Q4 earnings growth slowed slightly Suofeiya announced 2016 preliminary results, with revenue of Rmb4.52bn (+42% YoY)and net profit attributable to the parent of Rmb660m (+44% YoY), in line with ourestimates but slightly missing consensus. Q4 revenue grew 39% YoY while Q4 netprofit attributable to the parent grew 40% YoY, decelerating from Q3, mainly onbigger-than-expected losses from the Schmidt kitchen cabinet business. Schmidt: Sales ramping up, N-T losses do not impair growth prospects Schmidt generated revenue of Rmb420m, beating the company's earlier target. However, losses from this business also exceeded the company's estimate (~Rmb55mloss booked in consolidated financials), mainly as: 1) aiming to seize market share, thecompany cut ex-factory prices in 2016 to offer better value, effectively driving endmarketsales; while 2) year-end employee incentives and its 2017 talent pipeline causedpersonnel expenses to grow quickly. Channel development accelerated as dealers'confidence strengthened; nearly 600 stores now sell Schmidt kitchen cabinets, and thecompany plans to reach a higher-than-expected 1,000 stores by year-end. Schmidt islikely to break even in 2017, in our view. Wardrobes: Solid operational quality With rising cost pressure on all fronts, maintaining fast earnings growth off a high basewas no easy task for its wardrobe business. The company offset increases in certain rawmaterial prices through cost control efforts and efficiency improvements, resulting inonly a minor hit to gross margin. It also continued to raise the density of sales outlets intier 1/2 cities while developing stores in tier 4/5 cities. In addition, the company drovecontinuous growth in average transaction value (ATV) through enriching its productline. Revenue growth slowed slightly in Q4, which we mainly attribute to end-marketservice bottlenecks in the peak sales season. Valuation: Maintain Buy, Rmb66.8 price target We derive our Rmb66.8 price target using DCF (WACC 7.0%).

Offline sales poised to recover In our recent checks, most brands reported retail improvement starting from late Sept.In Sept, 100key large retailers across China saw their combined retail sales rise 2.1%YoY, up 3.7ppt from last year. This included a 2.4% rise in apparel spending, up 7.2pptfrom last year. In Oct, 50key large retailers across China saw their overall retail salesrise 1.6% YoY, up 2.4ppt, including a 6.4% YoY jump in apparel spending, up 4.7pptfrom last year and the fastest monthly growth recorded YTD. We think this may be dueto winter temperatures arriving half a month earlier than last year, as the sharptemperature drop may have triggered some turn-of-the-season spending. Healthy eCommerce momentum and Singles' Day sales Based on sound team incentives and strategic resource support from the company, theeCommerce division has become Semir's most important growth driver. Apart fromhelping to grow its two major brands, the eCommerce channel is also becoming animportant vehicle for new-brand incubation and marketing innovation. Momentum hasstayed strong during this year's Singles' Day shopping festival, with sales reachingRmb410m as of 8am today, which already exceeds the full-day total for last year'sSingles' Day. We expect its online retail sales to exceed Rmb3bn in full-year 2016;single-brand sales of nearly Rmb1.5bn already represent a larger scale than most midsizedbrands. Rising expense ratio Semir's expense ratio has been largely stable in the past two years, though growth inexpenses has picked up on a YoY basis. Selling and administrative expenses rose 28%YoY in 9M16, which we chiefly attribute to higher salaries, higher eCommerce divisionexpenses, and investment in new brands. Headcount of its eCommerce division nowstands at 800; profitability remains lower than the offline business but we see thisgradually improving, helped by a rising weighting of new products and economies ofscale. Valuation: Lowering PT to Rmb15, maintain Buy We are lowering our 2016-18E EPS to Rmb0.60/0.71/0.81, reflecting a higher expenseratio due to the eCommerce division and new-brand outlays. Our Rmb15PT is basedon DCF and assumes a 7% WACC. We maintain our Buy rating.

Solid earnings growth Revenue in 9M16 came to Rmb7.12bn (+15.5% YoY), with net profit of Rmb1.0bn(+20.9% YoY) and gross margin of 38.4% (+1.4ppt YoY). Selling expenses grew26.7% YoY and administrative expenses grew 33.5% YoY (mainly on higher R&Dspending and employee salaries), while financial expenses had a net gain ofRmb63.83m. The overall expense-to-revenue ratio was 17.4%, up 3ppt YoY. Meanwhile, there was net operating cash outflow of Rmb250m due to more supportfor dealers and an e-commerce inventory build-up. However, the company hastightened control of its accounts receivable and we expect this situation to improve byyear-end. Steady operations in Q3; pay more attention to current retail sales from Q4 Q3 revenue reached Rmb3.24bn (+15.9% YoY) and net profit was Rmb490m (+20.5%YoY). Q3 YoY earnings growth accelerated from Q2 due to lower asset impairmentprovisions during the quarter (fell by Rmb110m), as the company started calculatingbad debt provisions for receivables aged 1-6 months based on a reduced rate (to 1%from 5%) starting in September. Gross margin improved 1.9ppt YoY and the overallexpense-to-revenue ratio rose 3.8ppt YoY. Semir's fast-fashion casualwear productshave now started launching. We estimate that retail sales will have a bigger impact oncurrent-period earnings from Q4 onwards, as the company's percentage of revenuefrom order fairs decreases. Channel mix improving; rapid growth in e-commerce We estimate that casualwear grew 7% YoY in 9M16, with the e-commerce channel animportant driver. Among casualwear stores, channel mix showed ongoingimprovement; store floor area has risen ~2% vs. the beginning of the year and thesestores have already entered more than 200 shopping centres. We believe sustainedrapid growth of the kids wear business (~25%) is mainly due to last year's acceleratedstore count expansion and strong online growth. We estimate that e-commerce, apriority development area for the company, had revenue growth of over 90% in 9M16. Valuation: Rmb16.65 price target; Buy rating Our price target is based on DCF and assumes a 7% WACC. We have a Buy rating.

Q316 earnings maintained strong growth Q1-Q316 revenue was Rmb2.97bn, up 43.5% YoY, and net profit was Rmb410m, up48% YoY, better than we expected. Gross margin contracted 1.1ppts YoY to 36.4%. The overall expense ratio was 17.6%, down 1ppt YoY. Q316 maintained rapid growth,with revenue up 42.7% YoY and net profit up 48.1% YoY, close to the pace witnessedin Q216. The YoY gross margin contraction stemmed from the increased weighting ofthe low-margin kitchen cabinet business and the c5-10% rise in raw material prices thisyear. The company offset some of the pressure by increasing the utilization of boardmaterials, resulting in a net impact of -0.5ppt YoY on the gross margin of the wardrobebusiness. Wardrobe business saw increases in order volume/basket size The company's wardrobe business posted Q1-Q316 revenue growth of 33% YoY,driven by a 15% YoY increase in basket size and a 14% YoY increase in the number ofcustomers to 328k. In order to improve the operational efficiency of dealer stores, thecompany strategically focused on encouraging its dealers to expand the basket size,with more customers choosing custom-made cabinets and third-party home productsother than wardrobes. As of end-September 2016, the company's store count was1,750, and it could reach 1,800 by year-end, as it plans to add 150 stores in 2016. Kitchen cabinet business's gross margin improved Schmidt's Q1-Q316 revenue was Rmb235m, or 7.95% of total revenue. The businesscontributed Rmb125m to Q316 revenue, with a net loss of cRmb88m. It has opened450 independent specialty stores, with a target of 500 by year-end, and plans to reach800 stores next year. Due to rapid growth in kitchen cabinet sales, Q316 gross marginimproved from -9% in H116 to 9%. The company expects the kitchen cabinet businessto make a cRmb50m loss in full-year 2016 followed by a modest profit next year. Valuation: Maintain Buy rating, Rmb66.80 PT Our DCF-based price target of Rmb66.80 assumes 7.0% WACC.

9M16 net profit down 20% YoY; cash flow still strong. 9M16 operating revenue rose 5.3% YoY to Rmb2.16bn, with operating profit/netprofit down 10.7%/19.9% YoY to Rmb320m/260m and gross margin up 1ppt to48.7%. Selling/administrative expenses increased 12.2%/19.9%, with an overallexpense ratio of 33.3%, up 2.5ppts YoY, mainly due to a relatively big input at theinitial stage of Luolai's transformation into a one-stop household product supplier. Investment income fell 37% YoY due to lower yields of wealth management products. 9M16 cash flow from operations rose 17% to Rmb2.2bn, implying relatively steadyoperational quality. Q3 net profit down 22% YoY, falling less than in Q2. Q316 operating revenue rose 2% YoY to Rmb810 and operating profit/net profitdecreased 17.7%/22.4% to Rmb130m/110m, falling less than in Q216. The Q3 overallexpense ratio was 30.9%, up 3.5ppts YoY, with the selling/administrative expense ratioup 2.3/0.7ppts to 22.9%/8%. The financial expense ratio rose 0.4ppt YoY. We thinkgrowth of offline home textile sales will be limited; in particular, high-margin productsin department store channels still face pressure. However, operating revenue growth islikely to improve as the online segment makes bigger contributions in Q416. Likely to see profit resiliency next year. Luolai is converting end-market stores into directly-operated ones and enriching its onestophousehold product lines. Among more than 1,700 Luolai stores, 262 stores havefinished transitions and upgrades, with same-store sales improving. In Luolai's relativelybig home stores that provide one-stop household product shopping services, the shareof non-home textile products in sales have been close to 40%. With weak end-marketdemand, input during the transformation put pressure on Luolai, mainly including storeadjustment expenses, additional headcount and acquisition/integration costs. We thinkLuolai's store adjustment is ending and the company will have resilient profit growthnext year. Valuation: Price target of Rmb16.0; Buy. Given sluggish offline demand and Luolai's initial input to transform into a one-stophousehold product supplier, we are lowering our 2016-18E EPS to Rmb0.53/0.62/0.72and our DCF-based price target to Rmb16.0 (8.6% WACC). We have a Buy rating.

We estimate steady Q3 earnings growth amid a high comparison base We estimate continued weak overall sales during the Q3 slack season. Sluggish offlineapparel retail sales and international brands' price promotions put pressure on HeilanHome. The pressure came at a time when the company added many new stores. Weestimate the company's YoY retail sales growth in Q3 was close to that in Q2. Thecompany's earnings growth may trail its revenue growth as the recent opening of manynew stores drags down its profit-sharing ratio. We estimate its earnings grew c5% YoYin Q3 amid a high base (Q315 revenue/earnings +38%/60% YoY). We expect earnings growth to pick up in Q4 Against the backdrop of a weak market, weather plays a bigger role in apparel sales.Last year's warm winter caused the company's Q415 revenue growth to fall to 7% andnet profit to fall for the first time since its IPO. Chances are high of a cold winter thisyear due to La Nia, which would help earnings growth pick up in Q4. Helped by therecent temperature drop, the company's end-market sales growth improved, withbetter sales in northern regions (lower temperatures) than southern ones. The companyhas controlled the number of large orders for Q4 to avoid a further inventory build-upand intends to arrange production for replenishment orders based on real-time sales.Product designs get better The company introduced innovative autumn/winter designs as proof of ongoinginnovation after jointly launching the Madagascar summer collection with Oriental Dreamworks in H1. Recently, the company partnered with Xander Zhou, an up-andcomingmenswear designer, to introduce a limited edition ready-to-wear collection.Stylish designs and affordable prices (mainly at Rmb100-300) attracted early-morningqueues at the Wangfujing flagship store on launch day. Although the collection itselfwill make a limited contribution to sales, the campaign has led to greater attention toonline/offline stores, higher sales of other products and a fresh brand image. We expectthe company to continue carrying out such cooperations to improve its brandpositioning and design quality. Valuation: Cutting price target to Rmb14.68; maintain Buy We are cutting our 2016-18E EPS to Rmb0.72/0.87/1.04 and our DCF-based PT toRmb14.68 (WACC 8.3%), as the offline market is under pressure and it could take alonger time for new stores sales to ramp up. We maintain our Buy rating.

Offline casual wear business under pressure We like the changes Semir has made to its products/channels, but its offline storesremain under pressure due to the downturn in apparel retailing, markdowns byinternational brands, and the rise of cyber-celebrity brands. Its casual wear businessresumed growth in 2015, but we expect slower growth in offline casual wear sales in2016. The company's new fast-fashion model, to be pilot-tested on its autumn andwinter products, is a major change from its original order placement model. While thenew model will increase uncertainty over orders and create inventory risks, it will makethe company's products more attractive to the young consumer base, further wideningthe gap with traditional domestic brands. Semir launched a fashion partnership plan For its Semir brand, the company recently launched a fashion partnership plan to pilottesta cyber-celebrity brand operation at its e-commerce business unit. It invitescelebrities/popular fashion bloggers to be the brands' stakeholders for personalizedproduct design or co-development in order to boost sales via their fan base and stronginfluence. Recently, the company had a successful live-streaming sales launch at itsflagship store on Tmall for a fashion line with its first fashion partner, Nana Ou-yang, apopular young celebrity, and sold c60,000 pieces of the products in 20 hours. Theproducts' much shorter cycle should enable the company to reduce customeracquisition costs by fully monetizing the celebrities' fan base. We believe the company'sshift towards the fast-fashion model has been highly effective. It aims to reduce thepercentage of non-fast-fashion products in its casual wear to 50% next year. Kids' wear business improving The kids' wear business grew a strong 26% in H1, driven by accelerated storeexpansion and rapid e-commerce channel growth last year. We believe the relaxation ofthe one-child policy will bring incremental volume to the kids' wear market, especiallyin lower-tier cities given consumption upgrades. While consolidating the strengths of itsmain brands, the company is advancing its multi-brand strategy and e-commerce brandto cater to diverse needs, which could increase its market share. Valuation: Rmb16.65 price target; maintain Buy rating We lower our 2016-18E EPS to Rmb0.61/0.72/0.83 on the sluggish demand for casualwear and reduced financial income due to higher capital spending. Our DCF-basedprice target is Rmb16.65 (7% WACC). We maintain our Buy rating.

Acquisition of HTL completed*Yihua recently announced a deal to acquire all the shares of Singapore-listed furniturecompany HTL for S$400m. HTL has been delisted from the Singapore Stock Exchangefollowing the full payment for the consideration of the acquisition on 8 September. Webelieve Yihua will incorporate HTL into its financial statements in September. HTL haspledged NPAT of not lower than US$25.00/27.50/30.25m for the three financialperiods from 1 August 2016 to 31 July 2019. We are upbeat on HTL's profitability as it steps up expansion in Chinese market*We believe the improvement in HTL's profitability will be driven by: 1) improvement ingross margin as raw material costs decrease; and 2) closure of some overseas storesthat have been weighing on earnings, relocation of the HQ from Singapore to mainlandChina to save on administrative expenses, and full provision being made for therelevant one-time expenses prior to its consolidation into Yihua. In view of HTL'sexport-oriented business, we expect it to draw on the strengths of Yihua's channels inChina to expand its presence in the Chinese market after the consolidation, includingonline platforms and offline channels. We expect HTL to open nearly 500 new stores inChina in the next three years. We expect earnings growth to accelerate in H2*Yihua's domestic revenue saw only single-digit growth in H1, mainly due to aslowdown in franchisee recruitment and delayed recognition of revenue from ordersreceived during the promotion period in June. We believe domestic sales growth willimprove significantly in H2, mainly because of: 1) gradual recognition of revenue onshipments against orders received earlier; 2) arrival of the high season for furnituresales; and 3) resumption of franchisee channel expansion, as we estimate the companysigned on about 50 franchisee stores in September, which will open for business in H2. Valuation: Rmb15.45 price target; maintain Buy rating*Considering the impact of Yihua's product mix adjustments on the expansion of itsfranchise business and the increase in financial expenses due to the costs of acquisition,we lower our earnings estimates for its original business, but given the consolidation ofHTL, we raise our 2016-18E EPS to Rmb0.54/0.66/0.79. Our new DCF-based PT isRmb15.45 (WACC=7%). We maintain Buy.

Trying out fast-fashion supply chain model for adults' wearFollowing its focus on supply chain optimisation (quantitative streamlining and qualityimprovement) in 2014, Semir began its second major change this year, ie, developmentof fast-fashion products. The main considerations are: 1) changes in consumers andindustry-wide inventory pressure; and 2) with its futures supply chain basically stable, ithas the resources and capabilities to try out a new supply chain. Different from thetraditional futures model where orders are placed six months in advance, the design forfast-fashion products is quickly completed according to seasonal fashion trends andretail sales. Dealers may place orders for the season, with a delivery lead time of about2-3 weeks. The company targets making 30% of its adults' wear fast-fashion productsby end-2016 and then 50% subsequently. Further consolidated strengths of kids' wear brandSemir's kids' wear revenue grew strongly at 26% YoY in H1, driven by the strongbusiness climate for kids' wear, the company's strengthening brand name, and theresults of last year's channel expansion. It opened nearly 190 new kids' wear stores inH1. It is currently focusing its channel expansion on shopping malls, where it has about300 stores. Shopping malls are likely to contribute an increasing share of Semir's storecount going forward. The company's bargaining power with shopping malls willincrease as its brand becomes stronger. Meanwhile, its strategic partnerships withseveral well-known commercial property companies will give it priority in openingstores at ideal locations in their new shopping malls. E-commerce now main driver of casual wear business; trying brand incubationAfter resuming growth in the past 2 years, Semir's casual wear business growth slowedin H1. The overall apparel retail market was especially weak in Q2. We think thee-commerce business was the main driver, given limited offline growth. Half of Semir'sonline sales are out-of-season products and the rest are exclusive products, so there isno conflict of interest with offline franchisees' stores. We estimate online sales to reachRmb2.5-3.0bn in 2016. Semir launched 5 new brands of adults' wear (including men'swear, women's wear, and undergarments) this year for concurrent online/offlinedevelopment or online-focused development. It is also trying out partnerships withsome popular online stores, with serve as Semir's online distributors. Valuation: Maintain price target of Rmb18.20, Buy ratingOur DCF-based price target is Rmb18.20 (7.2% WACC). We maintain our Buy rating.

Stable results growth sustained Semir realised revenue of Rmb3.88bn (+15.1% YoY), operating profit of Rmb660m(+16.8% YoY) and net profit of Rmb510m (+21.3% YoY) in H116. Margin improvedmainly due to 0.9ppt YoY increase of gross margin, 15% YoY declines of assetimpairment provisions and higher investment returns from wealth managementproducts. Its Q216 revenue increased 14.2% YoY and net profit increased 18.5% YoY,slower than Q116 because selling expenses increased at a faster pace at 25%. Dayssales of inventory stood at 137 in H116, 33 higher than in H115; days sales outstandingwere 64, 19 higher YoY. Slower turnover could be explained by higher percentage ofdirectly-owned stores and stronger credit support for Semir franchisees. Ecommerce and kid's wear have become major drivers for revenue growth Semir realised Rmb1.2bn end-market revenue for its ecommerce business in H116(+82% YoY). Kid's wear revenue increased 26% YoY in H116, with faster growth inQ2 than in Q1, which was outstanding, in our view, amid a weak market. Leisure wearincreased 7% YoY – we estimate its offline revenue slowed, similar to the sector. Wethink Semir will try fast response supply chain for its winter items. In addition, thecompany has strengthened its inputs in new brands and set up a project team for newadult wear brands, with five new adult wear brands planned to debut both online andoffline. Increasing investments in ecommerce and kid's wear Semir announced three capex projects: Jiaxing logistics & warehousing base(Rmb850m), Hangzhou ecommerce park (Rmb340m) and Wenzhou Semir Park Phase II(Rmb390m), with the former two mainly targeting leisure wear brands and ecommercebusiness development (which we estimate could support over Rmb10bn sales). Atpresent, ecommerce logistics distribution center is located in Hangzhou, which will beconsolidated into Jiaxing base to cut costs. As a headquarter logistics base aiming toupgrade and expand kid's wear business, Wenzhou project will be used for incubation,operation and services for new brands. These three projects will be completed withinthe next 2-3 years. We do not think Semir's high dividend payout will be affected givenits abundant cash reserves. Valuation: price target of Rmb18.2, maintain Buy rating We maintain our DCF-based price target of Rmb18.2 (WACC=7.2%).

Revenue and earnings growth beat UBS-S and market expectations. H1 revenue was Rmb24.5bn, up 17.68% YoY, and net profit attributable toshareholders of the listed company was Rmb670m, up 27.19% YoY. Pre-exceptionals,net profit came to Rmb660m, up 40% YoY. Basic EPS was Rmb0.08, beating UBS-Sand market expectations. H1 operating cash flow was Rmb1.25bn, nearly 2x net profit. H2 could see faster store openings and significant uptick in same-store growth. Yonghui opened 24 new stores in H1, in line with its plan from the beginning of 2016,bringing its nationwide store count to 425. Considering its plans to open 26 BRAVOstores in H2, we estimate full-year store openings could exceed the 60-store target laidout in the plan from early this year. In H1, same-store sales grew 3%, a notableimprovement from H215. In particular, BRAVO stores saw revenue rise 12.4% YoY,giving the company impetus to open more BRAVO locations. Elsewhere, Yonghui'sshare placement to JD.com has been completed. The Yonghui-JD partnership is mainlylimited to JD Daojia, an online delivery platform, at present. Apart from Beijing,Yonghui's stores in Shanghai and Fujian province have also joined the JD Daojiaplatform, driving their H1 same-store sales to rise 1% YoY. Expansion accelerated, increase in new stores likely to boost earnings. Gross margin rose 0.34ppt YoY to 20.2% in H1, with an especially large increase forfresh produce gross margin (+0.44ppt YoY), in line with what we expected. In the pastfew years, Yonghui has continued to strengthen its fresh produce supply chainadvantages while raising its proportion of semi-finished products and proprietarybrands; as a result, we expect its fresh produce gross margin to keep improving. Also,the company is exploring new management models for its stores, aiming to boostmotivation via equity participation by store-level management. Sales per square metergrew and the selling expense ratio dropped 0.26ppt YoY; we foresee further declines inthe selling expense ratio as more stores implement equity partnership systems. Valuation: Upgrading earnings forecasts and price target, maintain Buy. Though the share placement to JD.com will be EPS-dilutive, H1 earnings beatexpectations and financial income is likely to rise after the share placement. Therefore,we are raising our 2016/17/18E EPS to Rmb0.13/0.16/0.18 from Rmb0.13/0.15/0.17. Inaddition, we are raising our mid-term growth assumption given our positive view onYonghui's growth following the JD.com investment. We are lifting our DCF-based PT toRmb5.80 from Rmb5.30 (WACC 7.7%). We maintain our Buy rating.

Q2earnings below expectation In H116, the company posted revenue of Rmb8.76bn (up 10.5% YoY), operating profitof Rmb2.36bn (up 10.4% YoY) and net profit of Rmb1.77bn (up 6.4% YoY), belowUBS and consensus expectations. Gross margin was 40.8%, down 0.4ppts YoY; overallexpense ratio was 13%, down 0.8ppts YoY. Profitability was basically flat YoY.However, as the effective tax rate rose to 25.5% from 23.7% in H115(some deferredincome tax was confirmed in H115), net profit growth was relatively low. Tax paid rosenearly Rmb900m, which caused operating cash flow to drop 46% YoY to Rmb700m. Ifexcluding this influence, then operating cash flow would have been up 21% YoY. Change in revenue-sharing makes revenue growth in FS less than retail growth Heilan's revenue grew 8.5% YoY in Q216, not showing accelerated growth as weexpected. We believe this was mainly as: 1) more than expected rainy days posednegative influence on street shops. However, sales were better in June than in April &May. Retail sales posted double-digit growth in Q216; 2) change in revenue-sharingpolicy caused the company's revenue growth showing in the financial statement to beless than retail revenue: Heilan opened 776new stores in the past year, and thesestores all apply the new revenue-sharing policy, under which the franchisees areassigned a higher share of revenue before they achieve a certain return rate. Under asluggish retail environment, Heilan gave a higher share of revenue to the franchisees inthe new stores; 3) the company's Bettsale brand suffered from substantial loss in Q216.We believe the company's sales have been steady since July, and expect its YoYrevenue growth to stay stable in Q316. Rapid online growth, offline stores continue to expand The company has taken the opportunity of mobile-end development and enhanced itscooperation with online platforms, optimizing visual experience and consumers'shopping experience. In H116, online business recorded revenue of Rmb400m, up 99%YoY and accounting for a 4.9% share. We expect the overall return rate at 10-12%,below the industry average. Offline stores maintained rapid expansion, with a netaddition of 652stores in H116, 372of which are under Heilan, 162under Eichitoo, and118under Bettsale. We expect store opening to slow moderately in H216and that thenew stores will gradually start to contribute to revenue. Valuation: price target of Rmb17.20, maintain Buy rating We derive our PT of Rmb17.20based on UBS's DCF methodology (WACC 8%).

Net profit up 48% YoY; wardrobe earnings beat expectations Suofeiya reported H116 revenue of Rmb1.67bn (up 44.1% YoY), operating profit ofRmb260m (up 43.8% YoY), and net profit of Rmb200m (48% YoY). Gross margin was35.7% and overall expense ratio was 19.3%, both basically flat YoY. Excluding theimpact of the losses incurred by subsidiary Schmidt, net profit rose c60% YoY. Production efficiency improved, but kitchen cabinets weighed on gross margin Suofeiya's traditional wardrobe revenue rose 36% YoY to Rmb1.5bn (of which 51%came from wardrobes and 49% came from other custom cabinets), kitchen cabinetrevenue was Rmb110m, and other household product revenue was cRmb50m.Wardrobe gross margin improved c3ppts YoY to a record high of 39.5%, mainly drivenby: 1) unit manufacturing costs fell YoY due to economies of scale; and 2) theutilisation rate of plank materials rose 2ppts, as the degree of automation continued toimprove. However, kitchen cabinet gross margin, at -8.67%, undershot ourexpectation, mainly due to large initial investment and high fixed costs such asdepreciation and amortisation at the kitchen cabinet factory. The company expects thekitchen cabinet business to meet its sales target of Rmb300m+ this year, with a loss ofRmb30m+ after consolidation, but it could start contributing earnings next year. Per customer transaction picked up; good order bookings Suofeiya's per customer transaction fell c10% YoY in 2015 due to the 799/899promotional packages. However, as the weighting of packages gradually stabilised, thecompany's per customer transaction picked up markedly in H116, rising 19%compared with the 2015 full-year average. We attribute this to the market's highacceptance of the company's expansion into other home furnishings and thepromotional packages beginning to attract orders: according to the company'sstatistics, promotional packages currently have a weighting of 34% and cross-saleweighting of 31%, with the remaining 35% contributed by others (not related topromotional packages). The H116 report showed that advances from customers morethan doubled YoY, which we believe is an indication of good order bookings. Valuation: Maintain Buy rating, PT of Rmb66.80 We derive our price target of Rmb66.80 based on DCF (WACC=7.0%).

Export business likely to improve steadily In 2015, Yihua's export business contributed 73% of total revenue, with the US itsmain export destination. Export revenue declined in H115 mainly due to the negativeimpact of the strike at ports along the west coast of the US, but picked up significantlyin H215 when the negative impact faded. In our view, against the backdrop of animproving US property market and RMB depreciation, the export business is likely toresume growth in 2016/17, with the company further expanding its product categoriesand customer channels. Strong property sales; pan-household ecosystem mostly completed The rapid YTD growth in property sales is likely to give furniture sales a boost. Yihua'sdomestic business has maintained rapid growth since it shifted its focus to the domesticmarket in 2014. In recent years, the company launched several capital operations toinvest in and acquire household industry chain-related businesses, including mutuallycomplementary product categories, online platforms, and channels to access largeproperty projects, with the objective of building an ecosystem to provide integratedsolutions for the home. We believe given the strong domestic property sales, thecompany will continue to consolidate the resources it acquired earlier to createsynergies. We expect the company's domestic business to improve its contribution tototal revenue to 40% in 2017. Acquisition of Singapore-listed HTL is still in progress Yihua recently announced a plan to acquire all the shares of Singapore-listed HTL forSG$400m. We believe the acquisition, which is currently in progress, will effectivelycomplement Yihua's products and channels: 1) Yihua's main business is solid woodfurniture, while HTL's focus over the past 40+ years has been upholstered furniture.2) Since Yihua's exports are focused on different regions than those of HTL, HTL cancapitalise on Yihua's channels in the US and China to increase its penetration in thesetwo markets. If Yihua incorporates HTL into its consolidated financial statements inSeptember, we expect it to be accretive to revenue by 30.0%/57.8% and earnings by10.8%/18.9% in 2016/17. We have not factored the consolidation into our earningsestimates, since the acquisition is not yet completed. Valuation: Maintain PT of Rmb14.50, Buy rating Our DCF-based PT is Rmb14.50 (WACC 7%). We maintain our Buy rating.

We expect gradual improvement in gold jewellery business In the two past years, sluggish gold prices caused the company's gold jewellerybusiness to decline. However, year to date, gold prices have risen sharply. The negativegrowth trend of combined gold sales at China's top 100 large retailers is graduallyimproving. By June, growth turned positive. The company's gold-related businesses(including investment gains from its stake in Zhaojin Mining) contribute c50% of itsearnings. In our view, while a gold-buying spree is unlikely to be repeated, a gold pricerebound will have a positive impact on the company's sales because its product pricingis based on spot gold prices. Therefore, we expect gold jewellery sales to pick upgradually. Opening of Shanghai Disneyland likely to boost visitor traffic to Yuyuan We believe the opening of Shanghai Disneyland will not give as strong a boost to thecompany's earnings as the World Expo did, but it will last longer, mainly manifesting ashigher visitor numbers to Shanghai boost the company's catering, food anddepartment store businesses (mostly in the Yuyuan Garden shopping district).Currently, Shanghai Disneyland is driving accelerated YoY growth in visitor traffic to theYuyuan Garden shopping district. For 2017, assuming visitor numbers to ShanghaiDisneyland total 20m, we estimate they would add cRmb130m to the company'srevenue and cRmb80m to its gross profit, or up c3%. Core profitability to recover but investment gains may weigh on 2016 earnings Year to date, individual visitors have driven a strong growth in outbound travel toJapan. Resort Tomamu in Hokkaido, acquired by the company last year, posted c19%/20%/57% YoY growth in average daily rate (ADR), sales and EBITDA from December2015 to May 2016. We believe the consolidation of the high-margin hotel business inHokkaido and an increase in the contribution of directly-operated stores to gold saleswill lead core business EBIT margin (excluding investment gains and changes in fairvalue) to trend up in 2016/17. However, an overly-rapid increase in gold prices fromtheir low in late 2015 may lead to related hedging products incurring substantialinvestment losses. We expect the company's profit margin to decline YoY in 2016 but itcould rebound in 2017 as gold price growth slows down. Valuation: PT of Rmb15.40; Buy rating Our DCF-based PT of Rmb15.40 assumes 7.1% WACC. We have a Buy rating.