Key points of investment:

Revenue increased 53.6% in 2018, and revenue and profit growth in the first quarter fell short of expectations. 1) In 2018, the company achieved operating income of 21.53 billion yuan, an increase of 53.6% over the previous year; Guimu's net profit was 6.2 billion yuan, down 17.1% year on year. 2) 18Q4 and 19Q1 are under pressure. Looking at a single quarter, 18Q4 achieved revenue of 5.74 billion yuan in a single quarter, an increase of 8.8% over the previous year; the net loss was 210 million yuan, mainly due to large-scale inventory price reductions in the fourth quarter. 19Q1 achieved revenue of 4.72 billion yuan in a single quarter, up 2.2% year on year; Guimu's net profit was 220 million yuan, down 15.3% year on year.

There were large fluctuations in upfront operations. Individual methods were used to fully account for some products, and the cash flow situation improved. 1) Aggressive stocking and capital tightening have put pressure on performance. The company raised capital through various methods in 1617 and adopted an expansion strategy for operations. In 2017, the inventory volume increased by 1.31 billion yuan, and the turnover situation deteriorated. The subsidiary Global Tesco was clearly affected by the slowdown in bank lending in the second half of 2018. Advertising investment and promotion during the peak sales season in the fourth quarter fell short of expectations, and some historical inventory sales were slow. 2) Significantly reduce future operating pressure. In 2018, the company made a total of 590 million yuan in asset impairment provisions, accounting for 71.2% of net profit in 2018, of which 540 million yuan was prepared for a decline in inventory prices. The company passed individual methods to fully charge for some inventory that is over one year old, mainly focusing on some brand products that are more than one year old in overseas warehouses, such as mobile phones, bracelets, sweeping robots, etc., and prepare 296 million yuan for price reductions based on individual laws. After the price reduction was calculated in 18Q4, the net inventory value of the company's account in 19Q1 was 4.71 billion yuan. 3) The cash flow situation is improving. The company achieved operating cash flows of 180 million yuan and 53.38 million yuan respectively in '18 and 19Q1. The year-on-year performance improved dramatically. The business plan developed steadily, and the focus was on improving the financial management system in '19.

The growth of self-operated websites is slowing, the number of users is increasing, and conversion rate metrics are under pressure. 1) Revenue growth slowed throughout the year. The self-operated comprehensive website Gearbest achieved revenue of 4.59 billion yuan in 2018, an increase of 7.0% over the previous year. Self-operated clothing websites (ZAFUL, Rosegal, etc.) achieved revenue of 350 million yuan, an increase of 12.2% over the previous year. 2) The number of users continued to increase in the second half of the year. In the second half of the year, Gearbest added 5.8 million registered users to 41.65 million, and added 9.67 million monthly active users to 52.03 million (monthly activity includes repeated statistics on PC and mobile devices). 3) Website traffic conversion efficiency is under pressure. The traffic conversion rates for Gearbest, Zaful, and Rosegal websites in 2018 were 2.0%, 1.7%, and 1.6% respectively, down 0.1 pct from the 17th report as a whole. Among them, the 90-day repurchase rate of Gearbest users reached 46.7%, down 2.8 pct from '17.

Patson and Youyi e-commerce have continued to grow, further strengthening their core competitiveness. 1) In terms of performance growth, in 2018, the subsidiary Qianhai Patson's revenue increased 41.0% year-on-year to 3.41 billion yuan, and profit increased 23.8% to 240 million yuan; during the merger period of Youyi E-commerce, revenue increased 57.9% to 5.61 billion yuan, and profit increased 52.2% to 290 million yuan. The growth rate was in line with expectations. 2) In terms of logistics warehousing construction, in 2018, the company's overall storage area increased from 280,000 square meters at the beginning of the year to 400,000 square meters, overseas warehouses increased from 54 to 67, and more than 50 dedicated logistics lines were built. The first phase of the Zhaoqing Logistics Park was gradually relocated and put into operation. 3) In terms of R&D investment, the company invested 62.53 million yuan in R&D expenses in 2018, an increase of 37.6% over the previous year, focusing on Gearbest restructuring and direct supplier projects. At the end of the year, the number of R&D personnel reached 1,022, an increase of 50.0% over the beginning of the year, strengthening the introduction of high-end technical personnel, including 133 network technology R&D personnel and 197 big data R&D personnel.

Cross-border Connect is a leader in the cross-border e-commerce industry. The company's operations are in a period of adjustment, and there is some room for improvement in the future. The company's 19-year plan is to improve financial soundness and enhance overall resilience to risks; on the management side, further improve the brand building of its own platform, strengthen its own brand building, and promote the localization of export e-commerce. Considering that the company's business operations were affected by financial pressure, the conversion rate of its own website traffic declined. The first quarter was still in the adjustment period. We lowered the profit forecast for the 19/20 years and added the forecast for 21 years. The estimated EPS for 19-21 was 0.77/0.98/1.21 yuan (the original forecast for 19/20 was 0.93/1.21 yuan). Corresponding to the 19-21 PE was 14/11/9 times, respectively, downgraded from “buy” to “increase” rating.