Business Summary:

Shenzhou International is the largest vertically integrated knitwear manufacturer on OEM (original equipment manufacturing) basis in China. The group offers customers the following services across the knitwear supply chain: (a) customized fabrics, (b) dyeing and finishing services. (c) printing and embroidery services, (d) cutting and sewing, and (e) packaging and logistics.

The enterprise manufacturing location is located at Ningbo Economic and Technical Development Zone, Ningbo City at Zhejiang Province; with garment factory also located at two other Chinese cities (衢州市及安庆市) and Cambodia. Sales representative offices are located at Shanghai, Hong Kong and Osaka. The group chiefly manufactures knitwear casual clothing; with more focusing on sportswear in recent years. Main reputation international customers includes NIKE, ADIDAS, PUMP, CHAMPION, MIZUNO, FILA & SPALDING. Product market extends gradually from Japan to other Asia Pacific district and Europe/US market.

In order to maintain business growth, the scale of overseas bases will be expanded, after the project of fabric plants commences production in Vietnam and Cambodia from 2020 and 2021. Furthermore, the enterprise improves the efficiency of garment production by employing more balanced measures such as application of automation equipment, development of production mold, optimization of job flow and improvement of planned control.

Financial Summary:

As of the annual results for the year ended 31 December 2018, net profit rose 20.7% yearly to RMB 4.54 billion. Earning per share equaled RMB 3.02, representing an increase of approximately 17.1% from RMB 2.58 for the corresponding period last year. Sales revenue increased 15.8% to RMB 20.950 billion. Gross profit margin remained at 31.6%; representing an increase of 0.2% from last year.

Percentage of sports wear products, casual wear products, and lingerie wear products to total sales was approximately 68.1%, 24.7% and 6.3% respectively. Sales of sportswear product, casual wear products and lingerie wear products increased by 18.5%, 12.3% and 2.0% respectively when compared with the year of 2017.

Since last year, China (30.1% sales) has become the largest customer for the group by region, followed by Europe (18.1%), USA (15.5%) & Japan (15.5%).

As of 31 December 2018, the cash and cash equivalent valued RMB 3.566. Bank loan remaining amount valued RMB 2.517, and the ratio of debt to equity was 11.3%.

Business risk include:

 (a) different level of imported tax levied when exported to other countries including USA. Business will be affected if trade war deteriorated;

 (b) increasing labour cost, raw maerial cost & air transportation cost;

(c) increasing standard requirements of environmental aspects;

(d) Macro-economics outlook faces uncertainty;

(e) rate of RMB currency increases

Technical Analysis:

It is suggested that buying price is $102. The target price will be $108, and cut loss level is set at $98.

References

Company Interim Report 2018

www.aastocks..com.hk

www.etnet.com.hk

www.afe-solutions.com

I, Gary Tam, am a licensed person under the Securities and Futures Commission. Until the date this commentary was published, neither I and/or my affiliates are the beneficiary of the securities mentioned herein or are entitled to any financial interests in relation thereto.