The results in the first three quarters of 2019 were lower than we expected.
Hefei Department Store announced its results for the first three quarters of 2019: revenue was 8.383 billion yuan, up 6.3% from the same period last year; net profit from home was 161 million yuan, down 6.5% from the same period last year, corresponding to profit per share of 0.206 yuan; net profit after deducting non-profit was 31.3% lower than we expected, mainly due to the loss of Huarong consumer financial investment. From a quarterly point of view, 2019Q1/Q2/Q3 revenue is + 9.6% compared with the same period last year, respectively, and net profit is + 5.7%, 66.9% and 202.9%, respectively, compared with the same period last year. The significant increase in net profit is mainly due to non-recurrent fair value changes.
Trend of development
1. Revenue in the first three quarters was + 6.3% compared with the same period last year. Among them, Q3 revenue growth rate is + 4.9%, slightly faster than Q2. In terms of business, we expect revenue growth to be mainly driven by year-on-year revenue growth in the supermarket sector and substantial year-on-year growth in real estate sales, while department stores (including home appliances) as a whole are affected by the market downturn and intensified competition. we expect to still face some growth pressure.
2. The investment loss of the participating company is a drag on profit performance. In the first three quarters, gross profit margin increased by 1.3ppt to 19.9% compared with the same period last year. We expect it to be mainly driven by the real estate business with high gross margin, of which the gross margin in the third quarter rose by 0.3ppt to 19.1% compared with the same period last year. On the expense side, the sales expense rate in the first three quarters increased to 4.4% compared with the same period last year, the management and R & D expense rate remained the same as the same period last year, and the financial expense rate increased to 0.2% year-on-year, mainly due to the increase in interest expenses. In addition, the loss of Huarong consumer financial investment is a drag on profit performance. In the end, net profit margin in the first three quarters fell 0.3ppt to 1.9 per cent year-on-year, and net profit margin after deducting non-profit margin fell 0.7ppt to 1.3 per cent year-on-year.
3. Pay attention to the improvement of follow-up operation. Affected by the downward pressure of macroeconomic growth and intensified competition in the regional market, the profit space of the company's main retail business continues to narrow. In this context, the company focuses on the transformation of the core business, promoting the digital construction of department stores, strengthening the coverage of supermarket outlets, and expanding the radiation scope of agricultural products circulation business. In addition, as the regional retail leader controlled by SASAC, the company does not rule out the possibility of improving quality and efficiency through the reform of state-owned enterprises.
Profit forecast and valuation
Due to the investment losses of the associated enterprises, we have lowered our profit forecast for 2019-20 by 7.4% to 7.8% to 0.28 yuan and 0.30 yuan, and the current share price corresponds to a price-to-earnings ratio of 16.0 / 15.1 times 2019 / 2020. Maintain the outperform industry rating, but due to the adjustment of earnings forecasts, we lowered our target price by 9.4% to 5.80 yuan, corresponding to 20.8 times 2019 price-to-earnings ratio and 19.3 times 2020 price-to-earnings ratio, which has 30.0% upside space compared with the current stock price.
Risk.
The competition in the industry intensified; the investment losses of the associated enterprises intensified.