The third quarter results are in line with expectations.

Lianhua supermarket announced its results for the first nine months of 2016: revenue was 22.3 billion yuan, down 1.4% from the same period last year; net profit was-188 million yuan, down 34.4% from the same period last year, corresponding to earnings per share of-0.20 Hong Kong dollars. The performance is in line with the forecast.

In the previous September, the company cleared 156 stores, and the total number of stores dropped to 3727.

Trend of development

The offline supermarket industry still faces greater challenges, mainly because the overall consumption environment is weak and competition intensifies. E-commerce giants are rapidly developing online supermarket business (Tmall supermarket has a transaction volume of about 10 billion yuan in 2015 and a target of 100 billion yuan in 2018).

The new management has introduced a series of reform measures: 1) operating loss-making stores jointly with Yonghui supermarket in some areas; 2) improving the fresh business to attract offline consumers.

Valuations are still attractive. At present, the company's share price corresponds to 0.2 times the 2016 price-to-sales ratio, which is much lower than the A-share peer (0.6 times the price-to-sales ratio). The company's net cash is about 8.3 billion yuan, which exceeds the company's market capitalization by about 93%.

Profit forecast

The net profit for 2016 / 17 is expected to be-216 million yuan and-64 million yuan.

Valuation and suggestion

At present, the company's share price corresponds to 0.2 times the 2016 price-to-sales ratio. We maintain our recommended rating and target price of HK $4.27, which is 30.98 per cent higher than the current share price.

Risk.

The reform fell short of expectations.