Event

According to the company's annual report, the operating income in 2018 was 4.133 billion yuan, an increase of 9.64 percent over the same period last year, and the net profit returned to the home was 112 million yuan, an increase of 2.70 percent over the same period last year. Basic earnings per share is 0.24 yuan. It is proposed to pay a cash dividend of 2 yuan (including tax) for every 10 shares.

Main points of investment

Revenue returned to growth for the whole year, and channel expansion affected the net interest rate: on the revenue side, Sanjiang Shopping's business income increased by nearly 10% in 2018 compared with the same period last year, achieving a return to business income growth for the first time in nearly five years. On the profit side, the rate of expenses during the period was increased to 20.22%, which slightly reduced the net interest rate by 0.18pct to 2.7%, and the net profit returned to the home increased by 2.7% for the whole year. Quarter-by-quarter, the pick-up in profits in the fourth quarter is mainly due to the reduction in the company's financial expense rate to-2.4% in the fourth quarter.

The channels of neighborhood stores are expanding rapidly and supermarket revenue is growing again: in 2018, the number of the company's stores increased by 33 to 202, with the net growth coming from neighborhood stores. The revenue of the supermarket channel increased by 6.8%, the flat efficiency increased by 4.2%, and the growth rate recovered somewhat; the same store of the old store decreased by nearly 3%, the number of channels maintained 128, and the second new store contributed to the revenue growth. The number of neighborhood store channels expanded from 41 at the end of 2017 to 74 at the end of 2018, driving revenue growth.

Fresh food is popular, and the effect of fresh drainage is obvious: in 2018, the company's revenue from food, fresh, daily department stores and needle textiles accounted for about 53%, 30%, 15% and 2%, respectively, with revenue growth of 7.6%, 31%,-10% and-15% respectively. Food and fresh products are favored by consumers. In 2018, the revenue share of raw and fresh products increased from 25% to 30%, leading to an increase of nearly 2% in the average daily effective passenger flow throughout the year, and the growth rate of passenger flow picked up.

Direct mining to reduce costs to increase the gross profit margin, channel expansion to increase the expense rate: in terms of profitability, gross profit margins of all categories increased in 2018, and the overall gross profit margin increased to 24.03%. The sales expense rate was increased to 18.27%, the management expense rate was increased to 2.98%, the annual financial expense rate was reduced by 0.46pct to-1.03%, the final period expense rate was increased by 0.52pct to 20.22%, and the net sales interest rate was reduced by 0.18pct to 2.7%. As a result, the growth rate of home net profit is lower than that of revenue growth.

In terms of inventory, inventory accounted for about 7.9% of revenue in 2018, basically the same as last year. Inventory turnover increased significantly, from 8.5 in 2017 to 10 in 2018. In terms of cash flow, the net cash flow of business activities increased by 4.4% to 321 million yuan, and the cash flow of business activities continued to improve.

With the deepening of cooperation with BABA, the management personnel has been changed: at the end of August 2018, the company completed the non-public stock offering project and introduced strategic investor BABA. In April 2019, the cooperation between the company and BABA continued to deepen, and BABA assigned management to the company. Starting from 2019, the company strives to upgrade the company from a traditional community inexpensive supermarket to a new retail community fresh supermarket within three years. Specifically, cooperation with BABA is expected to continue to increase the proportion of direct mining, increase gross profit margin, and speed up online and offline integration, driving the revenue share of online channels.

With the steady development of the supermarket industry, the new retail format continues to explore: the supermarket is one of the important channels of offline retail. Among the key circulation enterprises, the monthly growth rate fluctuated slightly at about 5% in 2018, and the sales volume of supermarkets increased by 4.8% in the first two months of 2019. The steady sales expansion of the supermarket industry is expected to promote the steady growth of the company's performance. The company deepens cooperation with BABA and continues to explore new retail formats. The company is expected to rely on BABA's supply chain system and management experience to reduce cost and increase efficiency and achieve steady performance growth.

Investment advice: to sum up, we can see that: (1) the business format of the company's supermarkets has resumed growth, the transformation of stores has promoted the growth rate of Pingxiao, and the second new stores have begun to make efforts, contributing to revenue growth; (2) the channels of neighborhood stores have expanded rapidly, and the proportion of fresh products has increased, driving passenger flow and turnover; (3) with the deepening of cooperation with BABA, BABA is currently the second largest shareholder and has been assigned to the management of the company to speed up the new retail cooperation plan.

Future highlights: (1) work with BABA to increase the proportion of direct purchases of goods and increase gross profit margin; (2) store transformation has achieved results, and the continuous transformation of stores is expected to promote sustained and rapid revenue growth; (3) the new retail plan is promoted, and 40 stores are planned to be expanded in 2019.

We predict that the company's earnings per share from 2019 to 2021 will be 0.21, 0.22 and 0.24 yuan, respectively. The rate of return on net assets is 3.7%, 3.8% and 4.1% respectively. At present, the company's PE (2019E) is about 63 times.

Advice.

Risk tips: rising rental costs affect the company's rent-to-sales ratio; store transformation push up costs; new business type cooperation with BABA effect may not be as expected.