Event description Meibang Apparel (002269) published its 2015 semi-annual report. The main operating results are as follows: during the reporting period, the company achieved operating income of 2,777 billion yuan, a year-on-year decrease of 7.24%; net profit attributable to shareholders of listed companies was -95 million yuan, a year-on-year decrease of 152.98%; and basic earnings per share was -0.04 yuan/share, a year-on-year decrease of 157.14%. Incident review Direct channels took the lead in reversing the decline, and the adjustment of franchise channels dragged down revenue in the first half of 2015. In the first half of 2015, the company achieved operating income of 2,777 billion yuan, a decrease of 7.24% over the previous year; operating costs were 1,588 billion yuan, a decrease of 1.18% over the previous year. During the reporting period, the company strengthened the optimal management of traditional channels. Direct channels achieved sales revenue of 1,608 billion yuan, leading the way in reversing the decline, increasing 5.09% over the previous year; affected by insufficient terminal demand, the retail scale of franchise channels continued to be under pressure, achieving sales revenue of 1,138 billion yuan, a decrease of 20.51% over the previous year. Among them, in the second quarter, the company achieved revenue of 1,023 billion yuan, a year-on-year decrease of 11.22% and a year-on-month decrease of 41.65%. Gross margin declined due to both increased discount levels and lower mark-up rates. During the reporting period, in order to promote terminal retail growth, increase discount concessions, and reduce product mark-up rates, the gross margins of direct-run and franchise channels decreased by 3.96 percentage points and 4.01 percentage points, respectively. Overall, in the first half of 2015, the company's gross margin was 46.11%, a year-on-year decrease of 3.08 percentage points. The increase in investment in Internet transformation affected a sharp decrease in net interest rates on management expenses over the same period last year. During the reporting period, the cost scale for the period was 1,266 billion yuan, an increase of 5.31% over the previous year. Sales expenses, management expenses, and financial expenses increased by 3.03%, 36.29%, and -10.12%, respectively. The company's increased expenses to support the transformation and development of the Internet are the main reason for the sharp increase in management expenses. The fee rate for the period was 45.60%, an increase of 5.43 percentage points over the previous year. Affected by factors such as reduced revenue and increased expenses, the first half of 2015 achieved a net profit loss of 95 million yuan, with a net profit margin of -3.41%, a decrease of 9.39 percentage points over the previous year. The effects of inventory removal are obvious, and the concentration of accounts receivable increased significantly compared to 2014. As of the end of the reporting period, the company's inventory book value was 1,062 billion yuan, a decrease of 27.46% over the previous year, and a decrease of 26.02% from the beginning of the period. Among them, the volume of inventory commodities, which accounted for 98% of the book value at the end of the period, decreased by 26.01% compared to the beginning of the period, and raw materials and turnover materials decreased by 28.61% and 4.95%, respectively, from the beginning of the period. The size of accounts receivable was 222 million yuan, a year-on-year decrease of 8.85%; accounts receivable accounted for 3.54% of total assets, which was basically the same size as 3.36% at the end of 2014. Furthermore, the ratio of the top five ending balances collected by defaulters to the closing balance of accounts receivable was 31%, which is a significant increase in concentration compared with the 14% level at the end of 2014. Maintaining the “buy” rating is affected by weak terminal demand and the continued rise in labor costs, and the overall development of the domestic casual wear industry is not optimistic. There are many casual apparel retail brands in the domestic market at this stage, and competition is fierce. Against the backdrop of continuous decline in early performance, the company has stepped up refined management and value exploration of traditional channels. Among them, direct channel revenue has taken the lead in reversing the decline and achieving positive growth. During the reporting period, the company achieved remarkable results in removing inventory, and the inventory scale was further reduced. In the context of the weakening of the overall performance of the industry, the company is actively promoting the transformation of the Internet, and plans to invest in the construction of projects such as an “intelligent manufacturing” industrial supply chain platform, an O2O omni-channel platform, and an Internet big data cloud platform center through fixed capital raising. Currently, the company's application for a non-public offering of shares has been accepted by the China Securities Regulatory Commission. We expect the company's 2015-2016 EPS to be 0.08 yuan and 0.09 yuan, corresponding to the current stock price valuation of 92 times and 79 times. Maintain a “buy” rating.