This report is read as follows:

Epidemic situation, new stores and other factors drag down the performance, but Q2 turns losses into profits; at the same time, considering that the company relies on strong digital capabilities to cultivate the big store model, the performance may be expected to build a bottom to recover.

Main points of investment:

Maintain and increase holdings. The revenue of the first three quarters is 6.38 billion yuan /-3.2%, and the net profit of return to the mother is 152 million yuan /-35.9% in line with expectations. Considering that Q4 still has the impact of the epidemic, the forecast EPS for 2022 will be reduced to 0.19 yuan (formerly 0.21 yuan) by 2%, and the forecast EPS for 2023-24 will be 0.28 yuan 0.35 yuan. The growth rate will be 50% 26%. With reference to the comparable company's PE/PS valuation, the target price will be lowered to 13.3 yuan to maintain an increase in holdings.

The growth rate of Q3 net profit returned to normal, and the expense rate decreased slightly. 1) the revenue growth rate of Q1-Q3 in one quarter is-2.9%, respectively, and the net profit returned to the home is respectively-0.33%, 0.99%, 0.85 million yuan, 10.2%, 10.2%, 2) in the first three quarters, gross profit margin 30.2%/-1.17pct, net profit margin 2.35%/-1.24pct, we are optimistic that with the establishment of differentiated supply chain and the increase in the proportion of private brands, gross profit margin is expected to pick up. 3) period expense rate 27.89%/-0.41pct, sales 20.97%/-0.01pct, management 4.9%/+0.29pct, R & D 0.99%/-0.1pct, finance 1.03% Accord 0.59pctter4) operating net cash flow of 631 million yuan / + 95%.

The proposed equity incentive shows confidence in development. 1) the company intends to grant 36.9543 million shares (about 3.4% of the total share capital at the time of the announcement of the draft incentive plan) to no more than 406 people, mainly including directors, executives and core staff. 2) the performance evaluation target for 2023-25 is based on the net profit in 2022. The net profit growth rate in 2023-25 is not less than 50x80x120% respectively, and it is roughly estimated that the year-on-year growth rate will reach 30%. 3) We believe that equity incentives are conducive to the establishment and improvement of the company's long-term incentive mechanism, attract and retain talents, fully mobilize the enthusiasm of talents, and contribute to long-term development.

With the support of policy, we should be optimistic about the increase of market share and develop differentiated supply chain + local living services to construct core barriers. 1) small and medium-sized chain / single mother-and-child stores have been greatly affected by the epidemic; and considering the frequent recent optimized fertility policies, leading companies are expected to increase their market share against the trend by relying on competitive advantages; 2) continuously strengthen omni-channel integration and vigorously promote digital real-time retail in the same city; 3) continue to promote fine operation of members; and continue to empower users / employees in the field of digitization.

Risk tips: declining birth rate, increasingly fierce competition, e-commerce impact, etc.