天喔国际(01219) 　　Despite the weak 1H16 results, own-brand sales remainedstrong, and we believe margin should see recovery in 2017e 　　The recent tie-up with Fosun should allow Tenwow to furtherexpand its brand portfolio and drive own-brand sales higher 　　Reiterate Buy but cut target price to HKD2.90 (from HKD3.60)on lower earnings estimates 　　What’s new? While we are lowering our 2016-17 earnings estimates by 18-22%, wereiterate our Buy rating on Tenwow as we believe the long-term mix improvementstory is still intact and the current valuation at 11x 2017e PE also looks undemandingcompared to other consumer staples companies. During 1H16, while overall saleswere only up 1% yoy, own-brand sales were actually up 11% yoy, and the group’sgross margin also gained 3.6pp yoy to 21%, thanks to a change of sales mix andhigher mark-up for its own-brand beverage products. Despite the good performancein the own-brand business, the group’s net profit was down 15% yoy, mainly due tohigher distribution expense after the company took back the exclusive nationwidedistribution right from Nanpu (a JV company). The distribution expense to sales ratioincreased 3.5pp yoy to 7.9% in 1H16, and the increase was mainly due to expansionof sales force and bigger channel investments. We believe the impact from a surge indistribution expense is likely to be temporary, and we should see margin recoverynext year on bigger scale and better mix improvement. 　　Tie-up with Fosun. Tenwow recently formed a partnership with Fosun (0656.HK,Not Rated), in which Fosun will subscribe 132m new shares from Tenwow (around6.4% of existing share capital) at an issue price of HKD2.4/share. While thisplacement is likely to be EPS-dilutive, we believe it is strategically positive forTenwow in the long run as it could leverage on Fosun’s strong M&A expertise tojointly develop new brands in China and drive own-brand sales. 　　Earnings, valuation, and risks. We continue to use PE to value Tenwow and our targetprice of HKD2.90 is based on an unchanged13.5x 2017e PE, which is derived from thehistorical average forward PE since its IPO in September 2013. We are looking for 13%earnings CAGR over 2016-18e, and our 2016-17 earnings estimates are 4-8% belowconsensus but our 2018e estimates are 6% above consensus. We cut our target pricefrom HKD3.60 to HKD2.90 to mainly reflect our lower earnings estimates. Key downsiderisks include food safety issues, the government’s austerity measures, competition, andexecution risks on geographic expansion. Catalysts: Chinese New Year sales update inJanuary 2017 and 2016 results in March 2017.