Lining'S Online Growth Is Also In Line With Profitability.

Main points of report

Lining (02331) Q1 running in line with the expected: offline water down 20%-30% low segment, retail discount decreased by 3PP to nearly 30 percent off, China Lining retail discount decreased by 2-3pp to 10 percent off, the recovery trend was obvious in late March, online water low double-digit growth, while gross profit margin was flat compared with the same period last year.

It is estimated that the net profit from 20/21/22 will increase from 5%/33%/24% to 15.7/20.9/26.0 billion yuan (excluding 19 years and 234 million one-time gains and losses), and the actual growth of the main industry profits will reach 24% in the 20 years. The corresponding valuation 35/26/21X will continue to recommend.

Event: company announces 20Q1 pipeline

The company announced the first quarter of the operation, the whole platform water fell 10%-20% higher than the same period last year, the downstream channel water flow dropped 20%-30% low segment, electricity supplier channel water growth 10%-20% low segment, in line with expectations.

Retail sales returned to 8 in late March, and the discount was effectively narrowed.

Offline public health events closed down inefficient stores, discount rate narrowed in late March:

1) in terms of retail sales, the downward flow of 20%-30% is lower in the lower reaches of the line, with the retail channel decreasing by 30%-40%, the wholesale channel decreasing by 10%-20%, and the retail sales decreasing by more than that of the wholesale market, which is mainly related to the 19 year operation of the 160 stores. 2) in terms of channel quantity, direct outlets / distribution channels were reduced from 26/198 to 1266/4959, and more stores were closed. With the company closing public health events, some of the inefficient stores that were originally scheduled for closure in the 2-4 quarter were withdrawn early.

3) in terms of discount rate, the retail discount in January was better than that in the same period last year. In February and early March, the discount was the deepest. In late March, the discount had narrowed. The overall retail discount of Q1 decreased by 3PP to nearly 30 percent off over the same period, and the Lining retail discount in China decreased by 2-3pp to 10 percent off.

The growth of the electricity supplier and the gross profit margin are stable: the growth of 10%-20% on the Q1 line is low. At the same time, due to the high proportion of contributions from the Lining line, the gross profit margin of the public health events still maintained a low level of 50%-60% in the same period last year. Channel inventory: the absolute value of inventory did not increase significantly compared with the same period last year, but if the 1-3 month sales accounted for the sales ratio, the total channel inventory would be 1-1.5 months longer than the normal period.

In April, the situation of daily sales fluctuated, but the overall recovery trend was better than that in late March.

2020 Outlook: full cash reserves, increase revenue and reduce expenditure, profitability is expected to continue to improve without considering the impact of public health events, the company's original 20 year revenue growth target is double-digit to double-digit high, net interest rate increased to 10%-10.5%, after public health incidents, the company responded quickly, to implement revenue and expenditure control and inventory control.

Considering the impact of public health events, it is estimated that 20 years: 1) revenue side: revenue in the first half of the year will decline slightly, and the second half of the year will depend on public health events; 2) gross margin: 20H1 gross profit margin is expected to decline by 1pp, and the annual decline will not exceed 1pp; 3) net profit margin target will remain unchanged, rising from 0.9-1.4pp to 10%-10.5% over the past 19 years.

Earnings forecasts and investment proposals

Accurate consumer insight, distinctive product matrix and continuous youthful brand image make the company's competitiveness continue to improve. More detailed retail, supply chain and background control also enable the company to continue to grow at the same time as revenue growth. Although the first half of 20 years is inevitably affected by public health events, we are still confident about the long-term growth of the company. 20/21/22 annual revenue increased from 8%/18%/15% to 150/177/204 billion yuan. The net profit from the parent company increased from 5%/33%/24% to 15.7/20.9/26.0 billion yuan (excluding 19 years and 234 million one-time gains and losses), and the actual growth of the main industry profits reached 20 in the 20 years. The corresponding valuation of 35/26/21X, as a leading benchmark enterprise for product younger and management refinement, is worth continuing attention and maintaining the "buy" rating.