SUMMARY. Cut to SELL with TP of HK$ 1.14. We were wrong to assume newlyacquired talents and new products to be quick enough in boostingcompetitiveness. With tougher industry outlook, insufficient channel and brandingupgrades, greater discounts only led to GP margin erosion and operatingdeleverage. Hence, we cut our EPS est. by 62-65% in FY19-21E. Its currentvaluation of 17x FY20E P/E, vs peers’ avg. of 11x FY20E P/E, is too rich.
　　At least 80%/ high-single-digit decline in net profit/ sales in 1H19E. Inits profit warning note, Cosmo lady attributed such decline to: 1） weakdemand amid macro uncertainty, 2） raw material costs inflation, supplyconstrict due to tighter environmental protection rules, 3） more promotion tocounter competition, 4） greater retail discounts to destock aged inventories.
　　Down Industry demand was weak. According to NBS, overall apparel andfootwear sales growth slowed down to 2.6% YoY in 5M19 vs 8.0% in 2018.
　　Underwear segment was even worse, as peers like Embry Form （1388 HK）also disclosed a 7% drop in sales in 1Q19 （vs +5% in FY18） and issued aprofit warning, expecting a profit decline, in 1H19.
　　Limited sale boost from promotion. Cosmo Lady previously hoped saleswould improve as it raised promotion efforts, but the boost was limited.
　　Moreover, the Company did not react fast enough to adjust its costs, somelayoffs were made but too late in 2Q19 while rental costs are also underpressure as more larger-sized new stores were opened in 2H18. Hence,operating deleverage in 1H19E would be significant.
　　Earnings pressure may sustain into 2H19E. We believe sales growth toremain soft in 2H19E, as the Company continue to suffer from decliningstreet-level stores traffic, insufficient momentum from product and brandupgrades. Together with its decision to clear more inventory before arrival ofits new CEO, its earnings outlook in 2H19E would also be dim.
　　There is unlikely quick fix to the problems. The Company also listed outa series of strategy to improve, but we believe all of those would take moretime: 1） new strategy from new CEO, 2） new spokesperson, 3） shift inchannel mix, 4） better R&D, product designs and suppliers, etc
Down to SELL and cut TP to HK$ 1.14. We downgrade to SELL andchopped TP to HK$ 1.14, based on 12x FY20E P/E （rolled over from FY19E）。
　　The counter is expensive, at 21x/ 17x FY19E/ 20E P/E. We revised downour FY19E/ 20E/ 21E EPS estimates by 65%/ 63%/ 62%.