莎莎国际(00178) 　　On the back of its profit warning, but better-than-expected SSS trend in 2Q and Golden Week, we adjust our forecast for FY17/18/19 by -10%/9%/22%. Weexpect a 41% decline in NP to HK$90m on a 4% drop to HK$3.6bn sales. Thisis in line with the company’s profit warning alert announced on 24 Oct 2016.While we are becoming more positive on its operating outlook in HK, the shareprice rally since May has reflected the SSS recovery and margin improvement,in our view. Apart from SSS trend, we think share price will react positively if management can map out a strategy for overseas markets (e.g. exiting lossmaking markets) at its analyst results meeting; maintaining Hold. 　　The company is due to announce its 1HFY17 results on 23 Nov and we expecta 41% decline in NP to HK$90m on a 4% drop in sales to HK$3.6bn. This is inline with the profit warning alert announced on 24 Oct 2016. While SSSg in HKexperienced a nice turnaround, thanks to its own product strategy (more fastmoving items, e.g. from Korea) and return of mainland tourists, we thinkcutting losses from overseas operations, especially Taiwan, will be anadditional earnings driver in the future. 　　Our new forecasts reflect the better-than-expected SSSg trend but higherlosses for the overseas operation in FY17. We raise our target priceaccordingly to HK$2.96, translating into 24x/18x FY17/18E PE with yield at 8%. 　　We maintain our Hold rating. Our DCF-derived value is based on a HK marketCOE of 7.5% and a TGR of 0%. We use a beta of 1, in line with other consumerplayers’ (range: 1.0 to 1.3). Key downside risk: slower-than-expected GPMimprovement. Key upside risks: better-than-expected HK SSS growth, and a PEre-rating on Chinese growth potential. More details on page 3.