Is it reasonable for a company with annual revenue of around $2 billion to make a profit if its market capitalization is only $67.68 million? This is a question raised by Shuita Research, a well-known research institution, about the valuation of 1 Pharmaceutical Network (YI.US).

Zhitong Finance learned that YI.US (YI.US) released the 2024 Q3 performance report. Despite the challenges brought about by the weak consumer market and pressure on downstream pharmacies, 1 Pharmaceutical Network's performance in the third quarter was steady. According to the report, 1 Pharmaceutical Network achieved revenue of 3.6 billion yuan and gross profit of 0.21 billion yuan, a year-on-year increase of 10.5%; non-GAAP operating profit was 7.1 million yuan. It has achieved operating profit for three consecutive quarters, and has also achieved positive operating cash flow for three consecutive quarters.

Recently, Liu Junling, co-founder, chairman and CEO of 1 Pharmaceutical Network, emphasized in a fireside conversation with Watertower Research that the company should maintain profits and positive cash flow. In a challenging market environment, 1 Pharmaceutical Network is expanding the layout of fulfillment centers through strategic expansion of logistics networks, especially asset-light models such as joint ventures and franchises. This innovative business model not only increases the company's total commodity transactions and gross profit margin, but also enables it to scale up more quickly and economically.

It is worth noting that despite the current severe macroeconomic environment, Liu Junling believes that this has instead helped the development of the business model of 1 Pharmaceutical Network. He pointed out that China is solving some structural problems, which will help clean up the industry and push enterprises in the supply chain ecosystem to survive by relying on a more clear, transparent and efficient business model. And this is exactly the field that 1 Pharmaceutical Network wants to participate in, so in the long run, the current short-term disadvantages will be transformed into the company's long-term development advantages.

Liu Junling pointed out that many industries in China will face unprecedented challenges, “but the aging population is beginning to promote the development of the pharmaceutical industry. Because China's demographic structure is changing, an aging population will lead to an increase in medical expenses. China's medical expenditure accounts for about 7% of GDP, while the US accounts for about 20%. I've seen different data, about 17% to 20%. China still has a lot of room for growth in this area.”

During the reporting period, 1 Pharmaceutical Network further strengthened its core competitiveness in digitalization. Relying on its core technical advantages, the cost of operation management, supply chain management, etc. of 1 Pharmaceutical Network has continued to decrease, and operational efficiency has been greatly improved. In the third quarter, the company's operating expenses as a percentage of net revenue fell from 7.4% in the same period last year to 5.8% in the current quarter.

In a fireside conversation, Liu Junling emphasized the advantages of 1 Pharmaceutical Network in terms of digital operation. “We have a 100% pure digital operation system, which enables us to become an industry benchmark in terms of operational efficiency. We must use our digital capabilities to help our upstream and downstream partners so they can benefit from it and improve efficiency. We will work hard to ensure that we provide the richest selection, the most competitive prices, and that our customers are satisfied with our after-sales service.”

In addition, in the third quarter, 1 Pharmaceutical Network opened four new fulfillment centers nationwide, and plans to add at least five more next year. This expansion plan will further consolidate the leading position of 1 Pharmaceutical Network in the digitalization of the pharmaceutical supply chain and lay a solid foundation for its future growth. By integrating the joint venture fulfillment center and franchise fulfillment center model, 1 Pharmaceutical Network can launch the fulfillment center faster with less capital expenditure, greatly shortening preparation time and improving operational efficiency.

Regarding the target of operating expenses as a proportion of revenue, Liu Junling said that in order to reduce operating expenses to less than 5% of revenue, the company only needs to continuously expand its business scale through greater order density. He believes that once the company's annual revenue reaches 20 billion yuan, the company should be able to achieve this goal.

However, despite the many achievements of 1 Pharmaceutical Network, its stock price performance is out of touch with operational and financial results. The stock price doesn't seem to reflect the real value of a company with annual revenue of around $2 billion and is expected to achieve its first full-year operating profit and positive operating cash flow this year.

Faced with market undervaluation, Liu Junling said, “Since the company was founded, we have come a long way, spent billions of yuan to build infrastructure, and integrated more than 70% of independent retail pharmacies in China into our platform. In the long run, macroeconomic policies are beneficial to us, and the population structure is becoming more and more conducive to our development. Of course, we also faced some challenges, but we finally reversed and made a profit this year. I believe it is only a matter of time before everyone realizes that this is a very valuable enterprise, and we want the company's value to be truly reflected in the market.”

According to the Water Tower Research Review, the net cash of 1 Pharmaceutical Network is equivalent to ADS 0.66 US dollars per share, and revenue is about 2 billion US dollars, but the stock price performance is out of touch with revenue and financial results. Compared with the pharmaceutical supply chain companies that are booming in China, the market capitalization/revenue ratio of 1 Pharmaceutical Network is also far lower than that of its peers. However, with the transformation of the industry and the continuous efforts of the 1 Pharmaceutical Network, I believe its market value will be truly reflected.