Results first take: Shenzhou (2313 HK) FY21 results in-line with its profit warning expectation
What’s new
- Shenzhou’s FY21 earnings result in-line with its profit warning expectation of a 33.7% drop yoy
- The earnings decline was largely stemmed from impact of COVID-19 pandemic, with unfavorable factors such as;
- the production lines in Cambodia and Vietnam had suspended operation partially
- increase in production costs, such as material and labour cost, and
- the exchange rate of Renminbi has been strengthened
- Revenue increased 3.5% yoy thanks to the 10.5% increase in sales of sportswear products.
- GP margin stood at 24.3% in FY21, representing a decrease of 6.9ppt from last year.
- The board proposed a total dividend of HKD1.63 per share, with a higher dividend payout ratio of 60.3% (2020: 51.1%)
Our view
- Whilst the suspension was well telegraphed to the market, the delay of production coupled with rises in raw materials and energy costs caused a larger than expected drop in the margins.
- As Shenzhou’s strong share price has been due to its consistency. A break in this due to COVID and inflation has hit at this massive premium.
- The abandon of zero-COVID strategy and the higher vaccination rate of 76% should help Shenzhou to avoid its operation in Vietnam to be suspended like 2021.
- In the longer term, we think Shenzhou’s diversified manufacturing bases in China, Vietnam, and Cambodia provide clients with unmatched sourcing flexibility, which has ensured stability moving forward.
- Shenzhou’s share price has dropped 43% since the suspension of Vietnam’s production line, which should have more than reflected this COVID impact. The company is currently trading at below -1 standard deviation of its 5 years mean PE.
- Recommendation and target price are under review.