Actively driving growth
Investment Thesis
Largest integrated fabrics & garment manufacturer in China. As a key supplier for global brands including Nike, Uniqlo, Adidas, Puma, and more, Shenzhou Int’l (Shenzhou)’s diversified production bases in China and Asia, as well as its strong manufacturing capability in integrating fabric and garment production, should enable it to continue to gain market share, especially in the sportswear segment.
We forecast the Group to achieve sales and earnings CAGR of 12% and 15% respectively in FY23-25E.
Downstream inventory levels still high but easing sequentially. We expect gradual restocking from the sportswear and casual wear categories in 2024. Sportswear revenue accounted for 72.2% of sales. Top 4 customers, comprising of Adidas, Nike, Puma and Uniqlo accounted for 79.6% of 2023 sales (2022: 82%)
FY24E earnings poised for rebound. We expect Shenzhou to record 12% topline recovery, driven by sportswear and casual wear orders. We expect GP margin to expand by 1.2ppt to reflect gradual improvement, driven by higher utilisation rates from overseas capacity.
Buy with target price of HK$94.3. We raise our FY24E forecast by 1% on improving GP margin assumptions, but lower our TP to HK$94.3, based on 26x FY26F PE (previously 28x), on sector derating,
supported by >3.7% yield. The company’s strategy is pivoting towards expanding its capacity in Southeast Asia, with new plants planned in Indonesia. This will enable the company to meet brand customers’ requirements to diversify their sourcing needs.
Key Risks
Key risks include macroeconomic headwinds, high inventory levels amongst apparel brand owners, unfavourable currency fluctuation, raw materials (such as cotton and polyester) cost fluctuation, and lastly, rise in trade tariffs between its trading partners.