Hello everyone, and thank you for joining us today for 111's First Quarter 2021 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, CFO of our Major Subsidiary; Mr. Harvey Wang, Co-COO; Mr. Barry Zhu, Co-COO; Ms. Tiffany Jugal, SVP of Investor Relations and Business Development; 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@ir.111.com.cn.

Good morning, and good evening, everyone. Thank you for joining our 2021 first quarter earnings call. I'll begin with an overview of the company's business and operational performance and before handing it over to Luke to take you through the financials in Section 2. We will then conclude our prepared remarks with guidance for Q2 2021 before opening the call for Q&A. We were pleased to report another quarter of strong growth. In the first quarter, net revenue rose 64.7% year-over-year to RMB2.6 billion. This marks the 11th consecutive quarter of year-over-year revenue growth since our IPO. In China, Q1 is typically a soft quarter in the healthcare space as well as for the general retail industry due to the Lunar New Year holiday. In addition, Q1 2020 was unusually strong due to the sudden surge in demand for pandemic-related products. So we're pleased with the year-over-year growth, which, excluding one-time pandemic-related sales was 89% in Q1 2021. Non-GAAP net loss attributable to ordinary shareholders as a percentage of net revenue has also decreased from 6.9% in the first quarter of 2020 to 4.2% in this first quarter, which shows our continued momentum towards profitability. Our top line growth is driven by our S2B2C model and we'll continue to take the lead in the modernization and advancement as China's healthcare system. Our growth is a testament of the tremendous progress in our mission, who digitally connect patients with medicines and healthcare services.

Thank you, Junling. Moving to the financial sections on Slide 13, you can see the details of the first quarter 2021 results from Slide 14 to 16 of our presentation. I would like to highlight a few key business and financial matrix. And I'll focus on year-over-year comparisons. All numbers are in RMB unless otherwise stated. Let's start with the first quarter results. Total net revenues for the quarter grew 63.4% to RMB2.6 billion, which is at the high end of our guidance range. Our B2B segment revenue grew 77.6% to RMB2.45 billion and our B2C segment revenue was down 47% to RMB142 million. The decrease is attributed to the first quarter being generally slower for the entire retail industry due to the Lunar New Year holiday, as well as first quarter 2020 being an unusually strong for online purchases, due to mandate quarantine. Our B2B gross margin was 3.6%, up from 3.3%. While our B2C gross margin remained stable at around 20%. The improvement in gross margin of our B2B segment reflected our ability to continuously improve the margin by maintaining robust top-line growth. Overall, our gross profit grew by 32.2% to RMB116 million. Total operating expenses for the quarter were up 43.6% to RMB2.9 billion as the percentage of net revenue, total operating expenses for the quarter decreased to 11.1% compared to 12.8%. For Fulfillment expenses, as a percentage of net revenue for the quarter was 2.6% down from 3.5% in the same quarter last year. Sales and marketing expenses as a percentage of net revenue for the quarter was 4.7% down from 6.1% in the same quarter of last year. G&A expenses as the percentage of net revenue for the quarter was 2%, up from 1.9% in the same quarter last year. Technology expenses accounted for 1.9% of net revenue up from 1.3% in the same quarter last year. This is primarily driven by an increase in the number of personnels in the R&D and IT teams reflected of our continuous investment in our infrastructure. As a result, the GAAP net loss attributable to ordinary shareholders for the quarter was RMB109.3 million, as compared to RMB109.4 million in the same quarter last year, which accounted for 4.2% of net revenue down from 6.9%.

Your first question comes from the line of of HSBC. Please ask your question.

Yes, thank you very much management for taking my questions. This is from HSBC. I hope to ask two questions on behalf of Rachel Yang. My first question is on the fulfillment costs. So we do see that the fulfillment costs has further decreased in Q1. So just wondering how we made it and how do we see further room for decrease? And the second question is about the industry. So we see much more industry outpace recently such the online sales of prescription drugs and the medical insurance payments. So how do we expect that those policies will impact our businesses? Yes that's my two questions. Thank you.

You're talking about procurement costs decrease, yes we have continuously improved our whole supply chain, including our systems we build. And also we initiate various BPI programs to improve our operational efficiency and effectiveness. At the same time, we are optimizing our supply chain infrastructure. As you have seen that in Q1 our build, launched two new fulfillment centers one in Northwest, one in Northeast and we’re restructuring the whole supply chain network. This enables us to have a more efficient supply chain. At the same time, we’re engaging with more third-party logistics and improving our core chain coverage, improving our fulfillment center automation, so all these together help us to lower the fulfillment costs.

Yes, let me address the industry question, that was a great question and by the way, Junling here. Yes you mentioned a few policy changes in recent months, but also if you look over in the past couple of years, from allowing online sales of drugs, the volume-based procurement, and also the hastened approval, or the speedy approval of new drugs into China, there are lots of changes in the regulatory side. I think if we look at all those policies, they all point towards two important directions. One is really transparency, the other is really - and if you look at our business model, you know, 111 is very different from our other competitors in industry, we do not have parent companies, we've background a lot of resources, our business model is purely based on two principles, one being transparency, the other one being efficiency. So, this really plays right into our strengths. And the other great developments are the push towards digital and the penetration towards lower TRC. And obviously, our digital solutions can help us address both the needs from the pharmaceutical companies and also the doctors and patients and pharmacies alike. And once again this place is riding for our strength and I must say that the Chinese government is extremely confident. And if you look at those policies, we actually wholeheartedly welcomed those new policies. And they actually will lay the foundation to make the Chinese health system, one of the most efficient ones in the world. I think in the next, within the next decade, we feel extremely lucky to be in the right market at the right time. Thank you, Xing.

Yes, thank you very much.

Your next question comes from the line of Zoe Bian of Citi. Please ask your question.

Hi, this is Zoe Bian from Citi, thank you management for taking my questions. My first question is about the revenue growth drivers in first quarter. We know that you have covered a majority of promises in China. And which customer group is your strategic focus in the next one or two years? The second question is about the partnerships with the pharmacy - with pharmaceutical companies. Can you please share why do they choose 111 to cooperate and can you give us more examples of your partnership? And the third question is about your new investment on the supply chain, any updates on the upgrades of supply chain, infrastructures and fulfillment centers and the fourth one is about your STAR board listing status. Thank you.

Yes, thank you, Zoe, I think we can start in your order. First question is about the drivers and revenue growth. That's a good question. And I think I spoke about in my script about why we compete to grow at a pretty fast pace, even though our revenue base has gone down over $1 billion last year. And I think fundamental it still our model driving the growth. It's our S2B2C model, if you look at the progress we made in Q1 and obviously we announced the two new fulfillment centers in full operation. And also we're expanding upgrading some of the existing fulfillment centers. And we increased the pharmaceutical partnership to 360 plus, and we also collaborated with a number of globally renowned pharmaceutical companies on their new drugs, like Eli Lilly, like BeiGene, like , et cetera. We're also working with some of the CSO companies that are also referenced that we have over 900 marketplace vendors on our platform. This is all our S, so that's our supply chain platform. And obviously, how do we really break up the S2B2C and then I explained that was further broken down into S2B2C to B2C, right? So in the S2B side, that's the pharmacy side of the business. I referenced a number by March 31, we actually covered more than 340,000 pharmacies, right, that is more than 50% of the overall markets and on the B2C side, the number of doctors we have been working with has increased to more than 15,000 by the end of the quarter right. So really, if you look into the growth of the business, this is the fundamental driver. And we're pretty confident that we're going to continue to deliver pretty robust growth, even though our base has become a much, much bigger base now. And the second part of your question is about the focus our customer groups, really on the pharmacy side yes indeed, with the majority of the pharmacies now. But what we believe the value we could offer to the small and medium chains, and the single source from the dimension of graphical coverage instead of focusing on Tier 1 cities. I think our biggest opportunity is really in the Tier 3 to Tier 6 cities. The lower Tier cities, they actually - those pharmacies there need our services more than those Tier 1 cities pharmacies. So I'll stop at that and maybe Gang should be talking about the partnerships on the question two.

All right, let me answer the second question to Zoe, you have seen that we’re a perfect partner for pharmaceutical companies with complementary strength. All you know that the pharmaceutical companies, they have their R&D capabilities, they have all their products, they like to have broad market coverage to penetrate to all the consumers. They have good branding and experts, medical experts, but they really like us to have the omni-channel commercialization capabilities, or supply chain coverage, or digital solutions. These are a perfect match. Another - plus our data service can help them to improve the scale, the customer insights, our entire service can help them to improve their field reps efficiency. And another big part is that where and that’s like basic company, they like our transparent corporate governance, like our compliance and all these together now make us to be their choice. Also the third question you mentioned about why we continue to expand our supply chain. I think we'll continue to do that in fulfillment centers, both in capacity and in throughput. We’re now also in the process of expanding our coaching coverage for innovative drugs and for bio drugs. We're also investing in warehouse automation to gain more operational efficiency. So we're through all these. We've deepened our regional penetration, broadened our market coverage, improve our timeliness delivery, and optimize our systems and operations.

Yes, regarding the STAR board domestic listing. In the second half of last year, we started the process of preparing an IPO on the Shanghai Exchange, particularly STAR board and that work is continuing. As many of you may aware, the listing process on China's exchange requires approval from various government entities. And because of that, we cannot control the timing and thus we cannot give a clear guidance on that. But we remain committed to achieving our goal of building an investor base consisting of both domestic and global investors. And we believe that our new listing in China, in addition to our current listing on NASDAQ will allow interested investors a convenient and efficient way to invest in 111, no matter where they’re based. Zoe, hope we answered all your questions.

Thank you, management for thoroughly answering my questions. Thank you.

Your next question comes from the line of Horace Cheng of Ideate Investments. Please ask your question.

Hi, thank you for the presentation. This is Horace Cheng of Ideate Investments. I just have two questions, the first one being related to the expenses. I see expenses have gone up, especially G&A and technology expenses have gone up significantly and especially on technology. Can you shed some light on the timing of the investment and sort of the nature of the increased expenses? My second question is on the gross margins, I see that gross margin continues to expand. Can you give us a little bit more insight on to the margin expansion and whether or not we should continue to expect such expansion? Thank you.

Right, so it’s a great question about expenses, the way of asking. If you look into the details of our business, we actually feel extremely confident of the future of our business. And what we wanted to do is, take the opportunity to really strengthen our profitability to better position ourselves in the marketplace, right. So this is a, tremendous demonstration of our own confidence over the future of our business. The expenses really are happening in the following areas, where we think we should be investing, to better position the company. You mentioned about technology absolutely, we actually more than doubled our technology team from last year. That is a key area but through - really to differentiate ourselves from our competition in the marketplace. And the other part of the investment actually goes into the innovative new businesses. So we have a number of new businesses that we’re incubating. We believe in the future, we believe especially in the S2B space, there's going to be tremendous price there. And of course, our fundamental of the business is supply chain platform. Obviously, a lot of the investment goes into our supply chain network, not only our fulfillment centers, but also the partnerships and the ecosystem, including the team that’s covering pharmacists, the accounts of the pharmaceutical companies. The team that are doing development in the marketplace vendors in other CSO companies, distributors, et cetera and of course we also make best our team and our G&A expenses are going up. We believe those investments are very necessary, given the opportunity we have in the development of the healthcare industry in China. This is going to really nail us on the map for the future development of the company. So I think about the gross margin side of the business, Luke are you going to address that.

Yes, we’re very pleased to see - we continue to improve the gross margin on the business, this quarter, we grow that V business revenue grow like 77%. But the gross margin, I mean gross profit will grow more than 90% and the percentage volume from 3% to 3.6%. So the drivers behind as we explained we’re increasing more direct sourcing on pharma companies, which we have better trading terms with them. Additionally, because we have been partnered with those pharmacies, we provide some solutions to them. And we’re able to achieve more of sales revenue, service revenue, as we highlight this time as well as we’re focusing, asking to focus on selling those high margin products like co-branded with particular pharma companies. So we think that with the scale we’re building up, we will have more opportunity to leverage the network, we build out and to provide not only the distribution service to the pharma companies, but also and then sales and marketing service, like digital marketing service we provide to them and other service. And also we'll be able to generate service revenue from all those SaaS solutions, we provided to the pharmacies, the clinics, private hospitals, et cetera. So, we've been able to improve the gross margin and gross profit on the S2B side, and quarter-over-quarter and we’re very pleased that we will continue to do that.

Okay, thank you.

Your next question comes from the line of Charlene Liu of HSBC. Please ask your question.

Hi, Dr. Yu and the management team thank you very much for taking my question. I think management team mentioned earlier, and as we know that 111 has already achieved great success in terms of covering the pharmacies 50% of the market. And obviously another area of growth is to start covering doctors/clinics? And by the end of the quarter, you've already covered 30,000, can you share a little more as to where you are on the expansion plan and how much of the landscape which you intended to cover has already been covered thus far. And can you talk about the percentage of your orders are now currently originated from clinics as opposed to the pharmacies? Thank you very much.

Okay, maybe Harvey, can you answer the question?

Yes, the majority of our customer engaged currently through our online operation, most pharmacies and clinics. And as Junling has mentioned, there are many from Tier 3 to 6 cities. And we also have onsite task force around the country to provide onsite services, especially for our new customers and those onsite customers, their service include cloud services and cloud clinics, and cloud CRM, and cloud services. We also developed an app called Hawkeye which monitor all our activity of our sales force and enable our sales force to achieve a much higher productivity than intelligence. I am not sure whether…

Yes, I think I want to add another comment there, Charlene. I think the revenue, majority of the revenue still comes from the pharmacies instead of the clinics, although clinics would be a future growth area we want to invest in and are currently more than 90% of the revenue still for the S2B business is still from the pharmacies.

Understood, is there a target as to how many clinics or doctors you intend to cover say in the next two to three years? And would it be one of your KPI to sort of target certain revenue breakdown at some point in time down the road coming from clinics?

Yes indeed, but we're not ready to announce to the outside world yet, we have an internal plan that’s definitely we have specific target develop, we deployed both teams that's prepared at doing that. So we will be reporting in due course.

Okay, wonderful. Thank you so much. This is very clear. Thanks for the opportunity.

Your next question comes from the line of Anthony Price of Odyssey Investments. Please ask your question.

Thank you so much. First of all, I want to congratulate you. I’m old Greek that lives outside of Washington D.C. and I've admired your company for well over a year. I think no one in the Communist Party would object it, no one in America would object to the work you're doing and I’m proud to be owning your shares. My question deals with the issuance of shares and let me explain? I had a lot of China Unicom some years ago and there was an issuance of 47% of the stock, the stock had gotten up in the 20s and it never recovered. Also the American government is issuing dollars now and destroying the value of the United States currency and I know you gentlemen are well intended and you want to - and you have a tremendous growth trajectory. But how are you going to protect us the outside owners that support you regarding the price going forward and the issuance of shares? Thank you, sir. Thank you for taking my question.

Anthony, first of all we’re most grateful for having you as our shareholder. I appreciate you attending the call and listen to our story and also expressing your views. Your view is very well taken. We understand what you're talking about, but it's a rather complex issue, and I would love to indeed to speak to you further on this and we’ll take your comment back and our team is going to do some further research on that. And we also will do some analysis of course there is always pluses and minuses whatever structure with shares we're going to have, but yes once again, your comments are very well taken. And we would love to have the opportunity to actually speak beyond this further.

Thank you, thank you.

Thank you.

Thank you. I'm available to speak about it in any time, and I thank you so much for understanding my question.

Indeed.

As there are no further questions at this time, I would now like to hand the conference back to the presenters. Please continue.

Okay, that sounds like we have completed all those Q&A session and so Monica, are we ending the call now?

Sure, thank you, operator.

That will conclude our call.

Thank you. In closing, on behalf of the entire 111 management team, we like to thank you for your interest and the participation into this 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.

Ladies and gentlemen, today's conference has concluded. Thank you for participating. You may now disconnect.