Joeone:Earnings beat expectations,mainly thanks to a rise in investment income

Net profit up 13% YoY, thanks to a rise in investment income

    In 9M16, the company achieved revenue of Rmb1.54bn (-3.7% YoY) and net profit ofRmb310m (+13% YoY). Growth in net profit was mainly due to 174% YoY growth ininvestment income, while net profit ex. non-recurring items dropped 23% YoY. 9M16gross margin was 57.8%, basically flat YoY. Selling expenses rose 15.3% YoY,administrative expenses dropped 1% YoY, and net financial income was Rmb8.8m,nearly double YoY, mainly thanks to an increase in FX gains. Overall expense ratio was35.7%, up 4.4ppts YoY, mainly on a 4.5ppt YoY rise in selling expense ratio. Inventorywas Rmb720m, up 20% YoY; accounts receivable was Rmb140m, basically flat YoY.

    Operating pressure was still big in Q316

    In Q316, the company achieved revenue of Rmb560m (-3% YoY) and net profit ofRmb120m (+114% YoY), beating our and market expectations. This was mainly asinvestment (mainly WM product) income rose to Rmb45.53m from -Rmb21.87m inQ315, contributing 34% to Q316 operating profit. Gross margin came in at 56.9% inQ316, down 0.3ppt YoY; overall expense ratio was 33.4%, down 0.2ppt YoY. Ifexcluding non-recurring items such as investment income, Q316 earnings was down22% YoY, indicating still considerable operating pressure.

    Offline business still faces adjustment; good progress in new brand

    Online business revenue grew 34% YoY in 9M16, but offline business revenue wasdown 7% YoY, as it faced the pressure of channel adjustments and declines in traffic inthe department store channel. Offline business dropped 5% YoY in Q316, with declinenarrowing moderately, while online business witnessed a YoY growth moderating to23%. The main brand revenue was down 6% YoY, but still contributed 97% ofrevenue in 9M16. The new brand FUN progressed well, with revenue up 117% YoY,but its contribution to revenue was still small. In Q316, the company's number ofoffline stores had net growth, with the addition mainly from its new brands FUN andJ1, and main brand's pace of store closures slowed down.

    Valuation: price target of Rmb17.06, Neutral rating

    We derive our price target of Rmb17.06 based on DCF (WACC 8.2%). We have aNeutral rating.