Incident: The company released its report for the third quarter of 2019. Revenue, net profit returned to the mother, and net profit after deducting non-return to the mother were 854 million, 174 million and 156 million yuan respectively, compared to -16%, -23%, and -30%, respectively, lower than our three-quarter report's forward-looking expectations. The reviews are as follows:
Looking at a single quarter, revenue from 19Q3, net profit returned to the mother, and net profit after deducting non-return to the mother were 313 million, 56.52 million, and 55.73 million respectively, compared to -15%, -31%, and -32%, respectively. We estimate that the year-on-year decline in revenue was mainly 1. Delivery using discount methods was more; 2. Controlling goods digested channel inventory.
The marginal improvement in financial data for 19Q3 was 313 million, +42.65 million over the previous quarter, but accounts receivable fell 1,472 million from 1,478 million at the beginning of the period, the first decline in two years (while the number of notes receivable in the previous period increased dramatically, accounts receivable also increased dramatically, so it was not transferred from accounts receivable to notes receivable). The number of corresponding accounts receivable turnover days fell from 468 days in 19H1 to 444 days in 19Q1 to 444 days according to 19Q1; 2, 19Q3, cash+bill receivables received from sales of goods sold in 19Q3 The amount is 281 million, the value of 19Q1 and 19Q2 It was 150 million and 200 million. While accounts receivable remained at the level of around 1,450 million, repayment gradually improved.
The cost of sales ratio continues to decline. Gross margin fell 4.20 percentage points in 19Q1-3. We estimate it was mainly due to more products being shipped in the form of discounted tickets. The 19Q1-3 sales expenses rate was 37.31%, down 4.25 percentage points from the previous year. We estimate that there are two reasons: 1. The company continues to make efforts to accurately allocate marketing expenses; 2. Some sales expenses are advanced in the form of ticket discounts. The 19Q1-3 management cost rate and R&D expense ratio increased by +1.60 and 1.06 percentage points, respectively. The absolute amount of the two expenses was basically the same as the previous year. The main reason was the increase in the cost rate due to the decline in revenue.
The majority shareholders' funding issues were resolved, and the focus was on the development of the company's main business. Dongsheng Group and Shanxi Venture Capital signed a “Share Transfer Agreement” on August 23, 2019, to transfer the company's 40 million unrestricted tradable shares (accounting for 8.13% of the company's total share capital) agreement to Shanxi Venture Capital. The transaction was transferred on September 30. After the majority shareholder Dongsheng Group transferred its shares, the capital issue was resolved in stages. We expect that its main energy will be invested in the quality of the company's operations, and we expect the company's operations to continue to improve.
Adjusted profit forecast: We expect the company's net profit to grow by -27%, 34%, and 22% in 19-21. EPS will be 0.56/0.74/0.91 yuan respectively (1.17/1.59/2.06 yuan before the adjustment). The current stock price corresponds to 19pe's valuation of about 29x. The company's products are classic brands of traditional Chinese medicine, and the seller base is good. Repayments have gradually improved since this year, and after the majority shareholders' funding issues are resolved, it is expected that the majority shareholders' funding issues will focus on enterprise operations. We look forward to continued improvement in the quality of operations in the future and maintaining the “Cautious Recommendation - A” rating.
Risk warning: product sales fall short of expectations; risk of bad debts; risk of production and operation.