The company is a leader in the apparel manufacturing industry, and its business scale has continued to grow over decades. Shenzhou International is the largest vertically integrated knitting manufacturer in Asia. The revenue scale in 2023 reached 25 billion yuan (-10% YoY)/Net Profit of 4.6 billion yuan (basically the same as the previous year). 1) The company is positioned as a high-end apparel manufacturer, facing the global downstream market. The customers are mainly leading domestic and foreign brands, most of which are sports customers. 2) At the end of 2023, the company had more than 90,000 employees, producing more than 200,000 knitted fabrics and about 500 million pieces of knitted garments per year. In recent years, it has added woven fabric products and further improved the category layout.
Short-term: Fundamental improvement trends are clear, orders are growing rapidly, and factory recruitment is resumed. 1) Orders: The inventory cycle drives an improvement in customer order demand. 2024Q1 apparel manufacturing companies generally showed good year-on-year growth under a low base. As a leading apparel manufacturer, the company is basically in line with industry trends. We judge that since 2024, the company's shipments have grown rapidly year on year. It is estimated that orders from core customers such as PUMA/adidas and domestic brands are expected to grow healthily and rapidly in 2024, and Nike customer orders are expected to increase steadily year over year. 2) Production capacity: We estimate that the capacity utilization rate of the company's overseas/domestic bases will basically reach 100% since 2024Q1, which is expected to drive a gradual increase in gross margin in the future. We have followed up and judged that the company's recruitment plan after the Spring Festival is progressing smoothly. Capacity expansion+year-on-year increase in utilization is expected to drive the company's production increase of 10% to 20% year-on-year in 2024.
Medium to long-term: Strengthen the competitive advantage of the integrated and international industrial chain, optimize the industry pattern, and continue to benefit leaders.
The global economic and trade environment is complex and changing, and brands' demand for quick response in the supply chain is increasing. Horizontal internationalization and vertical integration of industrial chains are still the fundamental competitive advantage of manufacturers. 1) The company deployed overseas production capacity earlier, and the share of overseas production capacity continued to increase. In 2023, the company's domestic/Vietnam/Cambodia base contributed about 47%/27%/26% of garment output, respectively, and -7pct/+3pct/+4pct, respectively. ① Domestic production capacity is mainly supplied to overseas markets in China and Asia. The scale is estimated to be stable in the medium to long term and digital construction will be strengthened; ② The overseas scale will continue to expand, and the share of future contributions is expected to continue to increase, consolidating cost advantages and meeting the medium- to long-term needs of overseas core customers. 2) Promote the construction of an integrated industrial chain and form deep customer bonds with fabric and product development and quick reaction capabilities, such as co-developing the functional fabric Airism with Uniqlo and TechFleece fabrics and product lines with NIKE. 3) The streamlining of upstream suppliers by leading brands is a medium- to long-term trend, driving the optimization of the competitive landscape. The share of core customer Adidas, domestic and segmented track customers occupied by medium- and long-term companies is expected to continue to rise.
Profit forecast: Rapid performance growth in 2024 is highly certain. 1) Considering the clear improvement trend of industry and company orders since 2024, we estimate that the company's revenue is expected to reach 289.2/328.4/36.68 billion yuan in 2024-2026, up 15.8%/13.6%/11.7%, respectively. 2) The year-on-year improvement in capacity utilization is expected to drive a gradual increase in the company's gross margin within 2024. 3) Assuming that the exchange rate is neutral and net interest income is basically the same year on year in 2024, we comprehensively expect the company's net profit for 2024-2026 to be 56.0/64.3/7.25 billion yuan, respectively, up 23%/15%/13% year on year. 4) Considering the rapid growth of the company's revenue and performance in 2024, we judge that there is still room for improvement in the current valuation.
Investment advice: We expect the company's net profit from 2024 to 2026 to be 56.0/64.3/7.25 billion yuan, respectively, which is 20 times PE in 2024; we believe that the company's corresponding reasonable PE is about 25 times, and the corresponding space is 20% to 25%, maintaining a “buy” rating.
Risk warning: risk of large customer order fluctuations; risk of new customer expansion falling short of expectations; risk of overseas production capacity expansion falling short of expectations; risk of foreign exchange fluctuation.