Main points of investment

Core point of view: the business trend is improving, BABA shares to accelerate performance recovery, pay attention to the follow-up cooperation landing. Xinhua is the regional leader in Fujian Province. BABA bought a 10% stake in Xinhua in September 2017, and the two set up a new box network company, which is expected to replicate the Sanjiang shopping model, build new innovative stores in Fujian Province, introduce an omni-channel business model similar to Ma Xiansheng, improve the company's endogenous store efficiency, efficiency and profitability, and accelerate its performance. 2017H1 has 124 supermarket formats. From the revenue side, the acquisition of three service e-commerce companies in 2015 led to the improvement of the company's revenue and net profit, and the gross profit margin continued to improve due to the improvement of e-commerce service e-commerce; the rate of depreciation expense was stable and the downward trend of wage and rental expense rate was established. The company's net interest rate can be improved. According to the comparable company valuation, segment valuation method, the total valuation of the company is 9.124 billion yuan, the target price is 13.32 yuan, the first time to cover the "overweight" rating.

Company overview: Fujian chain department store supermarket leader, cut into the field of e-commerce operation and sales. The company is the leader of chain department stores in Fujian Province. As of June 2017, the company has 133 stores, including 8 department stores, 1 department store complex and 124 supermarkets. The company is a typical private enterprise, the actual control is Chen Fashu, and it owns about 41% of the company's equity before the IPO. Xinhua Huadu Group, which it controls, is the largest shareholder of the company and is rich in unlisted assets. In the first quarter of 2015, the total assets / net assets of Xinhua Group reached about 20x10 billion, 9.6 times that of the company in the same period. In September 2017, BABA and United Action acquired a 10 per cent stake in Xinhua Group, a major shareholder, with a lock-up period of 18 months, and set up a new box network technology company, each with a 50 per cent stake.

Cut into the field of e-commerce operation and sales to open up profit growth points. On June 16, 2015, the company announced an additional plan to issue an additional 153 million shares at a price of 7.04 yuan per share to acquire assets and raise supporting funds. The 100% equity stakes in the three underlying companies (Jiuai Zhihe, Jiuai Tianjin and Luzhou Zhihe) are traded at a consideration of 760 million yuan. Based on the promised net profit of 50 million yuan in 2015, the transaction corresponds to 15.2 times PE, which is much lower than the valuation of similar listed companies. As the company's traditional retail business was hit by three public consumption restrictions and e-commerce diversion, the company's net profit margin was only 0.5% in 2014. 1) the acquisition of the three target companies will greatly increase the net profit of the company, which accounts for about 43% of the net profit after the completion of the transaction. 2) the growth ability of the target company due to the current traditional business of the company, after the completion of the transaction, the company will open room for profit growth; 3) the growth of the three companies will continue to improve. The income of 2017H1 Jiuai Zhihe, Luzhou Zhihe and Jiuai Tianjin is 74%, 289% and 15.54% respectively compared with the same period last year.

The gross profit margin stabilizes upward, the expense rate decreases, the net interest rate increases, BABA shares or will lead the company to accelerate recovery. The company's net profit margin has declined and remained low since 2013, mainly due to an irreversible increase in corporate expense rates, of which irreversible increases in wages and rents are the main part of the overall increase in expense rates. From 2015 to 2017, the company's net interest rate recovered, with the 2015/2016/2017H1 net interest rate of-6.07%, 0.73% and 1.00%. In terms of gross profit margin, the company's overall gross profit margin rose, benefiting from the increase in the proportion of revenue from e-commerce services. In terms of expense rate, the number of loss-making stores closed has passed its peak, the level of rent, wage and depreciation expense rate has dropped significantly, the company's three expense rate level has declined, and the overall net interest rate has improved. After BABA takes a stake in Xinhua Capital, it is expected to copy the Sanjiang shopping model, accelerate the layout of omni-channel stores in Fujian Province, and enhance the overall competitiveness of Xinhua Capital. At the same time, BABA will help to improve the efficiency and efficiency of Xinhua Capital, and drive the overall operation of the company to improve.

The target price is 13.32 yuan, giving the "overweight" rating for the first time. We estimate that the company's operating income from 2017 to 2019 will be 71.82 billion yuan 77.76 billion yuan, an increase of 7.0% 8.3% 8.9% over the same period last year. The net profit attributed to the parent company is 81 million, 143 million and 204 million, and the compound growth rate is 55.31% (affected by the consolidated statement of the target company). Based on 684 million shares of equity, the EPS is 0.12,0.21,0.30 yuan, and the target price is 13.32 yuan.

Risk tip events: 1) uncertainty through non-public offering; 2) uncertainty about whether Luzhou laojiao will continue to authorize in the future; 3) rent and wage costs continue to rise; 4) Cooperation with BABA is not as expected.