It turned into a profit in the third quarter of 2016. China and Austria reported a profit of 2.2 million yuan in the third quarter of 2016, compared with a loss of 6 million yuan in the first half of 2016. The company tightened the management of its O2O business in the third quarter of 2016 to limit the pace of its expansion. In addition, the newly increased area under management of contracts under management increased from 22.21 million square meters in December 2015 to 26.55 million square meters in September 2016, thus stabilizing the profit contribution. As a result, the O2O business lost 14.7 million yuan in the first nine months of 2016, and the overall gross profit margin dropped from 34.0% in the first nine months of 2015 to 29.2% in the first nine months of 2016.
The acquisition plan has been slightly delayed. After the successful acquisition of Oriental Harbour in February 2016, China and Austria announced the acquisition of a 70% interest in Yongcheng property in July 2016. Although the timetable for the acquisition has been delayed, it can still contribute to the full-year performance from 2017. The seller agrees to provide an annual profit of not less than 32 million yuan from 2016 to 2018.
In addition, the acquisition includes 87.6 million yuan of investment properties, which China and Austria will sell in the future to reduce acquisition costs and earn profits after the sale of investment properties. We estimate that China and Austria will have 361 million yuan in cash by the end of 2016, and the company will continue its business development plan through acquisition in 2017.
The resources available for O2O are limited. In September 2016, Aijia covered about 4700 residential properties and 476000 registered users, compared with about 4600 and 465000 registered users three months ago. We believe that China and Austria will scale back their expansion plans to reduce losses in the future. By the end of September 2016, China and Austria had invested a total of 49.4 million yuan in the development of Aijia, so there was only 11.1 million yuan left unspent for Aijia's development. In other words, we believe that China and Austria will consider the sustainability of their O2O business next year.
Lower the forecast for 2016. After announcing the results for the first nine months of 2016, we do not believe that China and Austria will achieve brilliant results in 2016. We have lowered our profit forecasts for China and Austria by 76.6% to 3.03 million yuan in 2017 and 16.7% to 78.34 million yuan in 2017 and 4.2% to 105 million yuan in 2018. We believe that the property management business is sound and provides a stable cash flow for China and Austria. If the company terminates its O2O business, it may get a revaluation opportunity. Based on a price-to-earnings ratio of 12 times 2017, our target price rose from 1.10 yuan to HK $1.33, with room for an increase of 6.8%, maintaining the "hold" rating.