Performance Overview: Revenue growth has slowed since 18Q4, and there has been a decline in net profit

The company released its 2018 annual report, achieving operating income of 21,534 million yuan, an increase of 53.62% over the previous year, net profit of 623 million yuan, a year-on-year decrease of 17.07%, after deducting non-net profit of 573 million yuan, a year-on-year decrease of 22.28%, EPS 0.41 yuan, and plans to distribute 0.45 yuan per 10 (tax included).

On a quarterly basis, revenue for the single quarter from 18Q1 to 18Q4 increased 74.38%, 79.81%, 86.70%, and 8.83%, respectively, while net profit of the mother increased 65.05%, 56.86%, 78.10%, and -180.36%, respectively.

At the same time, the company published its quarterly report for 2019, with revenue of 4.723 billion yuan, an increase of 2.19% over the previous year, net profit of 223 million yuan, a year-on-year decrease of 15.29%, after deducting non-net profit of 210 million yuan, a year-on-year decrease of 16.77%, and EPS of 0.14 yuan.

Overall: 1) Since the merger of Youyi E-commerce began in February '18, there has been a certain increase in revenue. After deducting its influence, revenue in 2018 increased 13.59% year-on-year, and Guimu's net profit fell 55.70%.

2) Since 18Q4, revenue growth has clearly slowed to single digits, mainly due to the impact of bank capital tightening, business development falling short of expectations, the subsidiary Global Tesco's revenue falling and Patson's slowdown. In 19Q1, considering that Youyi E-commerce still has a merger effect, it is estimated that the original business revenue still declined year-on-year.

The large decline in net profit in 18Q4 was mainly due to a sharp increase in asset impairment. In addition, the decline in gross margin exceeding the expense ratio also had an impact. The decline in net profit in 19Q1 was mainly due to the decline in gross margin exceeding the expense ratio. In addition, the impact of additional credit impairment losses.

Revenue split: 18Q4 sales slowed significantly

The company mainly does cross-border e-commerce business (revenue accounts for 97.53%), and there is also a small amount of domestic clothing sales business in the 100 yuan pants industry

1) Looking at the main cross-border e-commerce business by subject: in 2018, global Tesco (mainly export business, including a small amount of imports) earned 12.407 billion yuan, a year-on-year increase of 8.44%, net profit of 248 million yuan, a year-on-year decrease of 65.31%, net interest rate 2%, and the large decline in net profit was mainly dragged down by a sharp increase in asset impairment; Qianhai Patson (export business) revenue was 3.417 billion yuan, an increase of 40.95% over the previous year, with net profit of 238 million yuan, a year-on-year increase of 23.78%, a net interest rate of 6.96%; Importer (Importer) Business, 18 years2 (Consolidated at the beginning of the month) Contributed revenue of 5.611 billion yuan, the net profit of the mother was 290 million yuan, and the net interest rate was 5.17%.

Looking at the split between the first half of the year and the second half of 2018, the revenue growth rate of all business entities in the second half of 2018 was significantly slower than in the first half of 2018, with the biggest decline affected by Global Tesco. Among them, Global Tesco's 18H1/18H2 revenue increased by 30.41%/-2.58% respectively, Patson increased by 65.95%/26.70% respectively, and Premium E-commerce increased by 125.81%/24.63% respectively.

Looking at the second half of the year on a quarterly basis, Q4 sales fell short of expectations. Global Tesco's 18Q3/Q4 revenue increased 26.13% and -21.46% respectively; Patson +48.33% and +13.52% respectively.

2) Looking at the main cross-border e-commerce business by export and import: In 2018, the company's export revenue still dominated (mainly B2C), implemented through Global Tesco (which operates two major categories of clothing and electronics through its own website+third-party platform) and Patoson (a third-party platform, which specializes in electronic categories).

The total revenue of the company's e-commerce export business was 15.485 billion yuan, an increase of 19.09% over the previous year. Among them, Global Tesco's export business revenue increased 14.08% year-on-year to 12.068 billion yuan. Looking at the split, revenue from clothing self-operated sites, electronic self-operated sites, and third parties increased 12.23%, 6.96%, and 25.68%, respectively.

Looking at the first half of the year, sales at electronic self-operated sites and clothing self-operated sites have clearly slowed down. The export e-commerce business 18H1/18H2 increased by 43.99%/3.98% respectively. Among them, the revenue of the 18H1/18H2 export business, which dominates the global Tesco export business, increased 39.19%/-1.38% respectively. The export business was further divided by channel. The revenue of clothing self-operated sites increased by 29.48%/0.49% respectively in the first half of the year, electronic self-operated sites increased by 55.36%/-14.24% respectively, and third party revenue increased by 33.15%/19.28% respectively.

Looking at the second half of the year by quarter, it is estimated that Global Tesco's export business revenue increased by more than 40% and declined by more than 20% in 18Q3/Q4, respectively.

The total revenue of the imported e-commerce business was 5.980 billion yuan, an increase of 41.39% over the previous year. With the exception of Premium E-commerce, Global Tesco's import business is currently small (revenue of 369 million yuan) and does not contribute much to performance.

Financial indicators: The merger of Youyi e-commerce affects multiple financial indicators. The decline in gross margin exceeds the expense ratio, asset impairment increases dramatically, and cash flow is improving

Gross profit margin: The 2018 gross profit margin fell 9.19PCT to 40.58% year on year, mainly due to the merger of the top e-commerce companies and lower gross margin overall. By category, the gross margins of the company's clothing, home furnishings, electronic products, and maternal and child products were 61.41% (-1.27PCT), 47.45% (-0.11PCT), and 14.67% (-5.67PCT), respectively. Among them, the maternal and child products category was mainly sold by superior e-commerce.

The gross margins for a single quarter from 18Q1 to 19Q1 were 44.71% (-4.60PCT), 35.79% (-10.79PCT), 36.08% (-13.21PCT), 46.29% (-5.77PCT), and 43.30% (-1.41PCT), respectively.

Expense rate: The company's fee rate fell 7.86PCT to 34.34% year-on-year during the 18-year period, mainly due to the merger of superior e-commerce. Among them, the sales, management+R&D, and financial expenses rates were 31.51% (-6.95PCT), 1.97% (-0.20PCT), and 0.86% (-0.70PCT), respectively.

The cost rate for the 19Q1 period fell 0.91 PCT to 36.95% year-on-year. Among them, the sales, management+R&D, and financial expenses rates were -2.21/+1.93/-0.63 PCT respectively.

Other financial indicators: 1) Inventory at the end of '18 increased 30.54% year-on-year from the beginning of '18 to 5066 billion yuan, mainly due to the merger of Youyi e-commerce and the expansion of the original business scale. The inventory turnover rate was 2.86, which accelerated from 2.16 in '17.

In terms of inventory price reduction calculation, preparation for inventory price reduction in 2018 was 546 million yuan, mainly Global Tesco inventory (the 2019.4.1 announcement indicates that 531 million yuan is proposed). Inventory price decline preparation/inventory book balance at the end of '18 was 10.44% (up 7.17 PCT from the end of '17).

Inventory at the end of March 19 fell 6.95% from the beginning of the year, and the turnover ratio was 0.55, a slight decrease from 0.62 in 18Q1.

2) Accounts receivable at the end of '18 increased 153.98% to $1,684 million compared to the beginning of '18, mainly due to the consolidation of Premium E-commerce and the increase in the balance of accounts receivable from various payment platforms for the original business. The receivables turnover ratio was 18.35, a slowdown from 22.91 in '17.

Accounts receivable at the end of March 19 increased 9.20% from the beginning of the year. The turnover ratio was 2.68, which continued to slow from 5.09 in 18Q1.

3) Asset impairment losses surged 382.31% to 591 million yuan in 18 years, mainly due to the company's preparation for large-scale asset impairment and price reductions, mainly inventory price declines, of which loss of 546 million yuan were lost. Bad debt losses and impairment losses of goodwill were 40.42 million yuan and 4.48 million yuan respectively.

Asset impairment losses increased 143.40% year-on-year to 6.95 million yuan in 19Q1.

4) Net cash flow from operating activities was corrected to 183 million yuan in 2018, and continued to be positive year-on-year in 19Q1 to 53 million yuan.

The business is still affected by the external environment and is expected to improve. Long-term attention is being paid to improving the quality of operation of leading cross-border e-commerce companies

We believe: 1) As an e-commerce company, the company's business has shown the characteristics of low net interest rates and high capital turnover requirements. Since 2018Q4, it has been greatly affected by the tightening of bank capital, business development has fallen short of expectations, and the sales side has clearly slowed down. The revenue side grew by a low single digit in 19Q1, and there was no significant improvement. It is expected that it will take some time for the business growth rate to recover, and the revenue side expects a gradual improvement.

2) Judging from the main website operation indicators, the number of registered Gearbest, ZAFUL, and Rosegal users in 2018, the number of monthly active users, the average number of monthly visits, and the number of online SKUs continued to grow compared to 2017, but indicators such as the average monthly traffic conversion rate, customer unit price, and 90-day repurchase rate declined slightly.

3) The company's asset impairment rate increased sharply in '18, which significantly lowered the net interest rate. Net profit is expected to pick up in 2019 on the basis that inventory risk is fully reflected, and the growth rate is expected to be higher due to the low base.

4) Judging from industry opportunities and company development ideas, the cross-border e-commerce industry has broad market space and high prosperity. As a leader in the B2C export field, the company will continue to maintain its overall business scale and current market share while improving the company's product competitiveness, controlling costs and expenses, and improving the company's operating efficiency, focusing on building the company's core competitiveness in the cross-border e-commerce field, focusing on building the company's core competitiveness in the cross-border e-commerce field. Continue to promote branding and localization in business, and promote refinement and standardization in management.

Considering that there was no significant improvement in sales in 19Q1, and there is some uncertainty about the pace of future improvement, we lowered the EPS for 19-20 years and the additional 21-year EPS to 0.64, 0.90, 1.10 yuan, corresponding to 16 times the PE in '19, and downgraded it to the “increase in holdings” rating.

Risk warning: weak foreign demand, risk of changes in the international trade environment or e-commerce platform policies, improper mergers and acquisitions integration.