Hello everyone, this is Robert Sassoon, Senior Analyst at Water Tower Research, and I have the pleasure of hosting once again Junling Liu, CEO and Co-founder of a leading Chinese pharmaceutical B2B supply chain operator, 111, Inc. 111 trades on the Nasdaq and the ticker YI, and 111's Safe Harbor Statements can be found in the company's filings with the SEC. Without further ado, let me welcome Junling, and thank you for joining us again today.
Absolutely, always a pleasure, Robert.
Before we actually look at how 2025 is shaping up as we approach the end of the first quarter, let's take a step back and look at the performance in 2024, which you reported last week. Now, on the one hand, 111's results highlighted a challenging environment affecting the pharmacy sector in 2024, as well as the broader healthcare market in China, and that resulted in a near 4% drop in your revenues last year over 2023. The good news, however, is that despite these headwinds, the company still managed to deliver its first annual operational profit, a year of positive operating cash flow. Junling, let's unpack this for our viewers.
Starting with the revenue side, can you highlight the factors in 2024 that impacted your operations, and then explain how you still managed to deliver operational profitability and positive cash flow for the first time since the launch of your B2B business in 2017?
Absolutely. First of all, I'm very proud of the financial results we delivered. We achieved a major milestone in the company's development. For the very first time, we achieved operating profit, both at non-GAAP and the GAAP level. We delivered over RMB 260 million positive cash flow. We substantially improved our operational efficiency, and our bottom line improved almost CNY 350 million at the GAAP level. And, mind you , we achieved all of the above under very unfavorable circumstances. 2024 was a highly challenging year for China's healthcare and pharmacy sectors. The consumer behavior became much more cautious due to the macroeconomic pressures, and the retail pharmacy sales declined, according to Zhongkang data. The reforms around the medical insurance and outpatient benefit also disrupted operations at the pharmacy level. Many of the listed pharmacy chains reported substantial deterioration of profit.
Obviously, we were operating in a very different economic environment in 2024. I must say that I'm extremely proud of our team. Looking back, I myself am even surprised by how much we have accomplished and how the team focused on executing the strategy of delivering the broadest selection and offering very competitive prices. The financial results were achieved through disciplined cost control, AI-driven operational improvements, and supply chain digitization. We reduced the total operating expense by 31% year-over-year and improved our operating expense ratio to just 5.6% of revenue. These improvements highlighted our resilience and the efficiency of our tech-driven model.
Thank you for that answer. According to the reports I have read, 2025 has shown some signs of improvement in the first two months of the year, with retail sales up 4% year-on-year. Are you seeing any of this positivity in the sector that you are specifically servicing, or at least green shoots that tell you that 2025 will see a resumption of revenue growth for 111? Adding on to that question, you mentioned the pressure on independent retail pharmacies from the ongoing health reforms that are occurring now. Those reforms will ultimately create a stronger pharmacy network in China as pharmacies transition to clean, transparent, and efficient business models to survive. Are you seeing this transition start to happen, and how long do you think it will take before 111 will actually start to benefit from these reforms from a growth perspective?
Yeah, we've seen some positive development in recent months at the macro level, but we don't know how much this will translate into improved pharmacy-level performance yet. For a start, we saw that the government is encouraging the on-time payment to pharmacies from the Healthcare Security Administration. This will greatly help the cash flow position for the cash-strapped pharmacies, and hopefully will translate into better business outcomes. We're looking forward to seeing the implementation. The other phenomenon we saw is that the net number of pharmacies is actually declining for the very first time since we entered the space. We see new pharmacies open and existing pharmacies close shops all the time. In the past, we witnessed a rapid number of pharmacies emerged in the market, and the number just kept going up and up. It's the very first time we saw a shrinking number in 2024.
Now the country has about 700,000 pharmacies, and we're already servicing 500,000. The shrinking number suggests that the small and independent pharmacies will find it harder and harder to survive, given its lack of economies of scale and the lack of capital to invest in digital operations of the business. We don't believe the country needs 700,000 pharmacies, and that is really too many, I think. Perhaps 500,000 is a more reasonable number, and the super majority should be regional chains. That is precisely our sweet spot. It is far easier to service chains than small and independent ones economically. The other thing I want to point out is that while the healthcare reform did introduce short-term pressure and have impacted our business negatively, they are necessary and constructive. We absolutely want to operate in a transparent environment where efficiency can play a bigger role.
Just to follow up on that question, you mentioned that the pharmacy sector is actually, you're talking about the independent pharmacy sector, I assume that is shrinking. Are they actually the new ones that are opening up that are replacing the older ones that are closing down? Are they actually more inclined to embrace innovation?
It depends on if they are a chain pharmacy that is opening new stores or just new independent ones. What we have seen is that more and more independent ones, because other sectors are under even bigger pressure, they perhaps believe that this sector has got money to make. They just get a new pharmacy open, but they realize that they are very, very cash-strapped and technology poor. In order to compete against the chains, they are in no favorite position there. That is why the number is actually shrinking. There are more pharmacies that are closing shops than new ones get opened. I think if I see the number correctly, we had somewhat 40,000 shrink in the number of pharmacies.