Company news
The company's recent situation
We recently invited the management of Grain Mill to attend CICC's Shanghai Investment Strategy Meeting for the second half of 2019. We learned that the company's e-commerce channel has been growing steadily since the beginning of the year. Only the offline store closure adjustments have continued until 1Q19 and WeChat personalized push tool adjustments may have had a slight impact on revenue.
reviews
Offline channels: Same-store growth improved month-on-month, and store closure adjustments continued until 1Q19. The company began adjusting counters with low operating efficiency in 2H18. A total of 646 stores were closed last year. At the same time, management indicated that the store closure adjustments continued until 1Q19, while the pace of opening stores remained at 500-600 households per year, leaving stores in a clean closed state from the beginning of the year until now. Thanks to the company's efforts to add a food supplement counter, promote a partnership system, and launch small-sized products, we expect year-on-year to date same-store growth of around 2H187% to offset the impact of store closures. Management expects the offline channel growth rate to be stable compared to 2H18 from the beginning of the year to date. Considering that store closure adjustments have been completed, the Food Supplement Collection and partnership system will be extended to more counters in the second half of the year. At the same time, the company plans to introduce virtual shelves in offline counters to launch offline sales of WeChat Mall products. We judge that offline channel revenue growth is expected to increase further in the second half of the year.
Online channels: E-commerce channel revenue is growing steadily, and WeChat's policy prohibiting personalized push tools has had a slight impact. Management said that since the beginning of the year, the e-commerce channel revenue growth rate has remained strong; only WeChat member stores have been negatively affected by WeChat policy adjustments or are weaker than in the same period last year.
WeChat banned message template tools that can be personalized to reach consumers in 1Q19, affecting the company's operational efficiency. To hedge against this impact, the company began introducing an annual fee system in early June, that is, you can enjoy a purchase discount by paying a fixed annual fee. We believe this move may help increase consumer stickiness and repurchase rates. It is expected that it will partially offset the impact of WeChat policy adjustments, and it is determined that this impact is expected to be gradually eliminated in the second half of the year.
The New World project is progressing smoothly, and promotion is expected to begin as early as 3Q19. Management said that the Xintai project is currently in the final optimization stage of the cereal breakfast porridge machine, and tests have already been carried out at some convenience stores. Currently, the company's pricing is divided into two schemes: 9.8 yuan/cup and 6.8 yuan/cup. The main difference is the packaging material. The company maintains its target of promoting 3,000 convenience stores this year. We are optimistic that the New World project will boost the company's brand influence and scale. At the same time, we expect the project to contribute to revenue and profit growth starting next year.
Valuation recommendations
The current stock price is trading at 11.7/9.3 times the 2019/20e price-earnings ratio. Considering the continued impact of store closures in the first half of the year and WeChat policy adjustments, the 2019/20 revenue forecast was lowered by 4.4%/6.7% and the profit forecast by 2.1%/3.6%. The target price remained unchanged at 2.32 HKD, corresponding to 42% growth room and 16.7/13.2 times the 2019/20 price-earnings ratio. Maintain outperforming industry ratings.
risks
The promotion of food supplements, partnerships, and the New World Project fell short of expectations.