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Chinese online chemist 111 looks beyond lacklustre Nasdaq debut to strong growth at wholesale unit

Three years after selling an online supermarket to retail giant Walmart, founders Gang Yu and Junling Liu rang the bell on Wednesday at the Nasdaq exchange for the market debut of their latest baby, 111 Inc., amid a gathering storm for tech stocks on a variety of earnings and regulatory concerns.

Shanghai-based 111 operates an online retail pharmacy, 1 Drugstore, an online health consultation platform for consumers, 1 Clinic, and a wholesale pharmacy, 1 Drug Mall. The company’s ADRs closed slightly below the US$14 offer price on the first day of trading, after 111 raised a modest US$130 million in its IPO, which priced at the lower end of a US$14-US$16 range.

111’s lacklustre debut follows a bumpy ride for other much-anticipated offerings from Chinese tech companies. Smartphone maker Xiaomi dropped 1.2 per cent on its Hong Kong trading debut in July, while e-commerce upstart Pinduoduo has seen its shares whipsaw since a July Nasdaq debut.

“With the recent global market turmoil in the past few weeks and in emerging markets, we understand that it is not the perfect time [for a market debut]. We were focused on getting the IPO done and less concerned about pricing at this point,” said Weihao Xu, chief financial officer at 111, in a phone call from New York.

111 has longer term ambitions though, aiming to build the biggest online-to-offline health care platform in China to tap a booming market driven by the country’s ageing population and health care infrastructure that is unable to cope with demand. China’s general health and wellness market was estimated to be worth 9.8 trillion yuan (US$1.5 trillion) in 2017, and is forecast to reach 17.4 trillion yuan (US$2.6 trillion) in 2022 at an annual growth rate of 12.1 per cent, according to consultants Frost & Sullivan.

111’s executive chairman Yu and chief executive officer Liu were both executives at Dell 10 years ago before they struck out as entrepreneurs. The duo co-founded YHD.com or Yihaodian, an online grocery retailer, in 2008, which was later acquired by Walmart in 2015 and subsequently sold to JD.com in 2016 in exchange for a minority stake.

1 Drugstore started as the health care segment under YHD.com in 2010, but operated independently from 2012. Yu and Liu left YHD.com after the sale to Walmart to focus on developing 1 Drugstore into a fully-fledged retail pharmacy.

Patients in China depend heavily on hospitals for medical care and drug prescriptions, with retail pharmacies taking up only one fourth of total pharmaceutical sales in 2017 compared to 82 per cent in the US. The pharmacy market in China is also extremely fragmented, with the top three retail pharmacies accounting for only 5 per cent of total sales in 2017 compared with 82 per cent market share for the top three companies in the US.

US e-commerce giant Amazon made its move into health care in June with the acquisition of online pharmacy PillPack, a deal that many analysts expect to disrupt the US drugstore market.

1 Drugstore’s consumer-facing platform has grown into the largest direct sales online pharmacy in China in terms of gross merchandise volume – a key metric for online retail sales – according to Frost & Sullivan. Revenue growth at its business-to-consumer (B2C) unit dipped slightly to 406.5 million yuan (US$59.4 million) in the first-half of this year, from 426.4 million yuan in the same period a year ago.
The drop in sales was due to intensifying competition in the health care segment from e-commerce giant Alibaba Group Holding and the second-largest Chinese e-commerce platform JD.com, among others, according to a report last week from Toh Zhen Zhou, an analyst from Aequitas Reseach on Smartkarma Insight Provider.

JD.com partnered with leading Chinese drug maker Shanghai Pharmaceuticals to bring their pharmacy business online in 2015. Alibaba, parent company of the South China Morning Post, recently launched new features on its Taobao Marketplace that include 24-hour medicine delivery, and online medical consultation services powered by its health care arm Alibaba Health Information Technology.

But 111 has other supporting pillars. 1 Drug Mall, a wholesale platform launched in 2017 for pharmacies to source medicines and other pharmaceutical products, reported revenue of 316.6 million yuan in the first half of 2018, a 67-times increase from the same period a year ago.

111’s Xu expects the business-to-business (B2B) operation to be a key driver going forward. “The reality is it’s difficult to acquire customers, so we have pivoted to where the patients truly are – in pharmacies and at the doctors,” he said.

111’s total net revenue reached 730.9 million yuan in the first half of 2018, a 68 per cent jump from 435.2 million yuan a year ago. 111 has yet to turn a profit but has narrowed losses from 363 million yuan in 2016 to 249 million yuan in 2017.

“Key operating metrics at 111 suggest that the company is facing tremendous competition in its B2C business and this has probably forced management to pivot to the B2B market to arrest a slowdown in revenue growth,” said Smartkarma’s Zhou in his report.

“Although losses are narrowing and operating cash outflow has been shrinking, the company still has some way to go to prove to investors that it can be a sustainable new business segment.”

Source: South China Morning Post

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