Net profit of the mother fell 15.1% in the first three quarters of 2019. The fourth quarter is expected to be an inflection point in profit. 1) In the first three quarters of 2019, the company achieved operating income of 13.97 billion yuan, a year-on-year decrease of 11.5%; Guimu's net profit was 7.0 billion yuan, a year-on-year decrease of 15.1%. 2) 19Q4 is expected to reach an inflection point. The company achieved revenue of 5.05 billion yuan in 19Q3, a year-on-year decrease of 15.4%; Guimu's net profit was 240 million yuan, a year-on-year decrease of 24.4%. During the peak season in the fourth quarter of 2018, the company's business performance was sluggish due to financial pressure and other factors. Due to slow sales of goods, inventory price drops were calculated, resulting in a net loss of 210 million yuan in the single quarter of 18Q4. The company received 400 million yuan in loan capital support at the end of September this year. It is expected that the fundamentals of 19Q4 will usher in an inflection point.

Cash flow from export business is improving, and asset quality is improving. On the balance sheet side, the company reported an inventory size of 5.05 billion yuan for the third quarter of '19, a slight decrease from the end of 2018. The company obtains operating data through the business process, develops supporting algorithm models, manages inventory and slow-selling products, and the inventory scale is effectively controlled. In terms of cash flow statements, the company's net operating cash flow for the first three quarters of '19 was 38 million yuan, and the operating cash flow for the single quarter of 19Q3 was 130 million yuan; of this, net operating cash flow from the cross-border export business was 320 million yuan, and the operating activities of its subsidiaries Global Tesco and Patson generated 1.0 and 230 million yuan respectively. Since 2018, the company has adjusted its business strategy, strengthened the refined management of internal systems and operations, with the goal of optimizing the quality of operations such as cash flow and inventory turnover, and promoting refined operations.

The e-commerce agency operator subsidiary Yuyi E-commerce has grown slightly, and intensive cultivation has strengthened its core competitiveness. In the first three quarters of 19, the subsidiary Youyi's e-commerce revenue increased 5.7% to 4.37 billion yuan. Youyi is one of the leading e-commerce companies operating locally. It is doing well on online platforms such as Tmall, JD, and Suning. It also targets large integrated supermarkets and community terminal stores such as Kid Wang and Walmart. It has a professional logistics team, high-standard food-grade warehouses, and provides one-stop logistics services. Youyi E-commerce focuses on mother, baby and nutritional products. The maternal and child brands that operate on behalf of them include Aitami, Nuoyuneng, British Bullan, Mama&Kids, etc. In addition, it operates nutritional health brands including GNC, D-cal, and personal care and beauty brands such as medipeel and omelon.

Guangzhou Emerging Fund loans were put in place before the peak season to support the development of cross-border communication through practical actions, which is expected to help the company reach an inflection point.

The actual controller of Guangzhou Xinxing Fund is the Guangzhou Development Zone Management Committee. As a hub for the cross-border e-commerce industry, Guangzhou has strong support for the development of the industry, and is expected to push the company on a healthy path in the medium to long term. The company announced that Guangzhou Xinxing Fund provided a total loan of 400 million yuan to the company. The funds have been received in September. The funds will be used to support the company to supplement the liquidity capital for daily operations and return bank loans. During last year's Q4 peak season, the company's business fluctuated due to objective factors such as bank loan drawing, with a net loss of 210 million yuan in a single quarter. The loan is in place before this year's peak season. It is expected to provide strong support for the company's inventory preparation and marketing promotion this year, push the company to reach an inflection point in profit in the fourth quarter, and grow again from the bottom.

The company is an industry leader with operating advantages. Cash flow optimization is improving, and efforts from various parties are expected to usher in an inflection point in performance. The Guangzhou Emerging Fund provides comprehensive support, and the two sides complement each other's strengths to help the company return to the development channel. At the same time, the company continued to upgrade and improve logistics and warehousing, big data technology, its own product brand, and supply chain system in 19 years, gradually improving the pressure on business quality brought about by extensive growth in the early stages. We maintain our profit forecast for 19-21. We expect the EPS for 19-21 to be 0.60/0.67/0.76 yuan, corresponding to the 19-21 PE being 13/11/10 times respectively, maintaining the “increase in holdings” rating.