Revenue increased by 36%, net profit increased by 256%, new business development improved performance growth rate from January to September 2018, the company realized income of 609 million yuan, with an increase of 36.49%, net profit of 29.7752 million yuan, an increase of 256.00%, deducting non-net profit of 25.1881 million yuan, and an increase of 266.51%. The higher growth rate of net profit than income is mainly due to the increase in gross profit margin and the decline in the rate of sales and administrative expenses.

Quarter-by-quarter, 2017Q1-18Q3's revenue increased by 2.39%, 2.39%,-6.89%, 6.76%, 11.47%, 51.31%, 45.02%, and net profit from home increased by-48.89%, 66.65%, 26.07%, 81.03%, 552.85%, 240.18%. 2018Q2 set up a number of companies to expand Internet business, which led to a significant increase in revenue growth since then. After the new Internet business revenue, the rate of sales and management expenses decreased and the net profit growth rate was higher than that of income.

We will continue to optimize the home textile business, expand the second main business company with the Internet as the core, and locate the home textile market in second-and third-tier cities. In 2014-17, the revenue increased by-17.28%,-11.25%, 12.35%, 1.6%, respectively, and the company expanded its business such as group buying in 2016, and revenue returned to growth. In 2018, the company upgraded its brands and promoted the rapid growth of home textile revenue. The income of 2018H1 home textile business reached 336 million yuan, with an increase of 13.50% in the first three quarters of 2018.

The company's "more favorite" brand upgrade in products, stores, marketing, retail services and other aspects, positioning from young fashion to extravagant fashion; "Meimiankang" brand positioning of mass fashion, channel sinking to promote the rapid expansion of the number of stores; in addition, the company has been authorized by 7 well-known animation IP companies, such as Cherry meatball, Pig Pei Qi, undersea small column, to launch fashion home textile products to drive income growth.

The company expands its Internet business and sets up a joint venture with the team in the industry to form a dual main business operation of "home textile + Internet". In the first half of 2018, the company established Gansu Aibili Technology Co., Ltd. to provide various financial institutions with technology development and operation services such as "customer platform system, asset management system, investment and financing platform". Beijing Tiantian Aishang Technology Co., Ltd. is established as a joint venture to issue and sell digital IP in cooperation with major traffic platforms, online literature companies and film and television companies. In addition, the establishment of Suzhou small Corn Network Technology Co., Ltd., Pingxiang Xiaxia Electronic Commerce Co., Ltd., Guangzhou Heng Network, Pingxiang Haoyuan Network and other companies layout Internet market segments. 2018H1 Audemars Piguet Technology, Love every Day, Xia Xia e-commerce, Haoyuan Network, Suzhou Xiaomi, and Juheng Network respectively realized net profits of 6.6113 million yuan, 4.9625 million yuan, 1.6499 million yuan, 1.2358 million yuan, 9304 million yuan and 2.04 million yuan, totaling 1541.03 million yuan.

With the increase in gross profit margin and the decrease in fee rate, the new Internet business affects many financial indicators: from January to September 2018, the gross profit margin of the company increased to 41.64%, mainly due to the high gross profit margin of Internet business and the increase in the proportion of income to improve the profitability of the company, and the gross profit margin of home textile business remained basically stable. The gross profit margin of 2017Q1-18Q3 is 39.16% (- 0.37PCT), 38.77% (+ 2.04PCT), 37.64% (+ 3.65PCT), 39.16% (- 0.61PCT), 39.29% (+ 0.13PCT), 44.63% (+ 5.86PCT), 40.15% (+ 2.50PCT). After 18Q2, the gross profit margin increased significantly.

Expense rate: during the period from January to September 2018, the expense rate decreased from 6.05PCT to 29.17%, of which the sales expense rate also decreased to 19.65%, mainly due to the relatively low sales expense rate of Internet business and the company's control of marketing and other inputs; the management expense rate also dropped to 8.98%, mainly due to the company's control of staff compensation and other expenses. The financial expense rate also increased by 0.02PCT to 0.54%, mainly due to an increase in interest expenses.

Other financial indicators: 1) inventory at the end of September 2018 increased by 18.70% to 292 million yuan compared with the beginning of the year, mainly due to the increase in autumn and winter stock by the company's franchisees. Inventory turnover and inventory-to-income ratio were 1.32 and 0.48 respectively, with an increase of 0.21 and-0.10, mainly due to the impact of new Internet revenue.

2) accounts receivable at the end of September 2018 increased by 61.99% to 62.1399 million yuan compared with the beginning of the year, mainly due to the increase in new Internet business and the increase in the availability of goods by franchisees, and the company's account support to franchisees with good credit.

3) the asset impairment loss from January to September 2018 increased by 114.18% to 3.2627 million yuan, mainly due to the increase in provision for bad debts and provision for inventory price decline.

4) from January to September 2018, the net operating cash flow increased by 61.14% to-11.5442 million yuan, mainly due to the increase in operating cash inflow after the new Internet business.

The net profit is expected to increase by 90% to 140% in 2018, and the net profit brought about by the expansion of Internet business is expected to be 43.9611 million yuan to 55.5298 million yuan in 2018, an increase of 90% to 140%, mainly due to the steady growth of home textile business. the new Internet and related businesses are expanding rapidly.

We believe that: 1) the company develops the dual main business of "home textile + Internet", in which the company has certain channel, brand, design and R & D advantages in the home textile market after years of accumulation, and the company has set up six joint ventures in the Internet field. in the future, while expanding its own business, it will strengthen coordination with the main business in new retail. 2) the gross profit margin of home textile industry continued to decline in 2015-16. After 2017, the company controlled discounts, the gross profit margin of home textile industry gradually stabilized and recovered, at the same time, the gross profit margin of Internet business was relatively high, and the increase in revenue share is expected to enhance the company's profitability. 3) on June 11, 2018, the company's IPO issued 61.0179 million shares, accounting for 50.85% of the total share capital. Chen Jun and Huang Yani, the real controllers of the company, intend to transfer some of their shares through agreement or bulk transaction within six months after the lifting of the restriction, in order to introduce high-end talent and strategic investors. 4) Zhang Wen, chairman of the announcement of the company on September 4, 2018 (former deputy general manager of the company, who succeeded Chen Jun as chairman in December 2017), director Zhao Chuanmiao and supervisor Wu Ying plan to reduce a total of 1.3981 million shares due to personal capital requirements, accounting for 0.69% of the total share capital, which has a certain impact on the stock price.

Due to the incremental contribution of the new Internet business, we raised the EPS in 2018-19 to 0.24Univer 0.28 yuan, and predicted that the EPS in 2020 will be 0.33 yuan. The current stock price corresponds to 98 times PE in 2018, with a high valuation and a "neutral" rating.

Risk tips: weak consumption, new business development and integration risk, shareholder reduction risk and so on.