18 years' provision for impairment of assets resulted in a decrease of 56.85% in net profit and 28.51% in 19Q1 net profit.

In 2018, the company achieved an income of 454 million yuan, an increase of 5.49%, a net profit of 39.51 million yuan, a decrease of 56.85%, a deduction of non-net profit of 29.45 million yuan, a drop of 65.17%, and a planned 10-party distribution of 0.90 yuan (including tax). Among them, the sharp decline in net profit is mainly due to the lower-than-expected operating performance of Jiangtong Media, which is invested by the company in 2018, and the provision of 30.41 million yuan for the reduction of its related available-for-sale financial assets.

19Q1 revenue fell 6.72% compared with the same period last year, net profit from home decreased by 28.51%, and non-net profit decreased by 31.76%. The slowdown in 19Q1 revenue growth compared with the previous 18 years is mainly due to the slowdown in e-commerce channels, while the lower net profit growth rate is mainly due to the expansion of direct stores and the increase in sales expenses.

From a sub-channel point of view, 18 years of online income increased by 28.73% compared with the same period last year, accounting for about 20%, and it is estimated that offline income will grow in low single digits over the same period last year in 18 years.

In 2018, the company's income from infant clothing, cotton products and other maternal and child products increased by 8.81%, 8.52% and 37.32% respectively compared with the same period last year, accounting for 28.30%, 45.93% and 25.51%, respectively, and increased 0.86PCT, 7.04PCT and 5.91PCT respectively compared with 2017.

From the perspective of sub-brand, the company's income is dominated by its own brand, accounting for more than 80%, external cooperative brands are dominated by shell relatives, and other brands are dominated by equity investment.

In terms of volume and price, volume and price contributed to income growth. In 2018, the company's product sales and average price increased by 3.64% and 1.78% respectively compared with the same period last year.

From a regional point of view, the revenue of South China and East China, which are the main sales regions of the company, increased by 20.97% and decreased by 5.46% respectively compared with the same period last year. The income of other regions, such as southwest, central China, North China, northwest and northeast, increased by 14.71%, 1.50%, 6.02%, 4.46% and 9.39% respectively.

Strategy to create a "woman and baby industry collaborative ecosystem", multi-brand, omni-channel development company was established in 1996, is an early domestic enterprise engaged in the research and development, design, production and sales of maternal and infant consumer goods, specific categories include 0-3-year-old infant full product line (infant clothing, cotton, daily necessities, etc.) and some maternal supplies, mainly independent brands, appropriate introduction of foreign well-known brands for coordinated development, including independent brands Successively founded "next Generation" (1997), "Rabbi" (2001), "Baby Rabbi" (2008), respectively positioning low-and middle-grade infant clothing cotton products, mid-range infant whole product line and infant care products.

In the sales model, the company joins with self-management, distribution (dealers can set their own prices, and franchisees need to sell at the retail price suggested by the company). The company's "rabbi" and "next generation" brands are mainly sold through franchise and self-management mode; "Baby rabbi" and the foreign brands represented by the company adopt the distribution model to expand the market, and use the sales channels of "rabbi" and "next generation" at the same time.

In terms of channel form, the company's offline sales model is dominated by shopping malls, shopping malls and brand stores, supplemented by online flagship stores. By the end of 2018, there were a total of 1368 stores, of which 253 and 1115 were directly operated and joined, respectively, an increase of 56.17% and a decrease of 9.50% over the previous year, covering first-to fourth-tier cities in China. Online channels have been stationed in Tmall, Vipshop Holdings Limited, JD.com, Beibei net and other companies are positioned as "domestic well-known infant consumer goods brand operators" and strategically create a "collaborative ecosystem of women and infants' industry". On the basis of the original mother and child "wear" and "use" consumer goods, actively explore maternal and child health, childcare and other supporting services, and create a high-quality innovation platform of "products + services + Internet".

Financial overview: the performance of channel expansion increased rapidly before listing, and companies such as increasing R & D investment after listing and adjusting and optimizing channels were listed in 2015 in response to terminal retail weakness. Before listing, the company's performance generally maintained a relatively rapid development, with a compound growth rate of 16.71% and 24.23% respectively for income and net profit during the period 11-14. The growth of income in this period mainly depended on the expansion of channels, and the compound growth rate of channels in the same period was 19.40%. The higher growth rate of net profit than the growth rate of income is mainly due to the increase of gross profit margin driven by the improvement of brand power and the increase of 6.16PCT in the same period.

In the past 15 years, the company's revenue declined, down 10.64% from the same period last year, mainly due to weak terminal consumption and lower-than-expected sales; over the same period, the net profit growth rate dropped by 26.88%, which was mainly due to the decline in the company's gross profit margin and the increase in the rate of sales expenses. among them, the decline in gross profit margin is mainly due to the general franchise cabinet in the company channels, which is greatly affected by the downturn in retail department stores, and the increase in sales expense rate is caused by the increase in staff wages and mall expenses.

In the past 16 years, the company has tried out the franchise joint venture model by increasing investment in product research and development (the R & D expenditure rate has been increased to more than 3%, and more than 2000 new products have been launched each year on average). At the same time, the direct management system has been expanded, and the revenue has resumed growth. it increased by 5.99% compared with the same period last year, and the gross profit margin rebounded slightly, but the net profit growth rate continued to grow so that the net profit growth rate was basically the same as the income. A year-on-year increase of 5.81% In 2017, the company's revenue growth accelerated, up 11.61% from the same period last year, and net profit and investment income from financial products increased by 25.86% compared with the same period last year.

18 years of lower gross profit margin, higher expense rate and slower inventory turnover

Gross profit margin: the gross profit margin decreased to 51.46% by 1.81PCT in 2018, mainly for companies taking the initiative to benefit franchisees / consumers based on the research and analysis of market consumption power, such as setting some drainage products, increasing the schedule of preferential activities, and so on. 19Q1's gross profit margin was 56.49%, an increase in 3.21PCT over the same period last year, mainly due to an increase in the sales of new products with higher gross profit margins.

The company's gross profit margin is mainly affected by product pricing, channel structure, product structure and terminal promotion efforts. The price increase rate of products is 5-10 times, depending on different categories, in which the price increase rate of clothing and cotton products is usually higher, while the price increase rate of durable goods such as cribs and trolleys is lower. Before the listing, the company's gross profit margin benefited from the improvement of brand influence and product design research and development capabilities, and continued to rise slightly. After the listing, terminal retail sales were under pressure in 2015, and the company's gross profit margin decreased significantly, and rebounded in 2017.

Expense rate: during 2018, the expense rate increased from 9.55PCT to 38.03% compared with the same period last year, of which the sales expense rate increased by 4.59PCT to 23.41% compared with the same period last year, mainly due to the opening fees and promotion costs of new direct stores; the management + R & D expense rate increased by 4.90PCT to 15.65% compared with the same period last year, mainly due to the accelerated amortization equity incentive cost of RMB 8.55 million; financial expenses increased by 0.07PCT to-1.02% compared with the same period last year.

During the 19Q1 period, the expense rate was 41.64%, which increased 10.33PCT compared with the same period last year, including 29.77% (+ 9.15PCT) for sales expenses, 12.59% (+ 0.21PCT) for management expenses, and-0.72% (+ 0.97PCT) for financial expenses. The significant increase in sales expense rate was mainly due to the corresponding increase in store expenses and promotion costs in the context of the increase in the number of direct stores.

Before the listing of the company, the expense rate continued to decline slightly under the background of rapid income growth and relatively rigid expenses, and with the weakness of terminal retail after 15 years of listing, at the same time, superimposed short-term effects such as amortization of equity incentive expenses in 2017, and increased investment in research and development, the expense rate showed an upward trend.

Other financial indicators:

1) at the end of 2018, the company's inventory was 206 million yuan, an increase of 12.07% over the beginning of the year. In 18 years, the company's inventory turnover rate and inventory-to-income ratio were 1.13% and 45.39%, respectively, compared with 1.23% and 42.73% in the same period of 17 years.

By the end of March 19, the company's inventory fell 4.91% to 196 million yuan compared with the same period at the beginning of the year, and the inventory turnover rate of 19Q1 was 0.20, which was slower than that of 18Q1.

2) the accounts receivable of the company at the end of 2018 was 30.8 million yuan, down 43.34% from the beginning of the year. The turnover rate of accounts receivable in 18 years was 10.66, which was faster than that of 9.09 in the same period in 17 years.

By the end of March 19, the company's accounts receivable increased by 19.90% to 36.93 million yuan compared with the same period at the beginning of the year, and the turnover rate of 19Q1 accounts receivable was 2.72, which was faster than 18Q1's 1.93.

3) the investment income in 2018 increased by 45.27% to 15.4 million yuan, of which the profit of the participating companies increased over the previous year, resulting in an increase of 58.36% to 2.92 million yuan in investment income in joint ventures and joint ventures.

The investment income of 19Q1 increased 23.54% to 4.93 million yuan compared with the same period last year.

4) the asset impairment loss in 2018 increased by 681.94% to 30.33 million yuan, of which Jiangtong Media, which was mainly invested by the company, did not meet expectations in 2018 and calculated the relevant asset impairment loss out of the principle of prudence.

5) the net operating cash flow in 2018 was 49.57 million yuan, down 36.70% from the same period last year, mainly due to the opening and promotion fees of new direct-run stores.

The net operating cash flow of 19Q1 increased by 127.41% to 14.27 million yuan compared with the same period last year, mainly due to the decrease in the settlement of purchases and arrival of goods by 19Q1 compared with the same period last year.

Brands and products: take own brands as the cornerstone and enrich categories through strategic cooperation / investment

The company started from infant clothing and cotton products, and in the early stage of development, it mainly focused on its own brand "rabbi" and "next generation", and its sales model was mainly self-supporting and joining. In 2008, it independently established a new brand "Baby Rabbi" to enter the field of daily necessities for infants and young children, and mainly relied on existing channels such as "rabbi" and "next generation" to sell, so as to enhance brand awareness as soon as possible and after the formation of a certain amount of accumulation. In 2010, we began to expand distribution channels.

After the listing of the company in 2015, the strategic positioning of domestic well-known infant consumer goods brand operators. In 2016, it began to introduce foreign brands and put forward the corporate vision of "China's maternal and child industrial ecosystem". On the basis of consolidating the leading position of China's infant "clothing and consumption" consumer goods industry, the industrial layout will be extended to products and services in many areas such as infant food, clothing, use, culture, education, health, entertainment and so on. From 2017 to now, we have accelerated the ecological development strategy through investment and strategic cooperation.

Channels: in line with the changes of industry channels and the needs of the company's own development, the company's online and offline channel structure has been continuously optimized.

In the early stage of its development, the company mainly focused on the super channels of department stores in first-and second-tier cities, mainly through the joining model to achieve rapid channel expansion. In recent years, with the rise of one-stop maternal and infant stores, shopping malls, e-commerce and WeChat merchants, the decline of the flow of people in traditional channels such as department stores, and the more extensive problems such as goods and supply chain management in the joining mode, the company continues to adjust and optimize its channel structure.

1) offline channel: in terms of channel form, the company began to explore new terminal models such as brand collection stores in 2016, mainly with its own brand, while introducing other high-quality well-known brands and cross-border e-commerce business into the terminal storefront. increase the joint rate, customer unit price and so on, so as to improve the efficiency of single-store. Since 2017, the direction of opening stores has shifted to emerging channels such as shopping centers, and offline channels will continue to be greatly adjusted and optimized in 2018.

From the sales model, in the early stage of development, the company vigorously developed the joining model, through the joining model to achieve rapid channel expansion and market share grabbing. The company gives franchisees a discount of between 3.0 and 5.0, of which clothing and cotton products are lower, usually 3.0 to 4.0, and other baby durable goods are 4.5 to 5.0. In recent years, the company has established a certain brand awareness in the industry, the channel gradually turned to flattening, direct operation, vigorously expand the direct channel, so as to strengthen terminal control.

2) online channel: the company's e-commerce channel started relatively late, with a low proportion of online business and a low strategic position within the company in 2014 and before. the online strategy is mainly to do a good job in brand promotion, shopping experience and customer service, etc. try to avoid the impact of online channels on offline channels. From 2012 to 2014, the proportion of online revenue was 0.15%, 1.65% and 4.04%, respectively. At this time, online sales mainly for products and older products, e-commerce discount price is generally not lower than the physical store promotion price, to avoid direct competition with offline.

In 2015, the company gradually realized the importance of e-commerce channels, promoted the strategic position of e-commerce channels within the company, set up e-commerce centers to operate independently, increased efforts to invest in online channels in 2016, and developed rapidly in 2017. The growth rate of the company's e-commerce revenue has been more than 50% for three consecutive years from 2015 to 2017. The slowdown in revenue growth of the company's e-commerce channel in 2018 is mainly due to the increase in online customer acquisition / drainage costs, while the company's e-commerce two-team management model is still in running-in.

At present, the company's e-commerce channel has achieved the good development of online and offline same price, mutual diversion / omni-channel marketing, and it is expected that the company's e-commerce channel will continue to add power to the company's development in 2019.

The faucet of baby products has a broad prospect of expanding the ecological circle of women and children, and the effect of short-term channel adjustment and optimization remains to be seen.

The company's maternal and infant consumer goods industry has benefited from the continued boom in consumption upgrading in recent years. Looking to the future, the loosening of fertility policy will bring short-term benefits; in the medium and long term, under the background of declining fertility desire and the decrease in the number of women of childbearing age in the process of urbanization, the overall trend of fertility rate is downward, and the growth of the industry is driven by the continuous upgrading of consumption.

From the perspective of the industry pattern, the field of high-end maternal and infant consumer goods in China is mainly dominated by international brands; in the middle and middle and high-end areas, professional infant clothing brands are still relatively limited, and a few are more well-known, such as rabbi, Li Baby, Ying and so on. In recent years, the industry boom has attracted large children's / adult clothing brands to enter, but its professionalism still needs to be strengthened. In the low-end market, there are a large number of infant clothing enterprises, mainly unlicensed or mixed brands, mainly relying on low-price competition and serious product homogenization. According to Frost & Sullivan, rabbi, Li Baby and Ying are currently the top three brands in China in terms of market share of middle and high-end infant clothing, but the highest market share of a single brand is less than 2% and the industry concentration is low.

We believe that: 1) on the revenue side, the company's online operation team continues to optimize, the offline channel gradually changes from the rapid expansion of the previous joining mode to direct operation, flattening and fine development, and the proportion of direct operations is expected to increase. Online and offline channel adjustment continues to optimize, channel adjustment affects short-term performance, but long-term improve the company's overall operating efficiency, waiting for the company's revenue side to improve. 2) in terms of expense rate, the direct operation model helps the company to strengthen terminal control, open shop and promote expenses at the same time to increase the short-term sales expense rate; in terms of management expense rate, equity incentive expenses have been amortized for 18 years. The company pays attention to product research and development and expects that the rate of future R & D expenses is still on the rise. 3) the company obtained the high-tech enterprise certificate in May 2018 and enjoyed a 15% preferential enterprise income tax from 2017 to 2019. 4) in June 2018, controlling shareholder and actual controller Lin Haoliang and Lin Ruowen plan to reduce their holdings by no more than 6% through block trading / centralized bidding within half a year, and the reduction plan expires in January 2019 and no reduction has been implemented during the period. 5) in November 2017, the company announced a preliminary plan for the public issuance of convertible bonds, which is intended to raise no more than 329 million yuan. Invest in projects such as intelligent production of maternal and child care products and supply chain management (184 million yuan), intelligent production of baby underwear and supply chain management (146 million yuan), the project has yet to be submitted to the CSRC for approval. 6) the company announced on July 10, 2017 to restrict the draft stock incentive plan, and on November 22, 2017, the announcement actually awarded 1.48 million shares at 12.35 yuan per share to 27 people, including Supervisor Gao and the core backbone, with 390000 shares reserved. Unlock in three stages, with 30%, 30% and 40% of each phase unlocked. The performance assessment target is based on 2016 operating income, with revenue growth rates of not less than 10%, 25% and 35% respectively from 2017 to 2019, corresponding to 10.00%, 13.64% and 8.00% year-on-year revenue growth from 2017 to 2019. On November 6, 2018, the company announced the termination of the 2017 restricted stock incentive plan, and the repurchase cancellation of 6.97 yuan per share has been granted for the first time to all 2.59 million restricted shares that have not yet been lifted (due to the allocation of 1.50 yuan of rights and interests in 2017, an increase of 7.5 shares), accounting for 0.73%, and the implementation of the reserved portion has also been cancelled.

In the future, the company will continue to promote the layout of the ecological circle and cooperate with the high-quality resources on the industrial chain in coordination with the company's main business. Short-term channel adjustment affects income performance, equity incentive expense amortization and investment target risk provision for asset impairment and other short-term net profit performance. long-term companies occupy the first advantage in the industrial chain of women and children, pay attention to product research and development in areas with strong specialization in baby products, tamp competition barriers, and channel adjustment and optimization is expected to usher in performance improvement. As the channel is still in the process of adjustment, which has an impact on both the revenue side and the expense side, as well as the risk of uncertainty in the performance of the target of outbound investment, we downgrade the company's 1920 and 21-year EPS forecast of 0.19 PE 0.22 yuan, corresponding to 34 times of 19-year PE, maintaining a "neutral" rating.

Risk tips: weak terminal retail; outbound investment risk; channel adjustment and optimization is not as expected.