Performance continued to fall short of expectations. Total sales revenue increased 4.9% to RMB 8.979 billion. Total operating income rose 2% to RMB2.6 billion. Net profit attributable to shareholders fell 38% to RMB 324.7 million, 20% lower than our estimate (Shen Wan estimates: RMB 407 million, down 22.3% year on year). Earnings per share were RMB 0.116. The company proposes to pay dividends of RMB 0.05 per share, with a corresponding dividend rate of 43.1%. Valuation and target price: We lowered earnings per share from 2013 to 2015 by 19.6%/21.7%/23.2% to RMB 0.24/0.25/0.25, respectively, to reflect lower-than-expected same-store sales growth and higher-than-expected operating expenses. Based on the DCF model, we lowered our target price from HK$3.7 to HK$2.5. We maintain our reduced holdings rating. The company's stock price currently corresponds to 11.7 times the 13-year PE and 11.4 times the 14-year PE. Given the company's structural issues and the bleak industry scenario, we maintain our reduced holdings rating. Key Assumptions: We expect same-store sales growth rates of 1.0%/2.5%/3.0% from 2013 to 2015, respectively. We expect the deduction rate to be 17.6%/17.5%/17.4%, respectively, and the direct sales profit margin is 15.5%/15.3%/15.0%, respectively. There is a different understanding from the public: the year-to-date same-store sales growth rate has fallen short of expectations, and we expect the full-year same-store sales growth rate to be even lower than the management's guidance. Same-store sales fell 0.7% in the first half of '13, and corresponding same-store sales increased by more than 1% in the second quarter (down 2.8% in the first quarter). The same store sales growth rate for gold and jewelry products was over 20% in the second quarter and reached 12% in the first half of the year. The number of units declined under the same clothing store sales growth rate, and cosmetics sales performance exceeded the group average. Excluding gold, same-store sales fell 1% in the 2nd quarter of '13. Management expects the full-year same-store sales growth rate to be 2-3%, that is, the same store sales growth rate corresponding to the 2nd quarter of '13 is 5-6%. We believe that due to the company's structural problems and fierce competition, this guideline is difficult to achieve. Meanwhile, the same store sales growth rate has remained flat since July. Negative operating leverage led to a further contraction in profit margins. The deduction rate fell 80 basis points to a historic position of 17.5%, and the direct sales profit margin fell 150 basis points to 15.5%, leading to a drop in product gross margin of 80 basis points to 17.4%. The further contraction in product gross margin was mainly due to the dilution of new stores and the increase in sales contribution of varieties with lower gross margins. In addition to a contraction in commodity gross margin, a 28.6% increase in employee costs and a 34.9% increase in rent costs led to a 2.5 percentage point decline in operating profit margin (first half of '13:4.9%). Due to weak same-store sales growth and negative operating leverage, we expect operating profit margins to continue to decline by 4.8%/4.4%/3.9% from 2013 to 2015. Existing stores are less efficient, and the growth rate of opening stores will slow down in the future. Of the 55 existing stores, 18 are in a state of loss, and 20-25 have declined in profit, reflecting an inefficient mix of existing stores. The company continued to maintain its store plan this year, while the number of new stores added in 14/15 was lowered from 6-7 households to 4-5 house/year. The company added 2 new stores in the first half of the year, opened 2 new stores in July, and will continue to open 3 new stores in the second half of the year. The total loss of new stores in the first half of '13 was RMB 740 million, and the loss guideline for new stores for the whole year was RMB 150-160 million. The cost of capital is expected to reach RMB 400-500 million in 2013. While maintaining a reduced holdings rating, profits were further lowered. We lowered our earnings per share forecast for 2013-2015 by 19.6%/21.7%/23.2% respectively to RMB 0.24/0.25/0.25, reflecting a lower-than-expected same-store sales growth rate and higher-than-expected operating expenses. Based on the DCF model, we lowered our target price from HK$3.7 to HK$2.5. We maintain our holdings reduction rating. Catalysts: Stronger than expected same-store sales growth rate; new stores climbing faster than expected; potentially profitable mergers and acquisitions. Risks: Uncontrollable employee/rent costs; higher-than-expected losses in new stores; weak sales sentiment hurts optional spending