The share price dropped 9% on 25 October post 1HFY17 results given thepessimistic outlook for sportswear and footwear businesses. Despite theweakness in recent months, we share Belle's view that sportswear couldcontinue to benefit from the structural trend in China. For footwear, Belle hasmapped out a more detailed transformation plan. It is one of the few thatpioneer transformation in the space and we believe the 9% share price declineis an overreaction given the already low valuation; maintaining Buy.
　　Sportswear – managing market expectations but structural trend remains intactBased on 1HFY17 results and latest guidance, we lower our FY17/18/19 NPforecast by 3%/3%/6%. The key adjustment was due to the store opening planand margin assumptions for the sportswear business. We share Belle's viewthat sportswear is likely to continue to benefit from the structural trend inChina as its market share remains low compared to developed markets.
　　Footwear – dealing with its worst fear; pioneer in transformation planFor footwear, Belle's worst fear is massive department-store chain closure.
　　Therefore, it is increasing its collaboration with online channels （targets 10%sales in FY18） and collaborating with key department stores in adjusting itsprice value proposition. Should Belle transform sooner and take the lead in thewhole offline transformation development, it would stabilize the downwardtrend in the footwear business. Its healthy balance sheet and net cash levelprovide a good war chest for the company, in our view.
　　Target price of HK$6.02; risks
　　Belle has two businesses: footwear and sportswear. Pou Sheng （3813.HK, Buy）is its closest peer in sportswear. If we apply Pou Sheng's market P/E of 13.5xfor FY16 to Belle's sportswear business, this implies the market is paying 5.6xP/E for its footwear business at the current price of HK$5.07 vs. HK/Chinapeers' 8x/22x FY16 market P/E. Concerns over footwear are priced in.
　　Downside risks: failure to narrow the SSS decline in footwear, departmentstorechain closure and sportswear SSS/profit margin decline.