Xiaonanguo announced a 2-for-1 plan on Wednesday. The share price is HK$0.41 per share, an 18% discount from Tuesday's closing price. The net capital raised is expected to reach HK$297 million and will be used to acquire 9.8% of WOWO (JMU US)'s shares. The acquisition cost is HK$368 million, which is over 45% of its closing price on Tuesday. After the acquisition is completed, Xiaonanguo, Ms. Wang (Chairman), and Ms. Zhu (Executive Director) will hold a total of 38.8% of WOWO's shares. Xiaonanguo hopes to strengthen branded food sales through WOWO.

WOWO recorded a loss in 2015, but its financial results will not be incorporated into Xiaonangguo's statements. However, since Xiaonan pays a higher premium, if WOWO's stock price continues to remain low, Xiaonan may need to make impairment provisions for WOWO's investment. Same-store sales in Xiaonanguo may be worse than expected in the first half of 2016, but after the opening of Shanghai Disney, we expect same-store sales to improve in the second half of 2016, and there is still room for improvement in cost control. After investing in WOWO, sales of Xiaonanguo brand products are expected to record relatively rapid growth in 2017. Since the growth rate of same-store sales was worse than expected, and the stock supply also had a dilution effect, we lowered Xiaonanguo's net profit per share by 53.5%, 30.8%, and 32.3% respectively in 2016-2018.

Although same-store sales in the first half of 2016 may be disappointing, profits will reverse with proper cost control. The valuation is not too high. We maintain Xiaonan's “buy” rating, but due to the dilution effect of the stock offering, we lowered the target price to HK$0.60, which is equivalent to 39.8 times Xiaonan's price-earnings ratio in 2016, 17.1 times the price-earnings ratio in 2017, and 13.6 times the price-earnings ratio of 2018.