Poor interim performance. As the calculated income floor area increased to 17.11 million square meters, the turnover of China and Austria in the first half of 2016 rose by 32.6% to 261 million yuan (RMB, the same below). However, the rapid promotion of O2O business led to a rise in costs, so pre-tax profits fell 67.1% to 7.69 million yuan in the first half of 2016. However, the losses in the O2O business and share payment expenses failed to offset the tax recognition expenses, so the tax expenditure increased by 11.7% to 13.64 million yuan during the period. as a result, China and Austria recorded a loss of 6 million yuan in the first half of 2016.

The original business was expected. As China and Austria successfully acquired 70 per cent of Dongfang Harbour (managing 11 properties in Shanghai with a total area of 1 million square meters) in February 2016, the calculated floor space as of June 2016 increased by 23.8 per cent to 17.11 million square meters compared with the same period last year. As a result, turnover from property management business rose 35.7 per cent to 225 million yuan in the first half of 2016. In addition to the oriental seaport, Zhongao entered into an agreement with Yongcheng property in July 2016 to acquire a 70 per cent interest in Yongcheng property (managing 234 properties with a total of 18 million square metres). The pace of this acquisition may be slower than we expected. however, we believe it can still be completed within this year, and the acquisition of Yongcheng property will double the calculated gross floor area of Yongcheng to 35.1 million square meters.

Tighten the control of O2O operation. After one year of operation, Aijijia has expanded to 4600 residential areas in June 2016, with 465000 registered users. The rapid expansion of O2O to attract users has greatly increased expenditure, so we noticed that the gross profit margin of O2O business in the first half of 2016 was 140%. Moreover, operating expenses and share payment expenses caused the O2O business to lose 36.9 million yuan in the first half of 2016. China and Austria focus on the revenue generation model of O2O business in the second half of 2016 and limit the investment of O2O business to 15 million yuan in the second half of 2016. We do not expect Aijia to turn a loss into a profit in the second half of the year, but we hope that the loss will narrow.

The uncertainty of O2O business. 2016 is a year full of uncertainty for China and Austria. Although we estimate that China and Austria will make a profit of 13 million yuan in 2016, there are downside risks to the profit. We have also lowered our profit forecasts for 2017 and 2018 by 3.0% to $94 million and 5.6% to $110 million respectively. We believe that the property management business is bright and provides a stable cash flow for China and Austria. Based on the 2017 price-to-earnings ratio of 8 times, the target price fell from 2.02 yuan to 1.10 Hong Kong dollars, a drop of 3.5%, and the rating was downgraded to "hold".