We expect 3% SSSg in 4Q17/2017
　　We forecast Gome to report a NP of RMB314m, a 4% yoy decline on a 6% risein sales to RMB81bn. We expect the company to deliver a 3% sssg for 4Q17and for the full year (ie low end if its SSSg official guidance of 3%-5%) mainlydriven by its virtual traffic brought by online and shared GMV. By region, its Tier1 market (largely covering Tier 1/2 cities), still accounts for 80% of sales, thoughTier 2 cities saw better growth.
　　We reduced NP forecast by 14%/1%/1% for 2017/18/19F mainly due to
1. We now expect a lower GPM for 2017 ( 17% vs 17.3% old). Its GPM isexpected to have peaked in 2Q17 after its hike in 2Q as air conditioner’ssales peaked in 2Q. We expect GPM improvement will continue in 2018as guided in previous results analyst meetings.
　　2. Higher than expected online loss at RMB1,053m vs previous forecastof RMB937m for 2017. Its online sales saw decline in 3Q17 mainly dueto its deliberate reduction of lower margin products (which drive salesvolume). We believe it has stablized in 4Q17 and thus for full year a 20%yoy growth in online sales is expected. It targets to increase differentiateproducts mix from online (currently only 10% vs 47% for offline). On GPMtrend while management expects yoy improvement, the improvement hasbeen slower than expected. For 2017, we expect online GPM to be at 3%vs 5.5% previous expected.
　　Given the stabilization of EUR, we expect there will be no foreign exchange lossoccurred in 4Q17 for its Euro based bond.
　　Valuation and risks
　　Our DCF yields HKD0.87/share (previous: HKD0.82). A higher TP despite lowerNP was due to 1) 2017 earnings adjustment does not affect our DCF model and2) time value increase in our DCF model. We maintain our Hold recommendation,as we believe the shares are fairly valued. We use Deutsche Bank’s China COEof 9.5% and a beta of 1.1. Terminal growth rate (TGR) is 1.5%, in line withour 1.0-2.5% sector assumption for other consumer stocks that we cover. Ourtarget price implies 24/19x 2018/19E PE. Downside risks: 1) failure to improveprofitability and narrow online loss; and 2) weaker-than-expected SSSg. Upside risks: 1) better-than-expected SSSg; and 2) less competition for the onlinebusiness.