Main points of investment:

The company released its 2021 semi-annual report, which exceeded expectations. 1) in the first half of 2021, the company realized operating income of 39.223 billion yuan, an increase of 45.14% over the same period last year, a net profit of 304 million yuan, an increase of 3.13% over the same period last year, and a non-net profit of 277 million yuan, an increase of 24.7% over the same period last year. The double growth of revenue scale and profitability is mainly due to the company's active layout of overseas and online markets and the expansion of cooperative brands and categories, which promotes the rapid development of incremental business. 2) the company's 2021Q2 realized operating income of 18.37 billion yuan, an increase of 21.03% over the same period last year, a net profit of 147 million yuan, a decrease of 11.04% over the same period last year, and a non-net profit of 135 million yuan, an increase of 10.07% over the same period last year.

Online market penetration has achieved remarkable results, and multi-category and all-channel rapid development. From a sub-industry point of view, digital distribution / digital retail / other business revenue increased by 240.155% compared with the same period last year, accounting for 72% of revenue respectively. Thanks to the strategic cooperation with Alibaba Group Holding Ltd and co-investment and operation of Shenzhen Aiyoupin Electronic Commerce Co., Ltd., the company successfully built the online channel of B2B2C sales and service. From a product point of view, mobile phone sales / non-phone sales / other business revenue increased by 4457 per cent compared with the same period last year, accounting for 0.12 per cent of revenue respectively. The company's omni-channel cooperation with New Glory continues to deepen, and its output and sales volume are significantly higher than at the beginning of the year. In the future, it is expected that with the launch of Glory 50 and high-end flagship model Magic3, the company will work with New Glory to expand the value space of the middle and high-end mobile phone market. In addition, the company continues to help Yueke stabilize its leading position in the domestic electronic atomizer market, actively expand its business in overseas markets, has won the agency of more than 10 countries in Europe, Asia, North and South America, and successively set up subsidiaries and carry out business. there is a broad space for overseas market growth in the future.

The cost of sales increased slightly, and the profit level was under short-term pressure. The company's gross profit margin in the first half of 2021 was 3.02%, slightly lower than the same period last year, mainly due to online business development and accelerated overseas expansion to drive up costs in the short term. During the first half of 2021, the expense rate was 1.85%, a decrease of 0.23pct compared with the same period last year, in which the sales / management / R & D / financial expense rate changed + 0.12/-0.02/+0.00/-0.33pct respectively compared with the same period last year. The increase in sales expense rate is mainly due to the increase in marketing activities and personnel investment brought about by the expansion of sales scale, while the decrease in financial expense rate is mainly due to the reduction of exchange losses and discount expenses. Under the combined influence, the net profit margin of 21H1 is 0.71%, which is lower than that of the same period last year. We expect the company's profit level to improve under the scale effect in the future.

Seek the possibility of independent listing of the industry, and continue to support the rapid development of electronic atomizer and other businesses. In order to continue to support the development of electronic atomizer sales business and further seize the overseas incremental market, the company plans to transfer 6% of the shares of No. 1 machine technology to the Gongqing Shahe Tonglu investment partnership, seeking the independent listing of No. 1 machine technology and a broader space for capital operation. The company's holding subsidiary, No.1 Machine Technology, has been established for more than three years and has developed into a leading electronic atomizer sales and service provider, taking into account 3C digital and fast consumer fields. it has expanded and operated more than 7000 Yueke stores and more than 3500 stores throughout the country. we expect that the production of No. 1 machine will better focus on electronic atomizer sales and open up a broad space for overseas markets.

Downgrade earnings forecast and maintain "buy" rating. The company is a leading digital distribution and digital retail service provider in China, and we expect the strategic partnership with Glory to help the company benefit from the ever-changing smartphone market. at the same time, we are optimistic about the advance layout of the company in the high-growth new consumer goods track and overseas markets. Taking into account the seasonal factors of the mobile phone industry in the first half of the year, we downgrade our profit forecast. It is estimated that the company's EPS for 21-23 years will be 0.67 yuan (original value 0.90) / 0.93 yuan (original value 1.26) / 1.31 (original value 1.80), corresponding to PE of 15-11-8. Considering the continuous strengthening of the company's digital retail capacity and actively expanding new categories, we refer to the average price-to-earnings ratio of comparable retail companies to give the company 25 times PE in 2021, corresponding to the target price of 16.75 yuan, which is 68% higher than the current stock price and maintains the "buy" rating.

Risk tips: cooperation with Ali is not up to expectations; New Glory mobile phone sales are not up to expectations; e-cigarette regulatory policy is uncertain.