Pou Sheng International Holdings:Announces the termination of its CFO and resignation of its CEO

Pou Sheng issued a statement on Jan 8 that it has discovered some incorrectsales records for Dec-16, which may have led to recognition of sales that didnot take place. While the amount is small according to Pou Sheng, it hasengaged its independent auditor Deloitte for a thorough investigation. As aresult of findings, the Board has terminated CFO Mr. Chen, Kuo-Lung (Kevin)as he authorized and approved the records. Pou Sheng also announced CEOMr. Kwan, Heh-Der (Michael) has resigned as he was aware of the incident.

CEO responsibilities will be taken by the Chairman in the interim.

There have been no other reports of employee departures/terminations as aresult of the incident. Pou Sheng has stated that Dec-16 monthly sales (on Jan10) and FY16 result (end of Mar) announcements will not be impacted. Theerror was found during an internal audit process where the review alsoconfirmed, that historical data has not been affected. We think there areseveral points to monitor: 1) Data reliability/other potential accountingissues: While historical data passed internal audit, investors will likely look toDeloitte’s investigation results before alleviating concerns, which we believewill likely come before/with annual result. 2) Daily operations: Were moreemployees involved? 3) Future strategy: Pou Sheng's focus in the past fewyears has been on building a better infrastructure and mgmt system, and theGroup (which includes Pou Chen, Yue Yuen) have centralized resources towork with its key clients. As CEO, Michael Kwan played an integral role in PouSheng’s turnaround in the past three years. While other senior managementmembers are still present, the company will likely be revisiting potentialimpact from and future strategy. We will continue to watch for details. PouSheng said it is not ruling out the possibility for share buybacks as capacity toconduct up to 10% of its shares outstanding was approved earlier at its AGM.

Buy; 12m PE-based TP HK$3.00. Although Pou Sheng expects potential NIimpact to be small, we await more color from Dec sales report and pendingauditor review. Risks: Slower SSSG and store expansion, higher OPEX, FX.