Earnings in the first half of the year rose more than 10 per cent year-on-year, slower-than-expected revenue and gross profit margin expansion, led to the profit growth of Shengnuo Group. However, growth has been slower than expected due to rising R & D spending and tax rates. Affected by US procurement guidelines and consumers' preference for products made in the United States, export business revenue fell 4% year-on-year, but due to a 3.9% increase in same-store sales (living Hall: 2.3%, consignment counter: 4.4%), coupled with the strong performance of corporate customer orders, retail and corporate sales growth was higher than expected (more than 54% year-on-year), offsetting the decline in export business. In the first half of the year, the group opened 10 living pavilions in mainland China. As the price of raw materials fell 19 per cent year-on-year, while the average selling price of the bubble business fell only 16 per cent, gross margin rose 2.1 per cent year-on-year to 28.5 per cent.

Management expects growth and profit levels to continue to look forward to the future. In order to increase export sales, Shino will: I) outsource more production operations from factories in the United States, ii) establish its own plant in the United States (the first phase will be completed in the second half of 16) and iii) increase technology research and development, improve product quality and promote more own brands. As the Group continues to improve its product portfolio with value-added products and private-brand products, management expects gross profit margin to continue to improve. Although the cost of "made in America" is higher, because customers are willing to pay higher prices for these products, they can be offset by raising the average selling price. At the same time, as memory foam products gradually gain market recognition, the same-store sales growth of Shengnuo in China reflects positive signs.

Growth is expected to continue and valuations are not high. Due to falling export revenues, rising R & D costs and tax rates, we cut our profit forecasts for 2015-17 by 13-20 per cent. Although we have lowered our earnings forecasts and the US business (which accounts for more than 60% of the group's earnings) faces uncertainty, based on low valuations, profit growth of more than a dozen percentage points, return on equity of more than 20%, and strong balance sheet / cash flow, so we maintain our buy rating. Based on our postponement of the target price-to-earnings ratio of 10 times from 2015 to 2016, our new target price is HK $1.43, valuing it at about 1999 HK, the most recent Hong Kong-listed peer, and a discount of about 50 per cent to our US-listed peers.