中奥到家(01538) 　　Event 　　3Q16 revenue and net profit are in line. During the quarter, Zhong Aomanaged to acquire a 70% stake in Yongcheng, about 48% of Zhong Ao’stotal contracted GFA before acquisition. It has taken steps to reduce O2O lossincluding cutback in customer subsidies and lay-off. However we note the 3-5%lower net margins for newly acquired projects. Thus we maintain FY16Eearnings and cut FY17/18E earnings by 14/17% and cut our SOTP-based TPfrom HK$1.6 to HK$1.5. Reiterate OP as the property management businessand the M&A plan are growing on track despite lower margins for newlyacquired projects. 　　Impact 　　3Q16 revenue and profit in line. Revenue grew 28% YoY to RMB137mn,in line with MQ. The gross profit margin declined from 32% in 3Q15 to 27.6%in 3Q16 due to gross loss in community O2O platform as well as salaryincrease but partly offset by price hike per GFA. Adjusted net income grew17% YoY to RMB20mn, in line with MQ. 　　Successfully acquired Yongcheng. In Oct 2016, Zhong Ao managed toacquire a 70% equity interest in Yongcheng for RMB210mn which manages234 properties with total contracted GFA of 18mn sqm, or about 48% ofZhong Ao’s total contracted GFA before acquisition. Yongcheng’s propertiesare mostly located in the prime business districts of Ningbo. The deal(first announced in Mar with an update later in Jul) was completed slightlylater than our previous expectation. We currently model a 67% HoH increasein revenue-bearing GFA in 2H16. However we also note the 3-5% lower netmargins for newly acquired projects from lower management fee per sqm. 　　Transforming the O2O business. We note Zhong Ao has taken good effortsto cut back loss in the O2O business. It is removing subsidies on customerorders on Aidaojia and is letting go staff who are responsible for on-theground promotion. As a result, O2O revenue saw a meaningful decline fromRMB5.3mn in 2Q16 to RMB1.4mn. Aidaojia starts to offer a SaaS-basedcommunity O2O platform to third-party property management companies on asubscription model. Additionally, Zhong Ao entered into an agreement withAlipay. The company will provide mobile solutions for payments of propertymanagement fees and utility charges, and receive commissions from Alipayaccordingly. 　　Earnings and target price revision 　　Cut FY17/18E earnings by 14/17% and cut our SOTP-based TP from HK$1.6to HK$1.5. 　　Price catalyst 　　12-month price target: HK$1.50 based on a Sum of Parts methodology. 　　Catalyst: M&A, and scale and profitability of O2O 　　Action and recommendation 　　Retain OP.