Event

The company released its 2017 half-yearly report. 2017H1 achieved an operating income of 176 million yuan, an increase of 7.38% over the same period last year, an operating profit of 41.3832 million yuan, an increase of 10.25% over the same period last year, a net profit of 30.5609 million yuan, an increase of 5.37% over the same period last year, and a net profit of 30.8302 million yuan, an increase of 9.57% over the same period last year.

2017Q2 achieved an operating income of 86.718 million yuan, an increase of 5.68% over the same period last year, and a net profit of 13.4943 million yuan, a decrease of 6.53% over the same period last year.

Brief comment

(1) continue to promote channel expansion and ensure performance growth

Adhering to its own strategy, 2017H1 has deeply strengthened the expansion and transformation of retail channels. At present, there are 1348 terminal image stores and more than 1700 wholesale terminals across the country, covering 30 provinces, autonomous regions and municipalities directly under the Central Government, basically achieving full coverage in first-to fourth-tier cities, providing an important guarantee for the company's brand development and sales performance.

From a business point of view, 2017H1's revenue from selling infant clothing and cotton products was 141 million, an increase of 3.84% over the same period last year. At the same time, with the development of the business, on the one hand, the product structure optimization adopted a flexible price policy on the market, on the other hand, it continued to strengthen procurement and outsourcing cost control, so that the gross profit margin increased by 6.42pct to 52% over the same period last year. The contribution income of daily necessities for infants and young children was 29.4201 million yuan, an increase of 23.21% over the same period last year. Due to the rising cost of raw materials, diversification of product mix and relatively low gross profit margin of new products, the gross profit margin of the infant commodities business decreased by 4.77pct year-on-year to 42.65 per cent. The company's comprehensive gross profit margin was 49.57%, an increase of 1.84 pct over the same period last year.

2017H1 achieved an operating profit of 41.3832 million yuan, an increase of 10.25% over the same period last year; and a net profit of 30.5609 million yuan, an increase of 5.37% over the same period last year. This is mainly due to a decrease in non-operating income in the current period due to larger government subsidies in the same period last year, and an increase in non-operating expenditure due to donations in the current period.

(2) strengthen brand promotion and reasonable increase in sales expenses.

The sales expenses and management expenses of 2017H1 Company were 32.0667 million yuan and 18.3087 million yuan respectively, an increase of 17.95% and 6.73% over the same period last year. The sharp increase in sales expenses is due to the increase in advertising and counter support fees brought about by the company's brand promotion and channel expansion. The financial expenses were-2.4797 million yuan, down 53.75% from the same period last year, mainly due to the reduction of bank deposits due to the purchase of wealth management products. The company's income from wealth management products in the first half of the year was 3.4511 million yuan, which also boosted its performance. The sales expense rate, management expense rate and financial expense rate were 18.25%, 10.42% and-1.41% respectively, which increased 1.64pct, decreased 0.06pct and increased 1.87pct compared with the same period last year.

(3) inventory and accounts receivable are properly controlled and operational efficiency is improved. During the 2017H1 period, the company's inventory was 143 million yuan, down 2.31% from the same period last year; accounts receivable was 37.4836 million yuan, down 0.51% from the same period last year. With the promotion of the company's operating cost control, the operational efficiency is expected to be further improved.

Optimize the multi-brand marketing structure, strengthen research and development to enhance product competitiveness the company currently has rabbi, next generation and Baby rabbi three major brands, the implementation of differentiated development, brand positioning is clear. Rabbi and next-generation brands are sold mainly through franchise and proprietary models. Joining sales is conducive to the rapid expansion of the company's sales outlets, the rapid spread of brands and the development of market blind spots, saving the cost of business development, while self-sales is convenient for brand image maintenance and sales profit mining. While the Baby Rabbi brand and the introduction of agent products such as Bailey baby bottles mainly use the distribution model to expand the market, while the use of rabbi and the next generation of sales channels for sales, first drive behind.

In terms of product categories, the company strengthens the research and development of clothing for infants and young children, and extends the product line to make the category cover a wider range. At the same time, the company implements strict and comprehensive quality control, using the accumulation and correction of process parameters for many years, and currently has 22 product patents.

Strengthening terminal management and new driving force for online sales

In terms of terminal construction, in the first half of the year, the company adjusted its marketing structure and set up six branches in Beijing, Wuhan, Shenyang, Chengdu, Shanghai and Shantou to strengthen the management, expansion and service of terminal channels and markets, and marketing management tends to be more refined. The company guides the brand counter to expand to the shopping center, chooses the advantage shopping mall to open up the new store, and promotes the development of the new mode of the joint venture store. In terms of terminal management, strengthen store management and services, select the superior and the fittest and transform and upgrade the storefront. Promote the continuous improvement of terminal sales ability, and further improve the service ability and experience of the store counter.

In terms of online sales, the company also focuses on brand promotion, shopping experience and customer service, while strengthening cooperation with cross-border e-commerce and introducing foreign products, the proportion of online sales is increasing year by year.

Invest in Mille Dairy, lay out the health industry, and expand the maternal and infant industrial chain following the participation in the maternal and infant cultural and entertainment industry in 2016, the establishment of an investment management company, and the subscription of women and infant investment funds, in 2017, the company continued to actively distribute in the areas of maternal and infant food, medical investment and so on.

In May, with its own capital of 50 million yuan, the company invested 20% of Mille Dairy through a wholly-owned subsidiary rabbi, laying out the dairy field, enriching the company's existing product categories and forming a useful supplement to the business. Mille's main product is "Moohko Mecom infant formula", which is a local dairy brand in Denmark and has obtained EU organic certification, Danish organic certification and Chinese organic certification. Its income from 2015 to 2016 was 59.81 million yuan and 121.62 million yuan respectively, and its net profit was-9.17 million yuan and 7.92 million yuan respectively, achieving rapid growth. According to the announcement, Mille promised to achieve net profit of 2500 yuan and 40 million yuan respectively from 2017 to 2018.

In June, partners such as rabbi Investment and Guangzhou Jinlinkang Equity Investment Co., Ltd. set up Guangdong Jiakang Medical Investment Center to jointly operate the Sino-foreign joint venture obstetrics hospital project to further explore the maternal and child health industry. optimize the layout of the industrial chain. In the same month, the company also announced that it planned to invest in the production, design, R & D project of women's and baby's clothing products, with a construction period of two years, with a total planned investment of 100 million yuan, and has obtained local project construction permission.

Restricted stocks bind interests, performance commitments demonstrate confidence in the development ecosystem in July, the company issued a 2017 restricted stock incentive plan (draft), which is proposed to grant 2 million restricted shares, accounting for about 0.99% of the company's share capital. To encourage a total of 30 directors, senior managers and core backbone, the award price is 12.35 yuan per share. The performance appraisal target is that the growth rate of operating income in 2017-2019 is not less than 10%, 25%, 35%, respectively. Due to the company's vigorous expansion of extension in 2017, revenue is expected to grow rapidly. This time, the performance assessment will better reflect the expansion effect of the company, boost team morale and consolidate the building of the workforce.

Investment suggestion: the omni-directional layout of the company's baby industry chain, the first to benefit from the high growth of the baby industry after the opening of the second-child policy, with scarcity.

The main business is solid and steady, with brand advantages and technical advantages. The investment platform has been successfully set up to assist in the extension of high-quality business related to infants and children in the future, and actively achieve the strategic goal of the comprehensive ecological circle of mother and child industry covering six major areas, including "food, clothing, use, play, culture and education, and medical and health care". We expect the net profit from 2017 to 2018 to be 0.81 and 93 million respectively, an increase of 11.4% and 14.4% over the same period last year, corresponding to EPS 0.40,0.46 respectively, and 55.3,48.3 times corresponding to PE. At present, the total market capitalization is 4.485 billion, maintaining the "overweight" rating.

Risk factors: the rapid development of the baby industry leads to intensified competition in the future; the effect of the second-child policy is not as expected; offline channels are affected by the impact of e-commerce expansion; the outsourcing production capacity and quality of some of the company's products do not meet the requirements.