Higher-than-expected selling expense to hinder 2017 NP growth; Hold    SJ’s 1H17 sales/NP account for 55%/52% of our 2017 figures (ex TTacquisition). Sales were in line, while NP was short of our estimates due tolower-than-expected GPM (from channel mix shift) and higher opex (highermarketing expenses and new office depreciation) in 2Q. Thus, we lower our2017-19 NP by 5-14%. While we expect 2H sales growth to accelerate to 14%,higher opex cost will weight on margins. We believe the share is fairly valuedwith a revised target price of RMB30.04; Hold.    NP down 42% to RMB216m on sales being down 13.5% to RMB2.7bn in 1H    Excluding Kao business, which was terminated at end-2016, sales and NPwere +9.51%/-34.46%. 2Q NP (ex. Kao) was down 51.3% to RMB108m, whilecore sales were up 4.8%, a deceleration from 1Q’s 14.5%. GPM in 2Q was 67%vs. 1Q’s 72%. The slowdown in sales growth was due to change in itsoperating strategy in ecommerce, while the acceleration in 2Q NP decline wasdue to lower GPM for new channels and higher selling expenses.    Full year 2017 to maintain its double-digit sales growth target    Despite a slowdown in sales growth in 2Q17, management maintains itsdouble-digit yoy sales growth target for the full year for its core business (exacquisition). However, opex is likely to increase (as in 1H17). As such, wedecrease our FY17/18/19 NP by 14%/11%/5% to reflect higher-than-expectedS&D ratios. Separately, given the completion of the Tommee Tippeeacquisition in 4Q17, full-year SJ results will be based on business combination.    For 1H17, TT is not included.    New target price of RMB30.04/share, down 7%; risks    Our primary valuation methodology is DCF, employing a COE of 7.82%, beta of0.7 and TGR of 1.5%. This produces a fair value estimate of RMB30.04/share,implying 2017/18E P/E of 50x/40x. Downside risks: stronger competition,brand/product concentration. Upside: b-t-e sales of new products (see page 3).

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