20131007-巴黎银行证券-SHENZHOU_INTERNATIONAL_BUY_22页_835kb

SHENZHOU INTERNATIONAL (2313 HK) Summary

Core Content

Shenzhen International is a leading integrated apparel ODM/OEM company in Asia, known for its comprehensive manufacturing capabilities and strong relationships with international clients. The company is the largest knitwear exporter in China and has a diversified market presence across Japan, the US, Europe, and other regions. The report initiates coverage with a BUY rating and a target price of HKD31.6, based on a DCF model.

Main Points

• Integrated Manufacturing: Shenzhen offers a full range of services from fabric development to garment production, which allows for efficient operations, quality control, and competitive pricing.
• R&D Capabilities: The company has a strong R&D focus on multi-functional fabrics, enabling it to develop innovative products for clients such as Uniqlo.
• Capacity Expansion: Shenzhen is expanding its production capacity in Anqing, Cambodia, and Vietnam, aiming to increase volume and improve cost competitiveness.
• Market Diversification: The company has significantly reduced its reliance on domestic brands and increased exposure to international markets, particularly Japan and the US, which are expected to provide more stable growth.
• High Margins and Strong Balance Sheet: Despite higher labor and cotton costs, Shenzhen maintains superior gross and operating margins compared to its peers, supported by its scale and efficiency.

Key Information

Financial Highlights

Investment Thesis

• Target Price: HKD31.6, based on a DCF model with a WACC of 12.2% and a terminal growth rate of 3%.
• Valuation: At the target price, the stock would trade at 18.8x 2013E P/E and 15.9x 2014E P/E.
• Growth Projections:
  • Sales growth: 11.5% in 2013, 17.3% in 2014
  • Net income growth: 12.9% in 2013, 19.7% in 2014

Catalysts for Growth

• Capacity expansion in Anqing, Cambodia, and Vietnam
• Rising shipments and improved average selling prices (ASP)
• Stabilizing raw material prices
• Operating leverage
• Changes in China's cotton subsidy programme

Risks to Consider

• Slower-than-expected order inflow
• Higher-than-assumed costs related to raw materials and labor
• Weakening global economic growth and reduced apparel spending

Company Background

• Location: Mainly based in China (Ningbo, Quzhou, Anqing) with expansion into Cambodia (2005) and Vietnam (2013)
• Product Range: Initially focused on casual wear, now expanding into sportswear and lingerie
• Major Clients: Fast Retailing, Adidas, Nike, Puma, and others
• Ownership: 60% owned by the Ma Family
• Market Exposure:
  • Japan: 33.6% (1H13)
  • China: 19.5% (1H13)
  • Europe: 17.0% (1H13)
  • US: 8.1% (1H13)
  • Other countries: 19.5% (1H13)

Competitive Position

• Strengths:

  • Integrated business model from fabric to garment
  • Strong R&D in functional fabrics
  • Economies of scale and continuous efficiency improvements
  • Diversified market exposure
  • Long-term relationships with key clients

• Weaknesses:

  • High exposure to China production and rising labor costs
  • Higher cotton costs compared to non-Chinese manufacturers
  • Vulnerability to raw material price fluctuations

• Opportunities:

  • Diversification into other Southeast Asian markets
  • Potential changes in China's cotton subsidy program
  • Expansion into new client bases

• Threats:

  • Currency volatility
  • Rising costs in Southeast Asia
  • Changing consumer preferences and market conditions

Valuation Comparison with Peers

Shenzhen is currently trading at 11.8x 2013E P/E and 10.1x 2014E P/E, which is lower than the average for its peers, suggesting potential undervaluation.

Conclusion

Shenzhen International is positioned as a strong player in the apparel manufacturing sector due to its integrated business model, R&D capabilities, and geographical diversification. The company's focus on cost competitiveness and high-margin product lines supports its long-term growth potential. With a BUY rating and a target price of HKD31.6, the report highlights the company's ability to outperform its peers through strategic expansion and operational efficiency. However, potential risks include slower order inflow, cost pressures, and global economic conditions.