20160321-法国巴黎银行-申洲国际-02313.HK-Positive_developments_11页_431kb

SHENZHOU INT'L GROUP (2313 HK) Summary

Core Content

Shenzhen Int'l Group is a leading Asian integrated apparel ODM/OEM company and the largest knitwear exporter in China. The company has expanded its production base to Cambodia (2005) and Vietnam (2013), and has diversified its product range to include sportswear, casual wear, lingerie, and other knitting products. Its major clients include Fast Retailing, Adidas, Nike, and Puma.

Main Points

• Financial Performance (FY15):

  • Revenue increased by 13.5% to RMB12,639 million.
  • Net profit rose by 13.9% to RMB2,355 million.
  • Gross margin reached 30.45%, exceeding expectations by 1.1ppt due to product mix enhancement and lower procurement costs.
  • Operating margin was 23.63%, up from 22.22% in the previous year.

• Positive Developments:

  • Nike Overtake: Nike became Shenzhen's top customer, accounting for 30% of total sales in FY15.
  • Vietnam Expansion: The Vietnam fabric plant is on track, with Phase I and II completed and Phase III started. It aims for 200 tonnes per day production by end-2016. The garment factory is expected to employ 5,000 workers by end-2015.
  • Growth Potential: The company is expected to benefit from lower labor and logistic costs, tax benefits, and access to cheaper international cotton, with potential new client recruitment.

• Investment Recommendation:

  • Reiterated BUY: The recommendation is based on the positive developments and favorable operating environment.
  • Target Price: HKD48.00 (up from HKD47.72), based on 20x FY16E P/E.
  • Valuation Metrics:
    • Recurring P/E: 18.2x (2016E), 15.4x (2017E), 13.5x (2018E).
    • EV/EBITDA: 12.1x (2016E), 10.2x (2017E), 8.9x (2018E).
    • Price/book: 3.2x (2016E), 2.9x (2017E), 2.6x (2018E).

• Key Assumptions for Future Growth:

  • Increase in total sales volume: 13% (2016E), 12% (2017E), 11% (2018E).
  • Increase in blended ASP: 2% (2016E), 4% (2017E), 3% (2018E).

Key Financial Data

Revenue Breakdown

• Sports Wear: 63.5% of total revenue (RMB8,028 million in 2015).
• Casual Wear: 27.5% of total revenue (RMB3,476 million in 2015).
• Lingerie: 8.1% of total revenue (RMB1,022 million in 2015).
• Other Knitting Products: 0.9% of total revenue (RMB113 million in 2015).

Risk Factors

• Concentration Risk: Heavy reliance on four key customers (Nike, Adidas, Puma, and Uniqlo) may pose a risk if their performance weakens.
• Raw Material Prices: Drastic increases in raw material prices could impact profitability.
• ASP Growth: Lower-than-expected ASP growth may affect gross margins.
• JPY Depreciation: Could impact earnings from Japanese clients.
• Capacity Growth: Slower-than-expected capacity growth in Vietnam may limit growth potential.

Catalysts

• Vietnam Plant Ramp-up: Faster-than-expected production increase from the new Vietnam factory could improve operational efficiency and margins.

Company Background

• Shenzhen International is a leading Asian integrated apparel ODM/OEM company.
• It has a strong product innovation capacity, creating customer stickiness.
• The company has a vertically integrated business model, which contributes to its competitive advantage.

Key Executives

Financial Strength

• Net Debt/Equity: 3.3% (2016E), decreasing to (1.3)% (2017E) and (6.2)% (2018E).
• Current Ratio: 5.7x (2016E), 5.8x (2017E), 6.1x (2018E).
• Operating ROIC: 21.5% (2016E), 24.3% (2017E), 25.9% (2018E).
• ROE: 20.2% (2016E), 21.3% (2017E), 21.6% (2018E).

Dividend Policy

• Final Dividend: HKD1.07 per ordinary share in FY15, with a special dividend of HKD0.35.
• Dividend Yield: 3.1% (2016E), 3.7% (2017E), 4.2% (2018E).
• Dividend Payout Ratio: 57.2% (2016E), consistent with previous years.

Valuation Summary

• Recurring P/E (x): 18.2x (2016E), 15.4x (2017E), 13.5x (2018E).
• Reported P/E (x): 17.0x (2016E), 14.4x (2017E), 12.6x (2018E).
• EV/EBITDA (x): 12.1x (2016E), 10.2x (2017E), 8.9x (2018E).
• Price/Book (x): 3.2x (2016E), 2.9x (2017E), 2.6x (2018E).
• Price/Tangible Book (x): 3.5x (2016E), 3.1x (2017E), 2.7x (2018E).
• PEG: 1.2x (2016E), slightly above the average PEG of 1.1x for peers.

Market Outlook

• The stock has shown positive re-rating since 2011, and the re-rating is expected to continue with the completion of Vietnam plants.
• Strong order book growth from sportswear and Nike's Flyknit® is anticipated.
• Shenzhen's proven value creation model and product innovation are expected to drive sustainable earnings growth.

Investment Thesis

• Shenzhen is viewed as a quality OEM with strong product innovation capacity and customer stickiness.
• The Vietnam plant is a strategic move that will benefit from lower costs and tax advantages.
• The company is expected to maintain and improve its margins and operating performance due to the growing contribution of higher-margin Flyknit® and improved operational leverage.

Conclusion

Shenzhen Int'l Group is a well-positioned player in the apparel manufacturing sector with strong growth potential. The company's expansion into Vietnam, diversification of product lines, and strong relationships with key clients support its positive outlook. The reiteration of the BUY recommendation and the updated target price reflect confidence in its future performance and valuation. However, the company faces risks related to customer concentration and potential increases in raw material prices.