In the past week, after the central bank announced the "double cut", the Hong Kong A shares and Chinese concept stocks markets have entered an epic skyrocketing mode. Investors can't help but exclaim the classic line from Stephen Chow's movie, "I feel that they have all come back".

There has been a noticeable change in the attitude of foreign giants towards Chinese assets, with many issuing statements confirming their bullish outlook on Chinese assets. For example, Goldman Sachs' latest view suggests tactical investment in Chinese stocks, while Morgan Stanley believes that the Chinese stock market may see tactical rebound in the near term, even outperforming emerging markets.

With the support of a series of loose policy measures, global long-term funds are beginning to buy Chinese assets, and the Nasdaq China Golden Dragon Index has set a historical record of a 27.5% surge over two weeks (as of October 9). It is worth noting that the assets purchased by foreign giants mostly belong to the new productive assets, among which 111 inc (YI.US), one of the leading digital healthcare platforms in China, has attracted many investors' attention with its unique business model and sustained performance growth.

In the past two weeks, 111 inc's stock price has grown by 83% (as of October 9), far exceeding the increase in the China Golden Dragon Index. Not only has the stock price growth been remarkable, but the trading volume has also been noteworthy, with a turnover of $3.0416 million on September 30, reaching a new high since December 14, 2022, when the turnover was $3.6 million.

Even in the context of a significant decline in Chinese concept stocks over the past two trading days, where 111 inc has only experienced a slight decrease, investors still retain over 80% of their profits.

In the complex capital markets, especially against the backdrop of the surge in Chinese concept stocks, seeking and holding undervalued high-quality assets has always been the goal pursued by long-term funds and ordinary investors.

Benjamin Graham is known as the father of modern security analysis, and his theory of 'value investing' emphasizes investing in companies whose market prices are lower than their intrinsic values. The core of this concept is to look for high-quality assets that are undervalued by the market, buy them at a price lower than their true value, and then patiently hold them until the market price reflects their true intrinsic value.

In terms of asset quality, since 2024, 111 inc's revenue and profit performance has continued to show a stable growth trend. According to the company's financial report, in the second quarter of 2024, 111 inc achieved revenue of 3.424 billion yuan; Non-GAAP operating profit was 8.5 million yuan, GAAP operating profit reached 3.3 million yuan, and has achieved operating profit for two consecutive quarters.

If the company can continue to maintain stable or growing revenue, it indicates that its business is constantly expanding and its market share is increasing. Since its listing in 2018, 111 inc has shown steady revenue growth, expanding its revenue scale by 16 times in six years.

This sustained revenue growth not only demonstrates the company's outstanding ability in business expansion and market share increase, but also lays a solid foundation for the company's future development. Achieving profit for two consecutive quarters signifies that 111 inc is at a turning point.

111 inc 2024 Q1, Q2 Revenue and Non-GAAP overview

For potential investors, companies with positive Non-GAAP values may be more attractive. Because it means that after deducting non-recurring items such as asset impairment losses, amortization of intangible assets, share-based payment expenses, the company still performs well and has strong profit capabilities.

The growth of gross margin is a positive signal for any company, it means that the company's cost control and pricing strategies in selling products or providing services have been effective. In 2024 Q2, 111 Inc's gross margin reached 6.06%, marking its return to the 6% level after 18 months, and ranking fifth in historical statistics for single quarter data.

将历史的望远镜向前看，1药网自2021年以来毛利率均没有低于4%的水平，这是一个积极的信号，显示出公司具有较强的定价能力和成本控制能力。

而从毛利率反馈到净利率，其2024Q1、Q2净利率分别为-0.08%、-0.06%，同比增长85.47%、95.34%。依照此一趋势下去，1药网在下半年实现净利润为正是一个大概率事件。

1药网过去4个季度的毛利率和净利率

In addition to gross margin, the operating expense ratio is also a key indicator of company's operational efficiency. In terms of cost control, 111 inc continuously optimizes the supply chain management and reduces operating costs through technological innovation and business model innovation.

During the reporting period, 111 inc's operating expenses as a percentage of net revenue continued to decrease, dropping from 7.2% in the same period last year to 6.0% this quarter, while in 2019 this figure was 16.7%. This means that the company is able to continuously and more effectively manage its operating costs, thereby increasing net income.

Understanding a company's debt level can help investors assess its financial risks. 111 inc's debt ratio in the first quarter of 2024 was 90.45%, although relatively high, if the company can achieve business growth through effective capital operations, a reasonable level of debt will not pose a significant threat to the company's long-term development.

China's digital hospital pharmaceutical distribution service market has tremendous growth potential. According to research institutions, by 2027, this market is expected to double to 358 billion RMB (approximately 50 billion USD). In this context, as an industry pioneer, 111 inc's market share is expected to be further consolidated and expanded.

111 inc owns the world's largest virtual drugstore network consisting of over 0.47 million pharmacies, covering over 70% of pharmacies nationwide, reaching hundreds of millions of domestic consumer population, giving it a significant advantage in pharmaceutical sales channels.

In addition, 111 inc has established partnerships with over 500 well-known domestic and foreign pharmaceutical companies, ensuring the supply and quality of pharmaceutical products. 111 inc has independently developed a series of application systems such as smart product selection, smart procurement, smart pricing, and smart supply chain management, demonstrating strong technological innovation capabilities that help improve operational efficiency and enhance user experience.

From the perspective of value investment theory, companies with sustainable competitive advantages can stand out in the market, obtaining long-term excess profits. 111 inc is China's leading digital pharmaceutical and health platform, with a broad user base and market awareness. This position allows it to occupy a favorable position in the industry and provides a foundation for continuous growth.

China's digital out-of-hospital pharmaceutical distribution service market has huge growth potential. It is expected that by 2027, this market will double to 358 billion Chinese yuan (about 50 billion U.S. dollars).

Water Tower Research recently released a research report stating that given the huge growth space in the hospital outside distribution market, 111 inc's revenue is expected to exceed 20 billion yuan in 2027, the gross margin will expand to 8%, and by 2027, the proportion of operating expenses to revenue will decrease to below 5%.

According to Zhixun Finance APP, 111 inc's valuation is in a long-term, historically low area. Its American Depositary Shares (ADS) trading price is much lower than its B2B peers. Currently, 111 inc's p/s ratio is 0.51, much lower than the industry average. This indicates that the market's valuation of it is relatively conservative, suggesting a potential undervaluation.

Water Tower Research pointed out in the report that on September 12, 2018, 111 inc went public for the first time at a price of $14 per ADS, with a market cap of $1.14 billion. Its market cap briefly soared to over $2 billion in February 2021, influenced by short-term collective squeezing in the Chinese stock market at that time. However, at present, its market cap has fallen to only a small fraction of $88 million. In comparison, YSB (09885.HK) in Hong Kong has a current market cap that is 7.5 times that of 111 inc.

According to value investment theory, when the market price is below intrinsic value, it is a good time to invest. Although p/s ratio cannot fully represent a company's intrinsic value, it is an important reference indicator. A low p/s ratio provides investors with an opportunity to buy shares of companies with potential high value at a relatively low price.

Water Tower Research believes that from the perspective of enterprise value-to-revenue multiple (EV/revenue), 111 inc's valuation is attractive. Dongxing Securities' report points out that 111 inc is an undervalued pharmaceutical health leader, with differentiated competition expected to win in the future. It is expected that 111 inc's valuation can increase by 3-4 times.

Summarizing the above analysis, according to Benjamin Graham's value investment theory, 111 inc may currently be an attractive investment target, showing potential for being undervalued in multiple dimensions. Its low p/s ratio, robust cash flow, huge industry growth space, stable market position, and continuous technological innovation all provide strong support for its future development.

Especially in the past three years, Chinese concept stocks have lost more than seventy percent of their value due to previous shorting activities, resulting in a long-term lack of liquidity and keeping the valuations of many high-quality individual stocks at a low level for an extended period. With the current monetary policy driving incremental capital influx and the fiscal policy under consideration, it is expected that more policies, including tax incentives, will be introduced to promote the development of the real economy, indicating a long bull market ahead. As a leader in the digital healthcare industry, 111 Inc, considering its technological innovation capabilities in the digital healthcare sector and continuously improving profitability, coupled with the resonance of high-quality fundamentals, undervaluation, share repurchases, stock-based incentives, and the overall market and securities services sector, is poised to embrace an investment opportunity for valuation reshaping.