Incident: The company achieved revenue of 509 million yuan in the first three quarters of 2020, +0.81% year on year, net profit of 73 million yuan, +12.17% year on year. Among them, Q3 achieved revenue of 165 million yuan in a single quarter, +6.79% year on year, and net profit of 0.2 billion yuan, +46.62% year on year.

The Q3 revenue side resumed growth, and the pandemic spawned demand for more efficient filtration: the company achieved revenue of 165 million yuan in a single quarter in 20Q3, +6.79% year on year, and a relatively clear recovery from Q2. The company mainly deals in air filter-related products, and the downstream binds many well-known air conditioning companies at home and abroad, such as Daikin, Hitachi, Gree, Midea, etc. We expect that the recovery on the revenue side in Q3 may be driven by the month-on-month recovery of central air conditioning and commercial air conditioning after the impact of the epidemic gradually weakens. The company itself is a consumables company. On the one hand, the recovery in downstream demand drives sales, and on the other hand, the higher filtration requirements brought about by the pandemic have accelerated the replacement of filter panels. In particular, overseas consumers are more willing to replace filter panels. Judging from the information disclosed by Daikin, the company's main customer, under the influence of the epidemic this year, Daikin captured the increase in consumer requirements for air quality and quickly invested in the development of fresh air products. Sales of ventilation-related products were +160% compared to the same period last year. Among them, sales of residential purifiers are expected to double throughout the year. At the same time, after entering winter in Q4, the frequency of use of central air conditioning increased, and the company's revenue growth was strong and sustainable.

The company's profitability increased dramatically, and expenses were well controlled during the period: in the first three quarters of 2020, the company's gross profit margin and net interest rate were +2.5 and +1.5pct, respectively; the 20Q3 gross profit margin and net interest rate were +7.6 and +3.4 pct, respectively. The company's profitability increased dramatically. We expect this to be related to the sharp increase in sales of air cleaning products from downstream overseas customers, and the profit level of overseas business was superior to domestic, and the product structure was further optimized. Looking at the cost rate, the company's sales, management, R&D, and financial expenses for the first three quarters of 2020 were -1.1, +1.0, +0.9, and +0.9 pct, respectively; among them, the 20Q3 sales, management, R&D, and financial expenses rates were -2.4, +4.0, +1.8, and +1.9 pct, respectively. Since the company's overseas share is relatively high, exchange rate fluctuations in the third quarter had a clear impact on financial expenses; management expenses were +75.1% compared to the same period last year. We expect that the company will lay out new business segments and increase the number of corresponding employees, leading to an increase in remuneration expenses.

Advance payments increased sharply, and cash flow performance was stable: looking at the balance sheet, the company's monetary capital at the end of Q3 2020 was 3.7 billion yuan, -0.1 million yuan over the previous quarter, +33.6% year on year; inventory was 130 million yuan, -4.1% year on year. Advance payments were $0.1 billion, or +1081.1% year on year, reflecting good potential for future revenue growth. Judging from the turnover situation, the number of turnaround days for the company's inventory, accounts receivable, and accounts payable at the end of the Q3 quarter of 2020 was +3.0, +13.4, and -0.1 days, respectively. Looking at the cash flow statement, net cash flow from operating activities in the single quarter of 20Q3 was 0.1 billion yuan, +0.2 billion yuan over the previous year, and cash inflows from selling goods and providing labor were 170 million yuan, +2.7% year on year, in line with revenue growth.

Investment suggestions: The company has entered and continues to cultivate in the field of home appliances and has established long-term cooperative relationships with well-known air conditioning brands at home and abroad. The epidemic has spawned demand for more efficient filtration, and demand space for the air filter industry is expected to open up; the company is actively expanding downstream traditional and new energy vehicle customers, and vehicle air purifiers will become the company's new growth point in the future. We gave the company a reasonable valuation of 30 times PE in 21 years, corresponding to a market value of 4 billion yuan in 21 years, with a target price of 19.01 yuan/share. The first coverage gave it an “increase in holdings” rating.

Risk warning: risk of macroeconomic fluctuations; risk of fluctuations in raw material prices; risk of fluctuations in demand in downstream industries, etc.