2016 net profit +5.3% YoY, below expectation

Highsun Group announced 2016 results: Revenue was Rmb1.994bn, up 20.7% YoY; net profit attributable toshareholders was Rmb206mn, up 5.3% YoY, or Rmb0.09 per share, missing our expectations. In 4Q, revenue rose28.8% YoY and net profit rose 4.7% YoY.

Steady momentum of commerce, finance and culture & entertainment to fuel future growth. Driven by aturnaround in property leasing and its department store businesses, as well as the settlement of Panyu project,commerce revenue rose 9.5% YoY to Rmb1.76bn in 2016; financial revenue jumped 103.1% YoY on the rapid growth offinancial subsidiaries; and revenue from culture & entertainment remained largely flat YoY. Given the ample reserves ofquality commerce projects （in Shanghai, Zhuhai and Zhaoqing） and the significant potential in the culture &entertainment and finance businesses, we expect revenue to maintain robust growth going forward.

Earnings dragged by weakened profitability, non-recurring losses. In 2016, overall gross margin slipped0.6ppt YoY （the 3 major businesses all posted declines）， possibly due to project investment. The expense ratio fell0.4ppt YoY （sales, G&A and financial expense ratios: +2.3, -0.5 and -2.2ppt YoY）。 Moreover, the incremental assetimpairment loss and lower non-operating revenue together dragged pre-tax profit by ~Rmb37mn.

Trends to watch

Highsun ecosystem in full swing; growth to be sustained in the medium/long term. Commerce:Deployment in smart warehouse and creative industry park should help build the commerce platform. Culture &Entertainment: After completing the performance/actors upgrading, Red Sun will likely see new round of growth，Finance: The launch of small/micro finance, finance lease and payment businesses will help diversify Highsun’sdeployment in finance.

CB issuance completed with conversion price of Rmb5.26/sh. To optimize its assets/liabilities structure,Highsun may promote the conversion.

Earnings forecast

Given the earnings pressure amid new business cultivation, we cut our 2017e EPS forecast 15% to Rmb0.11 andintroduce our 2018e EPS forecast at Rmb0.14.

Valuation and recommendation

The stock is trading at 40x 2017e P/E. Maintain BUY. Given the downward earnings revisions, we cut TP by 15% toRmb5.7, implying 27% upside. Risks: Commerce projects disappoint; fluctuation in property settlement; cross-sectorM&A risk.