*ST Hitomaku discloses 2016 mid-year report

The company achieved operating income of 5.333 billion yuan in the first half of 2016, a year-on-year decrease of 9.72%; net profit attributable to shareholders of listed companies was 163.2671 million yuan, a year-on-year decrease of 63.92%; basic earnings per share were 0.04 yuan; cash flow from operating activities was -6.1598 million yuan, and negative outflows decreased 94.28% year-on-year.

Main business continues to be under pressure

The main reason for the decline in the company's performance is that the company is still affected by the decline in macroeconomic growth and e-commerce diversion. At the same time, the company concentrated on closing 11 stores in the second half of 2015, and the scale of operation was relatively small compared to the previous year. The company's main business, retail sales revenue during the reporting period was 4,839 billion yuan, a year-on-year decrease of 9.87%. By category segment, revenue from all categories in the retail industry declined year-on-year. Among them, fresh products (-0.84%) saw the smallest decline, while knitwear (-22.79%) and department stores (-23.49%) saw the biggest declines.

Gross margin declined year-on-year, and fresh food became the highlight

The company's consolidated gross margin for the first half of 2016 was 22.86%, down 1.01 percentage points from the previous year, and is at the midstream level of the industry. Looking at the category segment, gross margins of food, washing and chemical products, home appliances, knitwear, miscellaneous goods, and department stores have all declined; only fresh food margins have increased. The company has deepened the transformation of fresh food management in recent years, achieved a shift in fresh food management from a joint venture model to a self-operated model, and fresh profit margin continued to increase. During the reporting period, the gross margin of fresh products increased 0.92 percentage points over the same period last year, and the company's fresh food management transformation has achieved great results.

The cost rate for the period is controlled

The company's corporate expenses rate in the first half of 2016 was 22.06%, an increase of 0.05 percentage points over the previous year, which is basically the same as the same period last year. Among them, the sales expenses ratio was 17.78%, up 0.33 percentage points from the previous year; the management expenses rate was 4.18%, down 0.31 percentage points from the previous year; and the financial expenses ratio was 0.1%, up 0.03 percentage points from the previous year. Last year, due to reasons such as increased depreciation and category adjustments to increase product losses due to the conversion of distribution centers in Chengdu and Xi'an to fixed assets, etc., the cost rate for the period was as high as 24.69%, which was significantly higher than that of peers. This is also an important reason why the company lost money.

Compared to the full year of last year, the company's expense rate was controlled in the first half of this year.

There is a possibility of turning a loss into a profit this year, maintaining a “neutral” rating

The company's losses for two years in a row caused the company to be issued a delisting risk warning. This year, there was great profit momentum. The main reason the company lost money last year was the high cost rate during the period and the loss caused by closing a large number of stores. Assuming that the company's annual fee rate remains relatively stable compared to the first half of the year, and that no large-scale store closures occur, there is a possibility that the company will turn a loss into a profit. We forecast the company's 2016-18 EPS to be 0.06/0.26/0.45 yuan, which will remain “neutral” for the time being

ratings.

Risk warning: The macroeconomic economy is seriously declining; industry competition is intensifying; the large-scale closure of stores by companies has caused one-time losses.