18 years of income to meet the inflection point, to achieve a turnround to profit, a substantial improvement in net cash flow is a bright spot

1) operating income in 2018 was 7.68 billion (+ 18.6%), achieving double-digit growth for the first time since 2012, reversing the continuous downward trend. Among them, the sales revenue of direct comparable stores increased by about 7% compared with the same period last year, and the franchise distribution revenue increased by 33% compared with the same period last year. 18Q1/18Q2/18Q3/18Q4 's operating income is 2.178 billion (+ 30.1%) / 1.76 billion (+ 44.0%) / 1.609 billion (+ 4.1%) / 2.13 billion (+ 5.0%) respectively. The growth rate declined in the second half of 18 years due to weak overall consumption and weather, but with reference to the quarterly income growth of the industry leader White Horan House, Meibang's income growth in the second half of the year was at a more reasonable level.

2) from a brand point of view, Metersbonwe brand realized 13% year-on-year increase in sales revenue for the whole year, and the brand continued to maintain rapid growth in store area and sales scale, achieving a 48% year-on-year increase in sales revenue in 2018; together, Moomoo and ME&CITY KIDS achieved a 24% year-on-year increase in sales revenue.

3) the 18-year return net profit is 40.36 million (+ 113.2%), and the non-return net profit is 12.69 million (+ 104.0%). The 18Q1/18Q2/18Q3/18Q4 return net profit is 50.4 million (+ 74.2%) / 2.71 million (+ 103.7%) /-12.97 million (+ 83.7%) / 220000 (+ 100.1%), respectively.

4) the operating net cash inflow in 18 years was 620 million, a substantial increase of 295%. In the same period of 17 years, the net outflow was 320 million. The big difference between operating net cash inflow and net profit is mainly due to the long-term prepaid expenses (282 million) and asset impairment loss (313 million) caused by the opening of straight stores. If these two subjects can decline, the net profit is expected to improve significantly. We expect that in 2019, the company's new stores will mainly join, the long-term prepaid expenses will drop significantly, and the asset impairment is expected to have exceeded the peak.

The gross profit margin has decreased, and the expense rate has decreased obviously.

1) the 18-year gross margin is 44.66% (- 2.8PCT), which we believe is mainly due to the decline in sales discount rate and inventory clearance in the second half of 18 years. With the decline in inventory size, the 19-year net interest rate is expected to increase.

2) the 18-year sales expense rate is 35.31% (- 4.6PCT) and the management expense rate is 4.00% (- 0.28PCT). We believe that it is mainly due to the improvement of the company's revenue scale and the improvement of internal management efficiency.

The scale of inventory has decreased significantly, the number of days of inventory turnover has decreased significantly, and the impairment of assets has exceeded the peak.

1) the inventory of 18 years is 2.349 billion, which is 216 million lower than that of 17 years. Compared with the rapid growth of income in 18 years, the amount of inventory decreases, which shows that the company has a remarkable effect of destocking in 18 years. The number of inventory turnover days in 18 years was 208 years, down 25 days from 17 years.

2) the loss of asset impairment in 18 years was 313 million, which was 140 million lower than that in the same period in 17 years. Of this total, the inventory price loss in 18 years was 230 million, which was 140 million lower than that in 17 years. We judge that the 18-year asset impairment has exceeded the peak, the absolute amount of reference inventory has declined, and we expect the 19-year asset impairment loss to continue to decline.

For 18 years, the company has continuously improved management efficiency around brand & product upgrade, channel upgrade and retail upgrade. 1) Brand & Product upgrade: achieve Metersbonwe brand upgrade fission, comprehensively promote style and quality, the company has launched five series: NEWear, HYSTYL, NEWear vachic, MTEE and ASELF to meet the needs of different consumers.

2) Channel upgrading: the company adheres to the channel strategy of parallel development of shopping malls and traditional business circles, continues to deepen the comprehensive strategic cooperation with the major well-known shopping centers across the country, and is based on building benchmark model stores in the first-and second-tier markets. Drive the third-and fourth-tier markets to join the cooperative development as the goal, and promote a more diversified channel structure. In the past 18 years, the franchise distribution revenue increased by 33% compared with the same period last year.

3) Retail upgrading: the company promotes the capacity building of retail standardization and replicates efficiently and quickly in direct marketing and franchise channels from the two dimensions of brand attitude standardization and the best profit model standardization.

Why do we think the 19th annual meeting will usher in a turning point in net profit?

1) the expense rate of direct stores is high, and it is expected that the expansion of stores in 1919 will mainly join, which will reduce the expense rate. In the past 18 years, the company's long-term prepaid expenses reached 282 million, which we think is mainly due to the expenses incurred by the company in setting up direct stores. According to the company's 18-year annual report, the improvement of the company's brand and product image has attracted more high-quality franchisees, and 18-year franchise distribution revenue has increased by 33% compared with the same period last year. We expect that Xintuo stores in 19 years will be dominated by franchisees, which will reduce the cost rate. In addition, the annual report reveals that subsidiaries such as Shanghai Meibang and Shenyang Meibang have lost money, and we expect the company to continue to adjust loss-making stores to reduce losses in 19 years.

2) the impairment of assets in 19 years is expected to decline significantly: the loss of impairment of assets in 18 years is 313 million, which is 140 million lower than that in the same period of 17 years. Of this total, the inventory price loss in 18 years was 230 million, which was 140 million lower than that in 17 years. We judge that the 18-year asset impairment has exceeded the peak, the absolute amount of reference inventory has declined, and we expect the 19-year asset impairment loss to continue to decline.

3) improvement of management efficiency: the rate of management expenses and sales expenses of the company has declined in the past 18 years, and we expect that with the continuous improvement of the company's internal management, the rate of three expenses is expected to decline further.

Maintain the buy rating, the year of the inflection point, investors are advised to focus on

Maintain the forecast of net profit for 19-20 years 440 million / 666 million, corresponding to EPS 0.18 yuan / 0.27 yuan, respectively, an increase of 991.1% and 51.2% compared with the same period last year. The value of the company's leading casual wear brand is still there, and the net profit is in the period of recovery at the inflection point. 25x PE in 2019 will be given and the target price will be maintained at 4.50 yuan.

Risk tips: 19-year income is lower than expected; franchisees do not meet expectations to open stores; inventory size and asset impairment losses have increased significantly; expense rates have dropped less than expected.