Core views:

1. Summary of events

For the full year of 2019, the company achieved operating income of 3,979 million yuan, a year-on-year decrease of 3.74%; achieved net profit attributable to the parent company of 160 million yuan, an increase of 43.80% over the previous year; realized non-net profit attributable to the parent company of 107 million yuan, an increase of 13.50% over the previous year; and achieved net operating cash flow of 79 million yuan, a decrease of 75.22% over the same period last year.

2. Our analysis and judgment

(1) After deducting equity transfers, scale relied on the same store to achieve a slight increase, and equity transfers and interest income increased performance

In 2019, the company achieved total revenue of 3,979 million yuan, a decrease of about 154 million yuan over the same period of the previous year; of this, the retail industry contributed 3.790 million yuan as the main business, a decrease of about 174 million yuan (YOY -4.39%) from the same period last year. If the influencing factors of the Hangzhou, Zhejiang, and Haihai transfers were deducted, the company's main business revenue increased 0.53% year-on-year; other main sources of the remaining business included revenue from items such as product display fees and membership fees, which reached 189 million yuan in 2019, an increase of about 20 million yuan over the same period last year (about 20 million yuan) YOY 11.64%). From this, it can be seen that the decline in the company's total revenue scale was mainly due to a passive decline in revenue due to equity transfers.

First, from the perspective of company stores, as of the end of 2019, the company had a total of 207 stores, a net increase of 5 over the same period last year. Among them, in 2019, the company opened 14 new stores, closed 7 stores, and transferred 2.Although the number of new stores opened by the company in 2019 fell sharply from the level of 33 new stores opened last year due to being dragged down by the renovation and upgrading of existing stores, it is still relatively high. The company's newly opened stores achieved total revenue of 403 million yuan for the full year of 2019, a decrease of 380 million yuan from the same period last year, contributing a revenue variable of -118.43%. As for comparable stores that have been in business for more than two years, as of the end of 2019, the company had a total of 155 comparable stores. By region, the company had 134/21 stores within Ningbo/outside Ningbo, an increase of 12/-1 over the same period last year, contributing 2,99/417 billion yuan in revenue, respectively, with a change of 257/50 billion yuan over the same period last year, respectively, achieved 257/50 billion yuan respectively. Negative growth of -0.40%/-6.31% over the same period last year contributed 89.36% of the company's main business revenue and 218.43% of the main business revenue variable.

Comparable stores by business type. In 2019, the company had 50/64/41 supermarkets (remodeled) /supermarkets (unmodified) /small business stores respectively. Supermarkets/small business stores changed -9/22 compared to last year, and the three types of stores achieved revenue of 1,603/15.60/224 million respectively, achieving year-on-year increases of 2.04%-4.59%/1.27% respectively. Comparable stores were split according to volume and price. By the end of 2019, the company's comparable stores achieved an average daily effective traffic of 235,900 people, an increase of 3.69% over the previous year, and accelerated growth over the 18-year level.Based on the above data, the decline in the company's revenue side in 2019 was due, on the one hand, to a sharp decrease in the number of new stores opened by the company in '19 compared to the same period last year; on the other hand, it was due to the company's transfer of Hangzhou and Zhejiang to 2 fewer stores, while comparable stores located within the Ningbo metropolitan area benefited from the excellent performance of accelerated growth in passenger traffic after transformation and upgrading, which to a certain extent compensated for the negative impact of the slowdown in showrooms and store transfers. As for the situation of showrooms in 2020, the company plans to open 16 new stores in 2020. As of April 16, 2020, the company has opened 5 new stores and closed 0 stores, an increase of 1 over the net number of stores opened in 2019 Q1, and the company has already signed 8 unopened stores. Based on this, we expect a high probability that the company will complete the target of opening new stores throughout the year. Based on the fact that newly opened stores are expected to be at the same level as in 19, after gradually completing the upgrading work of existing stores, we expect the company to achieve large-scale expansion in 2020, and continue to expand the scale recorded in 19 after excluding the negative effects of equity transfers.

From the perspective of single-store efficiency, the single-day shopping efficiency of the company's stores in 2019 benefited from an increase in customer traffic of 44.17 yuan/square meter after the upgrading of stores in Ningbo, an increase of 1.97% over the same period last year.By region, the company's stores located in Ningbo/outside Ningbo achieved 46.93/32.82 yuan/square meter, respectively, a year-on-year increase of 3.36%/-10.08% over the same period last year. The sharp decline outside Ningbo was mainly due to equity transfers in Hangzhou and Zhejiang; by business type, the company's supermarkets (including innovative stores) /small business stores achieved a single-day ping efficiency of 43.37/53.41 yuan/square meter respectively over the same period last year, achieving a year-on-year increase of 1.57%/-1.77% respectively over the same period last year. It can be seen from this that the store renovation and upgrading plan implemented by the company in 19 had a remarkable effect on improving store efficiency.

Splitting the company's main business by region, the company's stores located outside Ningbo/Ningbo achieved revenue of 3,249/541 million yuan respectively, up 0.64/-238 million yuan from the same period last year, an increase of 2.00%/-30.53% over the same period last year. It can be seen that the company still has downtown Ningbo as its main battle zone, accounting for 85.73% of revenue, an increase of 5.37 percentage points over the same period last year. As for the reason for the drastic reduction in main business outside of Ningbo, it was mainly due to the fact that the company transferred its subsidiary Hangzhou and Zhejiang during the reporting period, leading to 2 fewer stores outside the city of Ningbo.

　　According to the division of the company's main business online and offline, the company achieved online/offline revenue of 27/3,520 million yuan respectively in 2019, and the corresponding revenue increase was -0.03/-172 million yuan respectively. Revenue from online sales was 270 million yuan, down 1.19% from the previous year. The decline in revenue was mainly due to the company's transfer of shares in Hangzhou and Zhejiang during the reporting period; online sales accounted for 7.09% of the main business revenue, an increase of 0.23% over the previous year. Excluding the influencing factors of the transfer between Hangzhou and Zhejiang, online sales revenue increased 24.55% year on year, accounting for 1.19% year on year.

The company's main business was split by product category. In 2019, food/fresh/daily necessities/knitting products in various stores reached 1,978/12.15/538/60 billion yuan respectively, up -1.33/0.23/-0.47/ -0.47/-18 billion yuan respectively from the same period last year, reaching -6.29% /1.95%/ -8.08%/-22.54 percent, respectively. With the exception of fresh food, all of the company's products recorded a decline to varying degrees, mainly due to the company's transfer of 2 stores in Hangzhou, Zhejiang, and Haihai during the reporting period, which led to a decline in sales revenue for all types of products. Excluding the negative impact of the above store transfers, the company's remaining stores achieved year-on-year increases of -2.32%/12.53%/7.84%/22.54%, respectively. Judging from the proportion of sales of various products, sales of food/fresh/daily necessities/knitted products accounted for 52.18%/32.05%/14.18%/1.59% respectively from the same period last year. Changes of -1.05/2.00/-0.57/-0.37 percentage points respectively from the same period last year can be seen. Through the sharp increase in the proportion of fresh food sales, it is expected that the company will continue to increase the proportion of fresh products sold in stores in the future.

On a quarterly basis, the company's Q1/Q2/Q3/Q4 achieved revenue of 1,142/952/980/904 million yuan respectively, with corresponding revenue increases of 0.27/-0.92/-0.85/-88 million yuan respectively. Q2/Q3 is the company's historical low sales season, and Q1/Q4 is the traditional peak season. The revenue share for the four quarters of 2019 was 28.72%/23.94%/24.64%/22.71%, respectively. The slight deviation from historical rules was mainly due to the negative impact of the company's Q2-Q4 revenue due to the company's transfer of shares in Hangzhou and Zhejiang in 19Q2; 19Q1 contributed mainly to the company's revenue increase during the reporting period, mainly due to the peak spring festival consumption season in 19.

The company achieved net profit attributable to the mother of 160 million yuan for the full year of 2019, an increase of 49 million yuan over the same period of the previous year; the corresponding net profit deducted to the mother was 107 million yuan, an increase of 13 million yuan over the same period last year. In this period, the company confirmed a total of 54 million yuan of non-recurring profit and loss, an increase of 036 million yuan over the same period of the previous year; of this, government subsidies, non-current asset disposal gains and losses and other projects, including current profit and loss, reached 0.35/0.14/12 billion yuan respectively, accounting for 114.03% of the total non-recurring profit and loss, mainly due to the company's transfer of 100% confirmed investment income and market development expenses to Hangzhou Zhejiang Sea in 19Q2.

In 2019, the company's Q1/Q2/Q3/Q4 achieved net profit of 0.54/0.58/0.24/024 million respectively, an increase of 0.15/0.40/0.01/-0.08 billion yuan respectively over the same period last year. Q1/Q2/Q3/Q4 achieved net profit of 0.48/0.16/0.22/0.2 billion yuan respectively after deducting non-return to the mother, an increase of 0.10/0.09/0.01/0.01/-0.08 billion yuan respectively over the same period of the previous year. This was mainly due to the decline in revenue compared to the same period last year and the number of newly opened stores falling short of the same period last year due to the company's transfer of shares in Hangzhou and Zhejiang in 19Q2.

(2) The comprehensive gross margin increased by 0.44 ct, and the cost ratio decreased by 0.18 pct. The company's comprehensive gross margin in 2019 was 24.47%, up 0.44 percentage points from the same period last year. Among them, the gross margin of the main retail sector reached 20.71%, a decrease of 0.08 percentage points from the previous year. Therefore, the increase in comprehensive gross margin was mainly due to a contraction in the size of the main business and an increase in the share of other high-margin businesses. Looking at the product categories in the retail sector, the gross margin level of the company's food/fresh/daily necessities/knitwear products was 21.41%/16.91%/25.37%/33.07% respectively, which was 0.40/0.65/-2.15/-0.50/-0.08 percentage points respectively over the same period of the previous year; by region, the gross margin of the company's stores in Ningbo/outside Ningbo was 21.32%/17.04%, respectively, falling sharply from 0.32/-2.87 percentage points from the same period last year. This is mainly due to the reduction in stores due to equity transfers in Hangzhou and Zhejiang. It can be seen from this that the decline in the gross margin level of the company's main business is mainly due to a structured decline caused by an increase in the share of fresh products with relatively low gross margins in sales.

The company's net sales interest rate for the full year of 2019 was 4.03%, up 1.33 percentage points from the previous year; the comprehensive expense ratio for the period was 20.04%, down 0.18 percentage points from the same period last year. The sales/management/finance expense ratio was not recorded at 19.61%/2.82%/-2.39%, a change of 1.34/-0.16/-1.36 percentage points over the same period last year. As for the sales expenses ratio, the company's 2019 sales expenses increased by 120 million yuan to 780 million yuan (YOY 3.35%) over the previous year, mainly due to the increase in packaging and low-value consumables due to the increase in store renovation, the increase in system service fees and online delivery fees, and the reduction in investment income due to the transfer of shares in Hangzhou, Zhejiang, and Hai. As for the management expenses ratio, the company's 2019 management expenses decreased by 11 million yuan year-on-year, mainly due to the company's improved labor efficiency of headquarters personnel; as for the financial expenses ratio, the company's 2019 interest income was determined in 2018. The investment of additional funds was slow, causing interest income from large fixed capital increases of 51 million yuan compared to the same period last year, which led to a sharp drop in the company's financial expenses ratio.

(3) Store transformation and upgrading have achieved remarkable results. If sufficient capital is raised to help the company advance its new retail transformation strategy after deducting the negative impact of Hangzhou, Zhejiang, and Shanghai equity transfers, the company achieved continuous growth in sales scale by relying only on the transformation and upgrading of existing stores in 2019. The main business achieved 0.53% year-on-year growth, and the revenue growth rate of the renovated supermarkets was 2.04%, which is enough to see that the store renovation and upgrading plan promoted by the company in 19 achieved remarkable results. During the reporting period, the company renovated a total of 46 stores, mainly in the greater city of Ningbo. Excluding clean newly opened stores, the renovation ratio reached 22.77%, and there is huge space for stores that can be renovated in the future. On the one hand, stores that were remodeled in '19 accurately grasped consumer demand for fresh products through customer surveys and data analysis, and greatly increased the category and area ratio of fresh and quasi-fresh products; on the other hand, they actively used informatization and intelligent means such as self-service cashiers, self-service weighing, and self-service labels to improve the quality of store service. By the end of 2019, the company had 15 stores that reached the new retail 1.0 store standard, setting the first step in the company's strategy to transform and upgrade fresh supermarkets in the new retail community. Considering that the company still has more than 90% of the private fund-raising capital completed in 2018, totaling more than 1.3 billion yuan, we expect that the company's 2020 store renovation plan will continue to advance in an orderly manner, and that the company's comparable store efficiency and passenger traffic may be further improved as a result, contributing an increase to the company's continued growth on the scale side.

(4) Develop in-depth cooperation with Ali in various fields to help the company achieve sustainable development. Since successfully completing the fixed increase plan to introduce Alibaba Group as a strategic shareholder in mid-18, the company has carried out in-depth cooperation with Ali in various fields such as operating capital, store digitalization, product supply chain, online business, and innovative business formats. First, from the perspective of store digitalization, the company added technology such as mature self-service checkout machines cultivated in Hema Xiansheng's new retail stores and digitization of store product bar code information to the store, while achieving a high degree of digital upgrading of the store, while greatly improving the consumer experience and employee work efficiency. Second, with regard to the commodity supply chain, since the company introduced Alibaba Group as a strategic shareholder, Alibaba Group has become the company's largest purchasing supplier. The share of total purchases has further increased to 5.36% from 4.67% in 2018. It can be seen that the company has made full use of the global commodity supply chain and domestic fresh products supply chain built by Ali. While enriching the product categories of stores, it has increased the proportion of high-end products and upgraded the quality of the supply chain. In addition, the company is also actively cooperating with Ali in the field of online delivery, using the company's Hema Xiansheng store in Ningbo and Ali's Taoxianda system to expand the online home delivery business in three ways with the company's own app to fully meet the various needs of different consumer groups. In 2019, the company took the initiative to expand “Taoxianda” delivery stores. By the end of the reporting period, a total of 29 stores had launched the service. At the same time, the revised “Sanjiang Yuncai” app developed by the company was officially connected to Alibaba Zhongtai, achieving unified management of all channels and improving the customer's online shopping experience to a certain extent. In addition to this, the company is also actively guiding stores through the operation of WeChat community groups, deepening interaction with customers, experimenting with online ordering and in-store pickup models to increase store sales. As for the expansion of new business formats, the company completed the management switch of the Ningbo Hema Xiansheng store in 2019, and has truly achieved the independent operation of the Hema Xiansheng business format. In the future, the company will work to build “Ningbo Hema” to provide fresher products and better services to Ningbo's middle and high-end consumers. Looking at the long term, we believe that future cooperation between the company and Ali in the retail field is likely to further develop, empowering the company in various fields such as digital technology, supply chains, and even store business formats to help the company achieve sustainable scale and performance.

3. Investment recommendations

The company insisted on its layout within Zhejiang Province and expanded to surrounding areas with the Ningbo region as the core. By the end of the reporting period, the number of stores in the province had reached 207. Based on the assumption that the company plans to open 16 new stores in 2020 and that the company's store renovation plan with excellent results in 2019 is likely to continue in 20 years, and considering the positive impact of the COVID-19 pandemic on the company's supermarket industry as a whole in early 2020, we expect the company to achieve revenue of 44.15/46.60/4.777 billion yuan in 2020/2021/2022, and Guimo's net profit of 151/157/171 million yuan, corresponding to PS1.63/1.54/1.50 times, corresponding to PS1.63/1.54/1.50 times, corresponding to PS1.63/1.54/1.50 times PE is 47/46/42 times, giving a “recommended rating”.

4. Risk warning

The risk of competition diversion in the consumer market; the risk of increased competition in the retail industry; the risk that showrooms fall short of expectations.