Company Status China Trends Released Operating Data for the 2nd quarter of '18: Kappa's offline same-store sales (excluding children's clothing and Japanese business) declined in the middle to low single digits (Q1 '18: medium to high single digit growth), and retail sales were stable (Q1 '18: high single-digit growth). Comment We believe that the weak sales in the second quarter were mainly due to internal factors within the group, such as channel efficiency and product lines, but management believes that the Kappa brand has gone through the most difficult period. Channel: The retail sales of 45 refurbished stores increased significantly in the first half of 2018. The company plans to open more efficient stores in the second half of the year, and plans to refurbish 25% of stores during the year. At the same time, inefficient stores in low-tier cities will be shut down, and stores and factory stores will be set up in shopping centers. Product: As of mid-2018, the company's inventory balance has been reduced by a low double digit compared to the end of 2017. It is expected that in the second half of the year, more than 300 stores will launch a new product line with the brand's unique DNA, which may account for about 25% of the brand's total sales. Preview for the first half of 2018: Brand same-store sales and low retail sales are expected to grow in single digits, but trade fair orders are down 20%-25% year over year. Additionally, adjustments in accounting standards (investments in saleable assets must be market-focused) or generate fair value returns. The valuation suggests lowering the 2018/2019 earnings per share forecast of 14%/16% to 0.13 yuan/0.14 yuan, corresponding to a decrease of 3.1% and an increase of 3.8%. Currently, the company's stock price corresponds to 8.5 times the 2018 price-earnings ratio and 8.1 times the 2019 price-earnings ratio. The recommendation was maintained, but the target price was lowered by 5% to HK$1.76, corresponding to an upward space of 28.6%, based on the total segment valuation (apparel business valuation 14 times 2019 price-earnings ratio; considering the company's multiple business segments, a 10% discount on the overall valuation). We are optimistic about Kappa's brand DNA and the company's continued improvement in channel efficiency, product line, and long-term brand equity. Risk consumption continues to slow; clothing industry trends fall short of expectations.