Incident: Yiyatong released its 2018 three-quarter report. 2018Q3 achieved revenue of 17.022 billion yuan, a year-on-year decrease of 0.19%; net profit to mother of 48 million yuan, a year-on-year decrease of 67.00%; deducted non-net profit of 41 million yuan, a year-on-year decrease of 69.85%. Under the economic downturn, the company's performance was under pressure and fell short of expectations. We think there are two main reasons why the performance fell short of expectations: First, growth in the company's main business was weak due to the slowdown in consumption growth. Revenue in the third quarter fell 0.19% year on year, but sales expenses increased by only 10.6% year on year, far lower than the 31.8% growth rate in the first half of the year. We believe that under the economic downturn, the company actively shrank its business scale from the perspective of risk control. It is worth noting that the company's gross margin for the third quarter was almost the same as in the first half of the year. Operating costs fell by 0.84% year on year, while gross profit was 1,207 billion yuan, almost the same as the same period last year. Second, in the context of deleveraging, the company's financial costs increased rapidly, which in turn led to a sharp decline in the company's net profit in a single quarter. Judging from the company's three-quarter report, financial expenses reached 477 million yuan, an increase of 75.36% over the previous year. Short-term cash flow has been affected, and it is expected that Shenzhen Investment Holdings will bring marginal improvements after entering the market. The company's operating model relies heavily on cash flow, which is the main reason why the company's valuation is being suppressed. Q3 Net cash flow from operating activities was -843 million yuan, ending the net inflow for three consecutive quarters. Also, take the cash flow from financing activities as an example. The first three quarters of this year were -1,965 billion yuan. The main reason was that the company's ability to finance was affected in the context of deleveraging. At the same time, Shenzhen Investment Holdings has become the company's largest shareholder. The entry of Shenzhen Investment Control will improve the company's financing channels and reduce financing costs. Also, take the cash flow from financing activities as an example. The first half of the year was -3445 billion yuan. The net inflow for the third quarter is estimated to be 1.48 billion yuan, and marginal improvements have already begun to be reflected. If financial costs can be further reduced in 2019 with the help of Shenzhen Investment Control, the company's performance will be more flexible. The company's business model is facing the impact of new e-commerce platforms such as Pinduoduo, and we are waiting for the company's countermeasures. The company has been deeply involved in distribution in the FMCG industry since 2009, and has turned the 380 platform into the company's main profit point. The essence of the 380 platform is actually a kind of channel integration. By integrating dealers across the country, the company's own network is built to achieve channel sharing. The target customer base is mainly in the third- and fourth-tier regions. However, e-commerce has now become an important distribution channel for manufacturers, and traditional channel vendors are being affected. In the short term, the company began to stimulate the initiative of sales partners through the “platform+sales partner” pan-amoeba management model and build a logistics platform to form a new growth point. Investment advice. Short-term company performance is affected by stagnant business scale and high financial costs, and the increase in long-term e-commerce penetration will further impact traditional retail channel providers. For the company, the entry of Shenzhen Investment Control is expected to bring about marginal improvements in financing. Considering the current economic downturn, we lowered our profit forecast for 2018-2019 and added a profit forecast for 2020. Net profit due to mother is expected to be RMB 308 million, RMB 556 million, and RMB 689 million respectively. Net profit to mother for 2018-2019 will decrease by 64.4% and 48.6%. EPS in 2018-2020 was 0.15 yuan, 0.26 yuan, and 0.32 yuan respectively, and the corresponding PE was 34 times, 20 times, and 16 times, respectively. The investment rating was downgraded from “buy” to “neutral” due to prudent considerations. Risk warning. The macroeconomic growth rate fell short of expectations, and the company's equity pledge ratio was too high.