Business Summary:

Shenzhou International is the largest vertically integrated high-end 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 headquarters manufacturing location is located at Ningbo Economic and Technical Development Zone, Ningbo City at Zhejiang Province; with representative office in Shanghai and Hong Kong. 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 and PUMPA. Product market extends gradually from Japan to other Asia Pacific district and Europe/US market.

The scale of overseas production capacities will be kept expanding amid pandemic.  The first phase of construction of the new Cambodian factory was completed and scheduled to commence operations in third quarter of 2020. Broker investment firm reiterated at buy on bullish view for long-term higher market share as some small peer small firms have left the market or halted production during pandemic. In particular, Nike reported a first quarter net income and revenue beat, helped by a double-digit growth in China under digital channel recovery. Overall, consumer demand would only be temporarily affected by pandemic and the market would eventually see a rebound.

Financial Summary:

As of the interim results for the year ended 30 June 2020, sales revenue decreased 0.4% to RMB 10.23 billion when compared with the corresponding period of 2019. Gross profit amounted to RMB 3.16 billion; a decrease of 0.5%. Gross profit margin was 30.9% which remained the same. Net profit rose 4.0% yearly to RMB 2.51 billion. Earning per share equaled RMB 1.67, representing an increase of 3.7% from RMB 1.61 for the corresponding period last year. An interim dividend of HK$0.9 per share was issued, which remained the same.

Percentage of sports wear products, casual wear products, and lingerie wear products to total sales was approximately 73.4%, 18.7% and 6.1% respectively. Revenue sales of sportswear product and lingerie wear products increased by 2.0% and 35.7% respectively whereas those of causal wear products decreased by 19.2%; when compared with the corresponding period of the previous year.

Since the year of 2018, China (28.0% sales) has become the largest customer for the group by region, followed by Japan (19.0%), Europe (18.7%) and United States of America (14.1%).

As of 31 December 2019, the cash and cash equivalent valued RMB 5.98B, and the enterprise equity amounted to RMB 26.40.  Bank loan remaining amount valued RMB 3.21B, and the ratio of debt to equity was 25.6%.

Business risk include:

 (a) different level of imported tax levied

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

(c) increasing standard requirements of environmental aspects;

(d) rate of RMB currency increases

Technical Analysis:

It is suggested that buying price is $124. The target price will be $136, and cut loss level is set at $117.

References

Company Interim Report 2020

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.