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111, inc (YI) Q3 2021 Earnings Call Transcript

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YI earnings call for the period ending September 30, 2021.

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111, inc (YI -2.21%)
Q3 2021 Earnings Call
Nov 19, 2021, 7:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the 111, Inc's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Mr. Stephen Kilmer. Please go ahead.

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Stephen Kilmer -- Investor Relations

Thank you, operator. Hello, everyone, and thank you for joining us today for 111s third quarter 2021 Conference Call. On the call today from 111 Dr. Gang Yu, Co-Founder and Chief Executive, sorry, and Executive Chairman; Mr. Junling Liu, Co-Founder, Chairman and CEO; Mr. Luke Chen, CFO of our major subsidiary; Mr. Harvey Wang, COO; Tiffany Jugal, SVP of Investor Relations and Business Development; Mr. Alex Liu [Phonetic] Finance Director; and Monica Mu, Investor Relations Director.

As a reminder, today's conference call is in broadcast live via webcast, in addition a replay will be available on our website following the call. The company's earnings press release was distributed earlier today and together with our earnings presentation are available on the company's IR website at ir.111.com.cn. Before we get started, let me remind you that this call may contain forward-looking statements 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 could 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 statement 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 our earnings press release for detailed information of our comparative financial performance on a year-over-year basis.

With that, I'll now turn the call over to our CEO, Junling Liu.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Good morning and good evening, everyone. Thank you for joining our 2021 third quarter earnings call. Before delving into performance, I would like to talk briefly about the regulatory environment. Next, I'll give a short summary of our business. For those who are new to our story, I will then cover our recent operational performance before handing the call over to Luke to discuss the financials. We will conclude our prepared remarks with guidance for Q4 of 2021, after which, we will open up the call for Q&A.

We believe that current policies will continue to provide tailwinds to the healthcare industry and to our company. In 2016, President, Xi, announced the healthy China of 2030 initiative that emphasized public health as a precondition to future economic and social development. This initiative is based on four core principles. First, put healthcare at the forefront of national development strategy. Second, encourage innovation. Third, develop new methods of care to focus on both prevention and the cure and the combined Chinese and the Western medicine. And fourth, ensure that rural areas of the country are given equal access to healthcare.

In the latest five-year e-commerce development plan and the Ministry of Commerce has once again reinforced the importance of healthcare as a national priority and provided a blueprint for the future of China's healthcare industry, including telehealth services, such as virtual registration, online consultation and the patient care management. In addition, the government is encouraging the integration of online and offline channels, as well as the development of B2B platforms with solutions that help solve the pain point of the healthcare industry.

We are well positioned in the healthcare industry as our platforms are in alignment with the blueprint for the future of China's healthcare system. In addition, recently proposed policies aimed at curbing monopolistic and anti-competitive practices will hinder efforts by large companies to form close to loop ecosystems that block out competition. Large platforms will become more open, leveling the playing field for all players, including 111. New policies could also unlock new opportunities for 111. For example, a key challenge that new policies seek to tackle is a lack of information symmetry within the healthcare industry, which can lead to healthcare decisions being made when only a portion of a patient's information is available.

This push to integrate data between online and offline healthcare businesses as well as new compliance requirements for the certification of doctors and patients on virtual platforms will require innovative solutions, a void that we are well positioned to fill. 111 has been on a mission to transform and advance the healthcare services industry in China by leveraging technology and the power over the Internet to connect patients with medicines and healthcare services. Our ecosystem seamlessly integrate supply demand and data to provide products and the services to patients when and where they need the most. Our value proposition solves a key problem for the healthcare industry, where decisions are made with incomplete patient data. Our patient centric care platform directly connect patients with products and service providers, and is enabled by three unique technology platform. 1 Pharmacy, which is currently one of the largest online retail pharmacies in China and it was also one of the first entities to receive an online pharmacy license. 1 Clinic, which provides consumers with a myriad of cost-effective healthcare services, including e-consultations and doctor-patient management services over the web. And the 1 Medicine, a one-stop shop for pharmacies. 111 also uniquely delivers a holistic healthcare platform that integrates medicine with healthcare services, benefits to all parties within the broader healthcare ecosystem of pharmacies, pharmaceutical companies, doctors healthcare providers and patients.

We are a differentiated company because we offer cohesive online and offline solutions, unlike traditional B2B players that only distribute products across their service area, our S2B2C model provides tools that enables businesses to achieve their goals. For pharmacies, we can help them operate more efficiently, train employees, expand into online channels, attract and retain customers and integrate data and the service across their online and offline channels. For pharmaceutical companies, we are a commercialization partner that can help sell their products outside of their hospital system, while providing services such as data analytics, patient education and the patient feedback. For doctors and patients we provide a telehealth platform that improves the patient care experience. Our competitive advantage is demonstrated by vast network of healthcare players. We can connect pharmaceutical companies to over 65% of China's retail pharmacies nationwide and connect patients to over 20,000 doctors with expertise in chronic diseases such as diabetes, neurology, dermatology, etc.

Moving on to recent performance. We had another strong quarter with net revenue increasing 42% year-over-year to RMB3.3 billion, marking the 13th consecutive quarter of year-over-year growth since our IPO. The B2B segment remains the core part of our revenue and continues to deliver impressive results, accounting for RMB3.2 billion of total revenue, up 46% year-over-year. The market continues to show strong demand for our diverse portfolio of service offerings and overall service revenue grew 106% year-over-year with B2B service revenues totaling RMB16.1 million, representing a 336% year-over-year increase.

Non-GAAP net loss as a percentage of the net revenues decreased from 4.1% in the third quarter of 2020 to 3.8% in this quarter. Net loss for Q3 2021 was primarily attributed to an increase in R&D and technology expenses and expenses attributed to the expansion of our fulfillment center capacity. We expect these expenses to grow at a slower pace going forward. Revenue for the B2C segment totaled RMB124 million, a 23% decrease from Q3 2020. The B2C segment remains an important pillar of our patient centric mission. We are pivoting the B2C toward profitable and positive margin contribution. To that end, we saw a managed revenue slow down in the last few quarters. We will continue to invest in new initiatives in our B2C business segment and we will report on this further going forward.

In addition to strong top line growth, our gross margins grew twice as fast as our revenue in the third quarter. Gross margins grew by 85% year-over-year and as a percentage of revenue, our gross margins improved to 5%. We're especially pleased with the margin improvement for our core business, which grew 145% from Q3 2020. As a percentage of revenue, the gross margins for the B2B segment grew from 3.6% in Q1 to 3.8% in Q2 to 4.4% in Q3. As mentioned in our Q2 call, we are laser-focused on margin improvement and this is just the beginning.

As our business continues to grow, we will realize further benefits from the economies of scale, such as steeper discounts and cross-selling our technology and service offerings. We will also continue to optimize product categories, improve supply chain and increase efficiency. For example, using our proprietary technology, we have identified areas of pricing efficiency and made the appropriate adjustments. We have also improved our product selection as compared to last quarter, with almost tripled the number of SKUs for products with higher margin profiles and we will strive to double that number over the next 12 months. In addition, the expansion of our service offerings will generate margin attractive revenue. Our efforts should allow us to double our margins, putting us on the clear path to profitability.

As the healthcare industry in China maintains its path toward digitization, it is important that we continue to invest in a robust technology infrastructure for our 111 platform. To support this requirement, our technology expenses in Q3 totaled RMB56 million, a 155% increase year-over-year. On quarter-over-quarter basis, technology expenses increased at a much more modest pace of 6%. We continue to improve upon our SMART supply chain infrastructure and in order to meet the growing demand for our products and services, we'll have more than doubled our fulfillment capacity since the beginning of the year. The additional capacity will position us for future growth by increasing the number of businesses selling products through our platform and growing the number of partnerships with businesses looking to commercialize in China.

In the third quarter, we expanded the number of direct sourcing partnerships with domestic and global pharmaceutical companies to over 400, up 33% from a year prior. Today, there are over 5,000 pharmaceutical companies globally and we will look to form partnerships with at least 20% of these companies. 111 is an attractive partner for pharmaceutical companies because we can help them establish and manage an out-of-hospital channel that connect them with majority of the retail pharmacies. Our value as a commercialization partner will continue to increase as we grow and enabling us to offer even more services to companies commercializing their products in China.

We launched our 1 Health Membership Program in Q2, and I'm pleased to report that it continues to gain strong momentum with our customers. The 1 Health Membership Program allows members pay an annual fee to unlock exclusive benefits and in the third quarter, we have over 11,000 participating stores, exceeding our internal target of 10,000. With this program, we have also seen an increase in purchases among participating stores who are not only attracted to our vast selection and competitive prices, but also in having access to the valuable tools we offer to help them better manage their businesses. Currently, over 2,000 stores are using our proprietary systems to help them manage inventory, optimize their procurement and product selection, improve customer experience through our CRM system and provide product education to their customers and employees. Going forward, we will build upon the early momentum this program has achieved and continue to offer new products and technology solutions to help pharmacies improve their operations and build more robust businesses.

Before I conclude, I want to spend a moment and the touch on how ESG efforts. To date, we have provided approximately 400,000 free online consultations, including to patients in Hunan province faced with severe flooding conditions, and we have partnered with local hospitals to provide medical services for underserved populations. We have also continued to support areas experiencing COVID outbreaks through PPE donations. As a company committed to helping people living healthier lives, ESG is very much embedded in our core values and going forward, we will continue to support our community and help realize our collective goal of a healthy China.

Beyond these highlights, we'll continue to strengthen our team, develop new technology and improve our capabilities as our business grows. We are confident going into the balance of the year that our leading position in the healthcare services sector along with industry tailwinds position 111 well for continued growth as we transform medical services in China, and ultimately deliver excellent value to our shareholders. Finally, I would like to thank our shareholders for their continuing support.

With that, I will hand the call to Luke to walk through our financial results. Thanks.

Luke Chen -- Chief Financial Officer

Thank you, Junling. Moving to the financial section on Slide 18, you can see the details of the third quarter 2021 results from Slide 19 to 21 of our presentation. I would like to highlight a few key business and the financial metrics and our focus on year-over-year comparisons. All numbers are in RMB unless otherwise stated. Total net revenues for the quarter grew 41.6% to RMB3.5 billion, which was within the range of our guidance. We already had two consecutive quarters with quarterly net revenues exceeding RMB3 billion mark, which will place us into RMB10 billion revenue club this year.

Our B2B segment revenue grew 46.3% to RMB3.2 billion, reaching a new record high for segment revenue in the quarter. Our B2C segment revenue was down 22.9% to RMB124 million year-over-year. We expect this downward trend will be reversed as we launched several initiatives to accelerate growth of this segment. Our B2B gross margin was 4.4%, up from 2.6%, while our B2C gross margin remained stable at around 20%. The improvement in gross margin of our B2B segment reflects our ability to continuously improve the margin, while maintaining substantial topline growth. Overall, our gross profit grew by 84.6% to RMB166.1 million and the combined gross margin was 5%, up from 3.8% a year ago.

Total operating expenses for the quarter were up 61% to RMB341.4 million. As a percentage of net revenue, total operating expenses for Q3 2021 accounted for 10.2% compared to 9% in the same quarter last year. Fulfillment expenses as a percentage of net revenue for the quarter was 3%, up from 2.5% in the same quarter last year. This was mainly attributable to costs associated with upgrading and expanding our existing facilitates to support our growth. As these expanded facilities reach full capacity, we expect the fulfillment expenses to decrease.

Sales and marketing expenses as a percentage of net revenue for Q3 2021 was 3.9%, down from 4.4% in the same quarter last year. Excluding the share-based compensation expenses, G&A expenses as a percentage of net revenue were 1% as compared to 0.9% in the same quarter of last year. Technology expenses accounted for 1.7% of net revenue, up from 0.9% in the same quarter of last year. This was primarily driven by an increase in the number of personnel in R&D and IT teams. We believe that continuing to invest in our team and technology and the service offerings in the area of digital health, big data and SMART supply chain will strengthen our market leading position. As a result, non-GAAP net loss in Q3 2021 was RMB136.3 million as compared to RMB97 million in the same quarter last year, which accounted for 3.8% on net revenue, down from 4.1% a year ago. Non-GAAP net loss attributable to ordinary shareholders was RMB213.4 million, compared to RMB94.4 million in the same quarter of last year. As a percentage of net revenue and GAAP net loss attributable to ordinary shareholders, increased to 6.4% in the quarter from 4% in the same quarter last year. The increase was mainly caused by accretion for profitable redemption of redeemable non-controlling interest in the future. A quick note, our cash position as of September 30, 2021, we had cash and cash equivalents, restricted cash and short-term investments of RMB1.1 billion.

As to the guidance for the fourth quarter 2021. On Slide 23, the company expects total net revenue to be between RMB3.44 billion and RMB3.7 billion, representing a year-over-year growth of approximately 30% to 40%. In addition to grow our topline, we are laser-focused on growing our margins. We expect the trend of margin growth outpacing revenue growth to continue as we keeping -- making strides toward becoming profitable. It should be noted that this outlook is based on current market conditions and reflects the company's current and preliminary estimates of the market and operating conditions, as well as consumer demand, which are subject to change. Please refer to Slide 25 through 27 of the appendix sections of our selected financial statements.

Operator, we are now ready to begin the Q&A session.

Questions and Answers:

Operator

Certainly. [Operator Instructions] Your first question comes from the line of Xipeng Feng of CICC. Please ask your question.

Xipeng Feng -- CICC -- Analyst

Hi, this Xipeng Feng from CICC, and thank you for taking my questions and congratulations on the company's progress.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Xipeng, your voice was very low. We cannot hear you clearly.

Xipeng Feng -- CICC -- Analyst

Sorry for that. Can you hear me now.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Yes much better.

Luke Chen -- Chief Financial Officer

Yeah, much better. Yes, please.

Xipeng Feng -- CICC -- Analyst

Okay, that's fine. Okay, I have two questions actually and and my first question is about the policy. As you may notice the National Health Commission of China has just released a draft document detailing the regulations for online medical services. So could you please share some more color -- colors on the impact of this policy or document, both to the industry or to the company?

And my second question is, well I see B2B segment has delivered a strong growth in the past several quarters. So what's the reason behind it and will the B2B segment maintain the growth momentum in the future? Thank you.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Thank you, Xipeng, for the question. I'll take on the first question about the policy. I spent a little time in my speech talking about policy. I had some key words like healthy China 2030, health has become a national priority and other keywords include online plus offline and the recent MOFCOM policy clearly stated supporting B2B internet players and the integration of digitization of finance, logistics, warehouses, etc. And I think overall those policies are all tailwinds and it's all very good for the industry and also very good for 111. And I noticed you're referring to the latest consultation paper. It's not a policy yet. And our interpretation and I think it's not a final policy, it's at the moment that we're still guessing how the final document is going to be. But as a first a read, obviously it is going to be very clear that digitization is the future and internet is going to play a key role in the overall healthcare industry. However, there has to be strict compliance and that kind of sealed the position of digitization in the industry and we actually embraced that policy change and I think with the much more strict compliance, they are cause for innovative solutions and 111 is very well positioned in that space, not to even talk about, we have always had a very high standard when it comes to compliance.

Luke Chen -- Chief Financial Officer

Yeah, Xipeng, I will take the question regarding B2B. B2B revenue has reached RMB3.2 billion in Q3 of 2021. Furthermore, we should -- even more important is that our B2B margin growth rate is much faster than our revenue growth rate, I think which is the margin growth rate is 3.15 times of our revenue growth rate. So we are very excited to see our core business is the B2B business, is getting more and more healthy.

We will continue to strengthen our competence on our S2B2C model, especially on the S side, as we are creating value for our upstream and downstream partners and customers. We are offering more services to these customers and partners. So we are getting more services revenue from this customer and partners, which you can see in our financial report. So our as S2B2C model is getting robust. We are confident that we will maintain the fast revenue growth rate and meanwhile with margin growth rate even faster than our revenue growth. Thank you.

Xipeng Feng -- CICC -- Analyst

Okay, that's very clear answer. Congratulations again on the company progress. Thanks.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Thanks, Xipeng.

Operator

Your next question comes from the line of Zoe Bian of Citi. Please ask your question.

Zoe Bian -- Citi -- Analyst

Good evening, Management. This is Zoe Bian from Citi. And congrats on the strong growth of 111 again this quarter, and thank you for taking my question. I have three questions. The first is for the collaboration with pharmaceutical companies, can you share any updates on the number of pharma's you work with and any new forms of collaboration? Could you give us a few examples of digital marketing and route of treatment?

The second is, can you share more updates of the 1 Health Membership Program? How to differentiate with services to the members versus other pharmacies?

And the third one is, when do you expect to breakeven? Thank you.

Gang Yu -- Co-Founder and Executive Chairman

Let me take the first question. You might have noticed that we increased our direct sourcing relationship with pharmaceutical companies to over 400. This is very important to us, is very remarkable. This means that we are accelerating our sourcing, accelerating the upgrade, our sourcing to the origin. If with your exports from the pharmaceutical companies, you reduce all middle layers, reduced our procurement cost, also improve the availability of our products. With also [Technical Issues] hospitals with pharmaceutical companies. We have partnerships with Eli Lilly, Novartis, Pfizer, Bayer [Indecipherable]. We started this initiative only as of last March, and now we have more than six specialized hospitals. Let's take the recent announcements we made for the partnership with a [Technical Issues] Chugai Pharma from Japan. This is -- 111 is the first e-commerce company in China to have the so-called omnichannel commercialization relationship with Chugai Pharma. This partnership will allow cardiovascular patients to community access education materials regarding their disease, treatment options, effective disease management source, will also improve patient's quality of life, reduce cost and provide doctors with addition tools to better manage -- better health in patients. So we have formed various partnerships with different pharmaceutical companies aside from that responsive relationship.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Okay. I'll address the 1 Health Program, and Zoe, appreciate that question. And I think before I answer that 1 Health program, let's look at the marketplace. Today in the pharmacy space, we have about 580,000 stores across the country. There are a few very big players. And if we look at all those big chains, they are all very centralized in terms of the organization, i.e., they have firm control of all of those pharmacies. They built their own chains, etc. 111 is trying to build a new model, we've -- a federation model. So with our model, we're going to have a lot more stores joining our platform. With digital franchising, the smaller guys can enjoy the same benefits like the big guys in terms of procurement, in terms of access to good assortment, in terms of access to systems, to digital technology, etc.

Now if you look at the progress we have made today, we have already covered more than 28 provinces and there are more than 300 medium-to-small chains joining us, and we have 11,000 stores. Obviously, our objective is to have more and more stores joining us. And because this is a federation model, there is very little barrier. And what we are going to do is to continue to leverage our digital technology to help those pharmacies to improve their competitiveness, especially when it comes to the systems, the procurement and also managing their assortment and the prices, etc. We are looking forward to providing more updates in future quarters.

Luke Chen -- Chief Financial Officer

Zoe, it's Luke. Let me answer your third question on the breakeven timeline. I think all our investors are seriously looking at us when we're going to make profit. And I believe we are now in a much clear position to project that and with the scale we built up and the margin improvement, we expect to be profitable in 12 months time. And our confidence level of achieving this target is pretty high. So you look at the margin now, it's like 5% and it will continue to grow to 6%, even 7% and even higher. So with that, together with the scale we built up and we are introducing more higher margin products into our portfolio. Of course, we continue to build a lean organization and optimize our investment. So we think this gain profitable is very close in the corner in the near future.

Zoe Bian -- Citi -- Analyst

Thanks a lot of management. That's the stand we -- although looking forward to the business development in the future. Thanks, again.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Thank you, Zoe.

Operator

Your next question comes from the line of Fergus Macpherson. Please ask your questions.

Fergus Macpherson -- Analyst

Hello. Kudos to you for your performance for the quarter. I have four questions if you don't mind. The first question is that I see that your company has continued to strengthen the technology capabilities, so in what areas do you envisage affecting various entry?

Second question, regarding your revenue from services rising rapidly. To what factors can this be attributed and how will you maintain such growth momentum?

Third question is regarding the market sectors you're seeking to enter. Query, what are their sizes and what's the outlook as it relates to these market sectors?

And the final question is, I'd like to ask about the status on your STAR Market IPO?

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Okay. I think, Gang can you address the first question about the technology part.

Gang Yu -- Co-Founder and Executive Chairman

I'll probably. Let me address the service revenue part. I didn't hear your first question. Let me address the service revenue. Yes, we are very happy to see that service revenue increased rapidly and continue to increase. And the increase -- the service revenue reflects the value creation by our platform and by our technology capabilities and mainly come from the following areas as [Technical Issues] First is service period for marketplace sellers are the three platforms. 1 time fees [Phonetic] 1 Clinic and 1 Medicine.

Okay, the second part is services fees for enabling services to pharmacies, such as the [Technical Issues] e-prescription services. The third part is the service fees for our enabling services to pharmaceutical companies, such as we mentioned about digital marketing, patient education, patient management, all those service. And the fourth part is the supply chain services for our ecosystem participants. We have several very important projects, such as [Indecipherable] These are the [Technical Issues] Go ahead Junling.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Okay, so I'm going to -- as I'll cover the first question and the third question. So with regards to the technology investments we have made, obviously it was 155% increase compared to the same period of last year. This is an area which we believe we can establish a competitive advantage. So our technology is really structured in a way to address the challenges that are faced by, like pharma companies, like pharmacies in terms of supply chain and to doctors and to patients. So we believe that investment in this area will give us the necessary advantage. I'll give you an example. In our 1 Health program, we have a pretty big team in terms of technology to really code every day. And today, we have already digitally connected over, while close to 3 million consumers and those consumers have various disease disease types and they have very -- we have a very clear profile and that we have a digital tools to interact with them. And in the past, those pharmacies were never in that position. So we believe the continued investment in this area will yield a good result. And if you look at what we have achieved so far, we've already got 19 patents in the areas of digital health, big data analytics and in our supply chain. We have more than 30 proprietary systems to really power our back-end operations.

When it comes to your question three, the size of the market and based on our intelligence that today the pharma market is about RMB2 trillion and by 2030 the outside of the hospital channel alone is going to account for more than RMB2. So we anticipate this is going to be one of the most attractive markets in the world. So with the aging population in the world, so this is going to be the space we're going to play in. We already laid a very solid foundation to position 111 as one of the key players in this space, and we define our space as the out of hospital care. So from a patient's perspective, they can actually have a holistic care if they actually stepped out of the hospital, let's say even if they are from a rural lower tier city, even if they left home, they like to the hospital they go -- they go home, we're still in a position to help them.

So we actually love the pharmacy space, given the coverage we have had. This is a clear advantage we have managed to build. So I'm of the opinion that we are able to really redefine the supply demand relationship with our platform, and obviously there are many other initiatives we have put in place so far. There is not -- nothing material as yet, but I'm looking forward to providing updates moving forward in due course.

Luke Chen -- Chief Financial Officer

Yeah, let me -- let me answer the question on the status of the STAR Market IPO. The domestic IPO preparation is still in progress. Based on our internal assessment, actually we are meeting all the requirements. However, there are new rules coming out by the STAR Market and we are evaluating. We are very optimistic about the China market to further open up. This news that China stock market will adopt those reservation system versus approval system, maybe -- maybe next year, and we believe we should get ready for that. So we will keep the Street informed or post it according to the SEC rules. Thank you.

Fergus Macpherson -- Analyst

Okay, thank you for for the enlightening response and I look forward to your results next quarter. Thanks.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

Your last question comes from the line of Jessie Liu of HSBC. Please ask your question.

Jessie Liu -- HSBC -- Analyst

Thank you for taking my question. This is Jessie from HSBC on behalf of Charlene. I have three questions, if I may. The first question is to follow-up on the gross margin of your B2B segment, we saw a very good improvement from last quarter. And you just mentioned that the margin can grow from 5% to 7% or even higher. I'm wondering if we think in a longer time period, say in 10 years, how high would be the -- the B2B segment margin could achieve?

And my second question is on your fulfillment capacity. I think it has been growing at a faster rate than previously guided in your Q2 results, which is very impressive. So I was wondering in terms of timeline and your target, what is your end goal for the fulfillment capacity enhancement and when will you finish?. And in terms of fulfillment centers, will you be building more and what will be the capex expectation on that?

And last but not least, the question is on your pharmacy clients because you mentioned you're already connected to 75% of overall pharmacies in China. So can you share with us your strategy in terms of further enhancing relationship with existing pharmacies and then how to reach out to the other 35% pharmacies? Thank you.

Luke Chen -- Chief Financial Officer

Okay, Jessie, I will take the first question regarding B2B margin. So we are excited to see in Q3 our B2B margin year-over-year growth has reached 145%, which is 3.15 times faster than our revenue growth, which means our B2B business is getting more and more healthy. And the margin improvement B2B come from following actions. First is introduction of more high margin products. Internally, we call them gold label products. And secondly, we are seeing a more effective use of our price intelligence system, PIS system, to optimize our pricing. And as Dr. Gang Yu just mentioned, we have more direct sourcing, over 400 plus pharmaceutical companies with upgrading our sourcing toward the source. And last, we are seeing improvement at our continuous improvement on our supply chain efficiency.

Talking about [Indecipherable] With the launch of the following phases of our to S2B2C, we are creating more value for our upstream and downstream partners and customers. So we are confident that there will be enough room for us to further improve margins. We definitely we can see a -- even margin growth rate in the next quarter should be faster than our revenue growth rate, and our B2B business should be getting more and more healthy. Thank you.

Gang Yu -- Co-Founder and Executive Chairman

Let me take fulfillment center capacity issue, is the question. In the past, we have observed that the fulfillment center capacity and throughput has been very important bottleneck of our growth. So we are -- as you see that we have expanded our capacity and throughput during the past year and we believe that [Indecipherable] and its corresponding backend systems form our core confidence. So it certainly ensure our first rate customer experience, quality of the products we offer and the rapid turn of our inventory and the positive cash flow. We believe these are all very, very important. So the fulfillment center capacity and throughput is very critical part of our supply chain. So the lack of it will directly impact our operation given our growth. So we are continuing to optimize and automate our supply chain while expanding it's capacity. And now only expanding our capacity through our own vendors. We are also using -- we're also creating new business models in the future. We'll announce that some new business models where we use the capacities of our partners. These all different new initiatives will help us to gain not only capacity, but also raise the barrier of entry.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Okay, Jessie. I want to take on the third question, I appreciate it. That's a great question by the way. When it comes to the pharmacy customers and obviously the first few years we made it a operational imperative to really cover as many pharmacies as possible until we get to the 50% market coverage. And obviously, we have successfully implemented that -- achieved that mission and now we cover approximately 65% of the market with 370,000 pharmacies also. So that is really mission accomplished. And moving forward, that will not be our first priority anymore. Instead, we will be continuing to really grow our loyalty, grow our share of wallet, and of course we're going to continue to add more customers, but it's not going to be the first year priority. And we will also be having other initiatives to really help the already signed up pharmacies that we have been servicing. We just spoke about the 1 Health. That is an example of one of the initiatives we offered to bring in value-added services to those pharmacies who are already on our platform and of course, we still welcome new customers to join in the future. Thank you.

Jessie Liu -- HSBC -- Analyst

Thank you. That is very clear. Looking forward to hearing from you in the next quarter. Thank you.

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Thank you.

Operator

As there are no further question, I would now like to turn the call back over to Mr. Stephen Kilmer for closing remarks.

Stephen Kilmer -- Investor Relations

Thank you, operator. 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 China, please let us know. Thank you for joining us today. This concludes the call.

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

Stephen Kilmer -- Investor Relations

Junling Liu -- Co-Founder, Chairman, and Chief Executive Officer

Luke Chen -- Chief Financial Officer

Gang Yu -- Co-Founder and Executive Chairman

Xipeng Feng -- CICC -- Analyst

Zoe Bian -- Citi -- Analyst

Fergus Macpherson -- Analyst

Jessie Liu -- HSBC -- Analyst

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