Shenzhou International: A global leader in knitting manufacturing, excellent quality sets an industry benchmark. Since its establishment in Ningbo, Zhejiang in March 1990, Shenzhou International has been one of the world's largest vertically integrated knitwear manufacturers for more than 30 years. It mainly produces knitted sports goods, casual wear and underwear. In 2023, we achieved operating income of 24.97 billion yuan, -10.12% YoY, and net profit to mother 4.557 billion yuan, or -0.12% YoY.

In 2023, the four major customers, NIKE, ADIDAS, UNIQLO and PUMA, accounted for 79.6% of the Group's annual revenue.

Industry trends: Brand-side concentration is increasing, and suppliers are gathering at the top. 1) The textile manufacturing industry has gone through four industrial chain transfers. 2) Garment manufacturing has long slopes and heavy snow, and the market size space is considerable. In 2009-2023, the global footwear market grew from $1.44 trillion to $1.82 trillion, with a CAGR of 1.7%. 3) The Matthew effect on sports shoes and clothing is remarkable, and the supplier's focus has been promoted as a development trend. In 2023, the top five global sports footwear brands were Nike, Adidas, Puma, Skechers, and Lululemon. Among them, Nike had the highest market share of 15.8%, followed by Adidas at 8.2%. The streamlining and centralization of the number of leading brand suppliers is a trend in the industry. 4) The concentration of the garment manufacturing industry is low, and there is still a lot of room for improvement. Major domestic textile and apparel manufacturers have a low global market share. As the sports brand market shows a trend of stronger players, leading sports brands are expected to continue to expand their market share with advantages such as strong brand influence, extensive market channels, and continuous product innovation.

Strong innovative research and development+integrated layout+pioneering global layout, leading the industry. 1) Strong independent R&D and innovation capabilities, high product technical barriers. The core management team has been deeply involved in the textile industry for many years and has rich experience. The R&D personnel have strong development and design capabilities; strong fabric development capabilities and outstanding independent research and development capabilities for new products; actively explore various new technologies, new materials and new process applications to carry out new product development and lean production; digitize and automate clothing, establish innovation centers, and increase investment in scientific and technological research and development. 2) Vertical integration layout, production and delivery with high quality and quantity. Select high-quality raw material suppliers to control source quality; establish a supplier management platform to jointly create an enterprise IoT environment with supplier partners; the vertical integration model effectively shortens the production and delivery cycle and is favored by brands; through the vertical integration layout model, the company is superior to peers in cost control. 3) Forward-looking layout of leading brands, stable and in-depth cooperation. The company has established a mid-to-high-end position for maternal and child clothing foundry, using this as an opportunity to open up the Japanese casual wear market, obtain high-quality orders from brands, seize the growth momentum of sportswear with a forward-looking layout during the industry's dividend period, and reach in-depth cooperation with leading sports brands.

Future highlights: Looking at cooperative brand drivers in the short term, increasing market share and expanding orders in the medium to long term. 1) Short-term focus: Core customers drive high revenue growth. 2) Medium- to long-term perspective: Under the trend of increasing industry concentration, the company's share is expected to increase. Leading brands form stable cooperative relationships with suppliers, and the market share of core suppliers is more concentrated. According to our estimates, the company's overall internal share of major customers continues to increase. As the concentration of industry suppliers increases, we expect that there is still room for improvement in the company's market share. Furthermore, the company has strong overall competitiveness and continues to cooperate with diverse new brands to further drive the company forward. In terms of new brand customers, Shenzhou International has successfully taken orders from many well-known brands, such as the Anta brand FILA (FILA), and has established cooperative relationships with new customers such as POLO (RALPHLAUREN), Lululemon, and Lacoste (French crocodile). As new cooperative customers deepen, order growth is promising for a long time.

Investment advice: As a global leader in knitting manufacturing, the company has maintained a leading position with strong innovative research and development+integrated layout+pioneering global layout, and has momentum for upward growth. We expect the company's net profit to be 5.701, 6.53, and 7.41 billion yuan respectively in 2024-2026, +25.1%, +14.5%, and +13.5%, respectively. The PE corresponding to the closing price on December 26 is 15x, 13x, and 12x, respectively, covered for the first time, giving it a “recommended” rating.

Risk warning: International trade risks, rising labor costs, risk of terminal demand falling short of expectations.