111 Inc (YI) 2019 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 111, Inc.

Third Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded.

And I would like to have the conference over to your first speaker for today, Mr. Rene Vanguestaine.

Thank you.

Please go ahead, sir.

Thank you, operator.

Hello, everyone, and thank you for joining us today for 111's Third Quarter 2019 Earnings Conference Call.

The company's results were released earlier today and are available on the company's IR website at ir.

111.com.cn as well as on PR Newswire services.

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. Harvey Wang, Co-COO; Mr. Barry Zhu, Co-COO; Ms. Monica Mu, Investor Relations; and Mr. [Alex Liu], Finance Director.

Junling will give an overview of the company's performance and operations, followed by Luke, who will discuss financials and guidance.

They will be available to answer your questions during the Q&A session that follows.

I have to 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.

It is now my pleasure to introduce Mr. Junling Liu.

Junling, please go ahead.

Thank you, Rene, and thanks to everyone for joining us on our third quarter 2019 earnings call.

The company's earnings results as well as the supplementary slide presentation were released earlier today and are available on the company's website at www.ir.

111.com.cn.

My comments will correspond to the slides.

If you have not already done so, I would encourage you to download the slides.

Looking at Slides 5 and 6. We're very pleased to announce another quarter of solid financial and operational results.

Our net revenue increased 123.2% year-over-year to RMB 1.1 billion, consistently exceeding the high end of our guidance for the fourth consecutive quarter.

This overall growth rate of net revenue hit a record high since our IPO last September, showing a solid acceleration in our growth trend.

Gross profit was RMB 47 million, also a new high for us, up 204.3% year-over-year.

For our year-to-date performance, net revenue increased 112% year-over-year to RMB 2.6 billion, which is already 46% higher than the 2018 full year's result.

Our overall revenue growth was mainly attributable to the robust performance of our B2B segment.

Let's dive in more about our B2B segment in Slides 7 and 8. Customer stickiness increased during the quarter.

We processed 280,000 orders, up 45.1% from last quarter, and our B2B revenue has been growing at approximately 40% for the last 3 consecutive quarters.

In the third quarter alone, it was up 229.5% year-over-year and 39.9% quarter-over-quarter to RMB 909 million.

Also, both the strong same-store sales and newly added pharmacies sales contributed to B2B revenue growth.

Customers of our existing pharmacies placed orders more frequently and contributed an increase of RMB 160 million in revenue, up 25% as compared with Q2.

And as shown on Slide 8, during the quarter, we added another 20,000 pharmacies into our virtual pharmacy network, which drove RMB 99 million in sales or an increase of 15% quarter-over-quarter.

We currently serve 210,000-plus pharmacies, which puts us on track to reach our goal of serving 230,000 pharmacies by the end of 2019.

Moving to our B2C business.

As shown on Slide 9, revenue in Q3 decreased by 11% to RMB 194 million from RMB 218 million, but gross margin grew 125% to RMB 30 million from RMB 14 million in the same quarter of last year.

And B2C revenues YTD decreased by 8.8%, and our YTD gross margin increased 500 bps to 15.2% from 10.2%.

We have made a significant transition from driving growth with low prices to focusing on customer value.

We stopped serving some of the money-losing customers and shifted our resources to patients' refill rate and duration of treatment.

Moving forward, we will continue to invest in our capabilities in chronical patients' life cycle wellness management and improve the experience of service modules of patient education, drug adherence management and online refill.

Our mission is to build an integrated online and off-line platform, and those critical capabilities are not only used to serve customers directly but also extend it to our pharmacies to help them to better manage their consumers.

Now let's move to our strategy execution.

As we continue to deploy our T2B2C strategy, we made strong progress during the quarter.

Let me highlight some key facts, as shown on Slide 11.

By the end of September, we're now directly sourcing products from 150 domestic and international pharmaceutical companies compared to 80 a year ago.

We have grown our virtual pharmacy network from 130,000 Q3 of last year to more than 210,000 this quarter.

We established a new fulfillment center last quarter to further strengthen our Smart Supply Chain.

We now have a modern logistic network with 5 fulfillment centers strategically located in Southern China, Eastern China, Northern China, Central China and Western China.

On August 23, we signed a strategic partnership agreement with TK.

CN, the online arm of Taikang Insurance Group, the Fortune 500 company.

Both parties will expand their businesses in the online consultation, e-prescription, e-commerce and delivery service, medication cost control, health care insurance and jointly develop a PBM model to address the challenges of access to health care services and overly high drug prices in China.

This is a key milestone for 111 following its strategic partnership with Manulife, Sinochem and MSH China in the Internet pharmaceutical plus insurance space.

In order to better articulate the execution of our T2B2C strategy, let me go through some of our current products and projects.

On Slide 12, we leverage big data and machine learning to enable pharmacies.

Under the traditional model, pharmacies need to place orders by phone, which wastes a lot of time in identifying the specifications and prices of drugs for hundreds of SKUs, all the more difficult as pharmacies are under time pressure to place a high quantity of orders to reach preferential amounts in order to reduce costs.

It becomes even more labor-intensive when the pharmacies manually input the purchase into their ERP system for inventory management.

Our Smart Sourcing System provides an integrated solution to address those pain points.

Our system generates a purchase list to automatically match specific drugs when pharmacies upload a purchase order.

1 Drug Mall accepts small orders or even orders for just one single product, and our Smart Supply Chain can provide just-in-time service to pharmacies.

After aggregating all the market data, our system offers smart recommendations through machine learning.

With our system, pharmacies only need 15 minutes to complete their purchase process versus several hours in the past and can also better manage their inventories.

Secondly, pharmacies have the flexibility to adjust their purchase amounts to reduce inventory and enjoy better prices.

They can also obtain insights on the market through 1 Drug Mall's platform, which can improve their sales revenue and profitability.

In the right part of the slide, we compare those pharmacies with Smart Sourcing System versus those without.

Average purchase amount went up 233%.

Average purchase breadth went up 178%, and average order frequency went up 107%.

The result is a win-win for our pharmacy clients and 111.

To Slide 13.

On the supply side, we help pharmaceutical manufacturers expand their market coverage.

By leveraging our field sales force, phone sales and app, we're able to effectively reach all provinces and regions across the country.

For example, there was a pharmaceutical manufacturer that asked us to promote one of its new drugs.

Within 1 month, we sold the drug to approximately 5,000 pharmacies across 269 cities and advertised it to over 50,000 end users.

To better manage our sales force by leveraging data collected from multiple touch points, we have developed a tool which is called Hawkeye.

Moving to Slide 14, Hawkeye captures every behavior when pharmacy customers surf in 111 website and also real-time monitors the supply chain update.

For example, if the replenishment of 1 SKU finished, Hawkeye will immediately generate a task for sales forces to reach any customers who researched -- who searched this SKU before.

This tool enables our sales team to identify the purchase intention of pharmacies more intuitively and make more effective recommendations.

As a result, our field sales coverage efficiency improved by 3x.

And we're not forgetting the seaside users, as shown on Slide 15.

As previously mentioned, in the past, we were more focused on making drugs available at very low prices and left our customers alone.

This year, we started the transformation of this business.

A state-of-the-art CRM tool is provided to our seaside users.

Let's take diabetic patients as an example.

When they submit an online diagnosis and then place an order, our online doctor will keep in touch with them to provide postdiagnosis management services, including additional information on symptoms, medication consultation, outreach for feedback on a regular basis and real-time drug and nutrition recommendations.

Under such care, the refill rate of diabetics improved to 65% from 39%.

Now to Slide 16.

Let's discuss some recent health care reform updates.

There are 3 important points that I want to bring to your attention in this quarter: China adopts the revised drug administration law, which allows drug sales online; social medical insurance coverage extended to online health care service; 4+7 Centralized Urban Pharmaceutical Procurement program.

In September 2019, the 4+7 program was further expanded to cover another 25 provinces, lowering generic drug prices up to 96%.

Those policies present great growth opportunities for China's pharmaceutical retail industry, both online and off-line, where we are competitively positioned.

Now that we have walked through what happened this quarter, I would like to move to where we are headed next in Slide 17.

In 3 years, we are aiming to serve 400,000-plus pharmacies, clinics and hospitals.

In 3 years, we will be prepared to provide online consultation, diagnosis, drug prescription and chronic disease management services for over 100 million patients directly and indirectly.

In 3 years, we plan to directly serve 1,000-plus mainstream pharmaceutical companies and assist them to reach more patients across the country.

With that, I will hand the call to Luke to walk through our financial results this quarter.

Luke?

Thank you, Junling.

Moving to the financials.

You can see the details for the third quarter in Section 3 of our presentation on Slides 19 to 21.

I would like to highlight a few key business and financial metrics and I will focus on year-over-year comparisons.

All numbers are in RMB, unless otherwise stated.

Let's start with our top line performance.

In Q3, our total net revenue grew 123.2% to CNY 1.1 billion, which was mainly contributed by our B2B segment growth.

Product revenues from our B2B segment were up 229.5% to CNY 909.5 million this quarter from CNY 276 million in the same quarter last year.

In the first 9 months, our total net revenue grew 112% to CNY 2.6 billion, which has already exceeded our 2018 full year revenue of CNY 1.8 billion by 45.8%.

In the first 9 months, product revenue from our B2B segment were up 240.7% to CNY 2 billion from CNY 593 million in the same period last year.

In Q3, product revenue from our B2C segment decreased by 11% to CNY 194 million from CNY 218 million in the same quarter last year.

Turning to Slide 20.

Gross margin in our B2C segment for the quarter was 15.6%, up from 6.2% in the same quarter last year.

Gross margin in our B2B segment was 1.1% compared with negative 0.5% in the same quarter last year.

The improvement in both our B2B and B2C segments was primarily due to an improving cost structure and a pricing strategy.

Overall gross profit for the quarter increased by 204.3% to CNY 47.3 million, and gross margin was 4.3% compared with 3.1% in the same quarter last year.

Please turn to Slide 21 for a detailed breakdown of operating expenses.

Total operating expenses for the quarter were up 13.7% to CNY 165.4 million.

As a percentage of net revenue, total operating expenses for the quarter were 14.9%, down from 29.1% in the same quarter last year.

In the first 9 months, total operating expenses were up 28.3% to CNY 448 million.

As a percentage of net revenue, total operating expenses was 17.2%, down from 28.4% in the same period last year.

Fulfillment expenses for the quarter increased by 52.8% (sic) [52.7%] to CNY 31.6 million primarily as a result of the rapid growth in our B2B business.

Fulfillment expenses as a percentage of net revenue was 2.8%, down from 4.2% in the same quarter last year.

Selling and marketing expenses for the quarter increased by 12.7% to CNY 87.1 million mainly due to an increase in the number of sales staff and expenses associated with the expansion of our B2B business.

Sales and marketing expenses as a percentage of net revenue was 7.8%, down from 15.5% in the same quarter last year.

G&A expenses for the quarter increased by 20.9% to CNY 32 million mainly due to an increase in professional service fees.

G&A expenses as a percentage of net revenue was 2.9%, down from 5.3% in the same quarter last year.

Technology expenses for the quarter decreased by 27.2% to CNY 14.7 million primarily due to an improvement in our system development efficiency and the implementation of automation tools.

Technology expenses accounted for 1.3% of net revenue, down from 4.1% in the same quarter last year.

We will continue to make infrastructure investments to support rapid revenue growth and expect to further improve operational efficiency and effectiveness.

Net loss attributable to ordinary shareholders was CNY 123.3 million compared with CNY 125.9 million in the same quarter last year.

Non-GAAP net loss attributable to ordinary shareholders was CNY 109.7 million, down from CNY 111.1 million in the same quarter last year.

Non-GAAP net loss accounted for 9.9% of net revenue, down from 23 -- 22.3% in the same period last year, narrowing down to single-digit percentage of net revenue for the first time.

As of September 30, 2019, we had cash and cash equivalents, restricted cash and short-term investment of CNY 784.6 million compared with CNY 1.1 billion as of December 31, 2018.

For the fourth quarter of 2019, we expect total net revenues to be between RMB 1.18 billion and RMB 1.24 billion, representing year-over-year growth of approximately 112% to 123%.

This forecast is based on current market conditions and reflects our current and preliminary estimates of market and operating conditions and customer demand, which are all subject to change.

On August 15, 2019, the company announced a share repurchase program, whereby the company is authorized to repurchase its own Class A ordinary shares in the form of ADS with an aggregate value of up to USD 10 million within the next 12 months.

As of September 30, 2019, the company had used an aggregate of USD 2.6 million and repurchased 606,953 ADS.

This concludes our prepared remarks.

Thank you.

Operator, we are now ready to begin the Q&A sessions.

Thanks.

(Operator Instructions)

Our first question comes from the line of [Yang Du] of TH Capital.

I've got 2 questions.

The first one is about pharmacies number.

The number grow rapidly in this quarter.

And so can you share some color on the key drivers behind the growth?

And how many do you expect to have at the end of this year and next year?

And I have another question regarding bottom line.

I noted the net loss narrowed in this quarter.

So just wondering your consideration of profitability.

Okay.

Thank you for the questions.

With regards to your first question, we have a sales force on the ground to -- our terminology internally is called business development.

They're actually a sales team, right?

So what they do is, every day, they get a region.

So they'll go out and look for those potential customers.

And a growing percentage of the company's story, the customers, once they agree to sign up, we will exchange permits and so on.

So our team has been doing a great work to actually continue to sign up new pharmacies.

And our objective is by the end of this year, we should reach the number of 230,000.

That is roughly about 50% of the total market, and that is going to be our strategic priority for 2019.

And we're pretty confident we can actually execute that strategy and will be happy about it.

And obviously moving forward, we will be more focused on really better service, the existing customers, because 50% is a very substantial number.

We should be very happy about it.

And we're going to execute other strategies.

With regards to the net loss narrowing to single-digit for the first time, we're very pleased about it.

And as you can tell, for the last few quarters, every single quarter not only are we growing the top line, but we are also achieving savings on the bottom line every single quarter.

And our expectation is to continue to deliver that, and we're pretty confident.

And of course, we aim to achieve profitability in the middle of 2021.

Our next question is from the line of Cherry Yin of JPMorgan.

This is Cherry.

Congratulations on another strong quarter results.

And here, I have 3 questions.

The first one would be about the industry trend.

As we know, the China's retail pharmacy market is still quite fragmented, and there has been a lot of reform policies to accelerate the consolidation.

So how do you position 111 in this consolidation trend in the long term?

And as we know, many of our clients are those individual pharmacy or small chain pharmacy who will see a lot of headwinds under these consolidation trends.

And what will be your expectation for them or new solution offering to them?

My second question would be about -- more specific about our results.

We have seen very encouraging reduction in the operating expense ratios.

What are the key drivers for that?

And finally, especially our fulfillment cost is quite impressive, only 2.8% in this quarter.

So could you share more color behind this?

Okay.

That's all of my questions.

Thank you, Cherry.

That's a lot of questions.

I think I'll take on the first question.

Maybe we'll get -- I think, Luke, you can address that and [Gang] can answer the other questions, right.

So yes, with regards to the industry trend, with regards to consolidation, yes, I agree with you, there will be consolidation and that is fully anticipated.

But I'll tell you what.

In the retail space, if you look at China's retail, the CVS kind of convenience stores, that space is actually growing, those mom-and-pop shops, especially you go down to tier 3, 4, 5 cities, right?

But our anticipation is actually in the pharmacy space, there will be more consolidation.

And some of the smaller guys will find it harder and harder to survive, and -- but they're not going to all disappear, and maybe 10%, 20% will disappear.

And we love it because this presents great opportunities for us to help some of the smaller chains and a lot of those mom-and-pop shops stand-alone stores.

And because of our services, because of our capabilities, I think they're going to stay.

And consolidation is not going to happen as fast as people have projected because there has been no lack of effort in that space.

If you look over the last 5, 6 years, all those big guys have been aggressively acquiring out there.

And if you look at today's market, the biggest chain today is still pretty much unknown, only got 5,000-some stores.

And it only takes about slightly over 1% of the share.

So fragmentation will still be the norm in the space.

And obviously, that is great news for us.

We are actively working on a concept of future pharmacy.

And internally, obviously, we have developed certain ideas.

And at this moment, we are not ready to share what the store -- the future store is going to look like, but I can like paint the direction.

We're going to have the best assortment, best relevant assortment for the pharmacies, and we're going to use our technology to provide things like chronic patients' management.

We're going to have IoT devices to constantly monitor the vital signs.

And with our enabling business model, with our virtual pharmacy network, there's no reason why we cannot build out a virtual pharmacy chain which will be known to all Chinese like CVS or Walgreens in the United States.

So I'll pass on to the next part of the question about the financials.

Let me just take the question on how we improve our supply chain.

We are a technology company.

So we improve our efficiency through business intelligence, data and systems.

So we have built more than 30-some systems, and probably close to half of them are around supply chain management.

For example, we built a system on procurement management system, assortment management system, warehouse management system, transportation management system, inventory optimization system and all kind of systems.

So through these systems -- and this is now all driven by optimization models and algorithms.

So through these systems, we optimize our network, optimize our total supply chain.

And we are confident that we provide one of the most efficient supply chain in the pharmaceutical retail distribution space.

Yes.

On the OpEx side, we just shared with you this quarter, our net revenue grew 123%, while our total OpEx only grew 13.7%.

And on a yearly -- year-to-date basis, our revenue grew 112%, and our total operating expenses grew 28.3%.

So as a result, you see that the operating expenses as a percentage of net revenue is going down.

On a quarterly basis, it's going down from 29.1% to 14.9% significantly.

So looking forward, we expect we will continue to deliver a quarterly revenue growth on a year-over-year basis, triple digit, while the OpEx increase is around like 20%-something.

So we will expect the OpEx of -- as a percentage of net revenue will continue lower as a result of the loss will be -- as a percentage of net revenue will also be narrowing down.

And as Junling just shared with you that we aim to be profitable in the middle of 2021.

Cherry, we hope that we answered your questions.

Yes.

That's very helpful.

Just like -- just could you share more specifically about the fulfillment cost?

I know like previously, we are already quite impressive, low compared with peers.

But we still see continued improvement in the fulfillment cost.

So is there any new updates you may share with us?

Certainly.

This all -- I mentioned that's all driven by application of our systems.

So we continue to optimize.

For example, our warehouse operations efficiency improved by almost -- more than 50% year-over-year, and we keep doing that.

It's our -- yes, just applying our systems and more data intelligence.

So with our revenue continuing to grow with the scale, we certainly expect we can -- there is still more room for us to improve on the cost to fulfill.

Yes.

We gained a lot of efficiencies through scale economy, and we also have a much better targeting power with the third-party logistics, with -- we build a lot of direct sourcing relationships.

All these will help our efficiency.

(Operator Instructions) We have a question coming from the line of Xipeng Feng of CICC.

This is Xipeng Feng from CICC.

I here have 2 questions.

And the first one is, well, with regard to the favorable policy relating to online sale of prescription drugs recently.

Well, what preparations have the company made already?

And my second question is would you please introduce more about the company's cooperation with pharmaceutical companies?

And what value is realized by your company in those cooperation?

Okay.

I suggest I'll take up the first part.

And Gang, you can take up the second half of the question.

Yes, thank you for the question about the regulatory change.

Obviously, in the past, it's always the policy to allow drug sales online, and now the people's assembly in China passed it as a law to allow drug sales online.

That is great news.

And with regards to getting prepared, ready for it, and I think we are probably more ready than most.

First of all, our Internet hospital is the second ever during the first batch of the permits that Ministry of Health recognized, and we have fully compliant practices there.

And of course, we have more than 2,000 in-house and affiliated doctors there.

We are able to service consumers directly.

And also, we can handle all the prescriptions from hospitals with our logistic network.

We cover the country without any blind spots.

We can probably cover a majority of the country, like 80% of the GDP within 24 hours.

Even if you live pretty far away, we're still able to reach you in, let's say, 48 and 72 hours.

And that is going to be a huge plus.

And obviously, we're the one who built most of the direct sourcing relationships with the upstream pharmaceutical companies, and we can buy some of the drugs at a competitive price.

And we are better than, I would say, anybody out there in the space when it comes to the assortment and availability.

And in addition to that, we also can enable the pharmacies.

So when the customer walks in to the pharmacy, if they don't have a prescription, they can always access our cloud doctors by scanning a QR code.

And through the diagnosis, our online doctors can issue a digital prescription to the pharmacy on the spot.

So at that moment in time, that pharmacy would be transformed into a virtual clinic.

And the latest development from our space is that we started working with some of the system integrators that are working with some of the provinces to provide the prescription sharing platform.

For instance, we're working with the biggest system integrator called [Xhigong] in China, who's been doing this system integration for quite a few provinces.

And we are the preferred supplier in terms of drug delivery once the prescription is flowed outside of the hospital.

So in a nutshell, I think we are very ready for the deployment of the policy, and we're looking forward to it.

Okay.

Let me answer your second question on how we are partnering with pharmaceutical companies.

We mentioned that we now have strategic partnership with 150 pharmaceutical companies, international and domestic, and we provide all kinds of services to them.

Let me just mention a few.

For example, we do geographic and channel coverage for them, including all the geographic region, to third-, fourth-, fifth-tier cities.

And we help them to do new product launch, and we help them to do online branding and marketing.

For example, we do online expo.

And every time, we have tens of thousands of drugstores, private hospital, clinics to participate.

We'll provide supply chain integration for them.

We are the supply chain integrator for more than 17 pharmaceutical companies to supply to other e-commerce companies, and we help them with the data service.

For example, we help them to understand, to gain customer insights, customer behavior and profile.

We help them to monitor and maintain prices.

We help them with customer education.

So all kinds of services we provide to all these pharmaceutical companies, and we are currently in a partnership with the top-tier pharmaceutical companies.

Our next question is from the line of [Dian Hao] of TH Capital.

Okay.

I have here [David Chang] of Citibank.

This is David Chang from Citibank.

I just have 2 simple questions.

The first one is about your T2B2C business.

So can you share with us the latest strategy and your technology driving the B2C business?

The second one is just give us -- I just saw your B2C business is now -- the growth of business is now really strong.

So what's the plan for the B2C business going forward?

Okay.

So let's come back to the T2B2C strategy.

So I think in my speech, I have provided some updates.

For instance, we made progress like with purchasing or sourcing direct relationship with 150 pharmaceutical companies, and now we have 210,000 pharmacies doing business with us or we're servicing them.

And we signed up another insurance partnership, which is very major.

Obviously, our direction is to use technology to enable the key stakeholders in our value chain.

Dr. Gang Yu just mentioned about the number of things we do for the pharmaceutical companies.

And for instance, in other space like the insurance companies, right, we -- what we've done in many areas, for instance, online consultation, the e-prescription, the delivery service, the medication cost control, the -- even selling insurance, and we joint-developed PBM models.

And the drug prices are pretty high.

We're able to help them to make it transparent, et cetera.

And another point I want to mention is that we actually built a team.

We have a dedicated team.

We call that team the enablement team.

All they need to do is to figure out better ways to better equip our ecosystem partners, especially the pharmacies.

As I mentioned, we are developing a blueprint for the future pharmacy, and that's the team that is dedicated in thinking about how we can migrate our capabilities in servicing our consumers to our pharmacy customers.

And your next question, with regards to the B2C business and our view of it.

First of all, B2C is very important.

Everybody saw that we didn't grow as well as the B2B business, but it's a quintessential part of our business.

And we attach great importance to that.

As a matter of fact, we're very pleased with that business transformation.

As I've mentioned, in the past, we used to focus on providing low costs to drive growth.

And now we are much more focused on customer value.

And our vision is that we have to build the capability in the patient's lifetime wellness management.

And for instance, we -- today, we built out modules like patient education, like the drug adherence management, the hassle-free online refill modules.

Those service modules are going to be extremely important because every chronic patient we acquire, we have probably on average more than 20 years to service them.

That is why that business is very important to us.

And now that we have fixed the cost structure, we aim to reignite growth for this business next year.

Next question is from the line of [Tom Hamilton] of [Park Hill Capital].

Congratulations on the quarter, impressive performance.

Two questions.

First, thank you, Junling, for going into the B2C business.

But I'd like to ask about the B2B side.

I mean how long can the fast pace of growth on that side of your business be maintained?

What are sort of some of the core drivers down the line?

And how can you increase revenues on the business side?

That's the first question.

Second question is, is there any plan to continue building more warehouses in China?

What's your target number there?

Thank you.

I think probably, Harvey, you can answer the first question, and Gang can ask the second -- answer the second question.

Okay.

Regarding the growth of business or B2B side, our B2B continues its very strong growth trends.

And meanwhile, we have already set up 5 B2B fulfillment centers in each region to better serve our B2B customers.

Instead of talking about how we can grow, we believe that today, it is just a fact.

Through Internet, pharmacies and clinics are enjoying a much broader assortment selection and a much more competitive price than our off-line distributors.

And meanwhile, we have doubled our B2B gross margin in the past 3 quarters.

And the profitability of B2B will be further improved with more and more direct sourcing from domestic and international pharmaceutical companies.

Thank you.

And I will pass the second question to Gang.

All right.

So you asked about are we going to build more warehouses.

Certainly, we will, okay?

We have -- we build all transition models to optimize our network.

So basically, right now, we already have a nationwide coverage.

As our -- the density of our orders increase, one, we make sure that we improve our customer experience as well.

That means that we'll have probably faster arrival -- on-time arrival rates, and we can reach customers quicker and have more selections and have better service to every single customer in the nation.

So certainly -- but all those decisions will be based on full optimization of our total network.

So we have -- we run the data.

We're -- as we start to grow, we'll add more warehouses.

But these are not warehouses.

We'll call them fulfillment centers.

We now have, we call it hubs.

And now we probably will build more fully deployed warehouses, fulfillment centers, to reach customers sooner and with better services.

Next question is from the line of [Dian Hao] of TH Capital.

Yes.

Congratulations on a good quarter, management.

So I have 2 questions, and they direct to that, clearly.

So about the warehouses and also the pharmacies, so in terms of geographical locations and what proportion of them are in the top-tier cities, tier 1, tier 2?

What proportion of that are in lower-tier cities?

And as you added more pharmacies and warehouses, and where are those newly added in the future are going to be?

So that's a location issue.

The second one is as we increase the order density, so what is the ideal average SKU turnover days you [envision]?

And compared with today, what kind of the progress that will be?

That's a very interesting question.

So basically, we decide location by network organization model.

We decide where to locate the warehouse.

It's a decision of multiple considerations based on the logistics availability, the total inbound and outbound costs and also based on labor availability of that region.

Certainly, it's based on other third-party logistics we are partnering with and how they can cover from that region.

So we have a full optimization model for network design.

So that's -- hopefully, that will answer your question.

And every time we add a new warehouse, new fulfillment center, based on the density of our orders, based on our customer demand satisfaction and total cost.

So that's first question.

And with regards to second question, it's a great question, by the way.

Inventory management, now I think it is our bread and butter.

We have to do well.

Otherwise, we're going to lose our ability to have lunch, right?

So today, we run inventory days on hand in the 20s, and we believe that is very appropriate to the scale of the business today.

And as we continue to progress, and obviously we can optimize based on density in certain geographies, our objective is to drive the inventory days on hand to sub-20 days.

We have another question coming from the line of [Tom Hamilton] of [Park Hill Capital].

One more question.

Back to the B2C business.

How do you guys plan to win new customers on that side of the business?

Okay.

Barry, you want to have a shot at it?

Okay.

In terms of regular e-commerce customers, we are trying to gain customers who have high potential demand of online postdiagnosis management services.

Based around this purpose, we will focus on diseases that have the following 3 characteristics.

So first one is chronic, and the second one is high self-pay ratio.

The third one is drug-based concerns such as liver disease and mental health.

These patients are attended by using online methods such as SEO, precise advertising and cooperating with pharmaceutical companies and hospitals.

No questions as of this time.

(Operator Instructions) Yes.

We have a question coming from the line of Junjie Huang of UBS.

This is Junjie on behalf of Rachel Yang from UBS.

So can I ask one question on your collaboration with HEC?

So could you please specify the difference between your collaboration with HEC and between -- and the collaboration with other pharma companies?

So where do you think we can add value to the collaboration?

And do you think that we will have more and more this kind of collaboration in the future?

That's a good question.

Certainly, you have seen our press conference 2 days ago, and we have built a very strategic partnership on certain -- on several fronts.

Why is that?

We help them to go cover deep -- have broader coverage and deeper penetration of their products, and we help them with the new product launch.

We help them on online marketing and customer education, and we also help them in terms of gaining more customer insights.

So basically, it's a very strategic partnership.

We are paving the way for very, very aggressive growth for them in our channel in the very near future.

No questions as of this time.

I would now like to hand the conference back to Mr. Rene Vanguestaine.

Please go ahead, sir.

Thank you, operator.

In closing, on behalf of the entire 111 management team, we'd 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.

Thank you.

Ladies and gentlemen, this concludes today's conference call, and thank you for participating.

You may now all disconnect.