Performance review

2017 performance is in line with expectations

Beijing Jingkelong announced its 2017 results: revenue was 11.956 billion yuan, up 0.6% from the same period last year, and net profit was 47 million yuan, up 77.9% from the same period last year. In the fourth quarter of 2017, revenue fell by 5.5% and net profit increased by 23.1%. The performance is basically in line with expectations.

In 2017, retail same-store sales grew by 2.98%. For the first time since 2013, retail same-store sales grew positively. Retail gross margin was 16.3%, an increase of 0.2 percentage points over the same period last year.

Wholesale revenue fell 1.6% year-on-year, but wholesale gross profit margin increased by 2.6%, mainly due to product portfolio adjustment and deep cooperation with major e-commerce platforms.

Trend of development

Benefiting from the macro environment, same-store sales growth is expected to continue to recover. The CICC Macro team expects CPI to reach 2.6 per cent and 2.8 per cent respectively in 2018-2019.

Focus on the upgrading of fresh products. The company has launched two new brands, "Jingjie fresh" and "Jingkelong Aijia". In 2017, a total of 13 stores were transformed into new brands, providing consumers with a better fresh consumption experience.

Valuations are still attractive. At present, the company's share price corresponds to 5 times the 2018 EV/EBITDA, which is lower than the comparable company.

Profit forecast

Considering the weak wholesale revenue, we lowered our 2018 net profit forecast by 1.9% from 52 million yuan to 51 million yuan, and introduced a 2019 net profit forecast of 59 million yuan.

Valuation and suggestion

At present, the company's share price corresponds to 5 times the 2018 EV/EBITDA. Maintain the neutral rating, but lower the target price by 5.96% to HK $2.21, corresponding to 17.55% upside space. The new target price corresponds to 6 times 2018 EV/EBITDA.

Risk

Competition from e-commerce and new retail has intensified; costs have risen.