Long-term growth story retained; maintaining Buy We lower our FY16-17 forecasts by 2-3% to reflect the weaker-than-expected3Q15 sales growth and management’s revised guidance for FY16-17 top-linesales growth (mid to high single digits). Air conditioner sales declined by 20%yoy in 3Q15, and management plans to continue with the reduction of outputuntil channel inventory returns to a normal level ? by 1Q/2Q16. To recap,channel inventory fell by 20% in September versus June. We believe Midea’slong-term growth story is retained. Maintaining Buy. Top-line target cut to mid to high single digits for FY16-17 Management cut its top-line growth guidance to mid to high single digits (fromlow teens) for FY16-17 in its 3Q15 analyst conference call. We believe this is tomaintain a balance between its profitability and market share gain, withprofitability as the priority. We expect washing machines/refrigerators/smallappliances to post FY15-17 CAGRs of 13%/13%/9%, driven by the launch ofdifferentiated products and the expansion of the flagship store coverage. Weestimate a 12% net profit CAGR over FY15-17, on a sales revenue CAGR of 7%. 3Q15: sales down 9% yoy, with core net profit down 1% yoy Midea reported a 3Q15 net profit increase of 14.7% yoy, to RMB2.7bn (corenet profit down 1% yoy), owing mainly to government subsidies. Sales revenuedeclined 9% yoy, owing to a 20% yoy sales decline in air conditioners. Channelinventory fell 20% in September versus June; however, this was still high, andmanagement expects a healthy level to be reached by 1Q/2Q16, which is inline with our expectation. The GP margin declined 0.8ppt, to 23.3%, onreduced output volume and a price discount on AC. Target price fine-tuned to RMB34.09, from RMB34.79, on 12x FY16E PE; risks We lower our target price by 2% to reflect the lower-than-expected top-linegrowth. Our DCF (9.5% COE, 1.0 beta, 2% TGR) yields RMB34.09/share (old:RMB34.79), implying 13x/12x FY15/16E PE, or 1.0x PEG, which is in line withthe 0.9-1.1x PEG for the sector. Downside risks: global expansion; slower-thanexpectedde-stocking of air conditioners; fierce competition.

Sales increased 15% yoy, while NP was down 64% yoy. Yonghui announced its 3Q15 results after the market closed on 29 October2015. NP dropped 64% yoy to RMB71m due to the operating deleverage. Salesgrew 14.8% yoy to RMB11bn. For 9M15, sales increased 17% yoy, aslowdown from 18% yoy growth in 1H15. Gross margin edged up slightly by0.3 ppts to 19.3%. Opex as a percentage of sales increased 1.5 ppts to 17.7%,with selling expenses and administration expenses increasing 24%/32%,respectively, which led to an EBIT decline of 72% yoy to RMB82m in 3Q15. Balance sheet remains healthy. Accounts payable increased 47.5% yoy to RMB5.95bn. Net cash increased toRMB6.46bn as of end-3Q15 from RMB661m as of end-3Q14. Operating cashflow was RMB1.59bn as of end-September 2015, vs. RMB1.28bn as of end-September 2014. 21 stores added, while SSSg declined 1-2% yoy. The company has opened 21 new stores in 10 regions including Shanghai,Beijing, Sichuan, and Anhui in 2015, bringing the total number of stores to 372by end-September 2015. GFA increased 15.7% yoy. SSSg in 3Q15 declined 1-2% yoy. To recap, SSSg was 3-4% in 1Q15 and 0.4% for 1H15. 3Q results below our expectation. 3Q sales were 23% of our full-year estimation, which is lower than 25%/25% inFY13/14. For the strategic partnership with JD, management has not revealedthe detailed action plan. We expect the plan to include joint procurement andO2O initiatives.

NP down 3.2% on sales growth slowdown Shanghai Jahwa (SJ) announced its 3Q results after market close today. NPdeclined 3.2% to RMB150m, with sales growth slowing to 4% (3Q salesRMB1.4bn). Excluding one-off items, NP was down 14.2% yoy to RMB139m.GPM remained at 58.2%, same as 3Q14. EBIT margin signicantly eroded 5 pptto 9.3%, mainly due to opex growth of 10% (above sales growth). Sellingexpense as % sales was up 3ppt to 40% and admin costs also up 1 ppt to 10%. By the end of September, the company’s inventory level had increased 42.0%yoy to RMB703m. AR significantly increased 53% vs end-Sep 2014. Thedisposal of Jaing Yin Tian Jiang (an associate company of SJ) was approved bythe board in October, but has yet to be reflected in the P&L. Trading in the share has been suspended since 23 Sep 2015 because thecontrolling shareholder offered to increase its stake in the company. SJ is tohold an analyst meeting at 2:00pm on 29 Oct (Thursday) when more detailsshould be disclosed.。 Deutsche Bank views – 3Q results slightly lower than our expectation Sales and core NP for 9M15 represented 75.2% and 82.5% of our full yearforecast. For reference, in 2013/2014, 9M sales accounted for 78.2% /80.1% ofannual sales. 9M NP accounted for 81% and 77.8% of total NP in 2013 and2014 respectively.

Controlling shareholder offered to increase SJ’ equity Shanghai Jahwa (SJ)’s share has been suspended since this morning. Thecompany made an announcement after the market close that its controllingshareholder, Ping An Life Insurance has offered to increase its stake of SJ’sshare. Further details will be disclosed and trading will resume in five workingdays. Deutsche Bank View To recap, on 28 July SJ announced that Ping An New Capital transferred 100%of Shanghai Ping Pu Investment (wholly owns Shanghai Jahwa Group, whichin turn owns 28% of Shanghai Jahwa United (listed company)) to Ping An LifeInsurance Co. We believe that the controlling shareholder share increasereveals its confidence about SJ’ long term perspective.

Core NP lowered 6/13/14% for 2015/16/17, mainly on sales and GPM changes. Although we believe the 2015 sales target of 18% is unachievable (we budget15% growth) due to the macro slowdown and change in distributors forHerborist, SJ will likely perform better than the industry. It should continue tofocus on product and brand enhancement. Therefore, despite the hiccup in2015, we remain positive on its five-year plan. We maintain Buy with a revisedtarget price of RMB48.52. 1H15: sales hurt by macro slowdown; change in distributors for Herborist. Management explained that, although SJ only reported 14% growth, thisalready exceeds the market’s 9% growth for the cosmetic industry. Theshortfall in 1H15 is mainly on Herborist, which failed to recover in 2Q15. Webelieve its growth was only in the mid single digits due to its change indistributor to more multi-brand operators from a single brand. Thus, sales indepartment stores were weak. However, online sales rose 30% for the brand. GF and Giving also reported double-digit growth, while Kao’s sales rose 60%yoy. Except for Herborist, which reported flat GPM, all other brands (includingKao) reported an increase in GPM. We lower our sales forecast and assume SJ’s sales target is unachievable. Management maintains its full-year sales target of 18% growth but admits thatit is a stretch target, as some of the issues that occurred in 1H should continueinto 2H. However, this is for the benefit of its long-term growth. In addition,there will likely be more new products launched from 3Q (a new productlaunch event is to be held on 27 August). Based on the trend for 1H15, welower our sales for 2015/15/17 by 6/5/5%. Our NP (core) is lowered by6/13/14% for the same period. We remain positive on its five-year strategy andbelieve that this is a short-term hiccup. Valuation and risks; TP of RMB48.42 from RMB55.45, on earnings revision. Our primary valuation methodology is DCF, employing a COE of 7.82%, beta of0.7 and a terminal growth rate of 2.5%. This produces a fair-value estimate ofRMB51.45/share, implying 2015/16E PEs of 34x/30x (this excludes one-offitems). The industry risk is higher competition from global and regional players. Company risks include brand/product concentration and failure to implementmanagement’s five-year plan.

Definitive agreement reached with JD According to the 2Q15 results announcement from JD.com (JD.OQ, US$32.81,Hold) on 7 August 2015, Yonghui entered into definitive agreements with JDon the same day. For reference, trading in Yonghui’s stock has beensuspended since 31 July. Yonghui will place c.479m new shares at a price ofRMB9.00/share, or an 11% discount to its 30 July closing price of RMB10.15.The total consideration will be RMB4.31bn. Upon completion, JD will hold a10% stake in Yonghui and have the right to nominate two directors (includingone independent director) to Yonghui's board of directors. Strategic partnership – joint procurement and O2O Yonghui and JD will form a strategic partnership to strengthen supply chainmanagement through joint procurement, and will continue to exploredevelopment opportunities in O2O initiatives and other areas of potentialstrategic cooperation. Deutsche Bank comments After the deal, Dairy Farm’s stake (subscribed in April 2015 at RMB7/share, adiscount of 22% to JD) will be diluted from 19.9% to 17.88% and the majorshareholder’s stake from 31.94% to 28.58%. While we believe this strategicpartnership will help strengthen Yonghui’s online operation and digitalmarketing capability, there is no detail in the announcement. Procurement isone of YH’s key strengths, especially for fresh products, and it also has leadingmarket share in areas like Fujian and Chongqing; we believe these are thereasons why JD is interested in investing in YH. That said, we have not seenany successful O2O business model in the industry so far and both companieswill need to explore its potential and execute correctly. We believe there will bemore updated information with Yonghui’s announcement.

Placement of 15% new shares to JD, DF and Mr. Zhang family; trading toresume on 10 August。 After the announcement earlier on 7 August by JD.com (JD.OQ, US$32.07,Hold) regarding subscribing shares of Yonghui (YH) (please refer to our note“Strategic partnership with JD.com” published on 7 August), YH announced acomplete placement plan later the same day. YH will place 718m new shares,18% of existing or 15% dilution of enlarged issued shares (718/4,785mshares=15%). In addition to JD’s subscription of 479m shares, Mr. Zhangfamily/Dairy Farm (DF) will subscribe 96m/143m shares, with a lock-up periodof three years. After the placement, DF’s stake will remain unchanged at19.99%, while Mr. Zhang family’s stake will fall to 29.15% from 31.94%. Strategic framework agreement with JD。 YH will ally with JD in its online platform, O2O business, warehouse &logistics, and internet finance business. YH plans to build up its O2O businessmodel, integrate its on/offline business and fulfill the last mile delivery service,leveraged by JD’s experience in e-commerce. It plans to introduce traffic fromonline to its offline stores. YH believes the partnership with JD will improvecustomers’ shopping experience and enhance customer loyalty. The jointprocurement is expected to pare down the purchase cost. RMB6.5m proceeds mainly to be used in store network and logistics。 YH will use the total proceeds of RMB6.5bn to strengthen its store network(RMB5.5bn), upgrade its cold chain logistics (RMB500m) and build up a DC inFuzhou (RMB460m). Total investment in these three projects is budgeted atRMB7.8bn. It plans to open 225 new stores in its covered provinces during2015-18 (vs. previous target of 180-200 new stores in three years from 2014 to2016). To recap, it operated 351 stores in 17 provinces as at end-June 2015.

SJ disposed Jiangyin Tianjiang at RMB2.33bn, contributing RMB1.79bn gain. Shanghai Jahwa (SJ) announced a supplementary agreement about thedisposal of Jiangyin Tianjiang Pharmaceutical Company (Jiangyin Tianjiang). Pursuant to this announcement, SJ will dispose 23.8% interest of JaingyinTianjiang to China Traditional Chinese Medicine Co.(0570.HK) (ChinaTraditional Chinese Medicine) at a consideration of RMB2.33bn. This implied15x2014PE of Jiangyin Tianjiang, which is line with the initial announcementmade on 5 January 2015. After the deal closed, Jiangyin Tiajiang will not be anassociate company of SJ anymore. This disposal is expected to contributeRMB1.79bn (ex tax) one-off gain in 2015, doubled 2014 NP of RMB874m. Jiangyin Tianjiang will cease its contribution to SJ’s P&L since September. Established in 1998, Jiangyin Tianjiang is the leader of traditional Chinesepharmaceutical ingredient manufacturer in China. It recordedRMB652m/RMB182m net profit in 2014/1Q15, respectively. China TraditionalChinese Medicine is a HK-listed company which specializes at pharmaceuticalmanufacturing, R&D and sales. In line with five-year strategy. This disposal is also in line with SJ’ five-year strategy that cleared beauty care,personal care and household care are the three major areas for SJ. Thecompany will focus on five main brands i.e. Herborist, Liushen, Maxam, GFand Giving to cover five respective segment markets, i.e. mid/high women skincare, mass market personal care, mass market women skin care, men’sgrooming and baby care. Based on this guidance, other less relevant assetswill be gradually disposed. SJ started to invest in Jiangyin Tianjiang since2002 and intended to seek synergy of its traditional Chinese medicine R&Dwith SJ’ Hanfang herbal cosmetics development, which eventually proved tobe a failure. SJ also developed its own R&D center afterwards. Hence, JiangyinTiajiang’s business has become irrelevant with SJ’ business development. Deutsche Bank. Based on the preliminary announcement in January, we already factored inthe exceptional gain in our P&L and cashflow, while there is a difference as weassumed that Jiangyin Tianjiang ceased contribution to SJ since 2H vs. inreality this started from September, the impact will be minor though. Wemaintain our Buy call on Shanghai Jahwa.

Ping An Trust transfers 28% SJ to Ping An Life Shanghai Jahwa (SJ) announced that Ping An New Capital, the controllingshareholder of Shanghai Jahwa Group (SJ’s parent company), has agreed totransfer 100% of Shanghai Shanghai Ping Pu Investment (wholly ownsShanghai Jahwa Group, which in turn owns 28% of Shanghai Jahwa United(listed company)) to Ping An Life Insurance Co. SJ announced that its shares will be suspended from 28 July. It will resumetrading and announce further details in three days. Deutsche Bank’s View We believe that after this move, Ping An will become a mid/long-term investorof SJ rather than a short-term investor, as Ping An Trust has the possibility ofdivestment someday. This is also in line with the agreement made by Ping Anin 2011 that Ping An will not transfer Jahwa’s equity within five years. According to management, some trust products that were used to acquireShanghai Jahwa in 2011 will expire in 2016. Local news reports also citedmarket concerns that Ping An Trust might exit its investment in Jahwa as itneeds to repay the trust product investors.

Trading remains suspended Shanghai Jahwa (SJ) announced on 21 July that its share trading will remainsuspended. To recap, trading has been suspended since 7 Jul 2015.This is mainly related to a strategic share increase of a major shareholder andpossible changes in shareholding structure. The major shareholder status ascontrolling shareholder will remain unchanged, however. As this is still under discussion, the company will resume trading and make anannouncement after the deal is concluded. Deutsche Bank view Ping An owns 27.9% of Jahwa and management 0.4%. We believe there are 2possibilities based on the public announcement: 1) Ping An simply increased its stake in the company from the market,showing support for the company; or 2) Ping An and a strategic partner both subscribed to new shares.We believe scenario 1 would be a non-event to the share price, while scenario 2 might be a positive move if the strategic partner can help develop thebusiness of Jahwa. In Jahwa’s 5-year plan, although there is no mention ofstrategic investors, it does intend to seek M&A opportunities. We will keep investors posted on the latest developments.Recap of 5-year plan: Five-year target to achieve sales of RMB12bn by 2018with “5+1” brand focus Management’s target implies a CAGR of 22.5% for 2014-18 or 17.1% exacquisition. The company aims to achieve RMB12bn sales, including RMB10bnfrom self-owned brands and RMB2bn from M&A. It also aims to be rankedNo.5 in terms of market share, vs. No.10 currently. Its sales target implies asales CAGR of 22.5% for 2014-2018 (or 17.1% ex acquisition), much higherthan the industry average of 12%. The anticipated drivers are 1) the marketgrowing at a healthy CAGR of 12%; 2) an increase in SJ’s market share; and 3)successful M&A.

1H15 earnings tracking in-line with expectation. Yonghui Superstores (YH) reported preliminary unaudited 1H15 gross salesand net profit of RMB20.8bn and 527mn, respectively. 1H15 sales accountedfor 46% of DBe full-year sales, which is 1-2% lower than historical average. 1H15 earnings represent 53% of DBe 2015 net profit, which is in line with ourexpectation and historical seasonality (1H earnings accounted for 54%/53% offull-year in 2013 and 2014). The announcement implies a 2Q15 net profit ofRMB163mn, up 11% YoY. We note that YH recognized an RMB34mn gain in2Q14 from the fair value changes of its investment in Wuhan Zhongbai. Withthe investment now categorized under equity investment, we think the markto-market gain did not recur in 2Q15. While we believe the 2Q performance issatisfactory, we have yet to check if there is any exceptional item. We expect solid performance for YH’s core operation, reiterate buy. In the announcement, management attributes profit growth to improved grossmargin, a significant reduction in financial costs as well as prudent expensecontrol. We believe this is the result of less promotion into 2Q15 as well as acontinued improvement in logistics, echoing our positive thesis. We plan toprovide more updates with result release. Reiterate Buy.