The company's recent situation
We recently organized a reverse roadshow for Grain Mill to Hong Kong and Shenzhen. We have a deeper understanding of the business growth prospects of the company's three existing channels: offline counters, traditional e-commerce, and WeChat member stores. We are optimistic about the company's rapid revenue growth prospects supported by multiple expansion drivers such as products and channels, and the prospects for increased profit margins brought about by channel optimization.
reviews
Actual core earnings in 2018 slightly exceeded expectations. Excluding profit and loss from changes in fair value of preferred shares and listing related expenses in 2018, net profit of $213 million. If expenses related to listing but not included in listing expenses of $11 million were further excluded, actual core profit was $224 million, exceeding our expectations of $211 million.
The reform of the partnership system, category expansion and the introduction of new customers are expected to drive the resumption of double-digit growth in offline business in 2019. After 18 years of adjustments to inefficient stores, we expect that the number of new stores added this year will return to the normal level of 450-550, and that the standards for selecting new stores will be higher (requiring monthly sales of 20,000 yuan within 3 months) to ensure the quality of new stores. In addition to adding new stores, we expect that the partnership system, category expansion and new customer introduction will boost the growth of old stores and same-store stores to double digits, and the offline revenue growth rate is expected to reach 16.4% in '19.
The rapid growth of online business is expected to continue. Currently, the company has more than 150 new product reserves. The company expects to launch 40-50 new products in '19, mainly online. New products are expected to continue to be the main driving force for online revenue growth. The company has now formed six health food categories, including flour, grain, cereal, porridge, tea, and healthy snacks. New products in the online business will focus on categories other than flour and grain, target the health needs of young consumers, and focus on developing health foods that are easy to eat, such as the recently launched popular black sesame pills. The company expects to contribute 50 million to 100 million yuan in online revenue in '19.
The progress of the Xindalu project is in line with expectations, and we expect to contribute to revenue growth starting in 2020.
Valuation recommendations
Currently, the stock price is only trading 11.6/9.0 times the 19/20 P/E. We slightly lowered our net profit in '19 by 2.5% to 281 million yuan, mainly by slightly reducing the number of net stores opened in '19 to 500 to reflect the company's higher standards for new stores, and by slightly increasing net profit in '20 by 1.4% to 360 million yuan to reflect the prospects for profit margin expansion brought about by channel optimization. The target price of HKD 2.32 remained unchanged, corresponding to 16.2/12.6 times P/E in 19/20 and a 40% stock price increase. We continue to be optimistic about the company's rapid revenue growth prospects supported by multiple expansion drivers such as products and channels, and the prospects for profit margin expansion brought about by channel structure optimization. At the same time, the company's profit in '19 is expected to exceed our expectations, driven by favorable tax cuts and fee reductions, and reaffirms the recommended ratings.
risks
Demand was weak, and new products and new business performance fell short of expectations.