Action

In 2015, revenue fell 4.9% to Rmb6.295bn; net loss was Rmb432mn, worse than expected. In 1Q16, revenue rose9.6% to Rmb1.922bn; net profit rose 32.4% to Rmb51.37mn (excluding non-recurring items, net profit +46.5%). Weupgrade the company to HOLD. Considering 2015 results missed expectations, we cut TP by 21% to Rmb5.

Reasoning

2015: revenue turning point in 4Q15; high expenses. Revenue rose 2.1% in 4Q15, after continuing to fall since3Q12. 1) Revenue in 2015 declined mainly because revenue from the franchise channel fell 16.2%, but the wave offranchisee withdrawal basically ended. Revenue from the direct operation channel rose 7% and that from ecommercerose 123%. 2) Revenue from MB/MC brand rose 7%/26%. Gross margin fell 1.2ppt to 44%. Selling/administrativeexpense ratio rose 2.1/1.7ppt to 34.9%/5.1%, leading to an operating loss. Inventories increased 31% to Rmb1.87bn. Inventory/accounts receivable turnover days rose 20/8 days to 169/32 days. Operating cash flow was -Rmb185mn.

1Q16: revenue continuing to recover; expense ratio under control. Revenue in 1Q16 rose 9.6%; gross marginrose 1.2ppt to 43.9%; expense ratio fell 1.5ppt to 35.8%.

Trends to watch: 1) The company’s market share fell from 1% in 2011 to 0.4% in 2015, already lower than Semir’s.2) The company expects a loss of -Rmb90mn~0 for 1H16. 3) The company plans to continue to promote marketingintegration with IP of popular games, and introduce a series of Disney fashion products including men/women casualwear, home wear, children’s clothing etc. 4) The future focus is on platform building. Brand integration is expected.

Earnings forecast and valuation

With revenue recovering and expense ratios under control, we raise 2016e EPS from a loss to Rmb0.03 andexpect 2017e EPS to be Rmb0.05.

Although the company expects a loss of -Rmb90mn~0 for 1H16, we expect a profit for the full year. Its current marketcap is equal to only 35% of Semir’s. We upgrade the company to HOLD. Considering 2015 results missedexpectations, we cut TP by 21% to Rmb5, implying Rmb12.6bn market cap (45% of Semir’s) and 11% share priceupside. The current share price is 33% below the average buyback price of the controlling shareholder. The privateplacement is expected to be approved in 2H16.

Risks

Continued decline in sales; further rise of expense ratios.