111, Inc. Q2 FY2020 Earnings Call

Hello, ladies and gentlemen and thank you for standing by for 111 Incorporated Second Quarter 2020 Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Monica Mu, Investor Relations Director. Please proceed, Monica.

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. Haihui 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. Before we get started, let me remind you that this call may contain forward-looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market 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 statement 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.

Thank you, Monica. Good morning and good evening everyone. Thank you for joining our 2020 second quarter earnings call. I would like to start with a quick note on the coronavirus pandemic. The situation in China has thankfully come under control and 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 COVID-19. Our hearts go out to those who have been affected by this insidious disease, and we express our utmost admiration and gratitude for the frontline healthcare workers tending 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'd like to first touch on an important strategic development that we announced today, and that we have completed the capital injections from new investors to invest an aggregate of RMB419.8 million, approximately US$60.49 million, into our principal subsidiary, Yao Fang Information Technology (Shanghai) Co., Ltd. at a pre-money valuation of US$1.2 billion, approximately RMB8.33 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 our recap of this announcement with details in Section One 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 expansion. Secondly, it will enable us to tap into new segments of China's capital markets and attract domestic investors who want to participate in the vibrant healthcare sector and the company's growth. Thirdly, it will further strengthen our brand as we broaden and deepen our partnerships with various stakeholders and the leading domestic pharmaceutical companies critical to our success as an omni-channel enabler. Fourth, it will solidify 111's leading position in China's digital healthcare ecosystem. And finally, it will realize a valuation that reflects the strengths and the phenomenal growth prospects of 111. While we are 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 to maintain a profile that will continue to help us build partnerships with world-leading pharmaceutical companies in their drug commercialization efforts in China. Now, I'd like to move onto our second quarter earnings, and you can find the details in Section Two. 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 guidance for the third quarter before opening the call for Q&A. We believe we have a winning formula in our four-pronged strategy outlined on slide eight. This is evidenced by our tremendous growth since the IPO summarized on slide nine. Moving onto the overall financial and business performance. In this quarter, we've kept up this strong momentum to deliver net revenue of RMB1.622 billion, up 93.5% year-over-year, and gross profit doubled over the same period last year to over RMB85 million, with non-GAAP net loss continuing to narrow from 10.1% of 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 RMB1.39 billion. We're continuing to lead with the most extensive pharmacy network in the country, covering over 50% of the 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 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 helps our customers reduce inventory turnover days and enhance product sourcing and assortment. Two, supply chain financing services free 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 a retail pharmacist to fill a drug prescription 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 customer 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 enhance 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, service revenue grew by 46% year-over-year to RMB6.2 million, while product revenues showed steady growth over the last two quarters, supported by our best-in-class CRM system. We serve patients with chronic diseases with a refill rate exceeding 60%. The value of our services to patients continues to grow as we add breadth and depth to our offerings. The number of strategic partnerships we have formed with domestic and global pharmaceutical companies continues to grow, up 180.9% 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 efforts, with services such as brand and product promotion, patient education, customer analytics, and pricing monitoring. These services have shown 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 RMB64 million. While the number of orders increased by 216% over the same period last year. As we grow this network of partners, we expect revenues 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 efforts by providing them an additional proven digital platform for sales. Beyond our three core segments, we are 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 disease management and not just one-time treatment presents a vast opportunity both in terms of improving health outcomes and fulfilling tremendous unmet market needs. In a country of 1.4 billion people, we cover a billing of those 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 and retail platform partners, doctors, and the 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 the treatment of minor ailments to a support system for patients, particularly for ongoing management of medical conditions. We at 111 have committed to building the capability and offering for this comprehensive healthcare 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 Ali Health and Longo. 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 resources for lung cancer patients. Delivered via a full life-cycle doctor-patient interactive platform to be established and operated by 111, patients can access disease education materials, medication guides, online consultation, follow-up consultation, and 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 healthcare infrastructure, we bring ever-greater value to our stakeholders. 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 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 customer feedback, which are critical for superior sales management and higher customer satisfaction. Clearly, when our customers succeed, we succeed. 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 again demonstrated the power of our technology-enabled integrated model and the effect of disciplined execution. Looking forward to the rest of the year and beyond, we're continuing to stay focused on executing against our four growth pillars to deliver long-term value to our shareholders. With our strengthened financial resources from the capital injection, we will have a greater ability to seek out and 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'll pass on the mic to Luke.

Thank you, Junling. Moving to the financials. You can see the details for the second quarter of 2020 in section three of our presentation from slides 18 to 20. I would like to highlight a few key business and financial metrics and our 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 RMB1.62 billion, which was driven by the continued strong momentum across all business segments. Our B2B segment revenue, which includes product revenue and service revenue, grew 113.7% to RMB1.39 billion. The strong growth in the B2B segment was attributed to the increase in the 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, which also includes product revenue and service revenue, grew 6.4% to RMB167 million, among which our B2C product revenue grew 5.3% to RMB161 million for the quarter while our B2C service revenue grew 46% year-over-year. The increase in B2C service revenue was mainly due to the increase in our digital marketing services provided to the pharmaceutical companies for patient education and management. Our E-Channel segment revenue grew 112.8% to RMB54 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 RMB85 million and the combined gross margin was 5.2%, up from 5% a year ago. Compared to the same quarter last year, the gross margin in our B2B segment was 3.2%, up from 1%. Our B2C segment margin was 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 related to our improved business scale, smart pricing and assortment management, as well as our sourcing capability. Total operating expenses for the quarter were up 24.2% to RMB177 million. As a percentage of net revenue, total operating expenses for the quarter were 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 were 2.7%, down from 3.3%. Sales and marketing expenses as a percentage of net revenue for the quarter were 5%, down from 9% in the same quarter of last year. G&A expenses as a percentage of net revenue for the quarter were 2.4%, down from 3.4% in the same quarter of last year. Technology expenses accounted for 1.1% of net revenue, down from 1.5% in the same quarter last year. As a result, the non-GAAP net loss attributable to ordinary shareholders for the quarter narrowed to RMB78 million as compared to RMB85 million in the same quarter last year, which accounted for 4.9% of net revenue, down from 10.1%. As for the guidance for the third quarter 2020 on slide 22 of section four, the company expects total net revenue to be between RMB2 billion and RMB2.17 billion, representing a year-over-year growth of approximately 80.1% to 95.4%. The above outlook is based on current market conditions and reflects the company's current and preliminary estimates of market and operating conditions, as well as customer demand, which are subject to change. Please refer to slide 24 and 26 of section five for our selected financial statements. A quick note on our cash provision: as of June 30, 2020, we had cash and cash equivalents and restricted cash of RMB743.5 million compared to RMB697.7 million as of December 31, 2019. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q&A session.

We have a question from Bingyu Chen from Citi. Please go ahead.

Hello. Good morning. Good evening. And thanks for taking my question. I have three questions. First of all, we noticed that the company has established a full lifecycle doctor-patient interaction platform for lung cancer patients. And what's the read on development? How do you value this platform, and will this model be replicated to other diseases? 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 that relative momentum going forward? And the last question is about how you applied a pre-money valuation of about US$1.2 billion for the Yao Fang Technology, while your market cap of the parent company is around US$515 million? Thanks.

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 'Yiliao Xiezuo'. We launched the program together with the China Primary Healthcare Foundation, and the platform offers the diagnostic and treatment services for cancer patients. It has a full lifecycle 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, etc. Although it is at a very early stage, it is showing great potential. The feedback from the doctors who are using the platform has been positive. They feel excited about it. And of course, the launch attracted many pharmaceutical companies, and so far 20 domestic and international pharmaceutical companies and medical equipment companies have shown strong interest. This is our first step in building this doctor-patient interactive platform, and it will be replicated across other disease types. We feel very excited about it. This links back to the digital platform we're building, which ultimately goes back to our mission statement, which is to digitally connect patients with drugs and healthcare services. So, I'll pass the mic to Harvey for the second question.

Yeah. Second question regarding the B2B growth. I think basically the B2B is developing pretty well. The growth is mainly coming from, I would say, two paths. One is our digital marketing capability. The other is the enhancement of our supply chain. On 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 clinics, and cloud imagery and cloud CIM. We also developed the Hawkeye and Turbo tools using fixed data and internet technology to assist our sales task force in acquiring new customers, activating existing customers, and also improving business as usual and average revenue per user, especially in the lower-tier cities, which contribute a major part of our B2B sales volume. On the supply chain side, we are getting more and more direct sourcing from our partnerships with both the pharmaceutical company and our continuing investment in our logistics network, which helps us to provide better services to our B2B customers. Last but not least, as Junling just mentioned, we also provide supply chain financing services that free up cash flow for our B2B customers, thus helping them achieve greater operational efficiency. Thank you.

Just to answer the question regarding the pre-money valuation of US$1.2 billion: we believe currently we are significantly undervalued with our market cap around US$500 million in NASDAQ. This pre-money valuation of US$1.2 billion is similar to when we got listed back two years ago in September of 2018. But if you look at our business size, it has more than doubled fiscal year 2018. We had net revenue around RMB1.8 billion, and in 2019 we achieved net revenue close to RMB4 billion. In the first half of 2020, we already achieved net revenue of RMB3.2 billion. So, we have more than doubled the business size. We are very happy to see that these investors fully recognize our value and have confidence in this company. We are very excited to complete this model of financing. Hope we answered your questions.

Yeah. Thank you so much. Thank you, Junling, Luke, and Alex. Thank you so much.

Thank you.

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

Hi. Thank you for taking my question, and congratulations on the great results again. This is Sherry from JPMorgan. I have two questions. The first question is about our STAR Market IPO plan. Could you share more about expected IPO timelines and potential strategic plan change after the capital raising? And my second question is about the E-Channel business segment. We saw this segment maintain outstanding growth, both in the first quarter and second quarter and also very stable margin. Could you help us understand the market outside of this segment and the gross margin trend compared with our B2B business in the long term? Thank you.

Yeah. Thank you, Sherry, for your question. First of all, with regard 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. This new round of financing, obviously we are very, very competent to continue executing on the strategy. We found extended reach into the domestic market, which is going to put us in a better position, and the money will be well spent on innovative technologies and our supply chain capabilities to really generate more growth for our business. I think there's another part of the question that Harvey can take on.

Yeah. The question regarding the E-Channel: you just mentioned that we have seen a very good trend in this E-Channel business growth. I think the reason is that more and more pharmaceutical companies are leading to authorize us as a sales channel for its E-Channel management to elaborate on this business model for the pharmaceutical companies. We are forming strategic collaboration with them, and then we deliver well-designed service packages to these business partners, including very important inventory management as well as price management, especially for the online business. We have now extended our customers to almost all mainstream online drug sales platforms. Through our supply chain and pricing management system, we help our customers, also pharmaceutical companies, to better control their inventory turnover and also manage the pricing on each online sales platform. We believe the strength of our E-Channel services will further enhance our ability to support strategic partnerships with pharmaceutical companies in their drug commercialization efforts by providing them a tailored solution on a new digital platform for them. Thank you.

That's very clear. Thank you.

We have the next question coming from the line of Xipeng Feng from CICC. Please go ahead.

Hi. This is Xipeng Feng from CICC and thank you for taking my question. I have two little questions. My first one is about the company's digital capabilities. I see that the company keeps strengthening digital capabilities in some ways, such as digital marketing and other digital healthcare infrastructure. Could you please share some more insight on this field? My second question is about your subsidiary Yao Fang. I noticed that you mentioned Yao Fang. 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 listed under STAR Market instead of Hong Kong market. Thanks.

Okay. This is Harvey. I'll take the first one on the digital capabilities. Our digital capability includes digital marketing, and there are several parts of it. We enable pharmaceutical companies to provide services like cloud OTC services and digital marketing services for our customers like those B2B pharmacists. We provide cloud-based services like 1 Drug Express that Junling just mentioned, our partnership with Meituan, along with our cloud pharmacy services, cloud clinics services, and cloud CIM. For our marketplace partners, we provide them with the business intelligence portal. For the internal stakeholders, as I mentioned in previous questions regarding B2B, we have our Hawkeye system and our Turbo system to assist our sales force in commercializing those drugs from pharmaceutical companies. With all these systems, we have set up a robust mechanism for drug commercialization across both online and offline channels, which we believe will create great value for this industry and replace the traditional drug sales processes, which require a heavy investment in manpower and marketing dollars, as well as inventory.

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 favorable since its launch, featuring some of China's most technology companies. That means the STAR Market will allow us to tap into new capital resources in the Chinese capital market and provide opportunities for domestic investors to participate in the rapidly growing health sector, especially in transformative innovative companies like us. Certainly, we also mentioned that we are committed to maintaining our service in NASDAQ because we believe that it provides us with a global brand and rigorous corporate governance that allows us to partner with multinational pharmaceutical companies for their drug commercialization efforts. Why not Hong Kong? We believe that the STAR Market will provide direct access to local capital to support our Chinese operations. We see that the STAR Market is an excellent source of cash to fund our opportunities in China. Secondly, we feel that the valuation is relatively attractive, although there's no guarantee. But we have seen the changes and past successes of other companies like us. We believe that the STAR Market listing will allow us to raise our profile within the business and investment community in China and beyond. Hope that answers your question.

Okay. That helps a lot and is very clear.

Thank you.

The next question is from the line of Andrew Lamb from Mitsubishi. Please go ahead.

Hi, management. Just wondering if you can hear me well.

Yeah.

Yeah, great. Sure. So, yes, thanks for taking my question, and congratulations on the great results. I just have one question. I wanted to understand the key driver of the increased wallet spending for pharmacies for your B2B business. To my understanding, the logic is when you have increased the number of pharmacies, the wallet spending or the average orders should be scalable as you are penetrating more products or more volume growth. Is there any underlying key drivers? For example, does the increase in wallet spend depend 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 for that? Is this kind of like a margin control mechanism? So, yeah, this is my question. I hope I have explained it well.

Okay. Andrew, let me take the question. I think one of your assumptions is valid: the SKU. We are offering more and more SKUs to our B2B customers. Furthermore, we are not using the traditional supply chain model. Actually, this is a brand-new supply chain model, which we call the JVP2 bottom model. We have various suppliers who join the JVP program, and each of them brings thousands of SKUs. These programs help us to quickly expand our SKUs with very promising models and efficient inventory turnover. With this JVP program, we have brought about 30,000 SKUs, which helps provide much business support to our B2B customers. Furthermore, as I mentioned previously, our digital marketing capability also helps us to improve the wallet share of our customers. For example, we assist pharmaceutical companies in commercializing their drugs, and our sales task force can obtain much better pricing from pharmaceutical companies through direct sourcing. Thus, we provide better pricing to our B2B customers, who do not have to buy from traditional channels that already go through three or four layers. Furthermore, supply chain financing services also help our B2B customers manage their cash flow better, enabling them to buy more from us. I hope that answers your question.

Yes. Yes. Yes. That is great. Yeah. No. I have no more questions. Thank you very much.

Okay. Thank you, Andrew. Next, operator.

Next question is from John.

Hi, management. This is John from Rice Capital. Congratulations. I have two small questions. First, I noticed that your cost of goods sold percentage continues to trend down, as does your fulfillment expense ratio, which is very impressive. I wanted to know if this fulfillment expense ratio will keep decreasing or if we are nearing our maximum efficiency. Additionally, how does this relate to our break-even point and eventual profitability? My second question is whether you could provide more details on your collaboration with Eli Lilly and if this represents our basic business model. Thanks.

Okay. So let me first talk about the cost. First of all, let's talk about fulfillment costs. The fulfillment cost reduction comes from several factors. One is that our scale has been doubling almost every year, and the economies of scale have been dramatically improved due to technology investments doubling. That's certainly one factor. The second factor is that we have more and more direct sourcing. Right now, we are sourcing directly from pharmaceutical companies, which helps eliminate the middle layers. Also, we built this last year with a three-party model that will allow us to get closer to our customers. That will also reduce our costs. Also, as you can see, our orders have started to double — more than double each year, giving us better volume shifts through third-party logistics. Lastly, our systems: we have invested a lot in technology, especially e-channel optimization technology, to optimize our image returns and reduce our operating costs. So we believe that this will further reduce our operating costs. As for the second question, regarding our partnership with Eli Lilly, this type of model would duplicate partnerships with many other pharmaceutical companies. Basically, we form partnerships with specialized hospitals, especially in diabetes. We have the oldest diabetes experts serving this platform, and we can provide diabetes patients consultations on this platform and prescriptions like Trulicity. We have directly sent the medicines to patients' homes or had them picked up at designated stores. This kind of partnership has been truly beneficial for both Eli Lilly and us, and we are both excited about this. We are in the process of signing many more similar partnerships with other pharmaceutical companies, so we believe this model will be replicated.

Thank you.

Thank you. We have the next question coming from the line of Rachel Yang from HSBC. Please go ahead.

Okay. Thank you for taking my question, and congratulations on a very strong quarter. Actually, I have three questions. The first one is on B2B business gross margin. We noticed there is a material improvement in margin. So, what have we done in the past quarter to improve the margin? Secondly, on the B2C business: we all understand that B2B is a major strategic focus, but we also know that the B2C business started to recover and grow in the second quarter. So, what is the driver behind this and what is our strategy to develop the B2C business in the future, especially considering we also have these strategic collaborations with upstream manufacturers like Lilly? Thirdly, actually, on a more general industry level: just curious if you have noticed any signs that the prescription drugs situation for sales outflow from hospitals has accelerated. Have you noticed this kind of trend? This is my question. Thank you.

Okay. I'll take the first two questions about B2B margin and B2C. Regarding B2B margin, besides the business growth on B2B, sales volume growth, we are seeing even faster growth on B2B gross profit. I think there are basically three reasons for this. One is our direct sourcing relationships with pharmaceutical companies, which yield much better returns from those direct partnerships. Secondly, our pricing system helps us to improve profits without any negative impact on our sales growth and expansion. And number three, I think, is supply chain innovation. As I mentioned, we have a JVP project. This project attracted a number of suppliers to join. It has helped us rapidly expand our SKU offerings while maintaining promising margins and efficient inventory turnover. The JVP portion of our so-called B2B business is increasing revenue. As for B2C, we are happy to see our B2C business return to growth momentum. This growth comes from our business restructuring in the past year, continuing to focus on customer lifetime management and leveraging our online chronic disease management system to improve customer refill rates. We are seeing significant improvement in the customer on-time refill rates with this chronic disease management tool, which is also part of our CRM. At the same time, we have reapplied our chronic disease management system and CRM system to B2B offline pharmacy customers to enable them to access clinical services from pharmacies. I think that will be a direction for us moving forward. Hope ...

We're probably out of time. Briefly addressing the last question: very timely. Today we just saw reports that the third national drug procurement has been completed, and from what we've digested, the high end of the discount was 94%, with comments suggesting that it will cost more to use water to take the drugs than the drugs themselves. We absolutely anticipate that prescription drugs will increasingly flow out of hospitals, and this represents a great opportunity for us. Thank you.

Okay. Thank you.

Thank you. Shall we move to the next question, sir?

Yes. Go ahead.

The next question is from the line of Raymond Chang from SPQ Asia. Please go ahead.

Hi. My question ... okay, excellent results this quarter. I have a broader question. Regarding the current situations, regarding U.S. and Chinese relations, would this be a concern for you? Do you have any contingency plans regarding threatened delisting for U.S. securities and Chinese securities? And do you see this troubling time as any opportunity that would favor your company going forward? Thank you.

First of all, our business is not impacted by the U.S.-China relationship. As you know, we mainly focus on the Chinese market, although our market value has been impacted since our listing on NASDAQ like other U.S. listed Chinese companies. So, we definitely hope that the relationship will improve, but we maintain our community for listing because we believe that it is a global market, benefiting both us and our investors.

Okay. Thank you very much.

Thank you.

We have the next question coming from the line of Marco Rodriguez from individual investors. Please go ahead.

Hello. Yes. I have two 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? Did it have any impact on the company, both positive and negative? Thanks.

Yeah. In terms of cash position, we believe we have a very strong cash position. As of June 30, we have a cash balance around RMB715 million. We just completed a new round of capital injection of around RMB420 million. We are pleased to see that we are generating what we call operating positive cash flow, which means the cash paid for purchases is much less than the cash received from sales. So, we see positive signs and fully believe that with the expansion of our business scale, we will see more positive cash flow from our operations.

I'd like to take the second part of the question, Marco. With regards to the outlook after or post-COVID-19, our anticipation is that this pandemic is going to create fundamental changes. We're betting on the Chinese healthcare industry undergoing a digital transformation, which is going to be the biggest trend we are targeting. Through this pandemic, people have realized or, in some cases, were forced to use online services. General reluctance to go to hospitals has increased. In the past, there was resistance from doctors because they were too busy handling patients in person, but during this pandemic, doctors experienced the benefits of using online services. Additionally, the Chinese government's policy shift encourages online players to take on a larger role in chronic disease management. We believe that 111 is uniquely positioned to take advantage of these trends.

Thanks. Good luck to you going forward.

Thank you.

Thank you, sir. We have the next question.

Thank you for accepting my questions. Congratulations on your great results. I have two questions. First one is with e-commerce giants like Alibaba and JD.com actively developing their online B2C pharmacy business. What advantages do 111 have to stand out from the competition? The second one is how will drug procurement reform in China affect 111, especially for the B2B platform? Thank you.

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

Healthcare reform?

Okay. So we actually never compete against Alibaba and JD. Obviously, they are typically e-commerce players. If you look into our business, 70% of our business is actually prescription drugs, and we provide lifetime value for chronic patients. We help pharmaceutical companies to manage drug duration and support patients with chronic conditions. We aim to provide a platform for these patients to access disease-related information, education, online prescriptions, and refills. We assist pharmaceutical companies in managing the duration of treatments. While Alibaba and JD have tremendous traffic, our focus is different. This is a very large market with a volume of 2 trillion RMB annually, and we believe 111 can comfortably find our niche without directly competing against those giants.

Regarding the second question, you mentioned the impact of China's government healthcare reform on us: I think the reforms are favorable to us, as many new pharmacies have been launched since last year through initiatives that allow online drug sales. This encouragement for online platforms and procurement will ultimately favor us, and we will take all these opportunities as we shift our strategy.

Thank you. That’s very helpful.

Okay. Operator.

We do not have any further questions at this moment. Back to you.

Thank you, operator. In closing, on behalf of the entire 111 management team, we would like to thank you for your interest and 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.