1H20 performance is lower than we expected.

Gome Retail announced 1H20 results: revenue was 19.075 billion yuan, down 44.4% from the same period last year; the net loss per share was 2.623 billion yuan, corresponding to a loss of 0.12 yuan per share, which was larger than the net loss of 380 million yuan in the same period last year, which was lower than we expected, mainly dragged down by the epidemic. Among them, Q2 revenue and profit performance showed signs of month-on-month improvement, the follow-up need to pay attention to the company's business recovery data and the effect of transformation.

Trend of development

1. The epidemic dragged down the sales performance in the first half of the year. Revenue in the first half of the year was 19.075 billion yuan, down 44.4% from the same period last year, mainly affected by the epidemic, of which revenue from 1360 comparable stores fell 38.58% in the first half compared with the same period last year. Judging from the quarterly trend, 2020Q1/Q2 revenue fell 61.48%, 26.32%, respectively, compared with the same period last year. Thanks to the expansion of new models such as live streaming, the decline in sales has narrowed, of which the sales of the four super live broadcasts completed in the first half of the year reached about 2.5 billion yuan. At the same time, the share of new business revenue has increased, with county stores accounting for 8.23 per cent (vs1H19 5.49 per cent) and integration of cabinet and electrical appliances, home decoration and home decoration to 7.02 per cent (vs1H19 5.2 per cent).

2. The decline in the proportion of large household appliances sales in the first half of the year is a drag on profit performance. In the first half of the year, the comprehensive gross profit margin fell 6.3ppt to 11.6% compared with the same period last year, of which the sales gross profit margin dropped 5.6ppt to 9% compared with the same period last year. Mainly due to the decline in the proportion of large household appliances with higher gross profit margin during the Q1 epidemic, Q2 has rebounded with the easing of the epidemic. During the period, the expense rate increased by 5.4ppt to 22.1% compared with the same period last year, of which the sales expense rate increased by 4.2ppt to 15.9%; the management expense rate increased by 1.3ppt to 4.7%; and the other expense rate decreased slightly to 1.5% over the same period last year. During the reporting period, the company actively reduced expenses through rent negotiation, salary adjustment, marketing delivery efficiency improvement and other measures. In terms of monetary funds, the company completed the repayment of US $466 million in overseas bonds in the first half of the year, with paper cash and cash equivalents of 11.437 billion yuan by the end of June.

3. Continue to pay attention to the effect of business transformation of the company. At this stage, the company revolves around the strategy of home life, vigorously expand digital local retail models such as the community and Gome App, and create diversified consumption scenarios; at the same time, it has reached a strategic cooperation with Pinduoduo and JD.com to form complementary advantages in terms of traffic, supply chain and logistics. In the first half of the year, Gome's e-commerce platforms such as Pinduoduo and JD.com increased by 100 times compared with the same period last year. Looking forward to the second half of the year, the company plans to speed up the construction of a new Gome driven by both online and offline platforms, on the one hand, accelerate the layout of county stores, deepen channel sinking, and empower its own supply chain advantages; on the other hand, contribute to performance increment through external third-party platform cooperation and online community operation. In the follow-up, we should pay attention to the effect of the company's business transformation.

Profit forecast and valuation

Based on the impact of the epidemic and the uncertainty faced by the company during the period of performance transformation and adjustment, we have reduced the net loss of homing in 2020 to 514 million yuan, leaving the profit forecast for 2021 unchanged.

The current share price corresponds to 0.4 times Pmax S in 2021, maintaining the neutral rating and target price of HK $1, and 0.4 times Pmax S in 2021, with 9.9% downside space.

Risk.

Competition in the industry continues to intensify; the effect of the transformation is not as good as expected.