Gome 2Q17– SSSg to turn positive and improve sequentially, in our viewWe expect Gome’s SSS to have resumed positive growth at a low-single-digitrate in 2Q. This is mainly driven by air-con, mobile phone andkitchen/bathroom product growth. By contrast, color TV is still suffering astructural decline. We expect SSSg to continue to see improvementthroughout the year. The company targets mid-single-digit SSSg on a full-yearbasis, as they mentioned in the 1Q17 conference call.
　　We believe that the property market still leads to some consumption of whitegoods, while replacement demand will become a more important driver,contributing 70% of Gome’s home decoration orders. Aircon is more affectedby the weather. By brand, Green is taking more share, as Midea’s “T+3”strategy led to a short-term inventory shortage in channels. It has yet toexpand into rural areas.
　　Total store number expected to remain around 1,600. The company aims toopen 100-150 stores in 2017, mainly in Tier 2 markets, but it will also shutdown a similar number of stores. To recap, it net opened 21 stores in 1Q. Byregion, 75% of sales come from the Tier 1 market （including the 30 major citiesin China）。 25% from the Tier 2 market （lower tier cities）。
　　We expect its 2Q sales to grow 11% to RMB22bn with offline up 9% andonline sales up 20%, backed by GMV up 100%. We expect GPM for offlinebusiness in 2Q to improve by 0.5ppt to 17.8%, mainly thanks to product mixadjustment, i.e. it sells higher-margin products including Gree’s aircon, inparticular some exclusive SKUs, and domestic brand mobile phones, as well asdifferentiated products （mix increased from 20% to 30%-40%）。 We also expectEBIT of RMB201m, vs. RMB-109m in 1Q16, as we believe the earnings hiccupdue to the consolidation of Artway （non-listed stores） will gradually taper off.
　　We expect the net loss from the online business will gradually narrow down.
　　On a full-year base, we expect an RMB900m loss from online in 2017. Themain focus is to: 1） grow its overall GMV; 2） increase commission rates; and 3）improve GPM for self-operated products by at least 3ppt to realize break-even.
　　In terms of its investment activities, Gome invested RMB260m in Round B ofikongjian.com, the No.1 online home improvement company during thisquarter.