Company Reports

Shenzhou's first-half operating margin landed below what its own profit warning implied, and second-half guidance points to only marginal relief.

Shenzhou International is the supplier of choice for the world's largest athleticwear and casual wear brands, and it earns some of the strongest growth and margins in its peer group. The edge comes from vertical integration. Shenzhou owns the entire production chain from fabric to finished garment, making it a rare one-stop shop for the apparel giants. That structure compresses lead times, and shorter lead times mean brands get product to shelf faster, selling more at full price. This flows directly to a brand's bottom line, so brands are willing to pay up for it. Shenzhou's fabric-development arm adds a second, more cyclical profit lever that expands when brand innovation cycles accelerate and demand shifts toward novel, higher-value fabrics.

Shenzhou guided that first-half profit will be down about 40% year on year. Roughly 80% of the CNY 1.2 billion decline is from currency movements, with lower government subsidies and operational and tariff-related factors accounting for 10% each. Shares rose 4% in Aug. 10 trading.

Shenzhou International is the supplier of choice for the world's largest athleticwear and casual wear brands, and it earns some of the strongest growth and margins in its peer group. The edge comes from vertical integration. Shenzhou owns the entire production chain from fabric to finished garment, making it a rare one-stop shop for the apparel giants. That structure compresses lead times, and shorter lead times mean brands get product to shelf faster, selling more at full price. This flows directly to a brand's bottom line, so brands are willing to pay up for it. Shenzhou's fabric-development arm adds a second, more cyclical profit lever that expands when brand innovation cycles accelerate and demand shifts toward novel, higher-value fabrics.

Shenzhou International’s tariff burden is set to ease after the US Supreme Court, in February, struck down some US tariffs imposed under emergency powers. This follows a first-half marked by peak reciprocal tariffs, weak global sportswear demand, and sharp Chinese yuan appreciation.

Shenzhou's shares fell more than 10% after the firm reported second-half revenue growth of just 2%, alongside weaker profitability. Management issued guidance for mid-single-digit volume growth in 2026.

We have a strong conviction in Shenzhou’s ability to continue serving as the dominant supplier for global apparel giants. The firm is well-positioned for growth, thanks to the combination of its strong R&D capabilities and entrenched relationships with leading brands. Shenzhou’s business expansion will be driven by: (1) growing demand for sportswear globally, and (2) brands' efforts in consolidating their supplier bases. Efficiency improvements at existing plants and capacity expansions at new plants will enable the company to accept more orders, especially those from fast-growing brands like Lululemon.

We have a strong conviction in Shenzhou’s ability to continue serving as the dominant supplier for global apparel giants. The firm is well-positioned for growth, thanks to the combination of its strong R&D capabilities and entrenched relationships with leading brands. Shenzhou’s business expansion will be driven by: 1) growing demand for sportswear globally; and 2) brands' efforts in consolidating their supplier bases. Efficiency improvements at existing plants and capacity expansions at new plants will enable the company to accept more orders, especially those from fast-growing brands like Lululemon.

We have a strong conviction in Shenzhou’s ability to continue serving as the dominant supplier for global apparel giants. The firm is well-positioned for growth, thanks to the combination of its strong R&D capabilities and entrenched relationships with leading brands. Shenzhou’s business expansion will be driven by: 1) growing demand for sportswear globally; and 2) brands' efforts in consolidating their supplier bases. Efficiency improvements at existing plants and capacity expansions at new plants will enable the company to accept more orders, especially those from fast-growing brands like Lululemon.

Shenzhou International's share price has declined more than 10% following Nike's weak results in China.

Shenzhou International’s first-half 2025 revenue rose 15% year over year, while operating profit increased 5%. Management maintained full-year 2025 production volume growth guidance at 10% and set a high-single-digit growth target for 2026.

With US tariffs on Southeast Asia largely finalized, there is now greater visibility into the financial outlook for Shenzhou International, one of the world’s largest apparel manufacturers.

On April 2, the United States' President Trump announced a reciprocal tariff policy, imposing additional 49% tariffs on Cambodia, 46% on Vietnam, and 34% on China. In response, shares of Shenzhou International fell by 14%, while Asics dropped by 10% during Asian trading.

Shenzhou International posted strong results for the second half of 2024, with 17% year-on-year revenue growth and 29% operating profit growth. Looking ahead, management is guiding 10% revenue growth for 2025, alongside a stable gross margin.

We have a strong conviction in Shenzhou’s ability to continue serving as the dominant supplier for global apparel giants. The firm is well-positioned for growth, thanks to the combination of its strong R&D capabilities and entrenched relationships with leading brands. Shenzhou’s business expansion will be driven by: 1) growing demand for sportswear globally; and 2) brands' efforts in consolidating their supplier bases. Efficiency improvements at existing plants and capacity expansions at new plants will enable the company to accept more orders, especially those from fast-growing brands like Lululemon.

We have a strong conviction in Shenzhou’s ability to continue serving as the dominant supplier for global apparel giants. The firm is well-positioned for growth, thanks to the combination of its strong R&D capabilities and entrenched relationships with leading brands. Shenzhou’s business expansion will be driven by: 1) growing demand for sportswear globally; and 2) brands' efforts in consolidating their supplier bases. Efficiency improvements at existing plants and capacity expansions at new plants will enable the company to accept more orders, especially those from fast-growing brands like Lululemon.

Nike is one of Shenzhou's largest customers, contributing about 30% of its revenue in 2024. During its latest earnings call, Nike's management emphasized prioritizing inventory clearance rather than introducing new products to the market.

We have a strong conviction in Shenzhou’s ability to continue serving as the dominant supplier for global apparel giants. The firm is well-positioned for growth, thanks to the combination of its strong R&D capabilities and entrenched relationships with leading brands. Shenzhou’s business expansion will be driven by: 1) growing demand for sportswear globally; and 2) brands' efforts in further consolidating their supplier bases. Efficiency improvements at existing plants and capacity expansions at new plants will enable the company to accept more orders, especially those from fast-growing brands like Lululemon.

Narrow-moat Shenzhou’s interim results were broadly in line with our expectations, and management maintained its 2024 guidance. We fine-tune our earnings estimates and maintain our HKD 124 fair value estimate unchanged. With shares trading at around 15 times consensus earnings for 2024 versus a historical average of 20-plus times, we think Shenzhou is undervalued.

We expect Shenzhou International to deliver 21% year-over-year revenue growth and 47% net profit growth for the first half of 2024, rebounding from a weak first-half 2023. Despite challenges faced by a key customer, Nike, orders from other clients such as Adidas, Puma, and Uniqlo are anticipated to counterbalance any hits. Additionally, higher capacity utilization rates, nearing 100% at Shenzhou International’s factories, should translate into margin improvements. Therefore, we expect Shenzhou International to clock in a gross margin of 27.8% for the first half of 2024, a significant rise from 22.4% in the corresponding period last year.