Revenue in the first half of 2018 was in line with expectations but net profit was slightly worse than expected. Revenue rose 9.2 per cent year-on-year to HK $2.86 billion, mainly driven by improvements in Chinese mainland, Taiwan and the rest of the Asia-Pacific region. Gross profit margin fell 0.6 percentage points year-on-year to 59.2%, mainly due to higher average product costs, increased share of wholesale channels and more promotions. Net profit rose 3.7 per cent year-on-year to HK $254 million, slightly lower than expected. The company declared an interim dividend of HK $0.170 per share, equivalent to a dividend ratio of 105.5 per cent.

The net profit forecasts for 2018-2020 were lowered by 10.6 per cent, 7.3 per cent and 7.8 per cent to HK $561 million, HK $637 million and HK $671 million, respectively. The adjustment was mainly due to lower gross margin forecasts and higher operating expenses forecasts, which were partially offset by higher revenue forecasts. Since about 80% of the company's products are purchased from China, the devaluation of the renminbi is expected to reduce the company's average product costs in the second half of 2018.

Downgrade the target price to HK $5.20 but upgrade the rating to "buy". We have observed a strong recovery in Giordano's business in the first half of 2018, including improvements in comparable store sales and average selling prices. We expect the recovery to continue between 2018 and 2020, thereby improving profit margins. In addition, Giordano maintains a very high dividend ratio, which makes the company's dividend return very attractive. We have lowered the target price from HK $5.60 to HK $5.20 to reflect the adjustment in the earnings forecast. The new target price is equivalent to 14.6 times, 12.9 times and 12.2 times 2018, 2019 and 2020 price-to-earnings ratios, and 17.1% room for growth. So we upgraded our rating from "collect" to "buy".