delay in the imposition of certain tariffs on goods from China, citing progress in U.S. and China trade negotiation, which we believe eased consumers’ and investors’ concerns on the impact of U.S. and China trade war on the global economy and capital markets. Furthermore, in March 2019, the Chinese government announced an array of cost cutting measures to ease burdens on businesses. The stimulus plan boosted business sectors’ and consumers’ confidence in China economic outlooks. In addition, in March 2019, the U.S. Federal Open Market Committee, or FOMC, decided to hold interest rate steady.

 

   

Increased probability of an initial public offering and conversion of preferred shares. As we progressed further towards this offering, we increased our estimated probability of a successful initial public offering from 65% as of December 31, 2018 to 80% as of February 1, 2019. The holders of the our convertible redeemable preferred shares currently enjoy substantial economic rights and preferences over the holders of the ordinary shares. The estimated range of the initial public offering price assumes the conversion of our convertible preferred shares upon the completion of the initial public offering. The corresponding elimination of the preferences and rights enjoyed by the holders of convertible preferred shares will result in an increased ordinary share valuation.

 

   

Substantially enhanced balance sheet and financial resources. Given the proximity to the completion of the initial public offering, the estimated range of the initial public offering price assumes a successful offering. A successful offering will provide us with (i) proceeds that substantially strengthen our balance sheet as a result of increased cash, (ii) access to the public company debt and equity markets, and (iii) higher brand value to attract new customers as a publicly listed company. These factors have been reflected in the valuation implied by the estimated range of the initial public offering price.

Income taxes

We follow the liability method of accounting for income taxes in accordance with ASC 740, Income Taxes, or ASC 740. Under this method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The effect on deferred taxes of a change in tax rates is recognized in the Consolidated Statement of Comprehensive Loss in the period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion of, or all of the deferred tax assets will not be realized.

We accounted for uncertainties in income taxes in accordance with ASC 740. We recognize interest and penalties, if any, under accrued expenses and other current liabilities on our Consolidated Balance Sheet and under Other Expenses in our Consolidated Statement of Comprehensive Loss.

 

99


Table of Contents

Internal Control Over Financial Reporting

Prior to this offering, we have been a private company with limited accounting personnel and other resources with which we address our internal control over financial reporting. In connection with the audits of our consolidated financial statements included in this prospectus, we and our independent registered public accounting firm identified one material weakness in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness identified relates to lack of sufficient competent financial reporting and accounting personnel with appropriate understanding of United States Generally Accepted Accounting Principles (“U.S. GAAP”) to design and implement formal period-end financial reporting controls and procedures to address complex U.S. GAAP technical accounting issues, and to prepare and review the consolidated financial statements and related disclosures in accordance with U.S. GAAP and financial reporting requirements set forth by the Securities and Exchange Commission, or the SEC. The material weakness, if not timely remedied, may lead to significant misstatement in our consolidated financial statements in the future.

To remediate identified material weakness, we have hired additional qualified financial and accounting personnel with working experience with U.S. GAAP and SEC reporting requirements. We are currently in the process of establishing clear rules and responsibilities for accounting and financial reporting staff to address complex accounting and financial reporting issues. Furthermore, we have engaged an external consulting firm to assist us in assessing Sarbanes-Oxley compliance readiness and improve overall internal controls. In addition, we plan to:

 

   

implement regular U.S. GAAP and SEC financial reporting training programs for our accounting and financial personnel, and

 

   

develop and implement a comprehensive set of period-end financial reporting policies and procedures, especially for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are in compliance with U.S. GAAP and SEC reporting requirements.

However, we cannot assure you that we will remediate our material weakness in a timely manner. See “Risk Factors—Risks Related to Our Business and Industry—We have identified a material weakness in our internal controls as of December 31, 2018, and if we fail to implement and maintain an effective system of internal controls to remediate our material weakness over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.

Holding Company Structure

So-Young International Inc. is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiary, our consolidated variable

 

100


Table of Contents

interest entity and its subsidiaries in China. As a result, So-Young International Inc.’s ability to pay dividends depends upon dividends paid by our PRC subsidiary. If our existing PRC subsidiary or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiary in China is permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiary and consolidated variable interest entity in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of their registered capital. In addition, our wholly foreign-owned subsidiary in China may allocate a portion of their after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at their discretion, and our consolidated variable interest entity may allocate a portion of their after-tax profits based on PRC accounting standards to a surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiary has not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

Inflation

Since our inception, inflation in China has not materially affected our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December 2016, December 2017 and December 2018 were increases of 2.1%, 1.8% and 1.9%, respectively. Although we have not been materially affected by inflation in the past, we may be affected if China experiences higher rates of inflation in the future.

Quantitative and Qualitative Disclosures about Market Risk

Foreign exchange risk

Substantially all of our revenues and expenses are denominated in RMB. We do not believe that we currently have any significant direct foreign exchange risk and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and Renminbi because the value of our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.

The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. On August 11, 2015, the People’s Bank of China announced plans to improve the central parity rate of the Renminbi against the U.S. dollar by authorizing market-makers to provide parity to the China Foreign Exchange Trading Center operated by the People’s Bank of China with reference to the interbank foreign exchange market closing rate of the previous day, the supply and demand for foreign currencies as well as changes in exchange rates of major international currencies. Effective from October 1, 2016, the International Monetary Fund added Renminbi to its Special Drawing Rights currency basket. Such change and additional future changes may increase volatility in the trading value of the Renminbi

 

101


Table of Contents

against foreign currencies. The PRC government may adopt further reforms of its exchange rate system, including making the Renminbi freely convertible in the future. Accordingly, it is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future. The Renminbi has recently depreciated significantly against the backdrop of a surging U.S. dollar and persistent capital outflows of China, and we cannot assure you that the Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar and Renminbi because the value of our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.

To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of Renminbi against the U.S. dollar would reduce the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs, servicing our outstanding debt, or for other business purposes, appreciation of the U.S. dollar against the Renminbi would reduce the U.S. dollar amounts available to us.

As of December 31, 2018, we had Renminbi-denominated cash and cash equivalents of RMB459.2 million. A 10% depreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2018 would result in a decrease of US$6.1 million in cash and cash equivalents. A 10% appreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on December 31, 2018 would result in an increase of US$7.4 million in cash and cash equivalents.

Interest rate risk

Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits and wealth management products. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure.

After completion of this offering, we may invest the net proceeds we receive from the offering in interest-earning instruments. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Recently Issued Accounting Pronouncements

A list of recently issued accounting pronouncements that are relevant to us is included in note 2 to our consolidated financial statements included elsewhere in this prospectus.

 

102


Table of Contents

INDUSTRY

Medical Aesthetic Service Industry in China

Medical aesthetic services are elective medical procedures that specialize in improving cosmetic appearance, thereby improving people’s quality of life and psychological well-being. Medical aesthetic services can be divided into surgical and non-surgical treatment. Surgical medical aesthetic services, often referred to as plastic surgeries, include procedures such as breast augmentation, face and body contouring, blepharoplasty, and rhinoplasty; whereas non-surgical medical aesthetic services are comprised of injection procedures (using neurotoxins, dermal fillers, etc.), and laser and other energy-based treatment for skin management purposes, such as skin rejuvenation, tightening, and removal of scars and stretch marks.

The medical aesthetic service industry in China is large and rapidly growing. According to Frost & Sullivan, the total revenues of the medical aesthetic services industry reached RMB121.7 billion (US$17.7 billion) in 2018, representing a CAGR of 23.6% from 2014. The total revenues of this industry are expected to reach RMB360.1 billion (US$52.4 billion) by 2023, with an accelerated CAGR of 24.2% from 2018 to 2023. With such growth rate, China has become one of the fastest growing medical aesthetic service markets in the world, ranked the second in terms of market size in 2017, and is poised to become the largest market in the world by 2021. In particular, non-surgical medical aesthetic procedures enjoy a higher-than-market expected growth rate, a CAGR of 26.3% from 2018 to 2023, as they can reach a larger group of consumers thanks to the less risky and painful processes and shorter recovery time.

 

LOGO

 

Source: Frost & Sullivan

Key growth drivers of the medical aesthetic service industry in China include the following:

Steady growth in disposable income. According to Frost & Sullivan, the per capita disposable income in China has increased from RMB20,167 (US$2,933) in 2014 to RMB28,228 (US$4,106) in 2018, observing a CAGR of 8.8%. The growth is expected to continue at a CAGR of 7.7% from 2018 to 2023. Increased disposable income naturally leads to higher discretionary

 

103


Table of Contents

spending, which, in turn, enable more consumption opportunities in the medical aesthetic service industry.

Significant potential in penetration rate. According to Frost & Sullivan, every 1,000 people in China had undergone an average of 11.7 medical aesthetic treatment in 2017, whereas the penetration per thousand people rates in South Korea, the U.S., Brazil, and Japan were 80.4, 50.1, 43.6, and 27.0, respectively. The significantly lower penetration rate in China, compared to other countries with more developed medical aesthetic markets, shows tremendous growth potential in the near future as the industry continues to develop and as social acceptance of medical aesthetic procedures permeates. In particular, penetration rates in lower-tier cities, which primarily refer to cities other than Beijing, Shanghai, Guangzhou, Shenzhen and other major provincial centers, are expected to catch up rapidly, contributing more to the overall penetration rate in China. Moreover, with more efforts on customer acquisition and publicity, better service quality, improved brand recognition, and accumulation of safety records, an increasing number of Chinese consumers regard medical aesthetic procedures as a natural extension and upgrade from traditional non-medical wellness procedures.

Diversified demand for personal appearance improvement. Compared to other major countries, average Chinese consumers in medical aesthetic services industry are younger, according to Frost & Sullivan. Exposure to medical aesthetic treatment at a younger age, when consumers are more prone to form entrenched habits, creates longer consumer lifecycle and ongoing demand. In addition to typical anti-aging treatment demand that drives medical aesthetic service industries in certain developed countries, such as the U.S., the market in China sees significant demand for a much more diversified range of treatment from younger consumers.

Technology advancement in medical aesthetic treatment. As technology advances, new medical aesthetic treatment that deliver more effective result and offer more efficient process have emerged and transformed the traditional non-medical wellness services. More consumers are willing to invest in various medical aesthetic services, including both surgical and non-surgical treatment, as products have become more diverse and less risky, and better addressing consumers’ customized needs.

Medical aesthetic service providers can be categorized based on whether they are owned by the government. The medical aesthetic service industry in China is largely driven by private institutions as they actively create a competitive niche in their treatment and closely follow aesthetic trends. According to Frost & Sullivan, revenues of private institutions accounted for 81.5% of the total revenues of the medical aesthetic service industry in China in 2018, and the percentage is expected to reach 87.9% by 2023. Consequently, private institutions contribute significantly to customer acquisition expenses in this industry, and are expected to continue spending at a high level on customer acquisition due to their heavy reliance on brand image, differentiation, and reputation to acquire new customers.

The medical aesthetic service industry in China is highly fragmented and competitive. According to Frost & Sullivan, there were approximately 10,000 medical aesthetic service providers in 2018. Among private institutions, the top five players merely represented 7.4% of the total market. Similar to more developed oversea markets such as the U.S. and Japan, the industry in China is expected to remain relatively fragmented in the foreseeable future. As a result of this, medical aesthetic service providers will likely continue to differentiate themselves in this competitive environment through developing niche treatment and building brand recognition by heavy spending in customer acquisition.

 

104


Table of Contents

Customer Acquisition of Medical Aesthetic Service Industry in China

Medical aesthetic service providers in China acquire their customers through offline channels, such as beauty salons and outdoor advertisement, as well as online channels, which include online medical aesthetic platforms, search engines and general online e-commerce platforms. According to Frost & Sullivan, medical aesthetic service providers spent RMB31.3 billion (US$4.6 billion) on customer acquisition in 2018, representing 25.8% of the total revenues in this industry, which has increased from RMB12.9 billion (US$1.9 billion) in 2014, and is expected to reach RMB79.2 billion (US$11.5 billion) in 2023.

Compared to offline alternatives, online customer acquisition is the primary customer acquisition channel for medical aesthetic providers as consumers continue to generally shift to online channels for information and services. According to Frost & Sullivan, online customer acquisition spending in China’s medical aesthetic service industry amounted to RMB18.1 billion (US$2.6 billion) in 2018, and is expected to continue to grow rapidly at a CAGR of 22.2% from 2018 to 2023, reaching RMB49.3 billion (US$7.2 billion) by 2023, and outpacing the growth rate of total customer acquisition spending. This proves that online customer acquisition channel will continue to expand its wallet share against other customer acquisition channels.

 

LOGO

 

Source: Frost & Sullivan

Online medical aesthetic service platforms in China

Online medical aesthetic service platforms are destinations where users can discover, evaluate and reserve medical aesthetic treatment offline. Online medical aesthetic service platforms emerged in recent years and quickly gained market share from traditional online customer acquisition channels as such platforms effectively facilitated the direct interaction between consumers and medical aesthetic service providers.

According to Frost & Sullivan, customer acquisition spending on online medical aesthetic platforms accounted for 7.0% of total customer acquisition spending through online channels in 2018, which has increased from 0.9% in 2014 and is expected to reach 25.6% by 2023. Customer acquisition spending on online medical aesthetic service platforms increased from RMB64.5

 

105


Table of Contents

million (US$9.4 million) in 2014 to RMB1.3 billion (US$0.2 billion) in 2018, and is expected to grow to RMB12.6 billion (US$1.8 billion) in 2023, representing a CAGR of 58.2% from 2018.

 

LOGO

 

Source: Frost & Sullivan

Compared to search engines and other online customer acquisition channels, online medical aesthetic service platforms provide the following benefits:

From consumers’ perspective,

 

   

provide authentic, balanced and personalized content that promotes the transparency of the industry, and infuses consumers with knowledge and confidence;

 

   

serve as one-stop shop for research, evaluation, interaction and transaction reservation;

 

   

require medical aesthetic service providers to pass stringent validation processes, and constantly evaluate them based on real consumer ratings and reviews;

 

   

enable active and direct interactions between doctors and users, and among users, which promote free and transparent information flow and timely feedback; and

 

   

show transparent service prices, allowing consumers to effectively compare and make informed selections.

From medical aesthetic service providers’ perspective,

 

   

offer access to a wider geographic range of potential consumers;

 

   

reduce per user acquisition cost for high quality service providers as the vibrant social communities effectively distills medical institutions based on service quality;

 

   

feature flexible and cost-effective customer acquisition services that are especially friendly to the needs of small-to-medium sized medical service providers;

 

   

enable convenient, differentiated customer acquisition strategy through rich and highly customizable content formats, as well as the ability to communicate with users;

 

106


Table of Contents
   

provide value-added services to increase operation and management efficiency; and

 

   

deliver insights into consumer behavioral and preference trends, based on large and engaged user base.

Consumption Healthcare Service Industry and Its Reliance on Online Customer Acquisition in China

Consumption healthcare services, such as medical aesthetic services, refer to elective medical services that are primarily for improving people’s quality of life and not aimed at treating serious diseases. These include the non-therapeutic and high consumptive degree part of medical aesthetic services, physical examination services, dental and orthodontic services, refractive correction and optometry, certain obstetrics and gynecology services, assisted reproduction, and dermatology. In China, consumption healthcare services usually encompass those not covered by governmental medical insurance.

China enjoys a large and fast-growing consumption healthcare service industry. According to Frost & Sullivan, total revenues from consumption healthcare services industry in China grew from RMB276.6 billion (US$40.2 billion) in 2014 to RMB560.7 billion (US$81.6 billion) in 2018, representing a CAGR of 19.3%. The growth is expected to continue at a CAGR of 20.0% from 2018 to 2023, reaching RMB1,395.5 billion (US$203.0 billion) by 2023. Such growth is driven by increasing disposable income, growing awareness and household expenditure on discretionary healthcare services, rapid development of commercial healthcare insurance, and governmental support of private medical institutions.

 

LOGO

 

Source: Frost & Sullivan

Consumption healthcare service providers have experienced significant growth on spending on online customer acquisition to gain their customers. Online customer acquisition spending of consumption healthcare service industry grew at a CAGR of 19.2% from 2014 to 2018, and are expected to grow at a CAGR of 18.9% from 2018 to 2023, reaching RMB 169.8 billion (US$24.7 billion) in 2023.

The broader consumption healthcare service industry is similar to the medical aesthetic service industry in many aspects. According to Frost & Sullivan, the consumption healthcare service industry is still at early stage of development. Because of the high level of complexity and personalization that is attached to healthcare issues, consumers have experienced difficulties in gathering relevant and reliable information to make sound decisions and form

 

107


Table of Contents

healthcare habits. While consumers have concerns on service quality and lack of transparent information, medical service providers face strong and fierce competition in this highly fragmented market and are forced to spend tremendously on customer acquisition through limited and inefficient customer acquisition channels. With similar industry challenges, and similar consumer demographics and income levels between the broader consumption healthcare industry and the medical aesthetic service market, online medical aesthetic service platforms are well positioned to expand into the consumption healthcare service industry by facilitating consumers’ informed conversion process and lowering acquisition cost for medical service providers.

 

108


Table of Contents

BUSINESS

Our Mission and Vision

Our mission is to bring beauty and health to everyone. Our founders set up So-Young to transform the fast-growing yet opaque medical aesthetics market in China by providing transparent information, which ultimately allowed us to build a one-stop destination where users can conveniently find quality services.

Our vision is to become the most trusted technology company in the broader consumption healthcare service industry, and transform this market in the same way we have been doing for the medical aesthetics sector in China.

Overview

So-Young is No. 1 and the most popular online destination for discovering, evaluating and reserving medical aesthetic services in China.

 

   

audience reach: over 240 million average monthly views of our rich media content distributed through social media networks and our targeted media platforms in the fourth quarter of 2018;

 

   

user engagement: our So-Young mobile app accounted for 84.1% of total daily user time spent on online medical aesthetic service mobile apps in 2018, according to Frost & Sullivan;

 

   

transaction value facilitated: we facilitated medical aesthetic treatment transactions in the aggregate value of RMB2.1 billion (US$306.6 million) through our platform in 2018, representing 33.1% of China’s total amounts paid for medical aesthetic treatment booked online in that year, according to Frost & Sullivan; and

 

   

trustworthiness: we ranked top in terms of both brand awareness and customer stickiness in a survey of 1,000 respondents conducted in October 2018.

Our business model comprises three integrated components: (i) our original, reliable and professional content and its distribution through major social media networks and our targeted media platforms in China, (ii) our highly engaged social community characterized by signature user-generated content, and (iii) our transparent and user-friendly online reservation services for medical aesthetic treatment. With reliable and comprehensive content, as well as a multitude of social functions on our platform, users seeking medical aesthetic treatment can discover products and services, evaluate their quality, and reserve desired treatment. Because of our highly engaged user base, we believe that we are a more effective customer acquisition channel for medical aesthetic service providers, compared to other online channels. According to Frost & Sullivan, customer acquisition spending by medical aesthetic service providers on online medical aesthetic service platforms as a percentage of total customer acquisition spending on all online channels rapidly increased from 0.9% in 2014 to 7.0% in 2018, and is expected to reach 25.6% by 2023.

We leverage our popular and professional media content to reach and attract a vast audience. Our vibrant and trustworthy social community allows our users to discover the latest medical aesthetic treatment trends and helps them make purchase decisions. The personal experience shared by users who had undergone medical aesthetic treatment further builds the trust that is critical for others who wish to have similar treatment. We had a large depository of over 2 million day-by-day, case-based blogs called Beauty Diaries, as of December 31, 2018. We

 

109


Table of Contents

believe our business model, which connects a user’s innate desire to be more beautiful with a personal, emotionally-attached discovery and assessment process on our platform, is highly effective in facilitating users’ decision making and enhancing user experience. We also encourage users to rate, review and share their treatment experience on our platform. We believe the user-generated content, ratings and reviews on our platform incentivize medical aesthetic service providers to offer high-quality and diversified treatment with transparent pricing.

 

LOGO

Our Value Propositions for Users

 

   

reliability: we offer users a reliable experience through our pursuit of quality and trustworthy content offerings and our medical aesthetic service providers that are carefully selected;

 

   

transparency: we provide transparency on medical aesthetic treatment details, such as pricing, reviews and service provider credentials; and

 

   

convenience: our comprehensive media content, social community and online reservation function guide users to a seamless medical aesthetic service journey, from discovery, interaction and evaluation, to reservation, review and aftercare.

Our Value Propositions for Medical Aesthetic Service Providers

 

   

effective customer acquisition: leveraging our user base with high propensity to spend, as well as our data insight and technological strengths, we are able to match medical aesthetic service providers with targeted users cost-effectively;

 

   

differentiated branding: we empower medical aesthetic service providers, especially small and medium sized market participants, to introduce their brands and build credibility through authentic user-driven evaluations; and

 

   

operating efficiency: we provide SaaS and professional training programs for medical service providers, to help them better manage client information, increase purchase conversion rate and upgrade their service offerings.

 

110


Table of Contents

Our DNA for innovation defines who we are, brought about our earlier success, and will continue to serve as the bedrock for our future growth. Leveraging our strong brand image, extensive audience reach, trust of our users, highly engaged social community and data insights, we are well positioned to expand both along the medical aesthetic industry value chain and into the massive, fast-growing consumption healthcare service market. We have built a proven track record by launching a series of services aimed at medical aesthetic service providers, and by achieving early advantages in expanding into the dental, dermatology, ophthalmology, gynecology, and physical examination services in China.

We generate revenues through information service fees and reservation service fees primarily charged to medical aesthetic service providers. Our total revenues increased rapidly by 428.2% from RMB49.1 million in 2016 to RMB259.3 million in 2017, and further by 138.0% to RMB617.2 million (US$89.8 million) in 2018. Our net income was RMB17.2 million in 2017 and RMB55.1 million (US$8.0 million) in 2018, compared to a net loss of RMB81.0 million in 2016.

Our Competitive Strengths

We believe the following strengths have contributed to our success:

Market Leader with Powerful Business Model

We are the market leader in terms of audience reach, user engagement, transaction value facilitated, and trustworthiness, testifying to the success of our powerful business model.

 

   

audience reach: over 240 million average monthly views of our rich media content distributed through social media networks and our targeted media platforms in the fourth quarter of 2018;

 

   

user engagement: our So-Young mobile app accounted for 84.1% of total daily user time spent on online medical aesthetic service mobile apps in 2018, according to Frost & Sullivan;

 

   

transaction value facilitated: we facilitated medical aesthetic treatment transactions in the aggregate value of RMB2.1 billion (US$306.6 million) through our platform in 2018, representing 33.1% of China’s total amounts paid for medical aesthetic treatment booked online in that year, according to Frost & Sullivan; and

 

   

trustworthiness: we ranked top in terms of both brand awareness and customer stickiness in a survey of 1,000 respondents conducted in October 2018.

Our industry leading scale and fundamentally, our business model led to strong network effects across our platform, which enhances user experience, engagement and retention, and have proven to be highly scalable.

Strong network effect. We believe the three components of our business model are deeply integrated with one another, creating robust barriers to entry and enabling us to create a sustainable business model that cannot be easily replicated by competitors. In the simplest terms, users are attracted to our platform by content and services that we offer, while medical aesthetic service providers gather on our platform for the direct access to the largest online medical aesthetic user community and effective customer acquisition that it brings. As the number of our users grows, so does the number of medical aesthetic service providers on our platform. More medical aesthetic service providers will then lead to more tailored and greater variety of treatment, as well as more targeted content, which ultimately attract more users.

 

111


Table of Contents

High scalability. Leveraging our established brand image, extensive audience reach, highly engaged social community and data insights, we are well positioned to expand both vertically along the medical aesthetic industry value chain and horizontally into other sectors in the massive consumption healthcare service market. We have built a proven track record by launching a host of services aimed at medical aesthetic service providers, and by achieving early success in expanding into other consumption healthcare services in China.

Market Trailblazer and Technology Innovator

We have, as the most important part of our DNA, continued innovation aimed at pushing the boundaries of what the internet and technology can do to transform the traditional consumption healthcare service industry. We believe we have pioneered and shaped the online medical aesthetic services market in China as it exists today.

Our core innovation and contribution to the medical aesthetic service industry is building a platform that seamlessly integrates media content, social community and online reservation function. Since our inception in 2013, we have been leading the campaign to increase the level of acceptance and popularity of discovering, evaluating and reserving medical aesthetic services online. According to Frost & Sullivan:

 

   

We were the first to introduce a social community focused on medical aesthetic services, which has become the largest in China;

 

   

We introduced the Beauty Diaries, a revolutionary content format featuring day-by-day blogs written and shared by users who had undergone medical aesthetic treatment through our platform, which has become the iconic and most popular type of content in the industry; and

 

   

We were the first to launch online reservation function for medical aesthetic services in China, providing one-stop consumption experience to our users.

We embrace the latest technology developments and pursue the integration of technology into our platform. For example, we were the first in our industry in China to utilize artificial intelligence technology in analyzing facial features for evaluating virtual medical aesthetic needs and predicting treatment effects online, according to Frost & Sullivan. Based on our facial analysis technologies, our platform enables users to search for, and we are also capable of actively channeling, relevant and suitable medical aesthetic content and treatment information with a simple image input of the user’s feature. We also pioneered live video broadcasting as a content format on our platform both for users to share their aftercare experience and for service providers to enhance their brand awareness.

Most Trusted Platform with Highly Engaged Community of Users

According to a survey of 1,000 respondents conducted in October 2018, we are the most trusted online medical aesthetic service platform in China, and we ranked No. 1 in terms of both brand awareness and customer stickiness. The association of our brand value with trustworthiness translates into high repeat purchase rate on our platform.

Our highly engaged social community plays a vital role in promoting transparency in terms of the pricing and quality of medical aesthetic services by encouraging genuine user reviews and ratings, which in turn helps our users arrive at informed decisions. Our iconic Beauty Diaries invigorated our social community and allowed our users to be emotionally connected and supported, during and after treatment.

 

112


Table of Contents

As a testament to the highly engaged nature of our community, as well as the trust our users place in us, as of December 31, 2018, a total of over two million pieces of Beauty Diaries, each with author’s emotions and personal details, had been posted on our platform. In addition, our users frequently seeks advice on specific medical aesthetic treatment procedures from medical service providers on our platform through our messaging function, and the average number of daily consultation messages between users and medical service providers amounted to 160.6 thousand in 2017 and 288.4 thousand in 2018. A consultation message means each message sent between a user and a medical service provider on our platform, with each text sent counting as one distinct message.

We also attach the utmost importance to ensuring the quality of the medical services that are offered on our platform and the customer services that our users can enjoy. Transparency and fairness have been our philosophy and we have adopted carefully crafted mechanisms to allow for authentic and timely feedback. We subject each prospective medical aesthetic service provider to our strict selection process to safeguard the reliability of our platform. In addition to examining qualification documents, we conduct thorough background and publicity review, including on-site due diligence reviews, on prospective service providers. We also continue to monitor the qualification of our existing medical aesthetic service providers and the quality of their performance through our rating and review systems and other internal mechanism that we have implemented.

Reliable Professional Content Distributed through Social Media

We use reliable, highly relevant, interactive and multi-media content to attract our users and inform them of the latest medical aesthetics trends and services, and assist in their purchase decisions. We have the most comprehensive online content library in China with a focus on medical aesthetic services, according to Frost & Sullivan. We have a large pool of experienced in-house editors who incubate original ideas and present them in visually appealing formats. They also collaborate with doctors and medical aesthetic service providers throughout the content generating process. Our content is interactive and largely in the form of short-form videos, live video broadcasting, articles, and photographs, covering a full spectrum of beauty-related topics and medical aesthetics treatment categories.

We distribute our original content through our platform and major social media networks in China, giving us the broadest reach of audience and dynamic ways to attract and engage our users. In the fourth quarter of 2018, we recorded on average over 240 million monthly views of our rich media content distributed through social media networks.

Platform of Choice for Medical Aesthetic Service Providers

We provide compelling value to medical aesthetic service providers by offering targeted consumer acquisition solutions, helping them build their online presence so as to effectively connect and brand with users, and improving their operating efficiency. This makes us a platform of choice for approximately 4,000 verified medical aesthetic service providers including hospitals, out-patient departments and clinics covering over 300 cities in China as of December 31, 2018.

We not only expand the medical aesthetic service providers’ audience reach, but also match them with targeted consumers effectively, powered by our artificial intelligence prowess and big data insights. Moreover, we provide differentiated solutions such as SaaS, as well as providing professional training programs to medical aesthetic service providers based on their scale and needs.

 

113


Table of Contents

We enjoy tremendous loyalty among our medical service providers and achieved retention rates of 80% in 2017 and 87% in 2018, which are calculated as the percentage of paying service providers in the previous year who made payments in the year at issue.

Visionary Management Team with Proven Execution Capability

Our management team has extensive experience in internet, social community, healthcare and finance, and has proven execution capability. Our founder and CEO, Mr. Xing Jin, has been instrumental in setting up our innovative business model and leading So-Young to reach major milestones. Moreover, his serial entrepreneurial experiences combined with a deep understanding of and passion for the beauty and health industries provide clear leadership for and strong commitment to our mission and execution. Additionally, our management team has deep expertise across a number of sectors and disciplines, as well as extensive experience working at leading technology companies such as Alibaba, Baidu and Tencent.

Our Strategies

Going forward, we will continue to be laser-focused on enhancing the credibility, transparency and comprehensiveness of the information and services featured on our platform. We believe these unique competitive advantages are key to reinforcing our brand reputation, user loyalty and leadership position. Such established brand awareness, industry standing and platform capabilities position us well to expand into the broader consumption healthcare market.

We plan to achieve our vision, and ultimately our mission, through the following key strategies:

Drive Transparency in the Industry through Enriched Content Offering

We aim to further transform medical aesthetic industry in China towards greater transparency on service quality and pricing by focusing on enriching our universe of reliable, appealing and topical content offering. As the No. 1 player in the industry, we will lead by example and commit to delivering authentic, relevant and timely content to consumers to enable informed decisions and promote positive industry growth dynamics.

Professionalism.    We will leverage our deep understanding of medical aesthetics treatment, users and medical aesthetics service providers, as well as proprietary technology prowess and advanced algorithms, to systematically produce quality, appealing and topical original content. We will strengthen collaboration with medical professionals and star medical aesthetic influencers to deliver more interactive professional content, which in turn catalyzes higher conversion rates.

Content visualization.    We will continue to commit resources to diversify and enrich our media formats and tools, especially video-based content. We believe that our comprehensive and expanding collection of multi-media content will enhance the integrity of our content, drive consumer purchase decisions, and empower medical aesthetic service providers to introduce their services with greater precision.

 

114


Table of Contents

Proactively Deploy Artificial Intelligence and other Technological Innovations

Technological innovations and competency are essential to our platform’s competitive advantage. We will continue to implement a number of industry breakthrough technologies, including:

AI diagnosis. A key area of our research in artificial intelligence focuses on improved facial and object recognition technology powered by advanced neural network and algorithm. Cutting-edge simulation services have been integrated into and continually improved on our mobile apps to further enrich user experience and facilitate decision-making process.

Personalized content recommendation. We plan to further develop advanced artificial intelligence and big data technologies to increase the precision of our content recommendation, thereby increasing user exposure to relevant information, which catalyzes transaction reservation volume.

Smart customer service. We are developing advanced natural language processing algorithms and machine learning technologies to upgrade our automated messaging system, serving to lower the operating costs of medical aesthetic service providers on our platform, and allow more timely responses to user inquiries for greater customer satisfaction.

Strengthen Collaboration with Medical Aesthetic Service Providers through More Value-added Services

We offer and will continue to enhance our SaaS module to help our service providers reduce user maintenance cost and improve efficiency. Software products currently in our research and development pipelines include intelligent in-app messaging system and digital patient record database for online information service on our platform.

We intend to strengthen professional training courses on the proper management of sophisticated medical equipment, for medical aesthetic service providers to improve their service quality, professional knowledge and operational capabilities.

Continue to Raise Brand Awareness and Expand User Acquisition Channels

We intend to increase marketing and branding efforts to further raise the awareness of our professional and trustworthy platform. Our branding strategy will fully embrace the latest trends in social-based marketing activities, in a cost-effective manner by leveraging our word-of-mouth reputation.

We plan to establish a stronger presence on leading social media networks in China with high user traffic volume through collaborations. We also aim to expand our audience reach by establishing multiple channels of strategic marketing partnerships. Building on our profound understanding of user behaviors and preferences, we intend to launch more innovative and effective online and offline marketing events, cross-platform membership programs with other industry participants, as well as sponsorships of popular entertainment titles in China.

Expand into Other Consumption Healthcare Verticals and Tap into New User Segments

We believe a more diversified service offering will address a wider spectrum of our users’ healthcare needs, and in turn extend and expand their consumption lifecycle on our platform. We have started and will continue to prudently expand into consumption healthcare verticals

 

115


Table of Contents

with similar industry pain-points, overlapping consumer bases, or comparable decision-making processes. We plan to gain stronger foothold in the dental, dermatology, ophthalmology, obstetrics & gynecology, and physical examination services sectors.

We will offer multi-tiered service categories on our platform to better serve our increasingly diversified user base, particularly users with higher spending power and more tailored preferences.

Our Business Model

Our platform serves as a vibrant and dynamic social community and offers online reservation function that enables users to both discover reliable content and share their own medical aesthetics services experience, which incentivizes users to reserve offline treatment from medical aesthetic service providers. Thus, users are guided through the entire process of seeking and obtaining medical aesthetic treatment on our platform.

Our business model has unique value propositions for its constituents. With reliable content and various social tools on our platform, users seeking medical aesthetic treatment can discover suitable services and obtain comprehensive medical information on the desired treatment. Users can also interact among one another and with medical aesthetic practitioners directly through our social community functions. Once they decide on the type of treatment, users can conveniently reserve treatment through our online reservation function. Our reservation function facilitates reservations by providing insurance service referrals for users. In addition, after users complete their treatment offline, our online platform encourages them to share their experience through Beauty Diaries and ratings and reviews systems. This further enriches our content and drives more interaction within our social community.

Medical aesthetic service providers benefit from our business model when more users are drawn to our online platform because of our reliable content offered in rich media formats and our reputation among people seeking aesthetic improvements. The user-generated content in our social community, as well as the ratings and reviews on the services, can effectively and efficiently incentivize service providers to offer high-quality and diversified treatment with transparent pricing. Medical aesthetic service providers can further increase their exposure and boost user conversion rate by communicating with users on an individual basis through our social community functions, and through our information services. Our online reservation function, in return, provides data insights on current user landscape and market trends that allow medical aesthetic service providers to improve their business operation efficiency.

As users and medical aesthetic service providers are inexorably connected through our content, social community, and online reservation function, our business model forms an overall virtuous cycle that fuels its continued growth and expansion. In essence, users are attracted to our platform by our content and services offered on our platform, while medical aesthetic service providers are attracted to our platform by the access to the largest online medical aesthetic user community and the commercial opportunities that they bring. As the number of users grows, more medical aesthetic service providers will want to join our platform. More medical aesthetic service providers will then lead to more tailored treatment in more locations, as well as more targeted content, and ultimately attract more users.

Our Online Platform

Our online platform is realized through various products, including So-Young mobile app, So-Young Weixin mini program, and soyoung.com website, where both users and medical

 

116


Table of Contents

aesthetic service providers can access our rich media content, engaging social community, and transparent online reservation function. In addition, we developed So-Young Business College, a Weixin mini program, and an operation dashboard on soyoung.com to improve the efficiency and effectiveness of the business operations for our medical aesthetic service providers.

In 2016, 2017 and 2018, our average monthly UVs reached 2.9 million, 4.8 million and 10.3 million, and our average mobile MAUs reached 0.5 million, 1.0 million and 1.4 million, respectively.

Mobile Apps

So-Young Mobile App

Our So-Young mobile app serves as a one-stop destination where we offer users relevant medical aesthetic knowledge and experience, guide them along their journey to reach an informed medical aesthetic treatment decision in a supportive community, and allow them to effortlessly act on those decisions and make reservations for treatment from their desired medical professionals and medical aesthetic institutions. We designed the interface of our platform in mint green and light pink, signaling health and beauty respectively, and creating a soft and welcoming texture to our platform.

When users open our So-Young mobile app, they will immediately see our featured banners that display articles, short-form videos, and sales events. As users scroll down, various additional medical aesthetic categories appear, such as skin management, neurotoxin injection, blepharoplasty, rhinoplasty, etc. Users can also explore various medical aesthetic tools, including cosmetic surgery simulation powered by artificial intelligence, live video broadcasting, medical aesthetic encyclopedia, and report of new treatment overseas. We also recommend relevant content to users based on their user behavior.

Below are screenshots of our mobile app main entrance interface:

 

LOGO

 

117


Table of Contents

Beauty Research Club is where users get detailed information from Beauty Diaries written by users who have undergone medical aesthetic treatment and featured informational articles by practicing medical professionals on the platform. As users enter Beauty Research Club, a top navigation bar appears that includes content by people whom users follow, recommended content handpicked by our business operating team, and Q&A session with medical professionals.

The screenshots below illustrate the content in Beauty Research Club:

 

LOGO

Users can make reservations for treatment through our mobile app’s online reservation function. Medical aesthetic services are displayed based on the location of users and users can directly browse and search for services by categories and medical aesthetic service providers, and sort listings by popularity, price, reviews and location. Once users enter a particular services page, they will be shown other users’ reviews and diaries first. We also designed a tab displaying medical information of the particular treatment from our encyclopedia within the individual product page, so that users may obtain more objective description of the medical aesthetic treatment conveniently.

 

118


Table of Contents

Below are screenshots of the online reservation function on our app:

 

LOGO

To facilitate reservations and strengthen social interactions on our mobile app, we developed a messaging system and a user dashboard. The messaging system enables users to send private messages to other users, medical professionals and medical aesthetic institutions to retrieve more information on medical aesthetic treatment with fast turnaround time. User dashboard allows users to manage their orders and track participation and contacts in our social community.

Weixin Mini Programs

Mini Program is an innovative platform built into Weixin, facilitating discovery and consumption of services and products. It is useful for discovery and quick actions, and complements full-function native apps by increasing their downloads and traffic.

Our Mini Programs on Weixin include So-Young Beauty and So-Young Business College. So-Young Beauty features similar interfaces and functions as our mobile app. It serves as additional access points to our platform.

So-Young Business College offers a convenient online training platform for medical aesthetic practitioners, including medical professionals, managers, and medical aesthetic consultants, where they can access textual and video educational materials provided by our medical aesthetic industry experts. See “—Our Medical and Beauty Service Providers—Complementary Services—Training and Consulting Service.”

Our Soyoung.com Website

Users can access medical aesthetic community content and our services through our website soyoung.com. In 2018, soyoung.com recorded an average monthly UV of 10.3 million. As more internet users shift to mobile ends, our website mainly serves a comprehensive knowledge base targeting users who are in the process of researching for medical aesthetic options.

 

119


Table of Contents

Below are screenshots of soyoung.com website:

 

LOGO

 

LOGO

Our Users

We provide a variety of services to our users, including reliable and rich medical aesthetic knowledge base, a supportive social community filled with user-shared experience and online reviews, and an online reservation function where users can reserve treatment from medical aesthetic service providers.

We have a group of popular content creators whom we refer to as “medical aesthetic influencers.” Medical aesthetic influencers are very active in creating and sharing content on the latest medical aesthetic trends and their treatment experience. Content created by our medical aesthetic influencers helps shape purchasing decisions of other users on our platform and encourage social interactions.

We closely monitor user activities and original content generated through our platform to discover potential medical aesthetic influencers. Typically, to become influencers, users need to be experienced and knowledgeable in multiple medical aesthetic treatment, and have shared numerous detailed Beauty Diaries that truthfully depict their recovery process in our social community. After identifying users who are passionate about sharing their experiences and

 

120


Table of Contents

good at producing original and engaging medical aesthetic content, we encourage them to partner with our platform, which not only gives them access to our broad user base, but also helps them monetize their popularity.

We value our medical aesthetic influencers as they produce high-quality content and affect user behavior on our platform. We have historically provided cash and complimentary treatment in an immaterial amount as incentives to medical aesthetic influencers to encourage them to continually post popular and high quality content on our platform. Medical aesthetic influencers have their designated section in Beauty Research Club so that other users can access their content with ease.

Content

We strive to provide our users with the broad range of high-quality and engaging original content on medical aesthetics. We believe that reliable and well-crafted content provides the necessary information that users seek on our platform and enhance transparency of the medical aesthetic industry. Our content is available in a variety of rich media formats on our online platform, generated by users of all levels of experience and medical professionals, including Beauty Diaries, ratings and reviews, short-form videos and live video broadcasting.

Beauty Diaries

We introduced Beauty Diaries and transformed the traditional information flow in this industry. Users who went through medical aesthetic treatment are encouraged to share their experience in details including the medical institution, doctor, price, and other information on the treatment. The diaries typically start with before-surgery photos, followed by the entire recovery process in the form of diaries where their authors update their status by photos, videos and texts. In addition, by compiling other users’ experience and recovery progress, we offer recovery calendar for various medical aesthetic treatment so that users who are undergoing the same treatment can better prepare themselves with medical knowledge and emotional support. As of December 31, 2018, we had accumulated over 2 million Beauty Diaries.

 

121


Table of Contents

Below is a screenshot of our Beauty Diaries:

 

LOGO

Online Ratings and Reviews

Apart from Beauty Diaries that mainly focus on users’ personal stories, we have established a large and active ratings and reviews system on medical aesthetic service providers. When users reserve certain treatment and complete the treatment, they can rate the treatment in terms of physical environment, professional knowledge, service quality, and eventual result, on a scale of one to five stars. They can also post their review on the doctor or the medical aesthetic service provider in general. Empowered by our artificial intelligent technology, we further extract and aggregate key words from all user reviews to present an instant perception for users when using our online reservation function.

Live Video Broadcasting

According to Frost & Sullivan, we were the first to introduce live video broadcasting to the medical aesthetic industry. The broadcasts are hosted by either medical aesthetic influencers or medical service providers, and are interactive, immersive and fun. Our live video broadcasting function has also proven to be an effective means of introducing medical aesthetic services to our key user demographics. Typically, medical aesthetic influencers elaborate on their experience in particular treatment while medical professionals broadcast actual diagnosis and treatment planning process with real users, during which they introduce their treatment. Medical professionals also host live questions and answers session, and from time to time broadcast selected real surgeries that are appropriate to general users.

While watching these live video broadcasts, users can interact with our medical aesthetic influencers and practitioners in real time through embedded instant messaging tools, and conveniently make reservation for the mentioned treatment introduced by the hosts. Hence, live

 

122


Table of Contents

video broadcasting is effective ways for our users to make and act on their medical aesthetic procedure decisions in a relatively short time frame, and for our medical professionals to build their own reputation and branding images.

Live video broadcasting is accessible through our main entrance feed, and the screenshots below illustrate the reservation option and user interaction interface:

 

LOGO

Short-form Videos

We believe we have established a proven approach to producing popular, original, short-form videos and have continually released popular original titles and series, covering topics such as medical aesthetic tips, celebrity face analysis, skincare testing and lifestyle guides. Our experienced and large pool of in-house editors incubate original ideas and present them in aesthetically pleasing video format and collaborate closely with medical professionals and medical aesthetic service providers in the content creation process.

Featured Articles

Our in-house content team and medical aesthetic influencers bring our assessment of the latest treatment to our users through featured articles. In addition to medical aesthetic content, our articles cover a wide spectrum of user interests, ranging from fitness to shopping hauls. Our library of medical aesthetic reviews and other critiques effectively influences reservation decisions of our users and enhance the integrity and activeness of our community. Users can conveniently access these informational articles in Beauty Research Club on our So-Young mobile app.

Integration with Major Social Media Networks in China

We distribute our content through all major social network and media platforms in China, encouraging followers and readers to share and repost our content, which amplifies our brand

 

123


Table of Contents

image and enables us to reach a larger audience. Each account we manage on social media networks is designed to have its own tailored content and a distinct strong personality that targets a particular internet user demographic group. The average monthly views of all our social media content on third-party platforms was over 240 million in the fourth quarter of 2018. Our comprehensive and rich content provides us with continuous monetization opportunities. Through medical aesthetic services embedded within the content on our platform and social network networks, we provide information services to our medical aesthetic service providers to enable them to introduce their brands and services. See “—Monetization—Information Services.”

Trustworthy Social Community

Under our business model, after users discover potential suitable treatment through our rich content on medical aesthetics, we use our dynamic and supportive social community to enable our users to make decisions. We offer the following mechanisms to promote social interaction among users and between users and medical aesthetic service providers on our platform:

 

   

Share. Users can easily share their experience on particular medical aesthetic treatment on our So-Young app by posting Beauty Diaries and providing short reviews and ratings.

 

   

Follow. Users can establish relationships with other users and medical aesthetic service providers by electing to follow them. Feeds that are posted by a user or medical aesthetic service provider will automatically appear in Beauty Research Club’s “Following” tab.

 

   

Comment, Like, Favorite. Users can leave comments on all formats of content, including Beauty Diaries, videos and articles, and reviews in online reservation function, by clicking on the “Comment” button, and the author may reply to the comments. If users like the content, they can click on the Like button to express their support for the author. At the bottom of each content module, users can see how many people have commented on or liked the content. Users can also save most types of content into their favorites by clicking on the Favorite button.

 

   

Messaging. Users can send private messages among one another or to medical service providers and medical professionals in the form of text or voice recordings and can attach photos or Beauty Diaries on our platform. In 2018, the average number of daily consultation messages between users and medical service providers amounted to 288.4 thousand.

 

   

Q&A. Users can raise questions addressed to particular medical professionals or medical aesthetic service providers in general. We urge our medical service providers and medical professionals to respond quickly to the questions.

Through our warm and supportive social community, users are guided through the complete decision-making process in an efficient manner, resulting in significantly shorter time lag than typical medial aesthetic decision-making process. Moreover, filled with user experience and active doctor interaction, our platform enables our users to gain personal psychological support and professional care during the recovery process, thereby further increasing the reliability of our platform.

 

124


Table of Contents

Online Reservation

While our medical aesthetic content and community help users form their treatment decisions, our online reservation function enables users to act on these decisions in a convenient manner.

Medical aesthetic treatment are grouped into categories including neurotoxin injection, injection of dermal fillers, mesotherapy injection, skin management, laser hair removal, hair transplantation, blepharoplasty, rhinoplasty, micro-blading, breast augmentation, and body contouring. We further provide traditional relaxing spa services, including Chinese medicine physical therapies and massages, body and facial cares, manicures and pedicures, to capture the users seeking non-intrusive light treatment.

Pricing Policy

While medical aesthetic service providers are free to set their own prices on our online platform, we request that their prices on our platform be lower than on-site prices of the same medical aesthetic treatment at the particular medical institutions by contracts. We organize a number of special sales events year-round, such as China’s online shopping festival on November 11 and December 12, when our medical aesthetic service providers typically offer discounts on their treatment.

We believe that differentiation of medical aesthetic treatment promotes virtuous competition that not only produces reasonable prices and numerous options for our users, but also enhances the transparency and reliability of the medical aesthetic industry. At the same time, we also monitor the stability of prices for different categories of services to prevent destructive competition and fraud, thereby building a healthy online reservation function for the benefit of the whole industry.

Payment

When reserving services on our online platform, users only have to pay a portion of the treatment fee as deposit. The rest is settled when users visit medical aesthetic service providers offline. We provide our customers with a number of payment options through major third-party online payment platforms including Weixin Pay and Alipay, and enable our users to make payments for their reservations easily and efficiently. We are not dependent on any particular provider for online payment services.

Insurance

We designed medical aesthetic insurance products together with leading insurance companies in China, covering medical aesthetic treatment such as injections, blepharoplasty, and rhinoplasty. We believe that a well-customized insurance policy that addresses specific after-treatment medical and aesthetical situations provides additional protection for our users and enhance the reliability of our platform. While we are not a party in the insurance policy, we direct users to conveniently obtain the appropriate insurance products from insurance providers.

Customer Service and Care

We believe our emphasis on customer service and care enhances our brand image and user engagement, which in turn benefits the medical service providers on our platform. We have a

 

125


Table of Contents

dedicated team of customer service representatives in Beijing. We train our customer service representatives to answer user inquiries, proactively educate potential users about medical aesthetic services and promptly resolve user complaints. Each representative is required to complete mandatory training, conducted by experienced managers, on medical aesthetic knowledge, complaint handling and communication skills.

We have developed key policies and procedures for our customer service that maintain the health and sustainability of our platform, including platform rules, qualification standards and credit scores for medical aesthetic service providers, and a rating system. Our around-the-clock customer service team provides real-time assistance to our large customer base. If a user makes a legitimate complaint regarding the service quality of a service provider, we will deduct the credit score of such service provider. A lower credit score result