Executive Summary / Key Takeaways

• 111, Inc. (NASDAQ:YI) has achieved a significant turnaround, reporting its first-ever annual operational profitability and positive operating cash flow in 2024, a testament to its relentless focus on AI-driven operational efficiency amidst a challenging macroeconomic environment.
• The company's core investment thesis centers on its transformation into a tech-powered healthcare platform, leveraging a 100% digitized operating system and advanced AI applications to optimize its supply chain, enhance customer engagement, and reduce costs across its B2B and B2C segments.
• Strategic initiatives like the Kunpeng Pharmaceutical Logistics Network and the expansion of franchise and joint venture fulfillment centers are rapidly expanding market reach and driving substantial cost savings, positioning YI for sustainable growth in China's shifting pharmaceutical distribution landscape.
• Despite its smaller scale compared to industry giants, YI's industry-leading operational efficiency, evidenced by a significantly reduced operating expense ratio, provides a critical competitive advantage and a clear roadmap for future profitability as revenues scale.
• Investors should monitor YI's continued execution of its AI integration strategy, the expansion of its fulfillment network, and its ability to manage macroeconomic pressures and intense competition, which are crucial for sustaining its newfound profitability and realizing its long-term growth potential.

Setting the Stage: YI's Digital Healthcare Vision in China

111, Inc. (NASDAQ:YI) is reshaping China's vast healthcare market through an integrated online and offline platform, digitally empowering both upstream pharmaceutical companies and downstream pharmacies and consumers. Operating on an S2B2C model, the company connects all stakeholders to facilitate efficient product commercialization, broaden patient access, and enhance healthcare management. This strategic focus is particularly pertinent as China's healthcare sector undergoes profound transformation, driven by an intensified anti-corruption campaign, ongoing reforms, and a rapidly aging population. These dynamics are accelerating the shift of drug sales and prescriptions from traditional hospitals to retail pharmacies, creating a substantial RMB1 trillion out-of-hospital pharmaceutical distribution market that could eventually account for nearly half of the entire pharmaceutical distribution sector.

The company's journey began in 2010 as New Peak Group, later rebranding to 111, Inc. in April 2018. From its inception, the foundational strategy was clear: build robust infrastructure, achieve significant scale, and ultimately, deliver sustainable profitability. This long-term vision guided its evolution, including a pivotal shift in 2020 from a product intermediary to a tech-powered healthcare platform. This transition involved digitizing business models like its Joint Business Partnership (JBP) platform and marketplace, alongside the introduction of joint venture and franchise warehouses and a self-built logistics network. These strategic moves were designed to enhance cash flow, reduce inventory turnover, and deepen partnerships across the ecosystem.

Despite facing significant macroeconomic pressures in China, including cautious consumer spending and a 2.2% decline in total retail pharmacy sales in 2024 due to aggressive expansion and stagnant market growth, YI has demonstrated remarkable resilience. Its overarching strategy to leverage technology for operational efficiency, offer a comprehensive product selection at competitive prices, and build a robust supply chain has been critical. While YI operates at a smaller scale than industry giants like Alibaba Health (BABA), JD Health (JD), and Ping An Good Doctor (1833.HK), its differentiated approach, particularly its hybrid online-offline model and industry-leading operational efficiency, provides a distinct competitive edge.

The Technological Edge: AI and Digitization as YI's Moat

At the core of 111, Inc.'s strategy and competitive advantage is its profound commitment to technological differentiation, particularly through its 100% digitized operating system and extensive integration of Artificial Intelligence (AI). This fully digitized platform provides real-time operational data, enabling rapid decision-making and adjustments across sales, procurement, inventory management, and warehouse allocation. This foundational technology is not merely an enabler but the backbone of YI's strategy, empowering it to build an agile, intelligent, and customer-centric business.

The company's AI applications are critical in driving intelligent demand analysis, optimizing supply chains, and enhancing market responsiveness. For instance, its proprietary intelligent JBP platform and inventory sharing technology have established a unique decentralized inventory network. In 2024, this system expanded platform-accessible SKUs by 33,000 and increased inventory availability by RMB290 million. The AI-powered Borguan catalog, which analyzes procurement data from operations and thousands of partner pharmacies, improved forecasting accuracy from 71% to 82% in 2024. This led to the introduction of 6,598 new products, contributing over RMB905 million in Gross Merchandise Volume (GMV), while simultaneously reducing the platform-wide stock-out rate from 4.9% to an industry-leading 2.4%. Furthermore, the demand list generation time was dramatically cut from five hours to just 30 minutes, a tenfold efficiency boost.

YI also leverages AI for optimizing marketing strategies and operational systems. During flash sales events, AI-driven insights fine-tuned discount mechanisms and supported technology upgrades, resulting in a 17% month-over-month increase in GMV in December, an 8% growth in gross profit, an 18% surge in average revenue per user (ARPU), and a 14% rise in average revenue per order (ARPO) . Beyond these, AI-driven solutions have significantly advanced specialized areas, such as Chinese herbal medicine recognition, where accuracy improved from 77% to an impressive 98.18%, and content matching accuracy rose from 43% to 96% . The company's technology portfolio includes 33 patents, with recent additions focusing on AI-driven language processing for risk detection, doctor allocation algorithms, advanced drug sorting, and emotional analysis for customer behavior insights. These innovations collectively contribute to YI's competitive moat, driving operational leverage, enhancing financial performance through lower costs and better margins, and solidifying its market positioning for long-term growth.

Operational Excellence and Supply Chain Innovation

111, Inc.'s commitment to operational excellence extends deeply into its supply chain management, where continuous innovation in logistics and infrastructure is a key differentiator. The Kunpeng Pharmaceutical Logistics Network stands out as a pivotal achievement, designed to streamline logistics services and lower costs both internally and externally. This advanced cross-fulfillment center transshipment model connects YI's five major super hubs across East, Central, South, North, and Southwest China. By Q4 2024, the network operated 28 transportation routes and had expanded last-mile delivery coverage to additional metropolitan areas, including Wuhan, Guangzhou, Chongqing, and Tianjin . Operationally, the Kunpeng Network achieved significant improvements in 2024, reducing the order damage rate by 56% and improving average delivery time by nearly a full day . Financially, it generated RMB7.1 million in total gains, including cost savings, for the full year 2024 . The network is transitioning from a cost center to a profit center by providing professional pharmaceutical logistics and distribution services to external partners, helping clients reduce costs by 15% and addressing industry pain points with a 55% reduction in delivery damage rates .

Further enhancing its distribution capabilities, YI has rapidly expanded its supply chain infrastructure through a margin-friendly franchise model and joint venture (JV) fulfillment centers. In Q4 2024 alone, seven new fulfillment centers went online, bringing the total to 18 across the nation. This expansion enables delivery to over 300 major cities within 24 hours and nationwide within 72 hours . The franchise model, which transforms existing warehouses into full-fledged fulfillment centers using YI's digitized systems, significantly shortens setup times and reduces upfront capital outlay, particularly for reaching remote regions . The company plans to add at least 15 more fulfillment centers in 2025 .

YI's supply-side efforts also include strategic initiatives to optimize product offerings and strengthen partnerships. The company continues to prioritize investment in its JBP platform to optimize product range and enhance supply capabilities, leveraging wholesale purchasing models to promote key products from leading pharmaceutical companies . Direct supply partnerships, such as the long-standing collaboration with Beijing Scrianen Pharmaceutical and the formation of the "1Pharmacy" alliance, aim to diversify medicine offerings and drive mutual growth. Additionally, YI's private label business, featuring brands like "Guan Zhao" for chain stores and "Huang RongYao" for individual stores, is a significant growth engine. These private label products, encompassing OTC, RX, dietary supplements, and medical devices, offer a healthy gross margin of 29% and saw revenues surge 89% year-over-year in Q1 2024, advancing 35% in the first half of 2024 . This segment not only contributes to profitability but also builds brand equity and customer trust, offering an attractive solution for small to medium pharmacies to differentiate themselves.

These operational and supply chain innovations have directly translated into industry-leading efficiency. For the full year 2024, operating expenses as a percentage of revenues decreased to 5.7%, down 230 basis points from 8% in 2023 . In Q4 2024, this ratio further declined to 5.5% of net revenues, a 470 basis point decrease year-over-year . Fulfillment costs were notably reduced by 14% year-over-year in Q1 2024, 7% in Q2 2024, and 4.9% for the full year 2024 . This relentless focus on efficiency, driven by technology, positions YI as one of the most efficient healthcare e-commerce platforms in the sector, even when compared to much larger, more established players.

Financial Turnaround and Sustainable Growth Trajectory

111, Inc. has achieved a pivotal financial turnaround, marking 2024 as a historic year for the company. For the first time ever, YI delivered annual operational profitability and positive operating cash flow, a direct validation of its long-term strategy and diligent execution. In 2024, the company reported GAAP income from operations of RMB2.1 million, a sharp reversal from an operational loss of RMB350.1 million in 2023 . Non-GAAP income from operations reached RMB22.3 million, significantly improving from a RMB123.9 million loss in the prior year . This bottom-line improvement of RMB332.7 million (94.1%) on a GAAP basis and RMB126.6 million (99.5%) on a non-GAAP basis underscores the effectiveness of its strategic initiatives .

The full year 2024 saw net revenues of RMB14.4 billion, with gross segment profit at RMB829.2 million . Despite a challenging macroeconomic environment that led to a 6.3% year-over-year decrease in Q4 2024 net revenues to RMB3.8 billion, YI's operational efficiency gains were profound. Total operating expenses in Q4 2024 plummeted by 50.1% year-over-year to RMB209.8 million, representing just 5.5% of net revenues, down from 10.2% in the prior year . This trend of improved profitability continued into 2025, with the company maintaining quarterly operational profitability and positive operating cash flow in both Q1 2025 and Q2 2025. In Q2 2025, marketing promotional products related sales revenue increased by 53.6% year-over-year, and customer count grew by 19.0% year-over-year, indicating strong engagement despite market headwinds.

YI's liquidity position is supported by its positive operating cash flow, which reached RMB263 million for the full year 2024 . As of December 31, 2024, the company held RMB518.3 million in cash and cash equivalents, restricted cash, and short-term investments . The company maintains efficient working capital management, with accounts payable days around 45, accounts receivable days between 10-12, and inventory turnover days around 25-30 .

A notable financial consideration is the RMB1.08 billion redeemable loan outstanding to investors in 1Pharmacy Technology as of Q4 2024. However, the company has successfully reached agreements or obtained commitment letters from investors representing approximately 97% of this amount to reschedule repayments over extended periods . While an arbitration ruling in January 2025 favored an investor for a RMB30 million repurchase, management does not expect it to impact the business operations of its PRC entities . This financial discipline and strategic management of liabilities validate YI's path to sustained profitability and its ability to fund future growth.

Outlook, Guidance, and Investment Risks

Looking ahead to 2025, 111, Inc. management remains optimistic about its growth trajectory, while acknowledging the ongoing challenges in the macroeconomic environment. The company anticipates that its profitability and positive cash flow generation will be sustainable, driven by continued cost optimization through AI and internet technologies, which are deeply ingrained in its operational DNA . A key quantitative target articulated by management is to achieve an operating expense ratio under 5% if sales reach RMB20 billion or more . This ambitious goal underscores the confidence in its scalable, tech-driven efficiency model.

Strategic expansion of its fulfillment network is a significant part of the 2025 outlook, with plans to add at least 15 more centers, building on the 18 already established by the end of 2024 . Seven new fulfillment centers are currently in the pre-opening phase, targeting launches from September to December, with more in the pipeline for Northeast and Southwest China . AI is slated to become an even more integral part of the company's strategy, serving as a core engine for end-to-end technology integration across price intelligence, product selection, supply chain optimization, and customer service . Furthermore, YI will continue to invest in its private label business and the JBP platform to enhance product offerings and strengthen partnerships. The company is also open to evaluating various listing options, including a potential Hong Kong IPO, to support its growth and benefit shareholders .

Despite this positive outlook, investors must consider several pertinent risks. The macroeconomic pressures in China, characterized by cautious consumer spending and slowing retail sales growth in the healthcare sector, could continue to impact revenue growth . Ongoing healthcare reforms, while beneficial long-term, present short-term challenges due to uneven policy execution and regulatory uncertainties across provinces . The intensified industry competition, stemming from aggressive pharmacy expansion during the pandemic and a stagnant market, could further pressure per-store revenues and profitability for downstream partners . While the majority of the redeemable loan has been rescheduled, the outstanding amount and any future redemption requests could still pose liquidity management challenges.

In a competitive landscape featuring Alibaba Health (BABA), JD Health (JD), and Ping An Good Doctor (1833.HK), YI's operational efficiency and hybrid online-offline model are key differentiators. While YI's gross profit margin (TTM: 5.05%) is lower than some competitors like Ping An Good Doctor (2024: 32%), its operating profit margin (TTM: -0.01%) is nearing breakeven, comparable to Ping An Good Doctor's -2% in 2024. YI's significantly lower Price-to-Sales ratio (TTM: 0.02) compared to Ping An Good Doctor (2024: 1.37) suggests potential undervaluation if its profitability can be sustained and scaled. However, the negative Debt/Equity ratio (TTM: -0.30) indicates negative equity, which is a financial vulnerability requiring close monitoring. YI's strategic positioning to empower small to medium-sized pharmacies with its digital tools and private label offerings allows it to carve out a defensible niche, but its ability to scale revenue to match its operational efficiency will be critical for long-term value creation.

Conclusion

111, Inc. stands at a pivotal juncture, having successfully transitioned to operational profitability and positive cash flow in 2024, a significant achievement in China's dynamic healthcare market. This turnaround is a direct result of its unwavering commitment to leveraging AI and a fully digitized operating system to drive unparalleled operational efficiency across its extensive supply chain and customer engagement initiatives. The company's innovative Kunpeng Network, coupled with its margin-friendly franchise fulfillment centers, is rapidly expanding its reach and solidifying its competitive moat in pharmaceutical distribution.

While macroeconomic headwinds and intense competition present ongoing challenges, YI's strategic focus on technology-driven cost reduction, comprehensive product offerings, and a hybrid online-offline model positions it favorably to capitalize on the structural shift of drug sales to retail pharmacies. The company's ambitious guidance for continued cost optimization and fulfillment center expansion, underpinned by a robust AI roadmap, suggests a clear path towards sustainable profitability. For discerning investors, 111, Inc. represents a compelling opportunity to invest in a tech-enabled healthcare platform that has demonstrated the ability to execute its long-term strategy, with its technological leadership and operational discipline serving as critical drivers for future growth and market share expansion.