Results for the first half of 2016 were lower than expected

Baisheng Group announced results for the first half of 2016: revenue of 2.3 billion yuan, down 7.2% from the previous year; net profit - 124 million yuan, corresponding to earnings per share - 0.05 yuan. Performance fell short of expectations.

The growth rate of same-store sales declined to -9.7% (-9% in the first quarter; -8% in 2015), due to weak consumer sentiment, e-commerce development, and offline oversupply.

The gross margin on product sales remained steady at 16.7%. However, operating leverage effects and store closing costs continue to drag down net interest rates.

Development trends

Over 50% of Baisheng's stores have been in business for more than 5 years, and old stores will continue to lose market share in a fiercely competitive environment.

In June, Baisheng's first shopping mall project, Qingdao Golden Lion Plaza, was grandly opened. Qingdao Golden Lion Plaza has a construction area of 230,000 square meters. Since shopping mall models tend to be less efficient than department stores, we anticipate that the project may increase losses in the short term.

Profit forecasting

We lowered our earnings per share forecast for 2016 and 2017 from RMB -0.01 and RMB 0 to RMB -0.09 and -0.08 yuan respectively.

Valuation and advice

Currently, the company's stock price corresponds to 0.3 times the 2016 net market ratio. We maintained our evasive rating, but lowered our target price by 17.54% to HK$0.57, with room for 19.3% decline from the current stock price. The target price is based on 0.3 times the 2017 net market ratio.

risks

Potential consolidation risks.