Event: the company announced on April 24 that its revenue in 2017 was 6.973 billion yuan, an increase of 3.92% over the same period last year, and its net profit was-52.4434 million. The main reasons are: 1) the cancellation and liquidation of Xinhua Capital in Hangzhou and Songjiang Xinhua in Shanghai at the beginning of the year led to the reversal of deferred income tax expenses (the project increased by 63.32 million yuan over the same period last year) 2) affected by Nanchang Hongcheng store closing business site and Jiangxi Gaoan business site signing litigation compensation (a total of 19.5088 million yuan in non-business expenses); 3) the impact of the closure of the decoration of the main store and the one-time amortization of the decoration fees of some stores; 4) the company transferred 19.5% equity interest in Changsha Zhongpan Real Estate Company in the same period last year, which brought about 200 million investment income. The next day, the company released its quarterly report for 2018. 2018Q1 achieved revenue of 1.855 billion, up 1.54% from the same period last year, realized net profit of 28.6758 million from the same period last year, down 27.11% from the same period last year, and deducted 30.1885 million from non-home net profit, down 16.96% from the same period last year.

The performance of e-commerce agents is good, and the main business of supermarkets continues to be under pressure. During the reporting period, the company's e-commerce agents performed well, with revenues of 192 million yuan, 66 million yuan and 593 million yuan respectively, with a total net profit of 85.8217 million yuan, an increase of 30% over the same period last year. So far, the three-year performance commitment target has been successfully achieved. The main business of the supermarket continued to be under pressure. The growth rate of the same store in southern Fujian, eastern Fujian, western Fujian and northern Fujian and outside the province was all negative. The growth rate of the comprehensive same store in the supermarket format was-2.5%. The revenue of the first three areas reached 3.375 billion, 1.655 billion and 942 million respectively, a decrease of 2.03%, 0.47% and 4.59% over the same period last year, and only a very small area outside the province achieved 20% revenue growth to 338 million due to the contribution of new exhibition stores. At the same time, the company's profitability declined in 2017: 1) the gross profit margin of fresh, food and department stores decreased by 0.19pct, 2.21pct and 0.64pct respectively compared with the same period last year, while the gross profit margin of daily necessities increased by 2.60pct, while the comprehensive gross profit margin decreased by 0.3pct to 21.3%. 2) during the period, the expense rate remained at a high level of about 21%.

Positive change, the challenge remains. In the face of the dual challenges of online pressure and intensified regional competition, the company is actively facing leading changes: in May 2017, the first new business model "catering + retail" seafood will be officially opened. In September, BABA will be welcomed to invest in 10% and achieve strategic cooperation, share their respective supply chain advantages and carry out business cooperation in the transformation and upgrading of retail business. Major supermarket stores plan to fully dock the "Taobao to Home" business, and set up a joint venture to set up a new box company to invest in, build and operate innovative stores. In December, the New Huadu Free Man "Sports concept Store" opened in Fuzhou East Street, promoting the innovation of shopping scene and format combination, enriching consumer experience, and deeply exploring the B2B supply chain co-distribution model of Neighbourhood Life supermarket. At the same time, the company announced the 2018 equity incentive plan, mainly awarded to the company's core managers, in order to mobilize the enthusiasm of employees. The company is actively changing, with 2018Q1 gross profit margin from + 0.2pct to 21.6% and expense rate from-0.1pct to 18.1% year-on-year, but the challenge remains.

Investment suggestion: the company is the leader of Fujian supermarket, cut into e-commerce operation in 2015, benefiting from the transformation of product channels such as liquor, and the business growth momentum is good, but affected by online impact and intensified regional competition, the supermarket business has fluctuated greatly in recent years; the new retail has made positive changes in the first year, and 2018Q1 performance has improved, and it will continue to cooperate or add help with BABA in the future. According to the company announcement, the company's business plan for 2018 is:

It is proposed to add 10 new chain stores, the main business income to maintain steady growth, return to the mother of net profit to return to profit, at the same time, 2018H1 is expected to be 52% lower than the same period last year. It is estimated that the company's EPS will be 0.06,0.08 yuan per share from 2018 to 2019. Due to the uncertainty of performance, the company will be given a "neutral-A" rating for the first time, with a six-month target price of 10 yuan.

Risk hints: regional competition continues to intensify; online retail impact intensifies; cooperation with BABA is not as good as expected.