The 2Q18 performance fell short of expectations. The company announced 1H18 results: in the first half of the year, it achieved revenue of 1.99 billion yuan (+11.2%), net profit of 37.014 million yuan (-57.3%); 2Q single-quarter revenue was +9.8%, net profit was -144.4% year-on-year, mainly due to scale expansion, continued development of new regional markets and increased e-commerce investment, leading to increased costs and expenses, and performance fell short of expectations. Development trend 1H18 revenue side accelerated, 2Q off-season growth rate slowed. The company's revenue growth rate for the first half of the year was 11.7% year on year. The growth rate was significantly faster than the same period last year. Laiyifen is accelerating its expansion throughout the country with a “direct management+franchise” model. According to the announcement, the company added 275 new direct-run stores in the first half of the year compared to the same period. The number of direct-run stores increased 13% year on year, and 94 new franchise stores were added. The number of stores increased by 52% year on year. 2Q is the company's traditional low sales season, so 1Q stores are opened faster than 2Q, while the same store revenue of mature stores has maintained steady growth, so the 2Q revenue side growth rate has slowed down. The share of e-commerce channels in revenue has increased, reducing the level of gross margin. The company continues to vigorously expand online e-commerce and Laiyifen's app business. In the first half of the year, online e-commerce achieved revenue of 180 million yuan, +34.12% over the same period last year, increasing its share of total revenue to about 9%. The e-commerce business itself has a low gross margin level. At the same time, during the 1Q peak season, the gross margin of the e-commerce business fell 8% year on year, which in turn affected the overall gross margin level. The company's 1H18 comprehensive gross margin was 43.6%, -2.7ppt year-on-year. The 2Q gross margin should have increased to 46.4% month-on-month due to product structure improvements, but -0.4ppt year-on-year. The high level of fees has dragged down the overall profit situation. The company's 2Q sales expense ratio reached 35.3%, +0.2ppt year on year, +7.8ppt month on month, mainly due to offline scale expansion, increase in number of stores and promotional activities; 2Q management fee rate was as high as 15.1%, +6.1ppt over year, +5.8ppt over month, mainly due to the company's increased personnel reserves during the expansion period, total employee remuneration increased a lot, while equity incentive expenses increased more than 11 million yuan. The expense ratio for the period was as high as 50.1%, dragging down the company's profit level. 1H18's net profit margin was -3ppt to 1.9% year-on-year. Profit Forecast We have lowered our earnings per share forecasts for 2018 and 2019 by 12% and 12% from RMB 0.32 and RMB 0.36 to RMB 0.28 and RMB 0.31, respectively. Valuation and recommendations Since the company's profit margin has not returned to normal levels, we used the P/S valuation method. Based on the average P/S level of similar comparable companies, the company was given 1.18 times P/S in 2018, corresponding to the target price of 14.7 yuan, down 22% from the previous target price, maintaining a neutral rating. Risk area expansion risk, franchisee management risk, raw material price fluctuations, food safety risk.