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 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 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 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 warming recession. We at 111 Inc. continuing 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 the gratitude for the frontline healthcare workers tending the sick, the scientists researching treatments and the vaccines and the essential workers who have kept everyday life running through all. I'm also proud of the dedication, tenacity and the resourcefulness that our employees have demonstrated throughout this challenging period, as to continue to deliver for our clients and to provide essential support to our consumers. Before diving into our earnings, I'd like to first touch on 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, that will bolster the company's resources to invest in and pursue…

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 matrix 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 B2B segment was attributed to the increase in number of pharmacy orders, which reached 557,000 with gross 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 the 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% of total 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 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 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 on 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…

Certainly. [Operator Instructions] We have a question coming from the line of 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 in development, how you value this platform and will this model be replicated to other diseases, different depression. 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 that relative momentum going forward? And the last question is about the -- how you applied as 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 the US$515 million. Thanks.

Okay. Thank you, Bingyu. I think I'll take on the first question. Yes. In July in Shanghai we have launched the lung cancer patient care program. The Chinese name for that is called [foreign language]. We launched the program together with China -- China Primary Healthcare Foundation, and the platform offers the diagnostic and the treatment services for cancer patients. And 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 and 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 the 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 mike to Harvey for the second question.

Yeah. Second question regarding the B2B growth, I think basically the B2B developing pretty good. The growth is mainly coming from -- I would say from the tool path. 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 drug through our digital marketing tools. For example, enable our B2B clients with cloud-based digital services, such as cloud pharmacy services, cloud clinics and cloud imagery and cloud CIM. We also develop the Hawkeye and Turbo tools to use fixed data and internet technology to do that mechanical for our sales task force to acquire new, more customers, to activate existing customers, and also improve BAU [ph] 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 -- with both the pharmaceutical company and also our enhancement -- our continue investment on our logistics network help 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 freed up cash flow for our B2B customers then help them achieve greater operational efficiency. Thank you.

Yeah. Just -- look, let me answer the question on the pre-marked -- pre-money valuation of US$1.2 billion, we believe currently we are significant under valued with our market cap around like 500 million in NASDAQ. So, this pre-money valuation of US$1.2 billion is similar to when we got listed back to two years ago in September of 2018. But if you look at our business size is more than doubled in fiscal year 2018. We had -- the company has net revenue around RMB1.8 billion. And in 2019, we achieved net revenue more than close to RMB4 billion. In the first half, six months of 2020, we already achieved net revenue of RMB3.2 billion. So, we were more than doubled the business size. And we are very happy to see that those investors are fully recognized our value and have confidence in this company. And 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 result 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 maintained a very outstanding growth, both in the first quarter and second quarter and also very stable margin. Could you help us understand what's the market outside of this segment -- gross margin trend compare 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. We've -- this new round of financing, obviously we are very, very competent to continue to execute on the strategy. And we found 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, Harvey can take on.

Yeah. The question regarding e-channel, you just mentioned, we have seen a very good trend on this e-channel business growth. The reason I think is that more and more pharmaceutical companies are leading to authorize us as a sales channel for its e-channel management to elaborate this business model the pharmaceutical companies. We are science -- strategic collaboration with that. And then we deliver a well-designed service packages to these business partners, including very important inventory management, as well as the price management with that, especially for the online business. We have now extended our customers to almost all mainstream online drug sales platforms. Through our supply chain and our price management PIS system, we help our customer, also pharmaceutical company to better control their inventory turnover, and also better monitor and manage the price in each online sales platform visits -- the price management a lot, as you can imagine, because in the online sales platform, it is very difficult to better control price, but we have a tool called PIS system. We can real-time monitor the price changes and to see any discrepancy. And we believe the strength of our e-channel services will further enhance our ability to support the strategic partnership with a pharmaceutical company and their job commercialization efforts by providing them a telco 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. Actually I have two little questions. And my first one is about the company's digital capabilities. Well, I see that the company keeps strength in the digital capabilities in some ways, such as, digital marketing and other digital healthcare infrastructure. So, could you please share some more insight 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 these subsidiaries, including its main operating business? Besides I also wonder why you guys choose to be listing 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 including digital marketing -- and there are several part of it. We enable pharmaceutical companies, most services like cloud TTP services and digital marketing services, and so our customers like those B2B pharmacists. We provide cloud based services. For example, 1 Drug Express that Junling just mentioned, our partnership with Meituan and our cloud pharmacists services, cloud imaginary services and other cloud clinics services and cloud CIM. For our marketplace partners, we provide them business intelligence portal. And for the internal stakeholders, as I just mentioned in previous question regarding B2B, we have our Hawkeye system, our Turbo system to help on our salesforce to commercialize those drugs from pharmaceutical companies. With all its distance, we have put 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 processes, which require very heavy investment on manpower, a very heavy investment or marketing dollars, and also having investment on inventory.

The second question, Yao Fang is 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 tough since its launch. It features some of China's most technology companies. So, that means 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 innovative companies such as us. Certainly, we also mentioned that we're committed to maintaining our service in NASDAQ because we believe that it do have a global brand, it give us very rigorous corporate governance that 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 operation. And also we saw that -- we would believe that the STAR Market is excellent source of cash to fund out our communities in China. Second, we feel that valuation is relatively attractive, although there's no guarantee. But we have seen that the change 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 foreign region. Hope that answers your question.

Okay. That helps a lot, and very clear.

Thank you.

The next question coming from the line of Andrew Lamb from Mitsubishi [ph]. Please go ahead.

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

Yeah.

Yeah. Great. Sure. So, yes, thanks for taking my question and congratulation on the great results. I just have one question. I wanted to understand the key driver of the increase wallet spending for pharmacies for your B2B business. To my understanding the logic is when you have increased the number of pharmacies, in terms of the wallet spending or the average orders vary, should be quite scalable as you just are penetrating into more products or more volume growth. 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 rational of that is, is this kind of like a margin -- margin side of kind of control. So, yeah, this is my question. I have explained it well.

Okay. Andrew, let me take the question. I think one of your assumption is valid and that is, the SKU, we are offering more and more SKU to our B2B customers. And furthermore, we are not using the traditional supply chain model. Actually, this is a brand new so-called supply chain model. We call it, JVP2 bottom [ph] model, and we have various supplier. Those suppliers, they join the JVP program and they join the program -- each of them bringing thousands of SKUs. So, these programs help us to quickly expand our SKU with very promising modeling and efficient inventory turnover. So, with this JVP program, we have brining about 30,000 SKUs which is help provide a much business support 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 so-called -- we help pharmaceutical company to commercialize their drugs and our sales task force will get a much better -- we can get a much better price from the pharmaceutical companies through direct sourcing. So, we also so-called a good price follows B2B customers. And so, they don't have to buy from traditional channels probably already goes through three or four layers. And furthermore, supply chain finance -- financing services also help our B2B customers to better manage their cash flow and help them to buy more from us. I hope answer 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 [indiscernible].

Hi, management. This is John from Rice Capital [ph]. Congratulations. Just a small -- two small questions. One, I noticed that your -- I noticed that your cost of goods sold continued to -- the percentage continue to trend down as well as your fulfillment expense ratio, very impressive. Wanted to sort of a gauge -- and this fulfillment expense ratio continue to go lower, or are we close to -- 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 the 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. Thanks. Thanks very much.

Okay. So let me first talk about the cost. So, first of all, talk about fulfillment cost [technical difficulty]. Why it’s improved? We have been doing pricing management. The fulfillment cost reduction comes from several -- many factors. One is that our scale has been doubled almost every year and the economy of scale [indiscernible] investment -- technology investment have been doubled it. So, that's certainly one factor. Second factor, we have more and more sourcing. Right now, we are direct sourcing from pharmaceutical company, that certainly start to get rid of all middle layers. Also we build -- this last year we built a three [indiscernible] will share volume, will hope to get closer to our customers. That'll 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 volume shift through -- third-party logistics gave us a much better price. And lastly is we -- our systems, we have invested a lot of technology -- investment in technology, especially e-channel optimization technology to optimize our image returns, optimize our operating cost. So, the BGI systems, we believe that it will further reduce our operating cost. So, that's the first question. Second question, you asked about partnership with Eli Lilly, I think this type of model would duplicates senior partnerships with many other pharmaceutical companies. Basically we form a partnership specialized hospital, especially diabetes. And we are oldest diabetes experts or offers, registering to serve on this platform and we can give diabetes patients consultation on platform and the prescription like Trulicity. We have directly sent the medicines to patient's home or then pick up at the designated store. So this kind of partnership has been really truly [indiscernible] for Eli Lilly and us. We are both excited. They give us another job to commercialize. We are in the process of signing many, many more similar jobs with other pharmaceutical companies, so this model will be duplicated.

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 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 we have done in the past quarter to improve the margin? And secondly is on the B2C business. So, we all understand the B2B is actually a major strategic focus, but we also know that the 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 B2C business in the future, especially considering we all -- we also have this kind of strategic collaborations with upstream manufacturer, like Lilly. So, maybe elaborate a little bit more about your business strategy. And thirdly, actually on the more general industry term. Just curious have you -- have you noticed any signs that the prescription jobs for sales outflow from hospitals has accelerated, have you noticed that this kind of trend? This is my question. Thank you.

Okay. I take the first two about B2B margin and B2C. Regarding B2B margin, besides, the business growth on B2B, sales volume growth, we also seeing even faster growth on B2B gross profit. And I think there are basically three reasons. One is our direct sourcing relationship with our pharmaceutical companies, which you can understand you get much better return from those direct partnership. And secondary, our PIS systems build up as smart pricing mechanism to improve profits while without any negative impact to our sales growth and expansion. And number three, I think, it's supply chain innovation. I just mentioned, we have a JVP 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 margins and also efficient inventory turnover. And the JVP portion of our so-called B2B business is increasing revenue. And on the B2C side, we are happy to see our B2C business back -- coming back to growth momentum. And this growth comes from our business restructure in the past year. We continue to focus on customer lifetime management leveraging our online chronic disease management system to improve customer refill rate. And we are seeing a significant improvement on the customer on-time refill rates with this chronic disease management tool which is also part of our CIM. At the same time, we have reapply our chronic disease management system and CIM system to B2B offline pharmacy customers to enable the access clinicians for the pharmacy to also help healthcare services provider. I think that will be a direction for us. Hope …

Probably just that we're running out of time of briefly answering nothing. The last question was regarding in the industry, it's very timely. I think today we just saw report that the third VPP [ph] has been completed and from what we digested the high end of the discount [indiscernible] 94% and as 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 outflow the more and more assets to the hospitals, and more money that’s a great position to benefit from that. Thank you.

Okay. Thank you.

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

Right. Right. Yes. Go ahead.

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

Hi. My question -- okay. Excellent result this quarter. I have a border question. So, ask regarding the current situations, regarding the U.S. and Chinese attention, whether that would be concern to you? Whether you have any contingency plans? What is threatened delisting for U.S. securities, Chinese securities. And whether you see this trouble time any opportunity that would favor your company going forward. Thank you.

[Technical difficulty] first of all, our business is not impacted by the accounting U.S. relationship. As you know that we mainly focused on the China market, although, that our market value since our listing the NASDAQ. So our market value has been impacted due to our listing NASDAQ. Also like other U.S. listed Chinese companies. So, we definitely hope that the relationship going to be improved or [indiscernible], but at the same time we maintain our community for listed we believe that it's a global market and it benefits both us and our investors.

Okay. Thank you very much.

Thank you.

We have the next question -- thank you. We have the next question coming from the line of Marco Rodriguez [ph] from individual -- he is individual investor. Please go ahead, sir.

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? And whether it had any impact on the company, both positive, negative? Thanks.

Yeah. In terms of cash position, we believe we have very strong cash position. As of June 30, we have cash balance around RMB715 million. And also we just completed the new round of capital ingestion around RMB420 million. And we are more pleased to see that we are generating what we call the operating positive cash flow which means the payment we made it for the purchase and the cash received, it's much less than the cash 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 gain from -- with this operation.

Yeah. I'd probably take the second part of the question, Marco. With regards to the outlook after or post to COVID-19 or during the COVID-19, our anticipation is not this pandemic is going to create fundamental changes. And we just want to take on the advantage of one and particular phenomenon that is we bet that the Chinese healthcare industry, it's going to go through a digital transformation and that is going to be the biggest trend we're betting on. And obviously, through this pandemic people realized, or some people are forced as a patient to actually go online to receive consultation, to get to online refill and get better information because they are afraid of going to the hospitals. And in the past, there have been some resistance from the doctors because they're too busy receiving patients offline through this pandemic and 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 chronic 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 that trends. Thank you.

Thanks. Good luck to you going forward.

Thank you.

Thank you, sir. We have the next question. This is coming from the line of Gail Wong from [indiscernible]. Please go ahead.

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

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

Healthcare reform.

Healthcare reform? Okay. So, we actually never compete against Ali and JD -- 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 also online refill. So, we help the pharmaceutical companies to really manage the DOT, the duration of treatment. So -- and obviously Ali Health and 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 focus is rather different. And this is a very, very big market with 2 trillion run on annual basis. And I think 111 is very comfortable to find that -- a space where we do best instead of competing against those giants.

Gail, let me answer the second question. You mentioned the impact of China's government healthcare reform to us, I think almost all pharmacies are in favor to us. Thinking about the new pharmacies, numerous pharmacies that were launched since last year online job sales, prescription job, lot of we sell online and Medicare insurance we have been allowed to cover online. And the encouragement of online accommodation, online job per case is I think, those pharmacies -- and more pharmacies like [indiscernible] the jobs floating out of the optimal -- the preparation of drug and then accommodation. Those pharmacies, all I think favorable to us and [indiscernible] either online or offline pharmacies. We have online pharmacies. We reconcile with 280,000 offline pharmacies. So, we really take all the opportunities, I think that -- this is great timing for us. I know that this is the reason that we shifted focus on our strategy activity [ph].

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.