Main points of investment

Sanjiang Shopping is based in Ningbo area, and its revenue has rebounded in recent years: in 2018, the company's revenue was 4.13 billion yuan and its mother's net profit was 110 million yuan. Ningbo's revenue in 2018 is nearly 3.19 billion yuan, accounting for 80% of the main business income. In terms of sales in 2017, Sanjiang Shopping accounts for about 23% of the Ningbo supermarket market. In recent years, the company has maintained the top 50 fast consumer goods chain. Sales returned to positive growth in 2018, driving revenue growth of 9.6% in 2018.

At present, Sanjiang Shopping has two formats of supermarket and neighborhood store: the average area of supermarket store is about 3000 square meters, which is the main format of the company, accounting for 94% of the area. The average area of neighborhood stores is less than 400 square meters, which is closer to consumers, and combined with O2O platform to meet the basic living needs of residents in the surrounding area of 1 km. In terms of business area, the revenue of the company's supermarkets and neighborhood stores in 2018 is about 1.56 million yuan and 1.98 million yuan per square meter, respectively.

Sanjiang shopping fresh drainage effect is significant: Sanjiang shopping fresh revenue proportion gradually increased. In 2018, the company's fresh revenue increased by 25% compared with the same period last year. From 2014 to 2018, the proportion of revenue from fresh products gradually increased from 19% to 30%.

The proportion of fresh promotes the passenger flow of the company. In 2018, the company's average daily effective passenger flow increased by 2% compared with the same period last year. Fresh drainage and membership price model jointly promote the company's effective fee membership to increase by nearly 3% in 2018.

The flat efficiency of the supermarket has warmed up, and the transformation continues: since 2016, the company has gradually carried out the transformation of supermarket stores.

One is to use the new retail concept to improve the quality of online operations, with the proportion of online revenue rising from 1.9% to 6.6% in 2018.

The second is to optimize the layout of old stores, expand the fresh business area, fresh transformation to attract passenger flow. In 2018, the revenue of supermarkets was about 15600 yuan / square meter / year, up 2.7% from the same period last year.

The flat efficiency of small businesses is growing steadily, and there is a lot of room at present: revenue of neighborhood stores increased by 75% in 2018 and 44% in 2019Q1, mainly due to large-scale store expansion. The number of stores in 2018 and 2019Q1 both increased by 80% compared with the same period last year. With reference to the Red Flag chain, the space for small business formats in Sanjiang is about 200. The company plans to expand 40 stores in 2019, most of which are expected to be small stores.

BABA landed in the war, and the retail transformation went a step further: in August 2018, the non-public offering was completed, and BABA was the second largest shareholder of the company. In 2019, there was a great change in the management of the company. Li Yonghe, president of Tmall supermarket business group, was appointed as the director of the company, and the person in charge of the small business format of Box Horse served as the president of the company. After the management change, the company strives to upgrade from a traditional community inexpensive supermarket to a new retail community fresh supermarket within three years.

Continue to cooperate with BABA supply chain to deepen cooperation to improve operating capacity: in 2018, BABA became the company's largest supplier, accounting for about 4.7% of procurement in 2019. Relying on BABA's supply chain resources and bargaining power, the gross profit margin of various categories of Sanjiang shopping continues to rise. In addition, fresh, online new retail transformation, so that the company's operating capacity continues to improve, the company's inventory turnover, accounts receivable turnover are higher than comparable companies.

BABA's new retail layout: online and offline integration is the development direction of the retail industry. BABA Group already has an extensive layout of the new retail, and its offline expansion can be traced back to buying a stake in Yintai in 2014. Sanjiang Shopping was laid out earlier in BABA's new retail strategy. At present, it helps BABA operate two box horse stores in Ningbo, and Chen Qiang, the former head of the box horse business, comprehensively presides over Sanjiang shopping. Hema Xiansheng is currently in the exploration period. The Hema Xiansheng single store operated by Huadi, Zhejiang, Hangzhou in 2018 has an annual loss of 50 million to 6 million yuan. The orientation of fresh supermarket in Sanjiang shopping community is similar to that of box horse market. It is expected to occupy a place in the process of supermarket channel infiltration of fresh market by relying on the supply chain resources and bargaining power of Sanjiang Shopping and BABA system.

Fund-raising projects promote the growth of scale: in 2016, non-public offering fund-raising projects were revised and new chain supermarket development projects were added. It is planned to invest 400 million yuan to open 100 small stores and 30 community stores within three years. By 2022, the number of supermarkets in the company is expected to reach about 160, with a compound annual growth rate of about 7%, and the number of neighborhood stores is expected to be nearly 180, with an annual compound growth rate of about 26%. The orderly expansion of the number of channels is expected to promote the company's revenue to continue to improve.

Investment advice: Sanjiang Shopping is based on Ningbo's regional supermarket leader, fresh transformation, online channel expansion to promote the company's revenue growth in 2018. In 2019, the company Hangzhou Zhejiang Huadi issued a table to promote profit growth. Future fund-raising projects will bring channel extension, new retail transformation to promote endogenous growth, and work with BABA to improve the efficiency of the supply chain.

We predict that the company's earnings per share from 2019 to 2021 are 0.23 yuan, 0.26 yuan and 0.30 yuan respectively. The return on equity is 4.1%, 4.5% and 5.1%, respectively. We are optimistic about the company's future development prospects, the current PE (2019E) about 62 times, the valuation is high, given the "overweight-A" rating.

Risk tips: cooperation with BABA may not be as expected; the effect of new retail transformation and channel expansion may not be as expected; rental costs may increase or affect the company's rent-to-sales ratio.