Inconsistent with the forecast: Xiagong announced its results for the first half of 2012 on August 27; its income / net profit was RMB 4.328 billion / 297 million respectively, down 39% and 36% compared with the same period last year. It accounts for 62% of our annual forecast of RMB 8.879 billion / 477 million for 2012.

Key points: 1) the gross margin in the first half of the year fell 2.7 percentage points to 14.9% from 17.6% in the same period last year, in line with our 2012 gross margin of 14.8%, mainly due to the company's focus on small products. The operating profit margin is 4.0%, which is also in line with our forecast of 4.4%, but it is 4.0% lower than the level of the same period last year. The reason is that the sales management fee rate has risen to 10.5% from 9.1% in the same period last year. 2) Xiamen Gong achieved an investment income of 285 million yuan by reducing its stake in Societe Generale Securities (28.5 million shares sold), accounting for 81% of the pre-tax profit. At present, the company holds only 10.3 million shares of Societe Generale Securities, which means that the potential for future investment income is limited. 3) Xiamen Gong's accounts receivable rose 49% to 4.9 billion yuan from 3.3 billion yuan in 2011. to some extent, the operating cash flow in the first half of the year was negative 808 million yuan (compared with negative 719 million yuan in the same period last year); 4) as of June 30, the company's cash balance was 518 million yuan. The company issued 1.5 billion yuan of bonds in June and plans to issue additional shares in the stock market, raising no more than 1.5 billion yuan mainly for capital expenditure.

Investment impact: we reaffirm the sell rating of the stock and lower our earnings per share forecast for 2012-13-14 from RMB 0.60, 0.65, and 0.82 per share by 11%, 16%, to 0.53, 0.54, 0.68, to reflect the downward adjustment of profit margin assumptions caused by the increase in sales management expenses. In addition, we have lowered our 12-month target price based on Director's Cut by 9% from RMB5.8 to RMB5.3, which is 16% downside from the closing price of RMB6.32 on August 29. The main risks include higher-than-expected sales growth and better-than-expected cost control.