The company announced the 2020H1 performance report. The performance slightly exceeded market expectations. The performance slightly exceeded market expectations of 2020H1 Cool Smart achieved revenue of 372 million yuan, an increase of 41.66% over the previous year; it achieved net profit of 50.34 million yuan, an increase of 53.61% over the previous year, and the performance slightly exceeded market expectations. Among them, the company achieved revenue of 259 million yuan in the single quarter of 2020Q2 and achieved net profit of 31.51 million yuan to the mother.

Revenue side: Epidemic prevention materials led to rapid growth in the company's revenue side, and the main custom clothing business was affected by the epidemic and declined year-on-year.

1) By product:

① Customized clothing: 2020H1 achieved revenue of 135 million yuan, a year-on-year decrease of 44.12%, accounting for 36.29%. Mainly, 40%-45% of the company's clothing business came from overseas sales, and 55%-60% came from domestic sales. The Q1 domestic epidemic had an impact on company orders. With the gradual improvement of the domestic epidemic in April 2020, the company's domestic sales recovered; however, the outbreak of the overseas epidemic in the Q2 quarter had an impact on the company's orders, thus affecting the 2020H1 custom clothing business.

② Epidemic prevention materials: 2020H1 achieved revenue of 226 million yuan, accounting for 60.71%. As a new business, epidemic prevention materials effectively compensated for the impact of the company's main business due to the epidemic, driving a relatively rapid increase in the company's overall revenue. At present, epidemic prevention materials have been incorporated into the company's daily operations, and in the future, the company will continue to explore on the basis of masks, isolation gowns, etc.

③ Consulting and transformation business: 2020H1 achieved revenue of 449,600 yuan, a year-on-year decrease of 95.06%. The year-on-year decline in scale was mainly due to the impact of the epidemic.

④ Other business: 2020H1 achieved revenue of 10.88 million yuan, a year-on-year decrease of 11.5%.

2) By region:

① Domestic: 2020H1 achieved domestic revenue of 221 yuan, an increase of 37.75% over the previous year, accounting for 59.4%; ② Overseas: 2020H1 achieved revenue of 151 million yuan abroad, an increase of 47.79% over the previous year, accounting for 40.6%.

The gross margin of 2020H1 company was 38.53%, down 1.48pct from the previous year. The gross profit was mainly due to the contribution of epidemic prevention materials. Looking at the breakdown, the gross margin of epidemic prevention materials was 46.76%, which is higher than the gross profit margin of the garment industry at a normal level; the company's 2020H1 gross profit accounted for about 74% of the company's gross profit, which is the main source of the company's profit contribution; the gross margin of the main custom clothing business fell 14pct year-on-year to 24.77%. The company's gross margin for 2020Q2 in a single quarter was 36.56%.

The company's expenses during the 2020H1 period were 15.58%, a decrease of 6.97 pct compared to the same period last year. The 2020H1 sales expense ratio was 9.06%, a year-on-year decrease of 2.45pct; mainly due to the impact of the epidemic, the company's demand side was greatly affected, causing expenses such as store decoration and business hospitality to drop; the management expense ratio 2020H1 was 5.01%, down 3.18 pct from the previous year; mainly due to a decrease in employee remuneration and other expenses; the R&D expenses rate was 1.67%, down 6.97pct from the previous year; the financial expense ratio was -0.16%, down 0.71 pct from the previous year, mainly due to the impact of the 2020H1 no bank loans without interest expenses.

2020H1 achieved net profit of 50.34 million yuan, an increase of 53.61% over the previous year. Among them, the net profit returned to the mother in the single quarter of 2020Q2 was 31.15 million yuan, with a net interest rate of 12.16%. The net interest rate of 2020H1 was 13.52%, an increase of 1.05 pct over the previous year. We believe that the increase in net interest rates is mainly driven by new epidemic prevention materials businesses with higher gross margins.

The inventory value of 2020H1 company was 105 million yuan, an increase of 47.73% over the beginning of the year, mainly due to the increase in raw materials and inventory products for epidemic prevention materials.

The asset impairment loss of 2020H1 company was 155.799 million yuan, an increase of 557% over the previous year, mainly due to the impairment loss of 2020 H1 epidemic prevention materials and production equipment; of these, the impairment loss of new fixed assets was 3.11 million yuan; and the loss of inventory price reduction was 12.47 million yuan.

The net operating cash flow of 2020H1 company was 35.37 million yuan, a year-on-year decrease of 1.94%, with little overall change; the cash flow from investment activities increased 127.2% year-on-year to 7.53 million yuan, mainly due to the impact of the company's withdrawal of capital and income from bank wealth management products while purchasing fixed assets for epidemic prevention materials.

Building a digital flexible supply chain system, core pricing asset companies in the decentralized era have large-scale personalized customized production capacity, breaking through the industrial mass production dilemma of customized clothing.

The company is a representative enterprise for large-scale personalized clothing production. The business model is large-scale personalized customization through order channels, order-driven production, and large-scale production of personalized customized products using the Internet, big data and other technical means. By utilizing modern information technology and flexible manufacturing organization forms, the company was able to provide consumers with personalized clothing products at a cost close to mass production. Currently, the company has a large-scale production capacity of about 420,000 suits and 220,000 shirts per year.

Flexible supply chains have significant production advantages, and are core pricing assets in the decentralized era. The company's C2M/B2M operating and sales model allows factories to directly connect with consumers, and at the same time build a complete intelligent production system using six major databases and independently developed information platforms and R&D and production execution systems. The deep integration of informatization and industrialization has greatly shortened the development and production cycle of the company's products. The manufacturing of personalized products can be completed within 7 working days, supply and response efficiency has been improved, rapid and efficient production of orders can be achieved, and supply chain flexibility is remarkable. We believe that in the current era of decentralized traffic, companies can use their flexible production and intelligent manufacturing capabilities, cooperate with KOL celebrities and other opinion leaders based on the “focus on the economy” trend to form exclusive customized models and cooperative funds to quickly achieve large-scale orders, promote marginal cost reduction, and further enhance the company's profitability.

The company's 2020H1 performance slightly exceeded expectations. Looking at the main clothing industry, the 2B side gradually stabilized with the domestic epidemic, and domestic business revenue continued to recover; due to the uncertainty of the overseas epidemic, we expect the company's overseas business to continue to be affected. The 2C-side business is progressing steadily, and its share will continue to increase. Looking at epidemic prevention materials, the 2020 H1 profit contribution is mainly brought about by epidemic prevention materials. Up to now, Cool Intelligence has formed a complete supply chain from meltblown nose strips to finished disposable masks. The production capacity has reached 5 million disposable medical masks, and the production capacity of disposable civilian masks is 10 million. It is expected that epidemic prevention material products will continue to contribute to performance in the future. Considering that the company's performance in the first half of the year slightly exceeded expectations, we adjusted the company's profit forecast. We expect to achieve net profit of 91.17 million yuan/119 million yuan/155 million yuan (original values were 91.17 million, 94.18 million yuan, 114 million yuan) in 2020-2022, an increase of 32.76%, 30.52%, and 30.02% over the previous year. EPS is expected to be 0.38/0.50/0.64 yuan in 2020-2022, maintaining the “buy” rating.

Risk warning: Risk of losing orders from major customers, the impact of the epidemic exceeding expectations and affecting the company's order situation, investment projects yielded benefits less quickly than expected, and terminal consumption was weak.