2018 performance slightly exceeded expectations

Lianhua supermarket announced its 2018 results: operating income was 25.389 billion yuan, up 0.6% over the same period last year; the parent company had a net loss of 219 million yuan, compared with a net loss of 283 million yuan in the same period last year, slightly better than expected, mainly due to a pick-up in the performance of the same store. Among them, the growth rate of 2018H1/H2 revenue was-1.2% and 2.7% respectively, and the sales performance improved in the second half of the year.

Trend of development

1. The revenue growth rate becomes positive, and the performance of the same store is good. Full-year revenue was + 0.6% year-on-year, the first positive growth rate in five years, mainly due to same-store sales + 2.97% year-on-year. From a sub-format point of view, 1) supermarkets: benefiting from store transformation and upgrading and home business promotion, year-on-year revenue + 7.1%, same-store sales + 6.22%, initial transformation effect; 2) large integrated supermarkets: benefiting from loss-making network carding and category structure adjustment, annual revenue is-2.8% compared with-6.3% last year, and same-store sales + 1.74% to become a regular worker. 3) convenience stores: revenue year-on-year + 1.2%, same-store sales-0.99%, the quality of store operation has been improved. In terms of exhibition stores, 314 new stores were opened in the whole year (including general supermarkets / supermarkets / convenience stores 7Universe 238), the largest number of stores opened since 2013, especially the rapid contraction of supermarket outlets has been reversed; at the same time, 104 stores have been transformed, and the stock network has been continuously optimized; the number of stores at the end of the year decreased by 50 to 3371 compared with 2017, mainly due to the adjustment of convenience stores.

2, loss outlets carding and fee control led to a slight pick-up in profits. The gross profit margin decreased by 0.8ppt to 14.1% compared with the same period last year, mainly due to the impact of the full reduction of marketing activities; the sales expense rate decreased by 1ppt to 19.5% compared with the same period last year, mainly due to the reduction of operating expenses caused by network carding; the management expense rate increased by 0.1ppt compared with the same period last year, which was related to the target incentive expenditure for personnel; other expense rates decreased by 0.5ppt compared with the same period last year, benefiting from the reduction of loss provisions for shop closure. Net profit margin improved 0.3ppt compared with the same period last year, and profitability picked up.

3. Pay attention to the carding of loss-making outlets and the progress of new retail construction. In 2019, the company will further focus on network optimization and expansion, category and supply chain optimization, new retail transformation, etc., while improving the incentive system and the use of digital technology to improve business efficiency. The company is expected to maintain a fast speed of exhibition stores in 2019, with 308 new stores planned for the whole year, including 100 large-scale comprehensive supermarkets / supermarkets / convenience stores respectively.

Profit forecast

Based on the business recovery situation, the profit forecast of 2019Unix 20e will be raised by 9% to-0.2 Unix Mel 0.1 yuan.

Valuation and suggestion

The current share price is equivalent to 19e 0.05 times Pamp S. Maintain the recommended rating and target price of HK $1.81, corresponding to 19e 0.07 times Pmax S, with 41% room for the current share price.

Risk

Competition in the industry continues to intensify; the effect of the transformation is not as good as expected.