Performance review The results for the first half of 2017 fell short of expectations. Meibang Apparel announced the results for the first half of 2017: operating income of 2,896 billion yuan, a year-on-year decrease of 5.8%; net loss attributable to the parent company was 44.75 million yuan, a year-on-year narrowing of 25.7%, corresponding to a net loss of 0.02 yuan per share. Net losses after deducting non-recurring losses were reduced by 25% (non-recurring profit and loss mainly included government subsidies of 7.21 million yuan). The performance fell short of expectations. Revenue increased 6% in 2Q17, and losses narrowed by 34%. There was an improvement over 1Q17, but losses were not reversed in the first half of the year. Major high-end and children's clothing brands have slowed the decline in revenue. (1) According to channels, direct business revenue increased 4.5% year on year, franchise business revenue fell 20.8%, and online business revenue increased by 51%; the company has a total of >4,000 direct-run and franchise stores, and opened about 100 new stores in the first half of the year. (2) By brand, revenue for high-end brands ME&CITY increased by 11%, while revenue for children's clothing brands Moomoo and ME&CITY KIDS increased 37%; (3) By product, revenue for menswear, womenswear, and children's clothing fell 9.7% and 3.3%, respectively, and increased by more than 30%. Profitability continues to be sluggish. Gross margin increased 5.9ppt to 50.6% year on year. Among them, the gross margin of direct management and franchise channels increased by 6.3ppt and 3.8ppt, respectively; however, this was offset by a 5.7ppt increase in sales and management expenses, mainly due to high labor sales expenses and high rent and property costs. Asset impairment losses increased by 33%, mainly due to increased preparedness for falling inventory prices. Inventories continued to decline by 13% to $1.4 billion, but the number of days of inventory turnover still increased by 19 to 204 days, and the number of days of turnover of accounts receivable increased by 11 to 24 days due to the expansion of credit sales. Development trend (1) The company expects losses from 1 to 3Q17 to be narrowed by 0 to 30% year on year to 110 to 150 million yuan. (2) The increase in the use of space in existing stores is expected to drive growth in the performance of existing stores. At the same time, the channel layout will be skewed towards emerging channels such as low-level markets and shopping centers. Profit forecasts for 2017 and 18 were lowered by 13% and 20%. Net profit per share for 2017 and 18 is expected to be 0.02 yuan and 0.03 yuan, corresponding to a year-on-year increase of 29.3% and 45.6%. Valuation and recommendations Currently, the company's stock price corresponds to 211 times and 145 times the price-earnings ratio in 2017 and 18. Maintaining neutrality, the target price was lowered by 20% to 3.99 yuan, corresponding to 1.4 times the 2018 market sales rate, implying a 2% upside. During the period, Meibang Apparel strived to promote the transformation from a single major casual brand to five major style sub-brands, and returned to physical retail after experiencing poor results from the O2O transformation. However, the recognition of the company's new brands still needs to be improved, and interim results and forward-looking guidance show that the company's profitability is still relatively weak. Risky terminal sales continued to decline; the expense ratio was even higher.