Shenzhou's Market-Defying Stock: Unveiling HK's Hidden Gems

Shenzhou International (02313.HK), a major vertically integrated knitting manufacturer in China, has garnered consistent praise from top global brands like NIKE, UNIQLO, ADIDAS, and PUMA due to its reliable production capabilities and high-quality products. These brands highly value Shenzhou International’s responsive supply chain and product quality, making it one of their key OEM partners.

Shenzhou International specializes in producing and selling a variety of knitted apparel products. The company is renowned for its vertically integrated production model, encompassing every stage of production from fabric research and development, weaving, dyeing and finishing, printing and embroidery, to cutting and sewing.

This highly efficient supply chain integration is one of the company’s core competitive strengths, enabling it to quickly meet market demands and produce high-quality products rapidly. This efficiency has positioned Shenzhou International as the leading knitting garment exporter in China for several years running.

Notably, Shenzhou International operates on a global scale, with key markets in China, Europe, the United States, and Japan. This global market strategy reduces dependence on any single market, ensuring a stable sales environment with lower risk. The company is actively exploring further expansion of its overseas production capacity.

Investors are particularly focused on how Shenzhou International will identify new growth opportunities amidst global economic fluctuations and changing consumer markets.

Financial Performance

As of the end of December 2023, Shenzhou International reported a revenue of RMB 24.97 billion, adecrease of 10.1% from the previous year, with a slight drop in net profit by 0.1% to RMB 4.557 billion. This decline was primarily due to reduced demand for sportswear in the European and American markets and brand inventory reductions. Shenzhou International has maintained long-term, stable partnerships with major international clients such as Nike, Adidas, Uniqlo, and Puma. Currently, these clients’ overall order volumes are showing a stable growth trend.
Although some brand clients are facing inventory pressures, Shenzhou International’s excellent supply chain management and customer service capabilities enable it to maintain high customer satisfaction and order growth expectations. Despite the revenue drop caused by brand inventory pressure, the company still achieved a net profit of RMB 4.6 billion attributable to the parent company, remaining roughly stable year-on-year.
Shenzhou International’s gross profit margin for 2023 was 24.3%, with net interest income of RMB 440 million. In the second half of the year, gross profit margin increased by 4.3 percentage points year-on-year and 3.4 percentage points compared to the first half, indicating steady profit growth. This demonstrates improved capacity utilization, enhanced operational efficiency of overseas factories, and effective cost control during the pandemic. Overall, although Shenzhou International faced revenue decline challenges in 2023, it maintained relatively stable profitability through effective cost control and operational efficiency improvements. As global market demand gradually recovers, the company is expected to achieve better financial performance.

Market Analysis

Shenzhou International’s main products include sportswear, casual wear, and underwear, with a diversified product portfolio. In 2023, sales of sports products fell by 13.6%, mainly due to weak demand in the European and American markets and brand inventory reductions. Sales of casual products decreased by 1.4%, but underwear sales surged by 30.2%, driven by increased demand in Japan and other markets. Despite declines in some product categories, the growth in underwear sales partially offset these declines, showcasing the success of the company’s diversified product strategy. Moreover, the company’s global market layout played a significant role, with distinct sales performances across different regions. The European and American markets saw year-on-year declines of 19.1% and 20.4%, respectively, due to sluggish economic recovery affecting sales. In contrast, revenue in the Chinese market grew by 0.7% year-on-year, demonstrating the relative stability and growth potential of this market. These regional differences reflect varied market demands and provide a basis for future market strategy adjustments. In summary, despite global market demand fluctuations, Shenzhou International’s strong customer base and flexible market strategies highlight its competitiveness and growth potential.

Investor Perspective

By December 2023, Shenzhou International’s stock price fluctuations were mainly influenced by its financial and market performance. In 2023, the company’s revenue was RMB 25 billion, down 10% year-on-year, but the net profit attributable to the parent company remained at RMB 4.6 billion, demonstrating strong profitability. The gross profit margin increased to 24.3%, reflecting effective cost control and operational efficiency, providing support for the stock price. The decline in demand in Europe and the United States affected overall revenue, but the relatively stable Chinese market and flexible market strategies helped stabilize overall revenue amidst weak demand in some markets. As global market demand recovers, the company is expected to drive sales growth by improving capacity utilization and optimizing resource allocation.

From an investor’s perspective, Shenzhou International shows strong market competitiveness and sustainable development potential. Considering the global economic recovery and the company’s solid customer base, the stock price is expected to grow steadily. Investors are advised to increase their holdings during stock price adjustments to achieve long-term returns. Overall, Shenzhou International has good long-term investment value.

Future Outlook

Currently, Shenzhou International is positively enhancing its overseas production capacity and exploring new markets. Looking ahead, the 2024 Olympic Games are expected to boost demand for sportswear, providing new growth opportunities for Shenzhou International. Additionally, the gradual recovery of the global economy is likely to revive clothing consumption demand in Europe and the United States, laying the groundwork for the company’s performance recovery. Market recovery will inevitably put pressure on capacity. The company is currently implementing a phased recovery plan, focusing first on improving capacity utilization. As production bottlenecks approach, the group plans to optimize product structure and recruit employees. With a low base last year, recruitment activities in China and Vietnam are in full swing, aiming to restore the total number of employees to 99,000 by the end of the year. With increasing replenishment demand from brand customers, Shenzhou International expects significant capacity growth in the first half of the year, more stable revenue growth, and a positive impact on profit margins. Macquarie Bank is optimistic about Shenzhou International’s prospects, raising its profit forecast for 2024 to 2025 by 2% based on expected revenue growth and increasing the target stock price from HKD 89 to HKD 91, with an “outperform” rating!

Conclusion

Overall, Shenzhou International demonstrates strong market competitiveness and development potential with its stable financial management and efficient operations. Despite a revenue decline in 2023, the company maintained stable profitability through cost optimization and a global market layout.

Looking ahead, with the global economy gradually recovering and increasing demand for sportswear, Shenzhou International is expected to make significant progress in new market expansion and capacity enhancement. Macquarie’s research report gives Shenzhou International an “outperform” rating, and investors can increase their holdings during stock price adjustments to achieve long-term returns.