Review: earnings grew 54% YoY in H116; net profit dropped 42% YoY in Q216.
   
In H116, the company recorded revenue of Rmb900m (+25% YoY), operating profit ofRmb320m (+54% YoY), net profit attributable to shareholders of Rmb270m (+54%YoY) and EPS of Rmb0.22. However, we estimate its main business profit may havefallen 48% YoY. In Q216, revenue was up 34% YoY and net profit was down 42%YoY, while net profit rose 141.5% YoY in Q116.
   
Main reasons: widening drop in model car and decline in game GM.
   
Based on our analysis, slowing growth in the company's earnings was mainly due to: 1)revenue/gross profit of traditional main business, car model, dropped 19%/19% YoY,widening notably compared with declines of 2%/1.7% YoY in 2015; and its grossprofit contribution dropped to 23% in H116 from 29% in 2015; 2) growth in babyproduct revenue slowed to c4% YoY in H116 from 40%+ YoY in previous years; 3)game business, which contributes 30%+ to earnings, experienced a 26ppts fall in grossmargin to 35% though revenue grew 112% YoY; and 4) continued M&A causedadministrative costs to grow rapidly, with administrative expense ratio rose c3ppts to11.5%.
   
Model car may continue to drag earnings growth; game earnings may improve.
   
Looking into full year 2016, we expect: 1) the company's traditional toy business maycontinue to be sluggish; 2) game business: the company plans to launch multipleproducts in H216, including two ARPG mobile games and a self-developed MMOgame, Yatelan Zhanji. Earnings growth in H216 may improve over H116, and weexpect 2016 earnings to grow 20%+; and 3) sports business: we expect Real ClubDeportivo Espaol (in which the company holds a 99.35% stake) to realize Rmb100m inprofit in 2016, and to achieve 10% YoY growth in 2017-18E.
   
Valuation: price target of Rmb14.5, maintain Neutral rating.
   
Our 2016-18E EPS estimates are Rmb0.33/0.36/0.41. Our price target of Rmb14.5 isbased on the DCF methodology (WACC 6.6%). We maintain our Neutral rating.