Net profit in 2018 rose 5.3% year on year, slightly higher than expected. Hefei Department Store announced 2018 results: revenue of 10.68 billion yuan, up 2.8% year on year; net profit to mother of 220 million yuan, up 5.3% year on year, corresponding to earnings per share of 0.29 yuan, which was slightly higher than expected. The growth rate of real estate and other businesses exceeded expectations. On a quarterly basis, Q1/Q2/Q3/Q4 revenue was +4.2%/1.9%/-4.9%/9.1%, and net profit to mother was +1.2%/-22.0%/-89.7%/+233.3%. The sharp increase in Q4 profit was due to significant impairment in Q4 calculation last year. Development trend 1. The main department store business is under pressure, and real estate and other businesses continue to grow. In 2018, the company's department store/supermarket/agricultural products trading/real estate business revenue was 65.0 million yuan, 35.7/3.0 billion yuan respectively, up -0.1%/6.7%/7.7%/21.1% year-on-year. Among them, department stores were affected by business format adjustments and overall pressure on the industry, and the revenue growth rate fell 0.58ppt; supermarket business revenue grew further, but the year-on-year growth rate declined by 12.2ppt due to a decrease in the speed of new store openings; the growth rate of agricultural products trading business decreased by 13.0ppt due to the loss of incremental growth in Daxing's new market; the real estate business continued to grow rapidly, and diversified business formats are expected to contribute to the company's continued revenue growth. 2. Gross profit margin is declining, expense ratios are rising, and cost control needs to be strengthened. The company's gross margin decreased by 0.68ppt in 2018. Among them, the gross margin of department stores decreased by only 0.48ppt year on year. In the future, with the completion of business transformation, gross margin is expected to gradually rise steadily. Furthermore, in 2018, the company's sales/management/ finance rates were 4.35%/9.64%/0.04%, respectively, compared with +0.07ppt /+0.56ppt/-0.09ppt, and sales management expenses need to be strengthened. 3. Follow the reform of state-owned enterprises and the progress of the logistics park project construction. 1) As the reform of state-owned enterprises in Anhui Province progresses, Hepai is a regional retail leader controlled by the Hefei State-owned Assets Administration Commission, if cost control and operating efficiency can be strengthened, there is plenty of room for improvement in business performance. 2) In December 2018, Hepai announced that it plans to invest 1.28 billion yuan to build the Chizhou Top 100 Agricultural Products Logistics Park. The construction period is about 3 years, and the transaction volume is expected to reach more than 6 billion yuan after mature operation, which will bring additional volume to the company's agricultural products trading business performance. Profit forecast In view of the company's active promotion of diversified business layout, the 2019/20e profit forecast was raised by 5%/6% to 0.32/0.34 yuan/share. Valuation and recommendations The company's current stock price corresponds to 17.5/16.6 times P/E in 19/20, maintaining the recommended rating. In view of the profit forecast adjustment, the target price was raised 19% to 7.0 yuan, corresponding to 21.8/20.6 times P/E in 19/20, with room for a 24% increase compared to the current stock price. Risk spending continues to weaken; industry competition intensifies.