1H18 performance exceeded expectations

Smith Barney announced its results for the first half of 2018: revenue of 3.938 billion yuan, an increase of 36% over the same period last year; turning losses into profits recorded a net profit of 53.11 million yuan, corresponding to a net profit of 0.02 yuan per share.

Deducting 40.6 million yuan from non-net profit also reversed losses compared with the same period last year (non-recurrent gains and losses mainly include the reversal of part of the impairment of receivables and government subsidies). The company will not pay dividends during the period. The performance exceeded expectations, mainly driven by channel expansion and cost control. 2Q18's revenue rose 44 per cent to 1.76 billion yuan in a single quarter, with a net profit of 2.71 million yuan.

The higher-than-expected growth rate of income is mainly driven by channel expansion. (1) according to the channel, the revenue of direct marketing and franchise increased by 32% and 44% respectively over the same period last year, contributing 65% and 35% of the group's income.

In the first half of the year, the company opened new stores with a business area of about 120000 square meters. According to the estimated average store area of 150 square meters, about 800 new stores were opened, an increase of about 20 percent over the end of 2017. Revenue growth was mainly driven by channel expansion. (2) by product, the income of men's wear, women's wear, children's wear and accessories increased by 25%, 53% and 54% respectively. (3) in terms of volume and price, the increase in income is mainly driven by the increase in sales volume.

Profitability still needs to be improved. Gross profit margin fell 3.8ppt year-on-year to 46.8%; sales management expense rate fell 5.5ppt to 40.5% year-on-year, driving net profit margin to increase 2.9ppt to 1.3% year-on-year. The ratio of inventory to total assets increased by 4.9ppt to 30% compared with the same period last year, mainly due to an increase in the number of new stores. Inventory price loss increased by 24% to 178 million yuan compared with the same period last year. The cash flow of business activities changed from negative to positive to 14.81 million yuan.

Trend of development

The company expects to continue to turn losses into profits in the first three quarters of 2018 compared with the same period last year, and is expected to achieve a net profit of 55 million to 85 million yuan, mainly driven by revenue growth.

Profit forecast

We keep the profit forecast for 2018 and 2019 unchanged at 0.03 yuan and 0.05 yuan. In 2018 and 19, net profit per share corresponded to a year-on-year reversal of losses and an increase of 49%.

Valuation and suggestion

The company's current share price corresponds to the 2018 Universe 90 times / 60 times Pax E in 19 years. Maintain the neutral rating and target price of 2.96 yuan, corresponding to 0.9 times Pmax S in 2019, implying 3.5% upside space. The rapid growth in revenue in the first half of the year is partly due to a low base in the same period last year, and the store efficiency needs to be improved by relying on extension expansion; in addition, the company is still on the brink of break-even, its net profit margin is significantly lower than that of its peers, and cost control still needs to be further strengthened.

Risk

Terminal sales continue to decline; expense rates are further high.