The performance was lower than expected, but there was a double-digit increase in franchise revenue. 19Q1 income was 1.728 billion (- 20.68 per cent), net profit was 38.35 million (- 23.92 per cent), and non-return net profit was 36.7 million (- 22.68 per cent). The performance was lower than expected, mainly due to 19Q1's increased efforts to optimize direct channels and close inefficient stores, affecting short-term performance. However, the expansion effect of joining channels appears, and 19Q1's joining revenue has recorded double-digit growth. Forecast that 19H1 may lose a small amount.

Continuous improvement in net operating cash flow, inventory and asset impairment

1, cash flow: 2019Q1 operating net cash flow reached 248 million (+ 3.89%), following the 2018 annual report, see the trend of continued improvement.

2. Inventory: 2019Q1 inventory is 2.219 billion, down 130 million from the end of 2018. We judge that inventory has passed its peak and expect inventory to decline by more than 200 million for the whole of 2019.

3. Asset impairment: the impairment of 2019Q1 assets was 59.16 million, a sharp drop of 39% compared with the same period last year, mainly due to the decline in inventory price loss compared with the same period last year.

4. The reason why there is a big difference between cash flow and net profit: we think it is mainly caused by the impairment of assets and the prepaid expenses arising from opening a direct store. However, we have seen a sharp decline in the impairment of 19Q1 assets by 39%. The long-term prepaid expense of 2019Q1 is 274 million, which is 4% lower than that of 2018Q1 and 4% lower than that of the end of 2018. We judge that the company has not opened more direct stores. As the decoration expenses of clothing companies are amortized over three years, amortization expenses are expected to decline significantly from 2020.

It is expected that there may be a turning point in net profit in the second half of 2019

1. It is expected that franchise stores will be opened mainly in 19 years, and the cost of opening stores will continue to decline. In 2017 and 2018, the company opened more direct stores, mainly to reshape the channel image, in order to drive to join. The 2018 annual report revealed that the franchise revenue has increased by 33%, and we have seen the effect. 2019Q1, the revenue of the franchise channel has achieved double-digit growth, and the franchisee's confidence continues to recover, because we judge that the company's 19-year new store will mainly join, and will not incur amortization costs caused by too many stores.

2. Inventory and asset impairment continue to decline. With reference to the decline in inventory and asset impairment over the past 18 years, we expect asset impairment to decline by more than 150 million for the whole year.

3. The 19Q1 sales expense rate / management + R & D expense rate / financial expense rate is 31.64% (- 2.27PCT) / 3.73% (+ 0.85PCT) / 1.57% (+ 0.70PCT) respectively. It is expected that the expense rate will decrease in 19 years as the company reduces direct store opening and internal management improvement.

Maintain the buy rating. As the 19Q1 performance was lower than the previous forecast, it slightly reduced the 2019-2021 EPS to 0.17Universe 0.26Universe 0.37 yuan (the previous forecast was 0.18Universe 0.270.39 yuan), gave 2019 25 times PE, and slightly lowered the target price to 4.25 yuan (the previous target price was 4.50 yuan).

Risk tips: a sharp drop in direct revenue, less than expected to join and open a store, provision for large asset impairment, etc.