In the past week, after the central bank announced a "double reduction," the Hong Kong A-share and Chinese concept stock markets have entered an epic surge mode. Investors can't help but shout out the classic line of Stephen Chow, "I feel like they've all come back."

There has been a clear change in the attitude of foreign giants towards Chinese assets, with many issuing statements to express optimism about Chinese assets. For example, Goldman Sachs' latest view suggests "investors to tactically invest in Chinese stocks," while Morgan Stanley believes that the Chinese stock market may see a "tactical rebound in the near term, even outperforming emerging markets."

With the support of a series of easing policies, global long-term funds have started buying Chinese assets. The Nasdaq China Golden Dragon Index has even set a historical record with a 27.5% surge in the past two weeks (as of October 9th). It is worth noting that the assets purchased by foreign giants mainly belong to the assets of emerging new productive forces, and among them, as one of China's leading digital healthcare platforms, 111 inc (YI.US) has attracted the attention of many investors with its unique business model and sustained performance growth.

In the past two weeks, the stock price of 111 inc has grown by 83% (as of October 9th), far exceeding the increase in the China Golden Dragon Index. Not only in terms of stock price growth, but also in trading volume, it is remarkable. For example, the trading volume on September 30th was 3.0416 million USD, reaching a new high since December 14, 2022, when the volume was 3.6 million USD.

Even in the past two trading days, amid the general sharp decline of Chinese concept stocks, 111 inc has only experienced a slight drop, with investors still retaining over 80% of their profits.

In the complex capital markets, especially against the backdrop of the surge in Chinese concept stocks, finding and holding undervalued high-quality assets has always been the goal pursued by long-term funds and ordinary investors.

Benjamin Graham is hailed as the father of modern security analysis. The theory he proposed of value investing emphasizes investing in companies whose market prices are lower than their intrinsic value. The core of this concept lies in finding quality assets that are undervalued by the market, purchasing them at a price below their true value, and then patiently holding them until the market price reflects their true intrinsic value.

In terms of asset quality, since 2024, 111 inc's revenue and profit performance has continued to show steady growth. According to the company's financial report, in the second quarter of 2024, 111 inc achieved revenue of 3.424 billion RMB; Non-GAAP operating profit was 8.5 million RMB, and GAAP operating profit reached 3.3 million RMB, achieving operating profits for two consecutive quarters.

If the company can maintain stable or growing revenue, it indicates that its business is continuously expanding and its market share is increasing. Since its listing in 2018, 111 inc has shown steady revenue growth, expanding its revenue by 16 times in six years.

This continuous revenue growth not only demonstrates the company's remarkable ability in business expansion and increasing market share but also lays a solid foundation for the company's future development. Achieving profits for two consecutive quarters signifies a turning point for 111 inc.

111 inc 2024 Q1, Q2 Revenue and Non-GAAP Overview

For potential investors, a company with positive Non-GAAP figures may be more attractive. This is because it indicates that even after deducting non-recurring items such as asset impairment losses, intangible asset amortization, share-based incentive expenses, the company still performs well and has strong profit capabilities.

The growth of gross margin is a positive signal for any company, as it indicates that the company's cost control and pricing strategies in selling products or providing services have been effective. In Q2 2024, 111 inc's gross margin reached 6.06%, returning to the 6% level after 18 months, and ranks fifth in historical quarterly data with statistics available.

Looking ahead through the historical telescope, 111 inc has not had a gross margin lower than 4% since 2021, which is a positive signal, demonstrating the company's strong pricing and cost control capabilities.

From gross margin feedback to net margin, its net margins in Q1 and Q2 of 2024 were -0.08% and -0.06%, respectively, with year-on-year growth of 85.47% and 95.34%. Following this trend, it is highly probable that 111 inc will achieve positive net income in the second half of the year.

Gross margin and net margin for the past four quarters of 111 inc

In addition to gross margin, the operating expense ratio is also a key indicator for measuring the company's operational efficiency. In terms of cost control, 111 inc continuously optimizes supply chain management and reduces operating costs through technological innovation and business model innovation.

During the reporting period, 111 inc's operating expenses as a percentage of net revenue continued to decrease, from 7.2% in the same period last year to 6.0% this quarter, compared to 16.7% in 2019. This means that the company is able to continuously and more effectively manage its operating costs, thereby enhancing net income.

Understanding the company's debt level can help investors assess its financial risk. In the first quarter of 2024, 111 inc's debt ratio was 90.45%, which although relatively high, if the company can achieve business growth through effective capital operations, a reasonable debt level will not pose a significant threat to the company's long-term development.

China's digital pharmaceutical distribution service market outside the hospital has huge growth potential. According to forecasts by relevant research institutions, by 2027, this market will double to 358 billion RMB (approximately 50 billion USD). In this context, as an industry pioneer, 111 inc is expected to further consolidate and expand its market share.

111 inc owns the world's largest virtual pharmaceutical network consisting of over 0.47 million pharmacies, covering over 70% of pharmacies nationwide and reaching hundreds of millions of consumers in China, giving it a significant advantage in pharmaceutical sales channels.

Furthermore, 111 inc has established cooperation with over 500 well-known domestic and foreign pharmaceutical companies to ensure the supply and quality of pharmaceutical products. 111 inc has independently developed a series of application systems including smart selection, smart procurement, smart pricing, and smart supply chain management, demonstrating strong capabilities in technological innovation that help enhance operational efficiency and optimize user experience.

From the perspective of value investment theory, companies with sustainable competitive advantages can stand out in the market, gaining long-term excess profits. 111 Inc is China's leading digital pharmaceutical and health platform, with a wide user base and market awareness. This position allows it to occupy a favorable position in the industry and provides the foundation for continuous growth.

The Chinese digital out-of-hospital pharmaceutical distribution service market has tremendous growth potential. It is expected that by 2027, this market will double to 358 billion RMB (approximately $50 billion USD).

A recent report by Tower Water Research stated that due to the huge growth space in the hospital-outpatient distribution market, 111 Inc's revenue is expected to exceed 20 billion RMB in 2027, with the gross margin expanding to 8%. By 2027, the ratio of operating expenses to revenue will drop to below 5%.

According to the Zhitong Finance APP, 111 Inc's valuation is in a long-term, historically low range, with its American Depositary Shares (ADS) trading price far below its B2B peers. Currently, 111 Inc's P/S ratio is 0.51, much lower than the industry average. This indicates that the market valuation of 111 Inc is relatively conservative, suggesting a potential undervaluation.

Tower Water Research pointed out in its report that on September 12, 2018, 111 Inc went public at a price of $14 per ADS, with a market cap of $1.14 billion. Its market cap briefly soared to over $2 billion in February 2021, influenced by short-term collective pressure in the Chinese stock market at that time. However, as of now, its market cap has plummeted to only a small fraction of $88 million. In comparison, YSB Pharmacies (09885.HK) in the Hong Kong stock market is valued at 7.5 times that of 111 Inc.

According to value investment theory, when the market price is below intrinsic value, it is a good time to invest. While the P/S ratio cannot fully represent a company's intrinsic value, it is an important reference indicator. A low P/S ratio provides investors an opportunity to buy shares of companies with potential high value at relatively low prices.

Tower Water Research believes that in terms of enterprise value to revenue ratio (EV/revenue), 111 Inc's valuation is attractive. Dongxing Securities' report points out that 111 Inc is an undervalued leader in the pharmaceutical healthcare sector, with differentiated competition expected to win in the future, projecting that 111 Inc's valuation could increase by 3-4 times.

Based on Benjamin Graham's value investment theory, 111 Inc may currently be an attractive investment symbol, showing possibilities of being undervalued in multiple dimensions. Its low P/S ratio, robust cash flow, huge industry growth space, stable market position, and continuous technological innovation all provide strong support for its future development.

Especially in the past three years, Chinese concept stocks have suffered losses of more than 70% in most valuations due to previous short selling, and the long-term lack of liquidity has kept many high-quality individual stock valuations at a long-term low. This time, driven by monetary policy, there is continuously increasing capital inflow and active liquidity, while fiscal policy is also brewing. It is expected that more policies, including tax incentives, will be introduced to promote the development of the real economy, anticipating a long bull market. As a leader in the digital pharmaceutical and health industry, 111 inc, considering its technological innovation and continuously improving profitability in the field of digital pharmaceutical and health, with high-quality fundamentals + undervaluation + buybacks + stock-based incentives resonating with large cap and securities services sectors, will usher in an investment opportunity for valuation reshaping.