2016 results miss expectations

Aokang International announced its 2016 results: revenue fell 2.1% YoY to Rmb3.25bn and net profitattributable to shareholders fell 21.8% YoY to Rmb305mn, implying EPS of Rmb0.78. The main reason the resultsmissed expectations was the investment losses caused by LightInTheBox. Net profit （excl. non-recurringitems） -8.4% YoY （non-recurring items mainly included Rmb52.16mn of losses from disposal of non-current assets）。

In 1Q17, revenue -0.8% and net profit +1%, its first positive quarterly earnings growth since 2Q16.

Revenue fell due to decline in export orders: 1） in terms of distribution channels, revenue from online distributionchannels +20% to account for 14% of total revenue; while that from offline distribution channels fell 5% （86% of totalrevenue）。 Revenue from directly operated stores, franchise stores and exports recorded 2.4%, 0.5% and -17.5%growth, respectively. 2） In 2016, the number of its stores rose by 236 （+8.1%） to 3,018, comprising of 1,435 directlyoperated （+17%） and 1,713 franchise stores （+2%）。 3） In terms of brands, revenue from core brand, Kanglong,REDESS and other brands recorded +1%, +8%, +16% and -6% growth, respectively. Full-year revenue of Skechersreached ~Rmb90mn, but it has not turned profitable yet. The number of its stores totaled 125 at end-2016.

Lower discounts and price adjustments boosted gross margin: in 2016, GM +3.4ppt to 37.1%; selling expenseratio +1.4ppt to 13.9%; G&A expense ratio +1.1ppt to 9.2%; but operating cash flows -72.5% YoY to Rmb358mn.

Trends to watch

1） Expansion of distribution channels: the company will increase its store number by 200~300 each year andmove into popular shopping malls. The number of Skechers’ stores may rise by 150~200 in 2017 and will reach 1,000 infive years according to plan. 2） Products: the company will increase the proportion of products sold through bothonline and offline distribution channels and increase the proportion of revenue from women’s shoes.

Earnings forecast

We cut our 2017 EPS forecast by 9% from Rmb1.11 to Rmb1.02 and introduce that of 2018e atRmb1.18, implying 33.5% and 15.9% growth, respectively.

Valuation and recommendation

The stock is trading at 19.6x/16.9x 2017/18e P/E. We maintain our BUY rating, but lower our target price by3.36% to Rmb24.73, implying 24.21% upside and 21x 2018e P/E. We are optimistic about Skechers’ growthpotential. Customers at shopping malls will boost growth of its stores. The company’s earnings may improve in 2017.

Risks: high inventory level in end markets; performance of Skechers disappoints.