YI - 111 Inc.: Moving Toward Profitability In The Telehealth Sector

2023-03-26 03:12:33 ET

Summary

• YI is positioned well to take advantage of rapid adoption of telehealth in China.
• With China opening up, its physical pharmacies and warehousing should pick up.
• The combination of expected scale and cutting expenses is bringing the company close to consistent and sustainable profitability.

111, Inc. ( YI ), which operates a digital platform in China that connects patients to physical healthcare services and medicine, is showing signs of ongoing improvement as China continues to open up after shuttering for a prolonged period of time in response to COVID-19.

This has contributed to a year-over-year increase in revenue, which should continue to improve as the Chinese people embrace the efficiency of the online health platform, which provides improved convenience, accessibility, and lower health costs to end-users.

Even though the company did over $600.00 million in revenue in the fourth quarter of 2022, it is competing against several large competitors, and is confident it can scale further in the competitive environment and sector it operates in.

The goal of YI is to become the company in the sector with the lowest cost structure, which would result in a lot more flexibility if it can execute on its strategy.

In this article, we'll look at its recent numbers, the opportunity before it, and why it has a significant chance of growing on a consistent basis in the quarters and years ahead.

Some of the numbers

Revenue in the fourth quarter of 2022 was $601.4 million, up 19.9 percent year-over-year. Full year 2022 revenue was $2.0 billion, up 8.8 percent from full year 2021.

Gross profit in the reporting period was at 23.8 percent, up 31.5 percent from the fourth quarter of 2021. Gross profit for full year 2022 was up 35.2 percent.

Gross margin in the fourth quarter of 2022 came in at 5.6 percent, up from 5.2 percent in the same reporting period of 2021. Gross margin for full year 2022 improved from 5.0 percent to 6.2 percent year-over-year.

Non-GAAP losses in the reporting period were -$(5.8) million. Non-GAAP loss from operations for full year 2022 was -$(31.00) million.

Cash flow in the fourth quarter of 2022 was $9.2 million, the second quarter in a row it has generated positive cash flow.

At the end of calendar 2022 the company had cash and cash equivalents, restricted cash and short-term investments of $133.8 million.

Management cited the numerous disruptions it had in its business during the 2022 lockdowns, and if that is much less of a factor in 2023, as it appears it'll be, the company could surprise to the upside over the next year.

With revenue up approximately 14x over the last five years, according to management, there is a growth runway ahead of it that, if it regains momentum, will probably accelerate. Unless the Chinese government reverses its decision, a lot of the headwinds that held back the company's progress will be removed.

Scaling and improving the bottom line

Taken together with YI successfully chipping away at expenses, a significant return to revenue growth should further cut expenses, which will move the company closer to profitability. Management said it cut costs by over 50 percent year-over-year, and in the fourth quarter of 2022, on a non-GAAP basis, it achieved profitability.

Concerning the ongoing improvement in non-GAAP operating loss as a percentage of revenue, management said that building up its customer network in past years had helped the company sell higher-margin products, which in turn improved the revenue mix of YI.

With the company positioned to scale, expenses being lowered, and the major headwind of COVID-19 largely removed from the picture, if YI can execute on its strategy, the stock has a high-percentage chance of consistently and sustainably growing.

Even though YI's differentiator is its telehealth business, it also competes with physical pharmacies and warehousing, which should significantly benefit from the opening up of China going forward, accelerating its pace of growth.

Sector over the long term

For some time, it has been evident that anything that can be digitized will be digitized, and that includes connectivity between patients, physical health care, and medicine, i.e., telehealth, or digital health platforms like YI offers.

I've experienced in my own life concerning health care. Once I used a telehealth platform, or connected to my physician using a phone, I definitely didn't want to go back to the previous way of having to go to a physical office in person.

A lot of people feel the same, and companies like YI are going to benefit from that in the years ahead. That doesn't guarantee YI will be successful in implementing its strategy, but it does mean it's competing in a sector that has a lot of growth ahead of it.

COVID-19 accelerated the adoption of telehealth, with the entire global market in 2020 being $144.38 billion, and is projected to grow to approximately $636.00 billion in 2028, a CAGR of 32.1 percent from 2021 to 2028.

With the Chinese government approving of and supporting the telehealth sector in China, it should be a major contributor to overall growth in the global sector over the next several years. That provides a great growth opportunity for YI, which is strongly positioned to take advantage of growing demand.

A question that needs to be answered is, why is China opening up considered a tailwind for the sector if people are returning to a more normalized life? In other words, if they're in physical contact with people now, wouldn't that result in less telehealth demand?

The answer to that is, at least in China, is the pandemic, as management stated, revealed weaknesses in the healthcare system, and going forward there is strong support to build out digital healthcare in the country.

What it appears is happening is a hybrid solution. There will be an increasing transition to telehealth even as many people continue to visit physical medical offices and facilities. Over time the percentages of telehealth as an option for patients will grow, and the country will be prepared for other health emergencies that affect a significant number of the Chinese population.

Another factor in growth and adoption will be in relationship to the elderly demographic, which is usually less open to accepting changes associated with tech in general, and for the most part, prefer to visit a physician in person. If that's how it's playing out in China, it would mean telehealth will be accepted by younger demographics, which would be favorable to long-term growth in the sector.

Conclusion

I like the revenue growth trajectory of YI. It has been growing at a moderate, consistent pace recently, and it's not attempting to grow at any cost, which is why it is close to turning a sustainable profit.

It's not the largest company in the telehealth industry of China, but it has clearly stated it wants to be the most profitable. I think that's the right strategy to embrace, and it appears the steps being taken by management has brought it close to achieving that goal.

After falling to its 52-week low of $1.37 on May 24, 2022, it has since rebounded to its 52-week high of $4.00 per share on December 12, 2022. After breaking out it has defended the $2.00 mark as a floor and has had a double bottom of roughly $2.35 per share, which I consider the baseline to work from in the quarters ahead.

The current share price is attractive, and if the company can sustainably grow the top line while cutting expenses, it has a very good chance of breaking out to the upside in the years ahead.

With the telehealth sector here to stay and expected to grow at CAGR of 32.1 percent through 2028, YI has an opportunity to grow share and turn a profit, which should be a powerful tailwind for the company if it's able to execute on its plan.

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