1H19 performance is in line with our expectations

Hualian Comprehensive Super announced 1H19 results: revenue was 6.097 billion yuan, down 0.6% from the same period last year; net profit from home was 55.789 million yuan, up 35.0% from the same period last year, corresponding to earnings per share of 0.08 yuan. Performance growth was boosted by reduced losses on disposal of non-current assets and lease surrender compared with the same period last year; net profit after deducting non-current assets was 46.859 million yuan, down 10.7% from the same period last year, which is basically in line with our expectations, which is mainly due to the increase in expense rate after deducting non-net profit. From a quarterly point of view, 2019Q1/Q2 revenue is-1.4% and net profit is + 58.9% and 31.5% respectively compared with the same period last year.

Trend of development

1. Revenue is-0.6% compared with the same period last year, and passenger flow is facing downward pressure. Revenue fell 0.6% in the first half of the year compared with the same period last year, and we expect the number of store visitors to decline mainly due to increased competition in the industry. From a regional point of view, revenue in North China, which accounts for a large proportion of revenue, is-2.9% year-on-year, a sharp decline compared with Q1; revenue in southwest China is + 3.9% year-on-year, and revenue in northwest China is + 0.74% compared with the same period last year. Revenue in Northeast China and East China has declined compared with the same period last year. In terms of exhibition stores, two new stores were opened / closed in the first half of the year, bringing the total number of 1H19 stores to 164s.

2. Non-operating factors affect the fluctuation of short-term profits. The gross profit margin is from + 1.0ppt to 22.5% compared with the same period last year, which is expected to be related to the adjustment of the promotion strategy. Among them, the gross profit margin in North China, which accounts for a large proportion of revenue, has increased to 12.3% year on year, and the gross profit margin in the southwest region has increased from-1.6ppt to 11.7%. From the expense point of view, the sales expense rate is from + 0.8ppt to 18.3%, the management expense rate is from + 0.3ppt to 2.6%, and the financial expense rate is from + 0.2ppt to 1.2%. In addition, non-operating expenses fell by 22.16 million yuan (down 89.3%) from the same period last year, benefiting from lower year-on-year losses on non-current asset disposal and lease surrender, driving the final net profit margin to + 0.2ppt to 0.9% year-on-year. Deducting non-net profit margin from a year earlier-0.1ppt to 0.8 per cent.

3. Follow up to pay attention to the management efficiency of the main business of the supermarket. At this stage, around the plan at the beginning of the year, the company steadily promotes store expansion, and the company expects to open 10-20 new stores in 2019; at the same time, actively pay attention to fresh sales to improve the number of customers and floor efficiency; in addition, orderly enhance community group buying, e-members and other innovative service capabilities, strengthen comprehensive competitiveness. However, due to the influence of low base and non-operating factors, we expect that the profit side may still fluctuate greatly.

Follow up to pay attention to the changes in the operating efficiency of the main business of the company's supermarket.

Profit forecast and valuation

To maintain the current earnings forecast, the current stock price corresponds to 38 times Pmax E, neutral rating and target price of RMB 4.6, corresponding to the current earnings forecast of 2019, and 42 times of Pmax E, which is 11% higher than the current stock price.

Risk

Competition in the industry continues to intensify; the macro-economy continues to decline.