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Edited Transcript of YI.OQ earnings conference call or presentation 20-Aug-20 11:30am GMT

Q2 2020 111 Inc Earnings Call

Aug 25, 2020 (Thomson StreetEvents) -- Edited Transcript of 111 Inc earnings conference call or presentation Thursday, August 20, 2020 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Gang Yu

111, Inc. - Co-Founder & Executive Chairman

* Junling Liu

111, Inc. - Co-Founder, Chairman & CEO

* Harvey Wang

111, Inc. - Co-COO

* Monica Mu

111, Inc. - IR Director

* Luke Chen

111, Inc. - CFO

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Conference Call Participants

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* Bingyu Chen

Citigroup Inc., Research Division - Associate

* Andrew Lam

Mitsubishi

* Xipeng Feng

China International Capital Corporation Limited, Research Division - Research Analyst

* Sherry Yin

JPMorgan Chase & Co, Research Division - Research Analyst

* Rachel Yang

HSBC, Research Division - Head of China Healthcare Research

* John Hui

Rays Capital

* Raymond Cheng

SPQ Asia Capital Limited

* Marco Rodriguez

- Individual Investor

* Clare Wang

China Renaissance Securities

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, and thank you for standing by for 111, Incorporated Second Quarter 2020 Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the meeting over to your host for today's call, Ms. Monica Mu, Investor Relations Director. Please proceed, Monica.

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Monica Mu, 111, Inc. - IR Director [2]

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Thank you, operator. Hello, everyone, and thank you for joining us today for 111's Second Quarter 2020 Conference Call.

On the call today from 111 are Dr. Gang Yu, Co-Founder and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, Chief Financial Officer; Mr. Harvey Wang, Co-COO; Ms. Monica Mu, Investor Relations Director; and Mr. Alex Liu, Finance Director.

As a reminder, today's conference call is being broadcast live via webcast. In addition, a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation, are available on the company's IR website at ir. 111.com.cn.

Before we get started, let me remind you that this call may contain forward-looking statements made under the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current markets and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which could cause actual results to differ materially. For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward-looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year-over-year unless otherwise stated. Please also refer to our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.

With that, I will turn the call over to our CEO Mr. Junling Liu.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [3]

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Thank you, Monica. Good morning, and good evening, everyone. Thank you for joining our 2020 Second Quarter Earnings Call. I'd like to start with a quick note on the coronavirus pandemic. The situation in China has thankfully come under control, and the life is slowly returning to some form of normalcy. However, we cannot lose sight of the fact that many parts of the world face an ongoing unprecedented health crisis and a looming recession. We at 111, Inc., continue to stand in solidarity with the global community in the fight against the COVID-19. Our heart goes out to those who have been affected by this insidious disease. And we express our utmost admiration and gratitude for the frontline health care workers attending the sick, the scientists researching treatments and vaccines and the essential workers who have kept everyday life running through all. I'm also proud of the dedication, tenacity and resourcefulness that our employees have demonstrated throughout this challenging period as we continue to deliver for our clients and provide essential support to our consumers.

Before diving into our earnings, I would like to first touch on the important strategic development that we announced today, and that we have completed the capital injections from new investors to invest an aggregate of RMB 419.28 million, approximately USD 60.49 million into our principal subsidiary, Yao Fang Information Technology, Shanghai Co. Ltd, at a pre-money valuation of USD 1.2 billion, approximately RMB 8.33 billion.

In addition, it is our intention to pursue a listing of this principal subsidiary on the Shanghai Stock Exchange's STAR Market. You can find a recap of this announcement with details in Section 1 of the deck.

We feel that this move brings many strategic advantages because, firstly, it will bolster the company's resources to invest in and pursue opportunities for rapid expansions.

Secondly, it will enable us to pack into new segments of China's capital markets and attracting domestic investors who want to participate in the vibrant health care sector and the company's growth.

Thirdly, it will further strengthen our brand as we broaden and deepen our partnership with various stakeholders and the leading domestic pharmaceutical companies, critical to our success as omni-channel enabler.

Fourth, it will solidify 111's leading position in China's digital health care ecosystem.

And finally, it will realize the valuation that reflects the strengths and the phenomenal growth prospects of 111.

While we're excited and energized to pursue this opportunity, we're firmly committed to our listing status on NASDAQ, which will be complemented by our subsidiary listing in China. Having our ADS listed and traded on NASDAQ has allowed the company to access global capital markets and maintain a profile that will continue to help us build partnerships with world-leading pharmaceutical companies in their drug commercialization effort in China.

Now I'd like to move on to our second quarter earnings. You can find the details in Section 2. I'd like to provide an overview of the company's business and operational performance in this quarter, then hand over to our CFO, Luke, for the financial review and the guidance for the third quarter before opening the call for Q&As.

We believe we have a winning formula in our full prolonged strategy, outlined on Slide 8. This is evidenced by our tremendous growth since the IPO, summarized on Slide 9.

Moving on to the overall financial and business performance. In this quarter, we have kept up the strong momentum to deliver net revenue of RMB 1.622 billion, up 93.5% year-over-year, and gross profit doubled over the same period last year to over RMB 85 million, with non-GAAP net loss continuing to narrow from 10.1% over last year to 4.9% as a percentage of net revenue, another step closer to profitability.

Our multifaceted growth strategy is driving robust performance across all of our business segments. In our B2B segment, revenue grew by 113.7% to RMB 1.39 billion. We continue to lead with the most extensive pharmacy network in the country, covering over 50% of total drug stores in China. In the quarter, the alliance expanded to 280,000 retail pharmacies, an increase of 47% year-over-year. On the back of a wider network and a strong consumer demand, pharmacy orders saw an increase of 188.6% over the same period last year. Underpinning this growth in orders and revenue are several services and capabilities designed to better meet customers' needs and enhance their stickiness with us:

One, our unparalleled supply chain management system that helps our customers reduce inventory turnover days and enhance product sourcing and assortment; two, supply chain financing services that frees up cash flow for our customers and help them achieve greater operational efficiency; three, virtual consultations through our online hospital and e-prescription services that enable retail pharmacies to fill drug prescriptions seamlessly for patients; four, a partnership with Meituan that allows our pharmacy customers the ability to open an online store via 111's 1 Drug Express on Meituan.com. Our retail pharmacy customers benefit from an expanded consumer base, enhanced traffic, increased sales and access to Meituan's delivery capabilities. In turn, we gain more data on consumer demand and purchase behaviors, which helps us improve our machine-learning capability to better serve our pharmacy customers, and ultimately further their stickiness with us.

In our B2C segment where the lifetime value of a customer is largely driven by recurring services, such as online consultations and e-prescriptions, in this quarter, service revenue grew by 46% year-over-year to RMB 6.2 million, while product revenue showed steady growth over the last two quarters. Supported by our best in class CRM system, we served patients with chronical diseases with a refill rate exceeding 50%. The value of our services to patients continues to grow as we add breadth and depth to our offering.

The number of strategic partnerships we have formed with domestic and global pharmaceutical companies continued to grow, up 108.9% to 259 in the first half of 2020. In addition to direct sourcing, which lowers prices for end consumers, these partnerships also bring to our patients the latest innovations in pharmaceuticals. We provide omni-channel support to our strategic partners in their drug commercialization effort, with services such as brand and product promotion, patient education and customer analytics and pricing monitoring.

These services have shown early promise, as seen from the encouraging results of two of our multinational partners. Eli Lilly's diabetes drug Trulicity and Novartis' Cosentyx, both drugs are blockbusters in their respective categories. We are confident that we can help them achieve their potential in the Chinese market.

Driven by the strong demand from pharmaceutical product online retailers, revenue for our e-channel segment grew by 112.8% year-over-year to RMB 64 million, while the number of orders increased by 216% over the same period last year. As we grow this network of partners, we expect revenue for this segment to continue its upward trend. We also believe that the strength of this segment will further enhance our ability to support our strategic pharmaceutical partners in their drug commercialization effort, by providing them an additional proven digital platform for sales.

Beyond our 3 core segments, we're continuously exploring new strategic opportunities that can leverage our existing infrastructure, while deepening our core competency in digital healthcare. In particular, we believe that helping patients in ongoing diseases management, and not just one-time treatment, presents a vast opportunity, both in terms of improving health outcomes and fulfilling a tremendous unmet market need.

In a country of 1.4 billion people, we cover a billion of -- with over a 1.4 billion people, who're living in tier 3 to 6 cities with insufficient access to healthcare, we believe that our mission to digitally connect patients with drugs and healthcare services will meaningfully impact the lives of many. And we are well-positioned to do so, with our expertise in cloud-based supply chain management, AI analytics, and an omni-channel drug commercialization platform that brings together retail pharmacies, online retail platform partners, doctors and pharmaceutical companies in service of patients who otherwise can't get quality care in their localities.

Virtual medical consultations and in-home drug delivery clearly provide tremendous value for hundreds of millions of patients across the country. But the power of this model will only be fully realized when extended beyond today's focus on treatment of minor ailments to a support system for patients, particularly for ongoing management of medical conditions.

We, at 111, are committed to building the capability and offering for this comprehensive health care management model, one that allows us to take a comprehensive view of each patient. The benefits of such a model to both the patients and our company are affirmed by the recently announced merger between Teladoc Health and Livongo.

As proof of our belief in and commitment to this opportunity, we recently launched in Shanghai, the Lung Cancer Patient Care Program for holistic management of the disease. The program, spearheaded by the China Primary Health Care Foundation, offers diagnostic and treatment services and the resources for lung cancer patients, delivered via full life cycle doctor-patient interactive platform to be established and operated by 111, patients can access disease education materials, medicare guides, online consultation, follow-up consultation and the clinic visitation.

So far, the program has attracted the participation of 20 domestic and international pharmaceutical and medical equipment companies with an interest in lung cancer.

As we further strengthen our digital health care infrastructure, we bring ever greater value to our stakeholders, as shown in Slide 15.

One, for the pharmaceutical companies for whom we provide drug commercialization support, our data-driven cloud-based system allows for better targeting and profiling of patients. So that more personalized products and services can be delivered to them, resulting in faster updates of new drugs and greater commercial success. For our retail pharmacy customers, our AI-based smart sourcing system, machine learning capability and cloud-based e-prescription service translate into more effective sourcing and a better inventory management, leading to greater cost efficiency, optimal product assortment and a broader market reach.

For our marketplace merchants, our business intelligence portal provides a real-time picture of sales, delivery status and the customer feedback, all of which are critical for superior sales management and high customer satisfaction. Clearly, when our customers succeed, we succeed also, but our digital capabilities also provide a more direct benefit to our operations. Empowered by these industry-leading tools, our business development team is able to provide better service to prospects and customers alike, achieving higher conversion rates and customer loyalty.

In conclusion, our results in the first half of 2020 once again demonstrated the power of our technology-enabled and integrated model and the effectiveness of our disciplined execution. Looking forward to the rest of the year and beyond, we will continue to stay focused on executing against our 4 growth pillars to deliver long-term value to our shareholders. With our strengthened financial resources from the capital injection, we'll have greater ability to seek out and to capitalize on strategic market opportunities, further strengthening our leadership in China's digital healthcare markets, accelerating our growth and expediting our next phase of expansion.

Thank you. With that, I will pass on the mic to Luke.

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Luke Chen, 111, Inc. - CFO [4]

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Thank you, Junling. Moving to the financials. You can see the details for the second quarter 2020 in Second 3 of our presentation from Slides 18 to 20. I would like to highlight a few key business and financial metrics and I will focus on year-over-year comparisons. All numbers are in RMB, unless otherwise stated.

Let's start with our performance for the second quarter. Total net revenues for the quarter grew 93.5% to RMB 1.62 billion, which was driven by the continued strong momentum across all our business segments. Our B2B segment revenue, which includes product revenue and service revenue, grew 113.7% to RMB 1.39 billion. The strong growth in B2B segment was attributed to the increase in number of pharmacy orders, which reached 557,000, with growth rate at 188.6% year-over-year as well as the newly added pharmacies in our network.

Our B2C segment revenue also include product revenue and service revenue grew 6.4% to RMB 167 million, among which our B2C product revenue grew 5.3% to RMB 161 million for the quarter, while our B2C service revenue grew 46% for the quarter. The increase in B2C service revenue was mainly due to the increase in our digital marketing service provided to the pharmaceutical companies for the patient education and management.

Our E-Channel segment revenue grew 112.8% to RMB 54 million for the quarter, which was mainly driven by the strong demand from pharmaceutical product online retailers.

Overall, our gross profit grew by 101.3% to RMB 85 million, and the combined gross margin was 5.2%, up from 5% a year ago. Compared to the same quarter last year, gross margin in our B2B segment was 3.2%, up from 1.1%.

Our B2C segment margin was 12.1% -- 21.1%, up from 20.9%. And our e-commerce segment was 6.9%, similar to last quarter. The improvement in gross margin was directly relating to our improved business scale, our smart pricing and assortment management as well as our sourcing capability.

Total operating expenses for the quarter were up 24.2% to RMB 177 million. As a percentage of net revenue, total operating expenses for the quarter was down to 10.9% from 17.1% as we continue to improve our operating leverage and optimize our operational efficiency. Fulfillment expenses as a percentage of net revenue for the quarter was 2.7%, down from 3.3%.

Sales and marketing expenses as a percentage of net revenue for the quarter was 5%, down from 9% in the same quarter of last year. G&A expenses as a percentage of net revenue for the quarter was 2.4%, down from 3.4% in the same quarter last year. And the technology expenses accounted for 1.1% of net revenue, down from 1.5% in the same quarter last year.

As a result, non-GAAP net loss attributable to ordinary shareholders for the quarter narrowed to RMB 78 million as compared to RMB 85 million in the same quarter last year, which accounted for 4.9% of net revenue, down from 10.1%.

As to the guidance for the third quarter 2020, on Slide 22 of Section 4, the company expect total net revenue to be between RMB 2 billion and RMB 2.17 billion, representing a year-over-year growth of approximately 80.1% to 95.4%.

The above outlook is based on the current market conditions and reflects the company's current and preliminary estimates of the market and operating conditions as well as customer demand, which are subject to change.

Please refer to Slide 24 to 26 of Section 5 for our selected financial statements.

A quick note on our cash position as of June 30, 2020. We had cash and cash equivalents and restricted cash of RMB 743.5 million compared to RMB 697.7 million as of December 31, 2019.

This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We have a question coming from the line of Bingyu Chen from Citi.

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Bingyu Chen, Citigroup Inc., Research Division - Associate [2]

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I have 3 questions. First of all, we noticed that the company has established a full life cycle doctor-patient interaction platform for lung cancer patients and what's the recent development, how you value this platform and will this model be replicated to other diseases? It's just the first question.

And the next question is about, we saw that the B2B segment is developing rapidly. And what's the reason behind? And how will you maintain the growth momentum going forward?

And the last question is about the -- how you advised by the pre-money valuation of about USD 1.2 billion for the Yao Fang Technology, where your market cap of the parent company is around USD 550 million.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [3]

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Okay. Thank you, Bingyu. I think I'll take on the first question. Yes. In July, in Shanghai, we launched the Lung Cancer Patient Care Program. The Chinese name for that is called Da Yi Yun Hu. We launched the program together with China Primary Health Care Foundation. And the platform offers the diagnostic and the treatment services for cancer patients. And it has a full life cycle doctor-patient interactive platform, and the platform will be operated by 111. On this platform, patients can access disease education materials, medication guides, online consultation, follow-up consultation, clinic visitation, et cetera. Although, it is at very early stage, it is showing great potential. The feedback from the doctors who are using the platform said great things about it, and they feel pretty excited by it. And of course, the launch attracted many pharmaceutical companies. And so far, 20 domestic and international pharmaceutical companies and medical equipment companies showed very strong interest. And of course, this is our first step in building this doctor-patient interactive platform. And it will be replicated into other disease types. And we feel very excited by it. And this links back to the digital platform we're building and -- which ultimately goes back to our mission statement, which is digitally connecting patients with drugs and the healthcare services. So I'll pass on the mic to, I think, Harvey, for the second question.

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Harvey Wang, 111, Inc. - Co-COO [4]

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Yes. Second question regarding the B2B growth. I think basically, the B2B is developing pretty good. The growth is mainly coming from, I would say, from 2 parts. One is our digital marketing capability, the other is the enhancement of our supply chain. And for the digital marketing side, we can see, we are offering a total solution to pharmaceutical companies to commercialize their drugs through our digital marketing tools. For example, we enable our B2B clients with cloud-based digital services, such as cloud pharmacy services, cloud clinic and cloud inventory and cloud CRM. We also developed the Hawkeye and turbo tools to use big data and internet technology to build up a mechanism for our sales taskforce to acquire new small customers, to activate existing customers and also improve BAU and ARPU, especially in the lower tier cities, which contribute to a major part of our B2B sales volume. And on the supply chain side, we are getting more and more direct sourcing from our partnership from the -- with those pharmaceutical companies. And also, our enhancement, our continued investment on our logistics network help us to provide better services to our B2B customers.

And last but not least, as Junling just mentioned, we also provide supply chain financing services that frees up cash flow for our B2B customers and help them achieve greater operational efficiency. Thank you.

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Luke Chen, 111, Inc. - CFO [5]

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Yes just so -- this is Luke. Let me answer the question on the pre-money valuation of this $1.2 billion. We believe, currently, we are significantly undervalued with our market cap around like $500 million in the NASDAQ.

So this pre-money valuation of USD 1.2 billion is similar to when we got listed back 2 years ago in September 2018. But if you look at our business size, it's more than doubled. In fiscal-year 2018, we had -- the company had a net revenue around RMB 1.8 billion. And in 2019, we achieved net revenue of more than -- close to RMB 4 billion. In the first half, 6 months of 2020, we already achieved a net revenue of RMB 3.2 billion. So we've more than doubled the business size. And we are very happy to see that those investors fully recognize our value and have confidence in this company, and we are very excited to complete this round of financing. We hope we answered your questions.

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Operator [6]

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We have the next question coming from the line of Sherry Yin from JPMorgan.

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Sherry Yin, JPMorgan Chase & Co, Research Division - Research Analyst [7]

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Congratulations on the great results, again. This is Sherry from JPMorgan. I have 2 questions. The first question is about our STAR Market IPO plan. Could you share more about the expected IPO timeline and potential strategic plan change after the capital raising?

And my second question is about the E-Channel business segment. We saw this segment maintained very outstanding growth, both in first quarter and second quarter, and also very stable margin. Could you help us understand what's the market upside of this segment and gross margin trend compared with our B2B business in the long term.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [8]

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Yes. Thank you, Sherry, for your question. First of all, with regards to the timeline, obviously, we need to meet the Chinese regulatory requirements. And I would encourage you to refer to our press releases as we continue to disclose the progress of the process. And with regards to the strategic plan, obviously, our strategy has been very clear. With this new round of financing, obviously, we are very, very confident to continue to execute on the strategy. And we've -- the extended reach to the domestic market, that's going to put us in a better position. And the money will be well spent on innovative technologies, will be spent on our supply chain capabilities to really further generate more growth of our business. I think there's another part of the question which, I think, Harvey can take on.

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Harvey Wang, 111, Inc. - Co-COO [9]

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Yes. For the question regarding E-Channel, as you just mentioned, we are seeing a very good trend on this E-Channel business growth. The reason, I think, is that more and more pharmaceutical companies are willing to authorize us as sales channel for this E-Channel management. To elaborate this business model, the pharmaceutical company, we are -- signed strategic cooperation with them and then we deliver a well-designed service packages to these business partners, including very important inventory management as well as the price management to them, especially for the online business.

We have now expanded our customers to almost all mainstream online cloud sales platform. Through our supply chain system and our price management PIS system, we help our customers, those pharmaceutical companies, to better control their inventory turnover and also better monitor and manage the price in each online sales platform. This is -- they call this, the price management lock, as you can imagine because in the online sales platform it is very difficult to better control price. But we have tool called PIS system, we can real-time monitor the price changes and see any discrepancy. And we believe the strength of our E-Channel services will further enhance our ability to support the strategic partnership with the pharmaceutical company in their drug commercialization efforts by providing them a total solution on a new digital platform for sales. Thank you.

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Operator [10]

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The next question coming from the line of Xipeng Feng from CICC.

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Xipeng Feng, China International Capital Corporation Limited, Research Division - Research Analyst [11]

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This is Xipeng Feng from CICC. Actually, I have 2 little questions. And my first one is about the company's digital capabilities. Well, I see that the company keeps strengthen the digital capabilities in some ways, such as digital marketing and other digital health care infrastructure. So could you please share some more insights on this field. And this is my first question about the digital capabilities.

And my second question is about your subsidiary, Yao Fang. I noticed that you mentioned about Yao Fang. So could you please share some more color on this subsidiary, including its main operating business. Besides, I also wonder why you guys choose to be listing on the STAR Market instead of Hong Kong market.

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Harvey Wang, 111, Inc. - Co-COO [12]

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Okay. This is Harvey. I'll take the first one on the digital capabilities. And our digital capability, including digital marketing, there are several part of it. We enable our pharmaceutical companies, both services like cloud B2B services and digital marketing services and for our customers like those B2B pharmacies, we provide cloud-based services. For example, 1 Drug Express, as Junling just mentioned, our partnership with Meituan. And our cloud pharmacy services, cloud inventory services and also cloud clinics services and cloud CRM. For our marketplace partners, we provide them a business intelligence portal. And for the internal stakeholders, as I just mentioned in the previous question regarding B2B, we have our Hawkeye System, our Turbo System to help our sales force to commercialize those drugs from pharmaceutical companies. With all these systems, we have built up a robust mechanism on drug commercialization of both online and offline channels, which we believe we will create great value for this industry and replace the traditional drug sales process, which require a very heavy investment on manpower, a very heavy investment on marketing dollars and also heavy investment on inventory.

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Gang Yu, 111, Inc. - Co-Founder & Executive Chairman [13]

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I take the second question. Yao Fang is a wholly-owned subsidiary of 111. And why we choose the STAR Market instead of Hong Kong. First of all, we all know that the STAR Market has been very hot since its launch. It features some of the China's most prominent technology companies. So that means listing on the STAR Market will allow us to tap into new capital resources in China capital market and provide opportunities for domestic investors to participate in rapid growing health sector, especially investing in transformative and innovative company, such as us. Thirdly, Junling also mentioned that we are committed to maintaining our status in NASDAQ because we believe that it give us a global brand, it gives us very rigorous profit governance and allow us to partner with multinational pharmaceutical companies for their commercialization -- drug commercialization efforts.

Why not Hong Kong? We believe that the STAR market will provide direct access to local capital to support our China operations. And also, we saw that -- we do believe that the STAR market is the excellent source of cash to fund our growth in China.

Second, we feel that the valuation is relatively attractive, although that -- there's no guarantee, but we have seen that the trend and the past successes of other companies like us. And also, we believe that the STAR market listing will allow us to raise our profile with our business and investment community in China and the forward region. Hope that answers your question.

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Operator [14]

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We have the next question coming from the line of Andrew Lam from Mitsubishi.

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Andrew Lam, Mitsubishi [15]

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Management, just wondering whether you can hear me well?

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [16]

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Yes.

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Andrew Lam, Mitsubishi [17]

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Yes. Great. Sure. Congratulations on the great results. I just have 1 question. I wanted to understand the key driver of the increased wallet spending per pharmacy for your B2B business. To my understanding, the logic was when you have increased the number of pharmacies, in terms of the wallet spending or the average order value should be quite scalable as you just penetrated into more products or more volume growth. But is there any underlying key drivers, for example, the increase in wallet spend depends on the SKUs you have available, which, again, goes down to the number of cooperating upstream drug manufacturing partners that you have. Is that increasing and the rationale of that is this kind of like a margin side of kind of control. So yes, this is my question, if I have explained it well.

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Harvey Wang, 111, Inc. - Co-COO [18]

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Okay, Andrew, let me take the question. I think one of your assumption is valid and that is on the SKU. We are offering more and more SKUs to our B2B customers. And furthermore, we are not using traditional supply chain model. Actually, this is brand new supply chain model, we call JDP treatment model. And we have various suppliers. Those suppliers, they join this JDP program and they've join the program, each of them bringing thousands of SKUs. So this program helped us quickly expand our SKU with a very promising margin and efficient inventory turnover. So with this JDP program, we have bring in about 30,000 SKUs, which has helped provide a much better selections for our B2B customers. And furthermore, as I mentioned previously, our digital marketing capability also help us to improve the wallet share of our customers. For example, we get the -- we help the pharmaceutical company to commercialize their drugs, and our sales task force will get much better -- we can get much better price from the pharmaceutical companies through direct sourcing. So we also offer so far a good price for those B2B customers. So they don't have to buy from traditional channels probably already go through 3 or 4 layers. And furthermore, the supply chain finance -- financing services also help our B2B customers to better manage their cash flow and help them to buy more from them. I hope, I answered your question.

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Operator [19]

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Our next question comes from John Hui from Rays Capital.

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John Hui, Rays Capital [20]

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Management, this is John from Rays Capital. Congratulations. Just a small -- 2 small questions. One, I noticed that your cost of goods sold continued -- the percentage continue to trend down as well as your fulfillment expense ratio, very impressive. I wanted to sort of gauge -- and this fulfillment expense ratio continue to go lower or are we close to being almost as efficient as we possibly can?

And in terms of being able to breakeven, how does this translate towards eventual profitability for us?

And the second question, could you sort of elaborate a little further on collaboration with Eli Lilly and whether or not sort of the basic business model for me.

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Gang Yu, 111, Inc. - Co-Founder & Executive Chairman [21]

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Okay. I'll take that question, John. So first of all, we talk about fulfillment cost, why is we probably seen growth, the likely growth. We've been doing financing supply chain management. The fulfillment cost reduction comes from several main factors. One is that our scale has been doubling almost every year and the economy of scale start to transpire. All the big costs, including those of the CAPEX investments and technology investments have been diluted. So that's certainly a one factor.

Second, that we have more and more direct sourcing. Right now, we -- are -- start to direct source from [259] (corrected by company after the call) pharmaceutical companies, but certainly start to carry all middle layers. Also, we build, since last year, we built 3 new fulfillment centers. So those fulfillment centers will share the volume whereas, also gets closer to the -- our customers. That will also reduce our costs. Also, as you can see that our orders start to double -- more than double every year and that gave us more value chain to partner with the third-party logistics, give us much better price. And lastly, we and our systems, we have invested a lot of technology -- investment in technology, especially with supply chain optimization technology to optimize our investment returns, optimize our opening costs.

So (inaudible) PGI systems, we believe that we kind further use our fulfillment costs. So that's the first question.

Second question, you asked about the partnership with Eli Lilly. I think that this type of model where -- would duplicate similar partnerships with many other pharmaceutical companies. Basically, we formed a partnership on a specialized hospital, especially on diabetes. And we have all the diabetes experts or doctors registering and serve on this platform, and we can give diabetic patients consultation on platform and give you prescription, like Trulicity. We can directly send the medicine to patient's home or then pick up at the designated store.

So this type of partnership has been really truly a win-win for Eli Lilly and us. They were so excited. They give us another drug to commercialize. And we are in the process of signing many, many more similar drugs with other pharmaceutical companies. The same model where we duplicate.

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Operator [22]

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We have the next question coming from the line of Rachel Yang from HSBC.

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Rachel Yang, HSBC, Research Division - Head of China Healthcare Research [23]

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Congratulations for another very strong quarter. Actually, I have 3 questions. The first one is on the B2B business gross margin. We noticed there is a material improvement in margins. So what we have done in the past quarter to improve the margin.

And secondly is on the B2C business, we all understand B2B is actually our major strategic focus but we also noticed our B2C business started to recover and started to grow in second quarter. So what is the driver behind? And what is our strategy to develop our B2C business in the future, especially considering we also have this kind of strategic collaboration with upstream manufacturers like Lilly. So maybe elaborate a little bit more about your business strategy. And thirdly is, actually on the more general industry trends. Just curious, have you noticed any signs that the prescription just for sales outflow from hospitals has accelerated. Have you noticed this kind of trend? This is my question.

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Harvey Wang, 111, Inc. - Co-COO [24]

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Okay. I will take the first 2 about B2B margin and B2C. Regarding B2B margin, besides the business growth on B2B in the sales volume growth, we're also seeing even faster growth on B2B gross profits. And, I think, there are basically 3 reasons. One is our direct sourcing relationship with our pharmaceutical companies, which you can understand we get much better terms from those direct partnerships.

And secondly, our PIS system build up as smart pricing mechanism to improve profit while without any negative impact to our sales growth and expansion.

And number three, I think, is the supply chain innovation. I just mentioned we have a JBP project. This project has attracted a number of suppliers to join and it helped us to quickly expand our SKU, but with a very promising margin and also the efficient inventory turnover. And the JBP portion of our so-called B2B business is increasing rapidly.

And on the B2C side, we are happy to see our B2C business back -- coming back to a growth momentum. And this growth comes from our business restructured in the past year. We continue to focus on customer lifetime management and leveraging our online chronical disease management systems to improve customers' refill rate and we are seeing a significant improvement on customer on time refill rate with this chronical disease management tool, which is also part of our CRM. At the same time, we have reapplied our chronical disease management system and CRM system to B2B offline pharmacy customers to enable their transformation from pharmacy to auto health services provider. I think that will be a direction for us. I hope, I...

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [25]

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And the last question probably just that we're running out of time, I'll briefly answer, and I think, the last question with regarding the industry is very timely. I think today, we just saw -- we reports about the third VBP has been completed. And from what we digested the high end of the discount went up as far as the 94%, and they were making comments like it's going to cost you more to use the water to take the drugs than the drug itself. We absolutely anticipate that the Rx drugs will be outflowed more and more outside of the hospitals, and 111 is actually in a great position to benefit from that.

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Operator [26]

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Shall we move to the next question, sir?

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [27]

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Yes. Right. Right. Yes, go ahead.

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Operator [28]

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The next question is from the line of Raymond Cheng from SPQ Asia.

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Raymond Cheng, SPQ Asia Capital Limited [29]

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Excellent result this quarter. I have a broader question to ask regarding the current situations regarding the U.S. and Chinese attention. Whether that would be a concern to you, whether you have any contingency plan, what if it threatened the listing for U.S. securities, Chinese securities and whether you see this trouble time, are there any opportunity that would favor your company going forward?

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Gang Yu, 111, Inc. - Co-Founder & Executive Chairman [30]

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Let me answer the second question, first. First of all, our business is not impacted by the China-U. S. relationship. I do know that we mainly focus on the China market. Although that our market value since we are listed in the NASDAQ, so our market value is impacted we didn't hide it, it was our list in NASDAQ. Now almost the same as other Chinese companies. So we definitely hope that the relationship will soon be improved or restored. But at the same time, we maintain our commitment for the NASDAQ listing. We believe that it's a growth margin and the benefits both us and our investors.

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Operator [31]

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We have the next question coming from the line of Marco Rodriguez from Individual -- he's an individual investor.

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Marco Rodriguez, - Individual Investor [32]

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Yes. I have 2 questions. Number one, could you briefly discuss the company's cash position? And the second question is, what is the general outlook after the COVID-19 outbreak? And whether it's had any impact on the company, both positive, negative.

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Luke Chen, 111, Inc. - CFO [33]

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Yes. In terms of cash position, we believe we have a very strong cash position. As of June 30, we had a cash balance around RMB 750 million. And also, we just completed the new round of capital injection around RMB 420 million. And we are more pleased to see that we are generating what we call the operating positive cash flow, which means that the payment we made for the purchase and the cash received is much less than the cash we received from the sales. So we see that positive signs, and we fully believe with the expansion of our business scale we will see more positive cash inflow with this operation.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [34]

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Yes, I'll probably take the second part of the question, Marco. With regards to the outlook after, or post COVID-19 or during the COVID-19, our anticipation is that this pandemic is going to create fundamental changes. And we just want to take on the advantage of one particular phenomenon. That is we -- that the Chinese healthcare industry is going to go through a digital transformation and that is going to be the biggest trend we're betting on. Obviously, through this pandemic, people realized or some people are forced as a patient to actually go online to receive consultation, to get online refill and to get better information because they're afraid of going to hospitals. And in the past, there have been some resistance from the doctors because they're too busy receiving patients offline. Through this pandemic, all those doctors actually got a taste of using online services to care for their patients. Not to talk about the Chinese government's policy shift to encourage the online players to play a much bigger role, especially in the chronical diseases area. So I think, we're betting on those trends, and we believe that 111 is very uniquely positioned to actually take advantage of those trends.

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Operator [35]

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We have the next question. This is coming from the line of Clare Wang from China Renaissance.

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Clare Wang, China Renaissance Securities [36]

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Congratulations on great results. I have 2 questions. First one is that with e-commerce giants like Alibaba and JD.com actively developing their online B2C pharmaceutical business, what advantages do 111 have to make us stand out from the competition? The second one is that how drug procurements reform in China will affect 111, especially for the B2B platform?

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [37]

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Sorry, I didn't quite catch the second question.

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Luke Chen, 111, Inc. - CFO [38]

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Healthcare reforms.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [39]

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Healthcare reforms. Okay. So we actually never compete against Ali and JD health. Obviously, they are typically the e-commerce players. And if you look into our business, 70% of our business is actually prescription drugs. And what we do is really we provide lifetime value for chronical patients. And what we really focus on to service those patients with chronical conditions. And we want to provide a platform for those patients to receive the disease-related information, education, the online prescription and the -- also online refill. So we help the pharmaceutical companies to really manage the DOT, the duration of treatment. So -- and obviously, Ali health and the JD health have their tremendous traffic. And obviously, we don't have those traffic. We've got to play in different spaces. And our strategy is to really, to be the integrated online-offline platform. And Ali and JD don't have really 280,000 pharmacies across the country. And our focuses are rather different. And this is a very, very big market with a true -- over 2 trillion run on an annual basis. And I think 111 is very comfortable to find a space where we do best instead of competing against those giants.

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Gang Yu, 111, Inc. - Co-Founder & Executive Chairman [40]

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Let me answer the second question. You mentioned all we -- the impact of the Chinese government healthcare reform to us. I'm thinking of almost all part of this, all in favor to us because we think about the new policies, new working policy that we launched since last year for example, online drug sale, prescription drug sale and it's a lots of these drugs that we sell online. And the Medicare insurance, where we're allowed to cover online and encouragement of online consultation, online drug purchase. I think those policies and more policies like true e-com policy, the drug going out of hospital, the separation of drug and accommodation services. Those policies to are, I think, favorable to us. And its a clean structure on how and where we go into either online or offline pharmacy. We have online pharmacy. We directed partner with 280,000 offline pharmacies. So we basically cash flowing opportunities. I think that this is great timing for us. This is the reason that we didn't focused on our strategies at queue .

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Operator [41]

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Sir, we do not have any further questions at this moment. Back to you.

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Junling Liu, 111, Inc. - Co-Founder, Chairman & CEO [42]

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Thank you.

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Monica Mu, 111, Inc. - IR Director [43]

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Thank you, operator. In closing, on behalf of the entire 111 management team, we'd like to thank you for your interest and the participation in today's call. If you require any further information or have any interest in visiting us in China, please let us know. Thank you for joining us today. This concludes the call.