Net profit for 2017 was 78.25 million yuan, lower than the previous forecast. Hualian Super announced 2017 results: operating income of 11.76 billion yuan, a year-on-year decrease of 4.85%; net profit attributable to the parent company was 78.25 million yuan, turning a year-on-year loss into a profit (after deducting non-net profit of 4.55 million yuan, year-on-year reversal of loss), corresponding to a profit of 0.12 yuan per share, which is slightly lower than the previous pre-profit announcement. On a quarterly basis, Q1/Q2/Q3/Q4 revenue was -6.0%/-4.6%/-7.1%/-0.9%, respectively, and net profit was +107%/+401%/+104%/+106% year over year. Development trend 1. Revenue growth is still under pressure. Mainly affected by the sale of subsidiary Hualian Boutique, the number of stores in operation at the end of 2017 decreased by 13 to 156, leading to a 4.85% year-on-year decline in annual revenue. Among them, the company continues to push forward the store adjustment strategy, opening 11 new stores and closing 9 old stores throughout the year, which is lower than the 20 stores plan formulated at the beginning of the year. In addition, the company's revenue in the northwest and central China regions increased by 4.4%/22.9% year-on-year respectively. The rest of the regions all showed varying degrees of decline, and revenue growth was under pressure. 2. Gross margin declined slightly, and the sale of assets helped turn a loss into a profit. The company's gross margin fell 0.5ppt to 21.6% in 2017, with own/joint business margin +2.8/-8.6ppt, respectively; the period fee ratio improved by 1.4ppt to 21.8%, with sales and management expense ratios falling 1.5 and 0.1 percentage points year-on-year respectively, showing cost control results; the company's sale of 100% shares in Hualian Boutique brought investment income of 304 million yuan, helping to turn the annual performance loss into a profit. If the impact of asset sales is not taken into account, the company's performance losses have narrowed. 3. Short-term operations are still under pressure. Follow up on improvements in the main business. Faced with adverse factors such as e-commerce diversion and increased industry competition, Hualian Super Market plans to encrypt outlets in advantageous regions (20-30 stores opened in 2018), adjust product structure, establish innovative business formats such as community retail centers, etc., and track improvements in the company's main supermarket business in the future. Profit Forecast We have maintained our 2018 earnings per share forecast of $0.12, while introducing a 2019 earnings per share forecast of $0.12. Valuation and recommendations Currently, the company's stock price corresponds to 0.3/0.3 times P/S in 2018/2019. We maintain a neutral rating and target price of RMB 6.60, corresponding to 0.4 times P/S in 2018, with 16.81% upside compared to the current stock price. The incubation period for new risky stores has been extended; labor and rent costs continue to rise.