Amidst a challenging macroeconomic landscape, 111 Inc. (ticker: YI) sustained its operational profitability for the third consecutive quarter in Q3 2024. The company's net revenues held steady at RMB 3.6 billion, while gross segment profit saw a notable increase of 10.5%, reaching RMB 210.6 million. A significant reduction in operating expenses, which fell to 0.8% of net revenues from the previous year's 7.4%, contributed to this performance.
Key Takeaways
- 111 Inc. maintained operational profitability in a tough macroeconomic environment.
- Total (EPA:TTEF) net revenues were stable at RMB 3.6 billion.
- Gross segment profit increased by 10.5% to RMB 210.6 million.
- Operating expenses were significantly reduced by 23.2%.
- The company is navigating a challenging Chinese healthcare market but sees long-term growth opportunities.
Company Outlook
- 111 Inc. is focused on continuing to improve operational efficiency.
- The company is investing in digital technologies and expanding product offerings.
- Enhancing partnerships with pharmaceutical companies is a priority.
- 111 Inc. aims to leverage AI and data analytics for further growth.
Bearish Highlights
- The Chinese healthcare market is facing headwinds such as weak consumer sentiment and declining healthcare expenditures.
- Retail pharmacy sales have decreased, and there is intense competition among pharmacies.
Bullish Highlights
- Long-term opportunities identified in the anti-corruption campaign in healthcare and potential shifts in drug sales to retail pharmacies.
- The company anticipates benefits from a growing aging population and potential expansion in healthcare expenditure.
Misses
- Despite a stable revenue, the company still operates in a highly challenging market with several external pressures.
Q&A Highlights
- CEO Junling Lu emphasized the importance of digital transformation, stating that 100% of internal systems are now digitized.
- Lu expressed confidence in the company's leadership in operational efficiency and commitment to continuous improvement.
- The aging population in China was highlighted as a factor that will likely increase Medicare needs.
Technological and Operational Innovations
- 111 Inc. has improved the accuracy of its AI-driven herbal medicine recognition technology to 98.18%.
- The company added 23,000 new SKUs through inventory sharing technology.
- Expansion of fulfillment centers and the implementation of a franchise model are among the strategic moves to accelerate growth.
Supply Chain and Logistics Improvements
- The development of the Kuangtong logistics network has optimized the company's supply chain.
- Delivery costs were marginally reduced, and warehouse labor and packaging costs were optimized.
- Relocation of fulfillment centers has been part of the strategy to reduce costs.
111 Inc.'s resilience in the face of market challenges and its strategic focus on digital transformation and operational efficiency position the company to capitalize on future opportunities in the evolving Chinese healthcare market.
Full transcript - 111 Inc (YI) Q3 2024:
Moderator/Operator, 111: Hello, everyone, and thank you for joining 111's conference call today. On the call today from the company are Doctor. Gang Yu, Co Founder and Executive Chairman Mr. Junling Liu, Co Founder, Chairman and CEO Mr. Luke Chen, CFO of 111's major subsidiary and Mr.
Harvey Wang, COO. As a reminder, today's conference call is being broadcast live via webcast. The company's earnings press release was distributed earlier today and together with the earnings presentation are available on the company's IR website. Before the conference call gets started, let me remind you that this call may contain forward looking statements made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which can cause actual results to differ materially.
For more information about these risks, please refer to the company's filings with the SEC. 111 does not undertake any obligation to update any forward looking statements as a result of new information, future events or otherwise, except as required under applicable law. Please note that all numbers are in RMB and all comparisons refer to year over year comparisons unless otherwise stated. Please also refer to the earnings press release for detailed information of the comparative financial performance on a year over year basis. With that, I will turn the call over to 111's CEO, Mr.
Junling Lu. Please go ahead.
Junling Lu, Co-Founder, Chairman and CEO, 111: Good morning and good evening, everyone. Thank you for joining our Q3 2024 earnings call. The information we'll be discussing is also available in the slides posted earlier today on the company's website. I encourage everyone to download the presentation as well as the earnings report from our Investor Relations website at ir.111.com.cn. China's challenging macroeconomic environment continues to have an impact on our entire industry, including both the upstream and downstream sectors.
While challenges are inevitable, we still achieved a stellar performance maintaining operational profitability for 3 consecutive quarters. This achievement is primarily driven by our ongoing enhancements in operational efficiency, which have helped us navigate the unfavorable environment. In today's call, I will provide an in-depth overview of the current market situation facing our industry as well as the long term outlook and the opportunities ahead, along with our key financial highlights. I will also discuss how we are leveraging new technologies to strengthen operations, our supply side initiatives and our recent efforts. Finally, I will outline our future growth strategy before handing over to our CFO, Mr.
Luke Chen, who will provide a detailed analysis of our financial performance. 1st, on the macroeconomic side, in light of weak consumer sentiments, sales growth in retail goods has slowed in China. Our industry is also experiencing cautious household spending on healthcare. According to data from the National Bureau of Statistics, per capita healthcare expenditures growth rate declined 11.5% points from a year earlier for the 1st 9 months. Additionally, our downstream pharmacies are facing ongoing healthcare reforms, including adjustments to individual medical accounts and the gradual implementation of coordinated outpatient benefits alongside increased regulatory oversight.
While these reforms are designed to drive long term development of the industry, the short term outlook remains challenging. An aggressive expansion of pharmacies was fueled by optimism during the pandemic, while the total number of stores has increased. Market growth has not kept pace as evidenced by a 2.2% decrease in China's retail pharmacy sales from the 1st 9 months of 2024. According to Zhongkong Huai Fi system data. This disparity has led to reduced per store revenues and intensified the competition among pharmacies.
Many large chain pharmacies are now grappling with a significant declines in net profit, while independent pharmacies with their limited resources are under even greater pressure. For instance, Yixin Tang or YXT Health reported a 94% year over year decline in Q3 net income attributable to ordinary shareholders, followed by a 68% decrease at Tianjie or JVJ China Drug Store, 37% at Laobixin or LBX Pharmacy Chain and 22% at Daxinglin or Daxinglin Pharmaceutical (TADAWUL:2070) Group. Against this backdrop, it is more critical than ever for digital transformation in this industry, which presents vast opportunities for us. Pharmacists must navigate subdued consumer sentiment, slower growth in household healthcare spending and the shifts in patient behavior, while addressing cost pressures alongside operational efficiencies. Looking ahead, there needs to be more innovation in service delivery and strategic adjustments to categories to sustain growth and adapt to a transforming market.
For this, digitization and AR applications could serve as solutions for retail development. As a leader in this digital revolution, we have already implemented cutting edge digital technologies to enhance every aspect of our operations from sales and procurement to customer demand analysis, inventory management and warehouse allocation and so on. We are committed to empowering our upstream and downstream partners with our fully digitized operating system further reducing their ongoing cost and increasing efficiency. In addition to the unstoppable trend of digital transformation, we remain optimistic about China's healthcare market in the long term for two key reasons. First, the deepened national anti corruption campaign in the healthcare sector, which will foster greater transparency and integrity in hospital procurement is expected to accelerate the shift of drug sales and prescriptions to retail pharmacies.
This will become a RMB1 1,000,000,000,000 out of hospital pharmaceutical distribution market, which will amount for almost half of the entire distribution market within about 3 years. Our customer focus is on chain pharmacies and with our expertise in the out of hospital pharmaceutical market, we are well positioned to capture the significant growth opportunities this Shift brings. By offering a comprehensive and cost efficient product range coupled with an unwavering commitment to customer experience, we aim to increase market share in this sector where challenges and opportunities coexist. 2nd, we expect China's large aging population and the rise of the silver economy to drive significant demand for healthcare consumption. Given the healthcare expenditure as a proportion of GDP in China, it is still lower than in-depth developed countries.
The overall upward trend in the pharmaceutical and healthcare market remains strong in the long run. In Q3, our commitment to operational efficiency continued to drive significant results. We achieved profit from operations for 3rd consecutive quarter. Income from operations in Q3 was RMB2.4 million compared to an operating loss of RMB80.4 million in the same quarter last year. Non GAAP income from operations was RMB 7,100,000 compared to a non GAAP loss of RMB 54,000,000 in Q3 of the prior year.
This performance improvement underscored the effectiveness of our growth strategies and the resilience of our business model. We observed consistent positive changes across nearly all business segments. Total operating expenses in Q3 were 5.8 percent of net revenues, a 160 basis points decrease from the prior year. Fulfillment expenses remained steady at 2.8% of net revenues in line with the previous year. However, we successfully reduced the general and administrative expenses to 0.4% of net revenues from 1.3% a year ago.
Selling expenses decreased to 2.1% of net revenues compared to 2.6% in the prior year. Technology expenses were 0.5% of net revenues, down from 0.7% a year earlier. Excluding share based compensation, operating expenses as a percentage of net revenues dropped 100 basis points to 5.7%. Additionally, we remained positive operating cash flow of RMB110 1,000,000 for the 3rd consecutive quarter. Our investments in infrastructure and optimal staffing allocation have proven to be effective in navigating the current economic challenges while maintaining robust performance.
We have maintained our focus on areas that foster long term sustainable growth, ensuring that our digital capabilities remain at the forefront of industry standards. This quarter, our advanced digital infrastructure consistently delivered exceptional value to our customers with further reductions in technology and staffing expenses. These operational efficiencies have not only allowed us to withstand a competitive market, but have also supported our ability to adapt and thrive amidst the economic uncertainties as well as prepare us for long term opportunities. While our revenue remains comparatively smaller than some more established players, we continue to boast operational efficiency metrics positioning us competitively. We remain dedicated to setting the industry benchmark for efficiency with a clear goal of reducing operating costs even further and improving profitability with more refined and bigger operations.
This steadfast commitment is a cornerstone of our strategy and represents a vital part of our unique competitive advantage of moat. Those savings from our ongoing efficiencies will add flexibility and strength to our business while reinforcing our position as a leading healthcare e commerce operator. They could be reinvested into strategic areas such as technological innovation, market expansion and enhanced customer engagement when appropriate. Technologically, we continue to invest in system development, models, algorithms and the data applications to build our core competitiveness in digitization. Consequently, we have made notable advancements by applying digital and AI technologies that have strategically positioned us for continued success.
With our digitized JVP platform and inventory sharing technology, we seamlessly integrated with upstream suppliers to form a unified and a comprehensive stock pool that has significantly bolstered stock volume and availability. This advancement has enriched the product selection of additional 23,000 new SKUs. As a result, our supply capacity has been strengthened ensuring that we can meet customer demand more effectively and efficiently. We also utilize the supply chain optimization and smart pricing tools for the B2C Online Retail segment to enrich product offerings and adapt to market demands. This resulted in 100% increase in product categories and a record high customer conversion rate of over 13%.
This progress highlights the significant impact of data driven decision making and the platform innovation in sustained growth within the challenging retail environment. Moreover, we made outstanding progress in applying AI driven solutions, particularly in the Chinese herbal medicine sector. By training and the refining algorithm models for specification recognition, we increased the recognition accuracy of our AI model from 77% to an impressive 98.18% through multiple iterations. The accuracy rate of content matching for herbal medicine has similarly improved rising from 43% to 96%. Our competitive edge gets sharpened by optimizing inventory management and enhancing product offerings.
Our focus on continuous technological innovation is strategically important as it supports our mission to build a resilient, efficient and customer oriented business for adapting to evolving industry needs. By integrating advanced digital technologies and AI solutions, we are laying the groundwork for future growth and making ourselves better navigate future market challenges. Next (LON:NXT), let's delve into our supply chain management. We are setting an industry benchmark in supply chain excellence, consistently innovating in procurement, warehousing and order fulfillment to elevate efficiency. Our expansion of the Kuangtong network is pivotal aimed at providing streamlined logistics services that enhance both internal and external operations at a lower cost.
During Q3, this cross fulfillment center transshipment model enabled an extended proprietary network that connects our 5 major super hubs across East, Central, South, North and the Southwest China. This development is setting the stage for a comprehensive Kunpeng National Network enriched with 1st mile and the last mile services to ensure seamless end to end supply chain control. I want to highlight that under the Kuintang Pharmaceutical Logistics network, we added 8 new transportation routes in Q3, bringing the total to 28. The network also increased its external customer base by 12%, reaching 16.7% rise from Q2. This project achieved the cost savings of more than RMB5.3 to date.
As the Kuengpong network scales and integrates last mile services, we have witnessed a decrease in logistics and delivery expenses. When combined with optimized warehouse labor, packaging and warehousing, these efforts have driven an 8% year over year reduction in fulfillment costs to RMB277 1,000,000 in the 1st 3 quarters. Moreover, to drive future growth and coordinate with our strategy for the nationwide platform network, we also strengthened our supply chain infrastructure. We completed the Guangzhou fulfillment center relocation project in Q3, which is projected to yield monthly cost savings of RMB800000. We're also expanding our fulfillment centers nationwide with 4 new facilities in Wuhan, Guangzhou, Jinan and Shiyabong amplifying our existing supply capabilities.
These centers notably cut delivery times for local customers by up to 2 days, reinforcing our ability to cover over 300 major cities within 24 hours and nationwide within 72 hours. With each new center, we reduced local fulfillment cost by as much as 20%, providing clear strategic advantages. The expansion is also marked by an upgrade in our product assortment with the Guangdong Center adding 5,000 new SKUs. Now, our network encompasses 15 fulfillment centers. 5 of these centers act as central hubs, supporting deeper penetration into Tier 3 to 60s, where over 60% of our pharmacy customers' base resides.
To further enhance reach and service, we have adopted a collaborative approach for faster fulfillment center expansion by transforming existing warehouses into full fledged fulfillment centers with 100% use of our digitized systems and processes, we cut setup time by 70%. Our newly adopted franchise model, which provides 111 with a share of gross merchandise value presents a highly effective margin friendly solution for reaching remote regions. 111 plans to expand its fulfillment centers footprint by adding at least 5 more centers over the next year. Furthermore, as we review this quarter's achievements, I would like to highlight some significant honors that underscore our operational strength and the strong business influence in the regional markets along with our continued technological advancements. In September, our Southwest Operations Center, Chongqingihou Pharmaceutical Co Limited was named among the top 100 service industry enterprises in Chongqing for the 2nd consecutive year.
In October, our Central China Operations Center, Hubeiihao Pharmaceutical Co. Ltd. Was included in the top 100 private enterprises in Wuhan list for the 2nd consecutive year. Additionally, in October, our South China Operations Center Guangdong Hehe Pharmaceutical Co. Ltd.
Earns a place on the 2024 Top 100 Private Enterprises in Guangdong and was also named among the top 50 Private Service Enterprises in Guangdong for 2024. We greatly appreciate recognition from local markets and the industry and believe these acknowledgments will enhance our credibility as we continue to expand our footprint and drive innovation in the healthcare e commerce space. Last but not least, I'd like to outline our strategies for revenue, margin and profit levels. At 111, our business approach emphasizes providing customers with the most comprehensive selection of pharmaceutical products at attractive prices for greater customer engagement. Through leveraging data analytics and market research, we can efficiently refine our product portfolio to align with customer preferences, while maintaining competitive pricing by utilizing intelligent digital tools.
We're also committed to enhancing our cooperation with pharmaceutical companies. By expanding these collaborations, we aim to diversify our range of medicines on our digitally empowered platform, increasing sales that generate mutual growth, especially across lower tier cities. Our robust digital marketing network is integral to this strategy, enabling pharmaceutical companies curate and showcase their product offerings more effectively. We will also utilize targeted marketing initiatives to raise brand awareness and expand to previously underserved markets. Through our platform, pharmaceutical companies can access valuable insights, strengthen their product selection and efficiently scale their operations.
For us, as we provide optimized product portfolio and sell more products, we will see an improvement in our overall profitability. Model balance, we're prioritizing investments into our JBT platform. This unique model has proven highly effective in engaging new partners and offering the broader range of products, showcasing its powerful value proposition. By refining the platform to satisfy partner needs and extending its reach, we expect to cultivate a more diverse partner base and unlock expanded sales opportunities. As we continue to enhance and scale the platform, we believe this model will solidify our competitive position and evolve into a catalyst for stronger growth and profitability.
We remain focused on enhancing operational efficiency supported by ongoing investments in leading technologies that streamline processes, reduce waste and boost productivity. Our emphasis on AI and a full scale digitization is critical to maintaining industry leading efficiency, improving customer engagement and fostering the development of new products and services. These efforts are designed to reinforce our market leadership and stimulate fresh growth avenues. Digital transformation is pivotal to our future. With 100 percent of our internal systems now digitized, we have enhanced financial outcomes while positioning ourselves as a transformative leader empowering the industry.
Our full spectrum technological ecosystem supports internal processes and extends its benefits to upstream and downstream customers, offering them access to the state of the art digital solutions and specialized expertise. Looking ahead, we will amplify our commitment to digital innovation by integrating emerging technologies into our operations to create more seamless, more efficient customer experience. With that, I'll hand the call to Mr. Lip Chang to walk through our financial results. Thank you.
Luke Chen, CFO, 111: Thank you, Qingming, and good morning or evening, everyone. Moving to our financial performance. My prepared remarks will focus on a few key business and financial highlights. For details on our Q3 2024 results, please refer to Slide 17 to 20 in Section 2 of our presentation. Again, all comparisons are year over year and all numbers are in RMB unless otherwise stated.
Let's start with the 3rd quarter results. Total net revenues were RMB3.6 billion, remaining relatively flat compared to the same quarter of last year. Gross segment profit for the quarter grew 10.5% to RMB210.6 million. Total operating expenses for the quarter decreased 23.2 percent to RMB28.2 million. As a percentage of net revenues, total operating expenses for the quarter were down to 0.8% from 7.4% as we continue to enhancing our operating leverage and optimize our operational efficiency.
Specifically, fulfillment expenses remained steady at 2.8% of net revenues, in line with the previous year. Sales and marketing expenses as a percentage of net revenue for the quarter were 2.1%, down from 2.6% in the same quarter of last year. General and administrative expenses accounted for 0.4% of net revenues, down from 1.3% in the same quarter of last year. Technology expenses amounted to 0.5 percent of net revenue, down from 0.7% in the same quarter of last year. As a result, income from operations were RMB2.4 million compared to a loss from operations of RMB18.4 million in the same quarter of last year.
Non GAAP income from operations was RMB7.1 million compared to non GAAP loss from operations of RMB54 1,000,000 in the same quarter of last year. Non GAAP net loss attributable to ordinary shareholders was $12,400,000 compared to $6,900,000 in the same quarter of last year. As a percentage of net revenues, non GAAP net loss attributable to ordinary shareholders accounted for 0.3% in the quarter, down from 1.8% in the same quarter of last year. As you can see, we are improving our financial performance quarter by quarter and maintained operating profit for the 3rd consecutive quarter. Please refer to Slide 21 to 25 of the appendix section for selected financial statements.
A quick note on our cash position as of September 30, 2024, we had cash and cash equivalents, restricted cash and short term investments of RMB614.4 million. And we are pleased to report positive operating cash flow for the 3 consecutive quarters. To date, the company has total outstanding amount of RMB1.1 billion, which has been included in the balance of redeemable non controlling interest and accrued expenses and other current liabilities earned to a group of investors of One Pharmacy Technology pursuant to the equity investment made in 2020 as previously disclosed. 111 received redemption request from certain of such investors in accordance with the terms of their initial investments in 1 Pharmacy Technology. Following communication negotiation, the company has reached agreements and our commitment letters with investors representing approximately 90% of total amount to reschedule the repayments, allowing for phased repayment as extended periods if the holders exercise the redemption right.
The company has paid a portion of the repurchase funds upon signing the agreement. Additionally, the company is in ongoing discussions with investors who is holding the remaining approximately 10% of the total amount. This concludes our prepared remarks. Thank you. Operator, we are now ready to begin the Q and A session.
Moderator/Operator, 111: Thank Your first question comes from Jessie Lu with HSBC. Please go ahead.
Jessie Lu, Analyst, HSBC: Thank you for taking my question. This is Jessie from HSBC. First of all, I want to congratulations on delivering a very resilient result despite the challenging macro environment. I have two questions. The first one on OpEx.
I noticed that for OpEx as a percentage of revenue is around 5.8 percent over the past 3 quarters. I was wondering going forward, is there room for this ratio to further come down? And what measures you were planning to do to drive that further improvement in OpEx optimization? The second question is on GP margin. Despite overall revenue has been flat year on year, we saw improvement for gross margin.
Can you help us understand the factors driving this improvement? Thank you.
Junling Lu, Co-Founder, Chairman and CEO, 111: Jessie, first of all, thank you for the questions. With regards to the question about OpEx, the short answer is yes. We will continue to reduce the expenditure in operating our business and we will see more and more impressive OpEx numbers because from day 1 of the company, our philosophy has always been to leverage technology to reshape the value chain of the industry. And we want to be the leader in operational efficiency. So how do we do that?
We believe that we have already become the leader in operational efficiency in the industry and we remain committed to continuing our effort in all aspects of our operations. Our optimization across all of the business segments is core in our management's daily work and we review those metrics on a weekly basis. We call it WBR. And of course, technology is essential in containing OpEx and we benefited big time in the past and no doubt it's going to continue to play an even bigger role in the future. In the meantime, we will constantly optimize our organization and we'll do some staffing.
We believe a lot of those expenses coming from people And if we could deploy those resources carefully and intelligently, we can achieve our savings. And of course, innovation in all aspects of our business is going to be key. I laid out some examples, especially in our supply chain to give you an illustration. That's going to help us to stay competitive. Like in the past, we only relied on building those fulfillment centers 1st party ourselves.
And obviously, nowadays, we have joint venture fulfillment centers. We also now have franchise fulfillment centers where the upfront capital outlay are all paid by our partners, whereas we can service partner our customers even better. We can produce a better customer experience. With regards to your question as to margin improvement, obviously, there are a few things we are doing and we will continue to do. First of all is the assortment management.
We have an internal tool, we call it the Borguan. So Borguan really constantly engage customers' needs and ensure that our assortment is constantly optimized dynamically. With that, the assortment management is taken care of. Of course, the other thing we do is the category management. Once again, this is very important in our margin growth.
You'll notice that our margin is growing faster than the revenue. And obviously, there are money losing categories and there are also money making categories. It's a fine act in balancing the 2. We'll have to really minimize the money losing categories and maximize the money making categories. The other thing, of course, is really important is to manage our upstream in our suppliers.
Our first party team worked really hard to find ways to get better deals from the pharmaceutical companies. We're going to make more investments in this area to have better coverage, especially those medium to small farmers from whom we can get better deals. I hope those answer your questions, Jessie.
Jessie Lu, Analyst, HSBC: Yes, very clear. Thank you very much.
Moderator/Operator, 111: Your next question comes from Alvin Miao, a Private Investor. Please go ahead.
Alvin Miao, Private Investor: Hello. Thank you for taking my questions. It's a wonderful quarter. Actually, I have 3 questions. The first is with 3 consecutive quarters of operating profits, does the company anticipate achieving operating profit for the entire year?
The second is supply chain management has always been a key focus for your company. What improvements and efficiency enhancement were made in Q3? And the last question is could you provide more insights into how the company managed to achieve positive operating cash flow for 3 consecutive quarters? Thank
Junling Lu, Co-Founder, Chairman and CEO, 111: you. Alvin, I'll take your first question. That's a great question about it's going to achieve profitability for the whole year. Yes, so we are quite optimistic in achieving operational profitability for the whole year. Thank you for that.
I'll leave your next question to Tohari.
Harvey Wang, COO, 111: Yes. Regarding the supply chain management, you are right. It has always been our key focus. And we actually, we emphasize industry benchmarks in our supply chain management. And we continue innovating in sourcing, in warehousing and like order fulfillment and the entire supply chain.
So in the past quarter, in Q3, our order fulfillment cost continued to decrease. It dropped from $101,600,000 of last Q3 to 99 point $98,000,000 of lease Q3. So it's a there is a net ceiling of $1,620,000 And our year to date fulfillment cost as a percentage of our revenue also decreased from 2.76% to 2.62%. So in logistics, we have achieved some of the following progress. First is our Ku Pan logistics network.
We scaled up the chain shipment network and also extended last mile delivery services. So in this part, in this year, our delivery cost has been reduced from 1.35 percent to 1.31%. And secondly, our labor and packaging cost in our warehouse also has been optimized by our by streamlining our operational process. And this part, our labor cost reduction in this year from 0.7% in terms of total revenue to 0.68%. And also our warehousing cost, for example, we just relocate our South China warehouse.
Our warehousing costs in this year decreased from 0.71% to 0.63%. So it's a reduction by 11.3%. And number 2, we are actually, we are expanding this Kuomteng network to provide professional logistics services, not only to our internal customer, but also to our external customer. So in Q3, we established this network for our 5 major fulfillment center, we call it our national fulfillment center in East, Central, South, North and Southwest China. And we plan to establish this national network with added 1st mile and last mile services to our upstream and downstream customers to ensure end to end control over with our entire supply chain.
Lastly, in Q3, we completed our just now I mentioned our Guangdong new South China fulfillment center relocation. We expect to have a remarkable cost reduction with this relocation. And also, we are expanding our franchise fulfillment center model nationwide. We in Q3, we opened a new facility in Wuhan and Guangzhou, reaching a total of 6 new model fulfillment centers in operation in Q3. And we expect to have more and more this new fulfillment center in this new model in Q4 and also early next year.
Junling Lu, Co-Founder, Chairman and CEO, 111: Thank you.
Luke Chen, CFO, 111: Yes. On the cash flow, as you can see, we have achieved GAAP and GAAP operating profit for the 3 quarters, which means that we are no longer burning cash for this business. Instead, we are creating positive cash flows at the operating level for 3 consecutive quarters. We think we are doing the right thing in terms of working capital control. We have been very focused on improving the turnover dates for inventory and accounts receivable.
And we also introduced a third party supply chain finance to many of our pharmacy customers. And we have also improved the turnover date for accounts receivable. There are still rooms for further improvements, and we are confident that we can do better job in the coming quarters. Yes, I hope we, Alvin, we answered your questions.
Moderator/Operator, 111: Thank you. Your next question comes from Robert Sassoon with Water Tower Research. Please go ahead.
Robert Sassoon, Analyst, Water Tower Research: Hi, thanks for taking my questions. I have a few of them. So let me start with this one. Based on the current market environment, how would you assess the Cummins (NYSE:CMI) performance company's performance in the Q3? What are your expectations for the market environment in the coming quarters?
And how do you think those expectations would impact on the development of the company's B2B and B2C businesses? Let me start with that. I have a few other questions after that.
Junling Lu, Co-Founder, Chairman and CEO, 111: Thanks, Robert. I'll take this question. First of all, we're pretty proud of the solid performance given the macro situation in China as it's pretty widely known. Both of our upstream and downstream customers are under tremendous pressure. The anti corruption in the hospitals and also the campaign against Medicare fraud in the pharmacies area will create short term pains.
But we are quite optimistic that the industry will be more transparent long term wise. And we're quite optimistic about the future business. I'll give you a few reasons. First of all, with China's demographics, especially the aging population, the Medicare needs will definitely go up. And if we look at the big picture, healthcare expenditure in China is about 7% -ish.
And whereas in the United States, it's about 20%. There is a huge headroom for the market to grow. And the other point I want to make is that the short term economic challenge will force both the upstream and the downstream customers to be more efficient. And our digital capabilities will really enable us to create more value for both our upstream and downstream customers. I'll stop at that.
Robert Sassoon, Analyst, Water Tower Research: Thank you very much for that answer those answers. I have a couple of other questions, more on the technical side. What could you actually highlight the progress and achievements that your company has made in the digital capabilities of the IT technology that you've been implementing in the Q3?
Harvey Wang, COO, 111: Yes. And the second sorry,
Robert Sassoon, Analyst, Water Tower Research: the second I just want to follow-up the second question
Alvin Miao, Private Investor: that I had to ask
Robert Sassoon, Analyst, Water Tower Research: on that point is can you outline the company's expansion plans in terms of product offerings and partnerships within the supply chain ecosystem?
Harvey Wang, COO, 111: Okay. Robert, thank you. I will take these two questions. First one regarding our digital capability and also IT technology. Actually, it's not only in the last quarter, actually from day 1, we have continued to invest in our system development, our models and also data appreciation and also always ever to build our core competitiveness in our digitalization, also achieving quite a number of results, especially in the past quarters.
1st, through our JVP platform and the very new inventory sharing technology, we link our upstream suppliers' inventory to form a unified and integrated stock. As a result, we have added in 32,000 new SKUs and as well as their related stock volume to further improve our supply capabilities. And the second achievement is in this big data side. For Chinese herbal medicine, we have trained and applied as a risk mix model for specification recognition. For those herbal medicines, it's pretty complicated.
So based on these specifications, we've been able to see that AI model that has improved its accuracy from 77% to 98.2% through multiple iterations. Additionally, the accuracy in content matching for those herbal medicines has increased from 43% to 96%. And as our upstream and downstream customers, so Chinese herbal medicine is a big part of their business. So and also a headache for everyone. So with this new technology, we believe we're really helping the entire supply chain to improve our accuracy and efficiency.
And regarding the expansion plan in terms of product offering and the supply chain side, actually for product offerings and our supply chain ecosystem, we started from, as Jinling just mentioned, introduced, we started from a 1st party model, which offers a good customer experience. But actually, years later, we realized that it will be it would be very efficient to expand our selection offering with a single first party model along as we can imagine. But you have to do everything. You have to no matter if it's upstream or downstream, you have to do it alone. So we innovatively reduced our supply chain.
Besides our third party model, currently, we mostly deal with our corporate with our upstream pharmaceutical companies. We also set up a JVP model for partnership with distribution companies. And now through the new JBT platform and this whole new inventory sharing technology, we have organically linked upstream merchant inventory to form our own integrated stock. So this is one very important part of our expansion plan in terms of product offerings. And also, it reached our product selection of additional, as I just mentioned, 23,000 new SKUs in a very short period of time.
It is just in the past one more month. So we will imply this technology across the country. And I believe our product offerings will be improved to a new level in the coming quarters with opening of more franchise or joint venture fulfillment center with this JDT platform and with this new inventory sharing technology. Thank you, Robert. Hope I answered your questions.
Robert Sassoon, Analyst, Water Tower Research: Yes, that's great. I'll jump back into the line.
Moderator/Operator, 111: Thank you. That concludes the question and answer session. In closing, on behalf of the entire 111 management team, we would like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting 111 in Shanghai, China, please let the company know. Thank you for joining us today.
This concludes the call.
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