1H16 recurring NP +17.4% YoY, in line with expectationsHighsun Group announced its 1H16 results: Revenue was at Rmb994mn (+17.9% YoY) and NP attributable toshareholders was at Rmb96.25mn (+6.0% YoY; recurring net profit +17.4% YoY because non-operating income-49.9% YoY to Rmb9.59mn), or Rmb0.04/share, in line with our expectations. In 2Q/1Q16, revenue +16.2%/+19.7%and NP +38.4%/-25.4%. In 1H16, net operating cash flow +100.3% YoY to Rmb354mn, higher than net profit.

Ecosystem starting to bear fruit and earnings likely to continue to improve in 2H16. Despite sluggish overallconsumption, Highsun’s revenue +18% YoY in 1H16 and NP +38% YoY in 2Q16, implying that Highsun’s ecosystem ofcommerce, entertainment and finance is starting to pay off. Business-wise, revenue from commerce/departmentstores/hotels/real estate/finance +1.5%/-0.9%/-8.2%/+39.5%/+271.5% YoY, while culture & entertainment recordedrevenue of Rmb68.16mn. Its finance and entertainment businesses are becoming new profit engines.

GM rose slightly, but rapid rise in sales expenses dragged earnings. In 1H16, overall GM +0.4ppt YoY to40.7%, thanks to better operating efficiency from the department store and finance businesses. Expense ratio +1.3pptto 24%, as its sales expense ratio +3.1ppt YoY (real estate business charged a higher provision for sales commissions;expanding its range of consolidation), but the financial expense ratio -1.8ppt YoY (due to lower interests payment).

Overall, net margin -1.1ppt YoY to 9.7%, due to the drag from rising sales expenses.

Trends to watch

Rapid external expansion of ecosystem. In 2016, Highsun actively expanded the four areas of its ecosystem viacapital market operations: 1) Finance: Completed strategic investment in Mindata Holding and became its No.3shareholder with a 6.04% stake; acquired Xinhui E-commerce to improve financial services; cooperating withGuangdong UnionPay to develop the first base to experience QuickPass in China. 2) Culture & entertainment: Tookadvantage of Shanghai Disneyland to issue Rmb1.1bn in convertible bonds (CB) to build related facilities around thepremise. 3) Commerce: Acquired 80% of Dongjin Property in order to deploy in the transformation & upgrading ofspecialized markets in Guangzhou; invested in China Food Town to promote synergies in commerce and entertainment.

4) AFV and charging piles: Highsun has been working with quality names to deploy in AFVs and charging pileoperations, accelerating its business transformation.

Successful issuance of CBs will likely drive share price hikes. The conversion price for the CB is Rmb5.26/sh.

Management has strong motivation to drive the stock conversion.

Valuation and recommendation

We keep our 2016/17e EPS forecast unchanged. We maintain our BUY rating and TP of Rmb6.7 (51x 2017eP/E), implying 27.62% upside from the current share price. Risks: Commercial projects miss expectations;fluctuations in real estate settlements; cross-sector M&A and consolidations.