1H19 performance is lower than we expected.
Mengjie shares announced 1H19 results: revenue of 1.15 billion yuan, an increase of 14.2% over the same period last year; net profit of 83.05 million yuan, down 9.6% from the same period last year, corresponding to earnings per share of 0.11 yuan, which was lower than expected due to a decline in profitability in the second quarter. 2Q19's single-quarter income increased by 21.9%, while its net profit fell by 37.1%.
Revenue split in the first half of the year: according to the products, the sales revenue of kit, quilt core and pillow core increased by 13%, 12% and 26% respectively compared with the same period last year, accounting for 39%, 30% and 6% respectively.
Business overview: (1) affected by the intensification of trade frictions, generous Sleep achieved an income of 47.21 million yuan in the first half of 2019, a decrease of 54% over the same period last year, with a net loss of 1.258 million yuan (net profit of 14.25 million yuan in the same period last year). (2) in 2019, the company focused on the layout of franchise channels, sinking to key communities and third-and fourth-tier cities, and nearly 600 new terminals were opened in the first half of the year; online and offline channels were integrated, and the new retail platform of "a room of good goods" was constantly upgraded and iterated. (3) promote the layout of washing and care services, and fully cover the washing and care services of new standard stores and smart stores in the first half of the year.
Financial review: the gross profit margin fell by 5.9ppt to 38.8% in the first half of the year, while gross profit margins in North and Central China, where the proportion of income has increased, have fallen significantly; the rate of sales and management expenses has dropped by 3.6 ppt; and operating cash flow has increased by 122% to 23.59 million yuan.
Trend of development
The company launched a 2019 restricted stock incentive plan with a grant price of 2.21 yuan. the performance evaluation requirement is 2019 and the net profit of 2020 is no less than that of 2016, an increase of no less than 100% and 150% respectively.
Profit forecast and valuation
Due to the decline in profitability in the second quarter and the uncertainty of consumer sentiment has not significantly improved, we have lowered our earnings per share forecasts for 2019 and 2020 by 2.6% and 1.4% to 0.22 yuan, corresponding to year-on-year increases of 100.5% and 11.9%.
The current share price corresponds to 2019 times and 22.2 times earnings in 2020.
We maintain a neutral rating, but due to the adjustment in earnings forecasts, we lower our target price by 1.9% to 5.68 yuan, corresponding to 26.0 times 2019 price-to-earnings ratio and 23.2 times 2020 price-to-earnings ratio, which is 4.6% higher than the current stock price.
Risk
High inventory risk and improper M & An integration risk.