Seeking Alpha • Jul 27
111, Inc.'s Inexorable Drive Towards Profitability
111, Inc. kept growing despite strong headwinds from pandemic lockdowns, which will continue to plague Q2 but not enough to lower FY22 outlook.
111, Inc. has plenty of growth avenues, particularly in high-margin services, which are growing at 70% from a very small base.
Despite the higher cost related to Covid, the company showed impressive gross margin expansion and operational leverage, bringing it in sight of breakeven.
The shares are still very cheap.
111 Inc. (YI) is a Chinese sophisticated online drug platform with the main business coming from its B2B platform serving as a one-stop shop for pharmacies, clinics, and hospitals to source pharmaceuticals, adding services like inventory management and analytics tools generating efficiencies across the supply chain.
It has a small B2C segment that is competing with the big boys like Alibaba Health, Baidu Health, WeDoctor from Tencent Holdings Ltd. (TCEHY), and JD Health Inc.
The shares have been obliterated like so many other Chinese ADRs and small growth stocks, but the company is making continued progress and the shares have become almost ridiculously cheap. Compare the share price:
FinViz
With company growth:
Data by YCharts
This is why we added shares at $2.17 and $2.25 recently for our subscribers. While revenue growth has slowed down as the company gets bigger (and growth slowed down further to 15% in Q1 as there were strong headwinds from Covid), the company has made large strides in operational improvement and predicts to reach non-GAAP operational breakeven later this year.
We'll describe a few elements that are responsible for the company's growth and competitive advantage.
Technology
YI earnings deck
The company has the backing of Chinese authorities, which in that environment is pretty important. The company is betting on the digitization of healthcare, which is a national priority, and it seems pretty well placed to take advantage of that.
YI earnings deck
It's technology and ecosystem are important sources of competitive advantage (Q1CC):
We have built an industry leading smart supply chain platform that is uniquely tailored to optimize our S2B2C business model and in our rivaled national sales network providing comprehensive coverage and a sophisticated multi-channel digital platform that serves numerous unmet needs in this massive market. This has made us an attractive commercialization partner as evidenced by our growing number of partnerships with pharmaceutical companies.
These pharma partnerships now exceed 550, and this works both ways as it also enables the company to lower sourcing cost, further cementing its advantage and increasing gross margins.
Ecosystem
111 Inc has created an ecosystem with over 100K different types of drugs selling on its platform and offering a host of additional services for 550+ globally renowned and domestic pharma companies, 400K pharmacies, hospitals, wholesalers, distributors, insurance companies, doctors and patients, keeping them connected through proprietary analytics systems.
This ecosystem is difficult to reproduce for competitors and creates stickiness to the platform that keeps customers returning.
And they keep expanding the pharma companies which they use to direct source medicines and the company offers marketing, distribution, and analytics services to the pharma companies. At the end of 2019, they had 188 pharma partners, growing to 330 at the end of 2020 and 550 at the end of Q1/22.
They have become an effective commercialization partner for pharma, distributors, and pharmacies. Given the scale of parties they reach, there are potential network effects operative here.
Services
YI earnings deck
The services part is still fairly small (RMB29M in Q1), but growing at 70% and boosting margins. Here are some of the services the company deliver (Q1CC):
On the services revenue and services margin part, our digital platform provides a comprehensive solution for pharmaceutical companies by integrating doctors, pharmacists, medical assistance, patients and medical representatives onto our Internet hospital. The service module also provides online remote consultation and provide e-prescription, patient-to-patient and also patient support, and refill services. And these features enable us to provide customized omni-channel digital marketing solutions for our pharmaceutical partners.
They also have services like market vendor services (for vendors), a commercial online marketplace model where licensed third-party distributors and resellers can offer inventory.
They offer online medication consultation services and e-prescription services (for patients and consumers), supply chain services, digital marketing, patient education and drug commercialization tools (for pharma companies), etc.
New deals are closed regularly, like this one with Beilin Pharmaceutical showing that it's not just for pharma companies. The marketing services for pharma companies (as well as distributors and pharmacies) remind us of OptimizeRx (OPRX) and the market opportunity in China is pretty big.
Given their position with pharmacies serving a whopping 400K, and also hospitals and doctors, they must be a pretty interesting partner for pharma companies distributors and pharmacies.
Then there is their virtual franchise model for over 10K small and medium-sized pharmacies called One Health (Q1CC):
All the participating pharmacies can use our platform to better manage their product selection, procurement, and inventory management, as well as accessing our distribution tools through our digital SaaS services, including smart sourcing, digital marketing, O2O, and CRM. This CRM initiative has assisted over 10,000 pharmacies in delivering improved medical services and personalized marketing to over 6.5 million consumers... In this year, we expect more and more pharmacies to join our One Health program.
Finances
Net revenues were RMB2.98 billion (US$470.5 million), representing an increase of 14.9% from RMB2.59 billion in the same quarter of last year.
In RMB, from the 8-K:
2021
2022
YoY
B2B Net Revenue
Product 2,440,504 2,851,396 16.8%
Service 12,025 18,360 52.7%
Sub-Total 2,452,529 2,869,756 17.0%
Cost of Products Sold(4) 2,364,354 2,701,643 14.3%
Segment Profit 88,175 168,113 90.7%
Segment Profit % 3.6% 5.9%
The B2C segment is very small and declining, although services are rapidly increasing:
2021 2022 YoY
B2C Net Revenue
Product 137,150 102,131 -25.5%
Service 5,063 10,704 111.4%
Sub-Total 142,213 112,835 -20.7%
Cost of Products Sold(4) 114,618 88,413 -22.9%
Segment Profit 27,595 24,422 -11.5%
Segment Profit % 19.4% 21.6%
Gross Segment Profit 115,770 192,535 66.3%
(4) For segment reporting purposes, purchase rebates are allocated to the B2B segment and B2C segments primarily based on the amount of cost of products sold for each segment. Cost of products sold does not include other direct costs related to cost of product sales such as shipping and handling expense, payroll and benefits of logistic staff, logistic centers rental expenses and depreciation expenses, which are recorded in the fulfillment expenses. Cost of service revenue is recorded in the operating expense.
It remains to be seen whether the B2C segment can revive growth, Q1 likely suffered considerably from the pandemic and Q2 will still see those headwinds. Some more data:
Service revenue +70% to RMB29M
Non-GAAP loss 2.4% down from 5.2% Q1/21
Goal non-GAAP operating breakeven in 2022
As a percentage of revenues, total operating expenses were down to 9.9% from 11.1%; total operating expenses for the quarter were up 2% to RMB295 million
S&M down to 3.9% from 4.7%
G&A down to 1.6% from 2%
Technology expenses down to 1.3% from 1.9%
Fulfillment expenses 3.2% up from 2.6% in Q1/21 on investment in fulfillment centers and pandemic cost
Non-GAAP loss from operations RMB72.4M down from RMB135.9M or 2.4% of rev down from 5.2% Q1/21
Non-GAAP loss RMB80.6M down from RMB109.3M or 2.7% of revenue down from 4.2% in Q1/21. Two reasons: gross margins increase from 4.5% to 6.5% and increased operational efficiency.
Covid headwinds
YI earnings deck
The majority of its staff is in Shanghai and many couldn't leave their house
Many orders are stuck in transit, significantly increasing fulfillment cost
The company was unable to replenish inventories
They set up a relief program for patients and pharmacies
From the Q1CC:
pharmacies in many cities have suspended the sale of full type of drugs i.e. antibiotics, anti-toxic drugs, anti-viral drugs, and antibiotics. In the face of these challenges, 111 quickly set up a pandemic relief program with a virtual command center providing instructions on a constant basis... Many pharmacies and medical institutions struggled with supply chain issues over the past few months and we have stepped in and filled this supply gap.
