Event: from January to September 2018, the company achieved operating income of 4.02 billion yuan, year-on-year + 24.0% (including 1.28 billion yuan in the third quarter, + 3.0% year-on-year), and net profit of 160 million yuan,-57.4% (of which the third quarter was-54.0% compared with the same period last year). Deduction of non-return net profit of 160 million yuan, + 0.6% year-on-year (of which the third quarter was-56.8%). The main reason for the decline in homing net profit is that Hangzhou Youke Cosmetics Co., Ltd. included in the scope of the consolidated statement in the same period last year included 220 million yuan in investment income at one time, deducting the impact of one-time investment income in the same period last year. The company's net profit belonging to the parent company increased by 0.9% in the first three quarters compared with the same period last year.

The sales expense rate has increased significantly: compared with the same period last year, (1) the sales expense rate increased from 3.01pp to 9.5% compared with the same period last year, and the month-on-month increase in 0.66pp was mainly due to the corresponding increase in cosmetics business growth in the reporting period; (2) the management expense rate decreased by 0.02% to 4.1% compared with the same period last year, and decreased 0.37pp compared with the same period last year. (3) the financial expense rate increased from 0.33pp to 1.4% compared with the same period last year, with an increase in 0.11pp on a month-on-month basis, mainly due to the increase in impairment losses on accounts receivable and inventory increase during the reporting period.

The company's inventory increased and its investment income decreased significantly: at the end of the reporting period, (1) the company's inventory was 1.07 billion yuan, + 42.2% compared with the same period last year, mainly due to the new agent brands in the cosmetics business during the reporting period and the preparation of goods for the peak sales season. (2) the investment income was 5.402 million yuan,-93.5% compared with the same period last year, mainly because Hangzhou Youke Cosmetics Co., Ltd. included in the consolidated statement in the same period last year included 220 million yuan in investment income at one time, deducting the impact of one-time investment income in the same period last year. Investment income in the reporting period decreased by 7.35% compared with the same period last year.

Profit forecast and rating: it is estimated that the net profit from 2018 to 2020 is 280 million yuan, 350 million yuan and 390 million yuan respectively, and the corresponding EPS is 0.70,0.87,0.96 yuan respectively. Considering that the company's cosmetics business will usher in the peak sales season in the fourth quarter, it is expected to improve performance and maintain the "overweight" rating.

Risk tips: commodity prices such as raw materials fluctuate or fall short of expectations; labor shortages or lower-than-expected risks.