For a company with annual revenue of about 2 billion USD and profitability, is it reasonable for the Market Cap to be only 67.68 million USD? This is a question raised by the well-known research institution, Water Tower Research, regarding the valuation of 111 Inc (YI.US).

According to Zhitong Finance, 111 Inc (YI.US) has released its Q3 2024 performance report. Despite facing challenges from a weak Consumer market and pressure on downstream pharmacies, 111 Inc's performance in the third quarter remained robust. The report shows that 111 Inc achieved revenue of 3.6 billion RMB in this quarter, with a gross margin of 0.21 billion RMB, a year-on-year growth of 10.5%; Non-GAAP operating profit reached 7.1 million RMB, maintaining operational profitability for three consecutive quarters, and positive operating cash flow for three consecutive quarters.

Recently, Liu Junling, co-founder, Chairman, and CEO of 111 Inc, emphasized in a fireside chat with Water Tower Research that the company aims to maintain profitability and positive cash flow. In a challenging market environment, 111 Inc is expanding its fulfillment centers through strategic expansion of its Logistics network, particularly through joint ventures and franchise models that require lighter assets. This innovative business model not only increases the total Trade volume and gross margin of the company but also enables it to scale up more quickly and efficiently.

It is worth noting that despite the current severe macro environment, Liu Junling believes that this actually provides support for the development of 111 Inc's business model. He pointed out that China is addressing some structural issues, which will help purify the Industry and drive enterprises in the supply chain ecosystem to rely on clearer, more transparent, and efficient business models to survive. This is precisely the area 111 Inc hopes to participate in, so in the long run, the current short-term unfavorable factors will transform into long-term development advantages for the company.

Liu Junling pointed out that many industries in China will face unprecedented challenges, "but the aging population is beginning to promote the development of the pharmaceutical industry. Because China's population structure is changing, aging will lead to increased medical spending. China's medical expenditure accounts for about 7% of GDP, while the USA is about 20%. I have seen different data, ranging between approximately 17% to 20%. There is still significant room for growth in this regard in China."

During the reporting period, 111 Inc further strengthened its core competitiveness in digitalization. Leveraging its core technological advantages, 111 Inc has seen a continuous decrease in expense costs related to operational management, supply chain management, and significant improvements in operational efficiency. In the third quarter, the company's operating expenses as a percentage of net revenue decreased from 7.4% in the same period last year to 5.8% this quarter.

In the fireside chat, Liu Junling emphasized the advantages of 111 Inc in digital Operation, stating, "We have a 100% fully digital Operation system, which allows us to become an industry benchmark in terms of operational efficiency. We must leverage our digital capabilities to assist upstream and downstream partners, enabling them to benefit and enhance efficiency. We will strive to ensure the most abundant selection and the most competitive prices, ensuring customer satisfaction with our after-sales service."

In addition, 111 Inc opened four new fulfillment centers nationwide in the third quarter and plans to add at least five more next year. This expansion plan will further consolidate 111 Inc's leading position in the digital sector of the pharmaceutical supply chain and lay a solid foundation for future growth. By integrating joint venture fulfillment center and franchised fulfillment center models, 111 Inc can start fulfillment centers faster with less capital expenditure, significantly shortening preparation time and improving operational efficiency.

Regarding the target for the proportion of operating expenses to revenue, Liu Junling stated that to reduce the ratio of operating expenses to revenue below 5%, the company only needs to continuously expand its business scale through greater order density. He believes that once the company's annual revenue reaches 20 billion yuan, the company should be able to achieve this goal.

However, despite the many achievements of 111 Inc, its stock price performance is disconnected from its operational and financial performance. The stock price does not seem to reflect the actual value of a company with annual revenue of approximately 2 billion USD that is expected to achieve its first full-year operational profit and positive operating cash flow this year.

In the face of market undervaluation, Liu Junling stated, "Since the establishment of the company, we have come a long way, spending hundreds of millions of yuan to build infrastructure and incorporating over 70% of China's independent retail pharmacies onto our platform. In the long term, macro policies are Bullish for us, and the demographic structure is increasingly favorable for our development. Of course, we also face some challenges, but we finally turned around and became profitable this year. I believe it is only a matter of time before everyone realizes that this is a very valuable enterprise, and we hope that the company's value can be truly reflected in the market."

Tower Research commented that 111 Inc's net Cash is equivalent to $0.66 per ADS, with revenue around 2 billion USD, but stock price performance is disconnected from revenue and financial performance. Compared to mid-sized companies thriving in China's pharmaceutical supply chain, 111 Inc's Market Cap/Revenue multiple is also much lower than its peers. However, with the industry's transformation and 111 Inc's ongoing efforts, it is believed that its market value will be truly realized.