2017 performance in line with expectations

Lianhua supermarket announced its 2017 results: revenue was 25.225 billion yuan, down 5.4% from the same period last year, and the net loss narrowed to 283 million yuan. The performance is in line with our expectations.

Same-store sales fell 3.88% in 2017 (down 1.2% in 2016), mainly due to increased online and offline competition.

Gross margin is stable at 14.9%. Operating profit reverses losses, mainly benefiting from 399 million yuan of disposal income.

Trend of development

Considering the rise in CPI, we expect same-store sales growth to improve in 2018.

Pay attention to the potential synergy with BABA. BABA has become the second largest shareholder of the company. The company is expected to launch more new retail attempts in 2018.

Valuations are attractive. The company's share price corresponds to 0.1 times the market-to-sales ratio in 2018. The company's net cash reached 6.7 billion yuan, which is 203% higher than the company's market capitalization.

Profit forecast

Considering the weak growth rate of same-store sales, we lowered our 2018 net profit forecast from-78 million yuan to-119 million yuan, and introduced a 2019 net profit forecast of-40 million yuan.

Valuation and suggestion

At present, the company's share price corresponds to 0.1x and 0.1x 2018-19 price-to-sales ratio. We maintain our recommended rating, but lower our target price by 13.4% to HK $3.62 (0.13 times the 2018 price-to-sales ratio), which is 52.1% upside from the current share price.

Risk

The reform fell short of expectations.