Concerns on its back-and-forth strategy; maintaining Hold
We lower our FY17/18/19 NP forecast by 11%/10%/12% to reflect weakerresults in 3Q and the slower-than-expected GPM improvement from2017~2019. The company’s back-and-forth strategies also bring furtheruncertainties, in our view. We thus cut our TP by 4% to HKD0.82 （vs. HKD0.85）and retain our Hold rating, as we believe the shares are fairly valued. We markLouise Li as secondary analyst in this report.
3Q17 results missed and store numbers will be reduced for 2017/2018
3Q sales/NP were 12%/39% lower than our forecast mainly due to lower-thanexpectedGPM and an unexpected online sales decline. The company retainedits full year SSSg guidance at 3-5% for 2017 and expects it to continue toimprove driven by its new upgraded stores, socialnomics platform, after salesservice, etc. It also expects NPM will improve gradually helped by better GPM,lower traffic acquisition costs and lower interest burden.
Valuation and risks
Our DCF yields HKD0.82/share （previous: HKD0.85）。 We maintain our Holdrecommendation, as we believe the shares are fairly valued. We use DeutscheBank’s China COE of 9.5% and a beta of 1.1. Terminal growth rate （TGR） is1.5%, in line with our 1.0-2.5% sector assumption for other consumer stocksthat we cover. Our target price implies 24/19x 2018/19E PE. Downside risks: 1）failure to improve store profitability and narrow losses in its online business;and 2） weaker-than-expected SSSg. Upside risks: 1） better-than-expectedSSSg; and 2） less competition for the online business.