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Initiating Coverage: A Leader in China's Digital Health Revolution

111 operates one of China’s most innovative B2B tech-enabled healthcare platforms. Stewarded by an innovative technology leadership team with supply chain management expertise, 111 is one of China’s leading B2B tech-enabled healthcare platforms, operating in an industry where barriers to entry are quite formidable for new entrants. 111’s comprehensive pharmaceutical supply chain ecosystem. 111 has developed an evolving digitalized model with the mission to reshape the entire value chain of China’s healthcare industry through its robust technology infrastructure and strategic partnerships. 111’s expanding pharmaceutical supply chain embraces 5,000 upstream suppliers and more than 470,000 pharmacies. The platform is set up to serve as a one-stop shop for outside-of-hospital pharmacies, enabling them to source a large and expanding selection of pharmaceutical products for the ultimate benefit of their consumers. Industry’s most cost-efficient operator. 111 has enjoyed robust revenue growth, expanding at a ~40% CAGR since 2019, although the last two quarters reported a Y/Y revenue drop due to a high base line created by a pandemic resurgence-driven sales surge at the end of 2022 and early 2023. With the market having returned to normalcy, Y/Y comparisons are expected to start improving, with flattish growth in 2Q24, turning positive in subsequent quarters. Despite recent faltering revenue growth, the company achieved its first GAAP operating profit in 1Q24 due to its relentless pursuit of operating efficiency improvements. 111 has been adept at leveraging technology to emerge as the industry’s best-in-class operator, an important advantage in a low-margin business. Winds of change blow in the right direction for 111. Amid the Chinese government’s commitment to reform the country’s healthcare system, its policies targeting the drug procurement process are central to addressing the problem of high drug prices and improving access and affordability of essential healthcare. This, along with accelerated digitalization of China’s healthcare system in the post-COVID era, present 111 with further significant headroom for growth. China’s digitalized outside-of-hospital pharmaceutical distribution services market is projected to double to RMB358 billion (~$50 billion) by 2027. Bottom of the valuation pile. For all of its attributes, 111’s ADSs trade well below those of its B2B peers. On an EV/revenue basis, 111 trades at more than a 90% discount to YSB, Inc. (9885: HK), its most direct peer, which trades at a similar valuation to the much larger traditional distributor peers.