KuaiBao's profit fell 66% from the same period last year.

Yi Yatong announced its performance, KuaiBao, with an income of 71.423 billion yuan in 2018, an increase of 4.2% over the same period last year, a total profit of 236 million yuan, a decline of 69.2% over the same period last year, and a net profit of 203 million yuan, down 66% from the same period last year, which is at the lower edge of the performance forecast of-70 percent. It is also lower than our expectation of-34.5%, slightly lower than expected. We believe that it is mainly due to the deleveraging of national finance and the withdrawal of banks' loans, and Avatar can only borrow from third-party channels with higher interest rates (annualized interest rate > 10%). According to the data, the financial expenses of 1~3Q18 are 1.25 billion yuan, an increase of 480 million yuan (+ 62.5%) over the same period in 2017. it is expected that the financial expenses for the whole year of 2018 will increase by about 700 billion yuan, which is the main reason why the performance falls short of expectations.

On a quarterly basis, fourth-quarter revenue fell 17 per cent year-on-year (1~3Q18 up 14 per cent), gross profit rose 6 per cent year-on-year (1~3Q18 16 per cent), and net profit fell 180 per cent (1~3Q18 18 per cent). We think the main reasons are: 1) financial expenses are mostly settled at the end of the year due to accounting; 2) the company takes the initiative to shrink its supply chain finance business.

Pay attention to the main points

Shenzhen controls to take a controlling stake, and the financial cost is expected to decline rapidly: the financial expenses of Yiyatong in 2018 are expected to be 18.2 billion yuan, which is the main reason for the sharp decline in profits. On December 27, 2018, Yatong Holdings gave up the right to vote corresponding to 10% of the total share capital, and the largest shareholder, Shenzhen Investment Control, officially became the controlling shareholder. We believe that with the credit support of Shenzhen Investment Control, Yi Yatong may have paid off all the previous third-party loans and replaced them with lower-cost bank funds, so the financial cost in 2019 is expected to quickly return to a reasonable level (~ 1.5 billion yuan).

"increasing revenue and reducing expenditure" is the main focus of the company in 2019: cost reduction refers to: 1) take the initiative to shrink the supply chain financial business; 2) remove the channel dealers and distributors with poor performance; 3) streamline the business team and reduce management costs. Open source refers to the use of the new "circulation protection" platform to match the supply and demand of loans in the upper and lower reaches of the supply chain to reduce information asymmetry.

Taking into account the performance of KuaiBao, we lowered our 2018 profit forecast by 48 per cent to 204 million yuan, raised 2019 net profit by 9 per cent to 722 million yuan, and introduced a 2020 profit forecast of 891 million yuan, corresponding to a profit growth rate of 253 per cent in 2019. The main reason for the rapid growth in 2019 is that Shenzhen Investment Control has acquired a controlling position, and financial costs are expected to quickly return to a reasonable level, freeing up a large amount of profit space ($30.6 billion).

Valuation and suggestion

The company's current share price corresponds to the 2018 Universe 57.7 pound 16.3 times earnings, we maintain a neutral rating and target price of 5.5 yuan, corresponding to 16.2 times 2019 earnings ratio and 1% downward space.

Risk

Macroeconomic stall; financial deleveraging intensified.