Morningstar

Morningstar, Inc.

Equity Bottom-Up

Despite the fact that narrow-moat Shenzhou continues to explore expansion opportunities, the apparel manufacturer remains overvalued. We maintain our fair value estimate for the firm at HKD 76, implying a 2018 P/E ratio of 21 times.
Analyst: Ivan Su

Shenzhou’s net profit narrowly missed forecast as result of currency headwind in the first half of 2018. The company’s outlook is within our expectations, with business expansion mainly driven by sales volume growth of 15%. However, 4% setback in average selling price (ASP) as a result of a strong CNY during the first half brings total revenue growth to 11% for the period. We are maintaining our HKD 76 fair value estimate on Shenzhou and view company shares as overvalued at current levels.
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No-moat Shenzhou’s first-half revenue and profit before tax were both 47% of our full-year estimates, generally in line with historical seasonality. We are encouraged by the fact the group started paying interim dividends for the first time this year. The interim dividend was HKD 0.70 or CNY 0.61 per share. We think this may signal a higher recurring dividend payout ratio instead of the combination of special and recurring dividend that it has used in the past. Gross profit margin in the second…

No-moat-rated Shenzhou’s revenue and net profit for 2016 met our estimate. Our fair value estimate has been raised to HKD 52.00 per share from HKD 48.00 per share mainly due to the introduction of our 2021 forecasts. The shares continue to be fairly valued in our view. We have already incorporated an optimistic, yet reasonable, 13% five-year revenue CAGR and expansion of operating margin excluding charges from 23.7% in 2016 to 27.1% in 2021. 
The group is dedicated to adding value to customers…

Dr. Andrew Stotz, CFA

A. Stotz Investment Research

<ul>
<li>Low correlation with Western stock markets, share price is less volatile, and low correlation to the Hong Kong market relative to its sector</li>
<li>ShenInt orders are secured by the growing demand from its long-term clients, representing sports and casual apparel brands such as Uniqlo, Adidas, Nike and Puma</li>
<li>Constant automation and operational development improved efficiency and boosted operating profit margin to the record high of 27% in 1H16</li>
<li>Trades at an attractive 16CE* 0.9 PEG ratio versus Asian…</li>
</ul>

China

Shenzhou International Group Holdings Ltd manufactures and processes textiles.  The Company produces, dyes, finishes, prints, embroiders, cuts, and sews knitwear.

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