Bank of America Merrill Lynch issued a report reiterating the 00210.HK buy rating, lowering the target price from 2.64 yuan to 2.45 yuan.

According to the report, Daphne's management said the market in 2015 was challenging and sales growth in the third quarter was weak, so the bank cut its profit forecasts for 2015 and 2016 by 64% and 48%, respectively. The management said that efforts are being made to rationalize the shop network, save costs and improve shop production efficiency. In the next two years, shops with operating losses of more than 10% will be gradually closed, and large stores will be increased to optimize sales channels. It is estimated that 200 stores will be closed in the second half of 2015, and the annual sales network will decline by about 6%.

In terms of inventory, Daphne's turnover days in the first half increased from 208 to 238 days, but management is confident that there will be a significant improvement by the end of the year as the company intends to increase discounts and sell some of its inventory to Southeast Asian countries. Gross profit margin is expected to fall in the second half of the year, but it is expected to be better than in the second half of 2014. Same-store sales growth remained weak in the third quarter, and the bank expects same-store sales to fall by about 17 per cent in the first half of the year due to last year's high base.

Merrill Lynch said that Daphne's earnings growth is weak, but the short-term outlook is uncertain. It is believed that its strong balance sheet will support the company through the downward cycle. After the management's adjustment strategy, the company's earnings are expected to stabilize or rebound, and the share price has room to rise.