Recurring net profit +11.3% YoY over 1——3Q16, largely in line with expectationsHighsun Group announced 1——3Q16 results: Revenue was at Rmb1.42bn （+17.6% YoY）， net profit attributable toshareholders was at Rmb130mn （+5.7% YoY） or Rmb0.06 per share, while recurring net profit +11.3% YoY（non-operating revenue -47.02% YoY to Rmb15.02mn）， largely in line with our expectations. In 3Q/2Q/1Q16, revenue+17%/+16.2%/+19.7% YoY, and YoY net profit +4.7%/+38.4%/-25.4% YoY.

Revenue continued its fast growth; profit growth likely to pick up. Despite sluggish consumption （top-50retailers' sales value -2.0% YoY in 1——3Q16）， Highsun recorded revenue growth of ——18% YoY, implying that itsecosystem of commerce, entertainment and finance is starting to pay off. Profit underperformed revenue possibly dueto new business development. As its ecosystem improves, we expect earnings growth to pick up.

Over 1——3Q16, gross margin -0.3ppt YoY to 40.2%; expense ratio +1.5ppt to 25.5%, as sales expense ratio+2.1ppt YoY （rising provisions for sales rebates for its real estate business and change in scope of financialconsolidation）。 Its plunging non-operating revenue （subsidies for demolitions & relocations in 2015） also hurt earnings.

Trends to watch

Rapid expansion of ecosystem in 2016. 1） Finance: Launched plans to establish Huacheng Life Insurance;completed strategic investment in Mindata Holding and became its No.3 shareholder with a 6.04% stake; acquiredXinhui E-commerce to improve financial services; cooperated with Guangdong UnionPay to develop the first base forexperiencing QuickPass in China. 2） Culture & entertainment: Continued to acquire the remaining 25% of Red SunPerforming Art and 49% of Xinzhongyuan Performing Art; took advantage of Shanghai Disneyland to issue Rmb1.1bn inconvertible bonds （CB） to build related facilities around the premise. 3） Commerce: Acquired 100% of Youli Toy todevelop corporate incubator and e-commerce demonstration base; acquired an 80% stake in Dongjin Property todeploy in the transformation & upgrading of specialized markets in Guangzhou; invested in China Food Town to promotesynergies in commerce and entertainment. 4） AFV and charging piles: By leveraging its rich property resources inGuangzhou and strong experience in commercial operations, Highsun has been cooperating with quality names todeploy in the AFV and charging pile operation businesses, accelerating its business transformation.

Successful issuance of CB is likely to boost its share price given management's strong desire to convert.

During the conversion period, if the closing price is >130% of the Rmb5.26 conversion price （i.e., Rmb6.84） in 15 of any30 continuous trading days, it will indirectly trigger a conversion. The current share price is still lower than theconversion price.

Valuation and recommendation

Keep 2016/17e EPS forecast unchanged. Maintain BUY and TP of Rmb6.70 （51x 2017e P/E; 29.09% upside）。

Risks: Commercial projects disappoint; fluctuations in real estate settlements; cross-sector M&A and consolidation.