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Shen Zhou'S Total Capacity To Cope With The Epidemic Has Resumed 95%

2020/3/16 12:13:00 2

Shenzhou International

Investment focus

We believe that the market panic amplifies the short-term impact of Shenzhou International (02313) business, and the long-term competitiveness of the company will become more prominent in the face of challenges. The current stock price adjustment makes its valuation attractive, providing a historic opportunity for long-term investment.

Actively respond to health events, in late February, the overall capacity has been restored to 95%+. The company's domestic plant was reactivated in February 10, 2020 (January seventeen), one of the first batch of enterprises to reopen in Zhejiang Province, and the recovery rate was over 40% on that day. Overseas Vietnam and Kampuchea factories are not affected by health incidents, and production activities have been carried out normally. In February 25th, the group's domestic factories have resumed recruitment. As of February 28th, Shenzhou group's overall capacity has reached 95% of the original normal capacity.

Shenzhou complete production chain, comprehensive layout of production capacity, customer orders are expected to focus. 1) the company has vertical integration production chain, saving logistics transportation and order connection time, and ensuring stable delivery time. 2) both inside and outside the country have capacity layout, fabric production capacity, we estimate that overseas capacity accounts for 45%, and garments overseas capacity is estimated to be 30%+. In the outbreak stage of health events, the company's overseas capacity has been carried out normally, and the domestic capacity has also been restored to a large extent and the supply is stable. 3) the company's short-term orders are stable. It is expected that the 2020H1 order production and transactions will be carried out normally and the long-term orders will cooperate with customers.

With long-term core competitiveness, the gradual expansion of capacity brings steady business growth. The company integrates R & D and comprehensive production management capabilities, and creates a modular production mode to improve production efficiency through high investment in equipment (annual capital expenditure accounts for more than 30% of net profit). Pay attention to employee welfare management, employee costs account for more than 20% of revenue, production team is stable, monthly turnover level is only about 5%. In addition, we believe that with the change of global terminal consumer demand, the leading brands will have a higher demand for quick response to suppliers in the future, and the stability of production will be challenged during the health incidents of small and medium-sized manufacturing enterprises. Shenzhou International will play a leading role in its stable production and short delivery time, and the order is expected to be concentrated. In the period of 2019~2020, construction capacity is expected to increase by about 10%. In 2021, the new plant began to speed up the release of production capacity. With the expansion of the company's capacity, business revenue can still grow steadily.

Investment advice. We judged that the order had not changed in the first half of the year, and the initial production end had little effect. In the second half of the year, due to the stability of its supply chain and the influence of domestic standby customers, the impact is also expected to be buffered. In view of this, we maintain the original performance forecast, predict that the net profit in FY2019~FY2021 is 52.59/61.38/72.30 billion yuan, the same as increasing 15.8%/16.7%/17.8%. The company's current price is 84.05 Hong Kong dollars, the market value is 126 billion 300 million Hong Kong dollars, corresponding to 2020/2021 PE is 17/14 times. As the largest vertical integrated garment manufacturer in the world, the company is a high quality customer with high productivity in the downstream industry. With the increase of overseas capacity and production efficiency, the company is expected to achieve steady growth in performance. Maintain "buy" rating.

Risk warning: the impact time and scope of health events are more than expected to adversely affect the company's business; downstream customer orders fluctuation affects company revenue; overseas capacity expansion is less than expected; trade environment changes affect profitability; cotton price fluctuation risk; foreign exchange fluctuation risk.

Preface

Shenzhou International stock price has been substantially adjusted in recent years due to worries over global economic growth and consumer demand and the sharp fluctuations in overseas financial markets. We believe that the panic in the market has magnified the short term impact of the company's business and the long-term competitiveness of the company will become more prominent in the face of challenges. 。 We have always been optimistic about the long-term investment value of Shenzhou International. At present, the adjustment of stock price makes its valuation attractive, providing a historic opportunity for long-term investment.

1. Why do we think the short-term impact of the company is less than market expectations?

We believe that the short-term business development of the company is still proceeding smoothly, and its impact is much smaller than the market expectation. The market concerns are mainly concentrated on 1) the production and expansion of the company's work are affected by health events; 2) the impact of health incidents on the global consumer market has led to fluctuations in the company's orders, especially the change in the order of major customers, resulting in a decline in the utilization of the company's capacity. Our view is that based on the company's positive response to health events and the close customer relationship brought about by the integrated and stable supply chain system, the current market worries have magnified the short-term impact of the company's business.

Domestic reemployment was rapid and overseas production was not affected. The company's domestic plant was reactivated in February 10, 2020 (January seventeen), one of the first batch of enterprises to reopen in Zhejiang Province, and the recovery rate was over 40% on that day. Overseas Vietnam and Kampuchea factories are not affected by health incidents, and production activities have been carried out normally. In February 25, 2020, the group's domestic factories have resumed recruitment, and by February 28th, the total capacity of Shenzhou group has reached 95% of the original capacity.

We believe that short-term health events test suppliers' production capacity and customer orders are expected to focus on Shenzhou international leading companies.

At present, the brand chamber of Commerce chooses the stable supplier of the supply chain to ensure the procurement, and the industrial chain stability of Shenzhou is unique. 1) Shenzhou International has a vertical production chain integrated with R & D design, weaving, dyeing and finishing, printing and embroidery, tailoring and sewing. It saves middle logistics transportation and order connection time, plus higher automation level, which makes the delivery time of the company shorter. 2) the company has five major production bases in the world, with domestic capacity in Ningbo, Anqing and Quzhou, and overseas in Kampuchea and Vietnam. Among them, fabric production capacity is estimated to be 55% in China, 45% overseas, and over 30% of garment production capacity abroad. In the outbreak stage of health events, the company's overseas capacity has been carried out normally, and the domestic capacity has also been restored to a large extent and the supply is stable.

At present, the company's short-term orders are stable. We expect that there will be no hack situation in 2020H1, and important customers and companies have been working together for a long time. The order is expected to be further concentrated. The company is stable with the important customers PUMA, Nike, UNIQLO and Adidas. It is the most important supplier for the customers, and the product quality and delivery time are stable. The customers will not adjust the long-term orders with Shenzhou. In the stage of industry fluctuation, brand associations pay more attention to supplier quality and strengthen cooperation with quality suppliers. We estimate that the proportion of clothing orders that the company currently accounts for PUMA/ Nike / Adidas is about 40%/17-18%/15%, and the future proportion is expected to increase.

The growth of past orders is larger than that of capacity growth. The continuous growth of domestic customer orders can slow down the fluctuation of international orders. From the company's past capacity utilization rate, the company's order demand growth is obviously higher than the speed of capacity expansion, so the company has stronger voice in the process of cooperation with customers. The sales of the company's products in the international / domestic market are about 70%/30%, and the customers are mainly international customers. The proportion of domestic customers' orders is small. At present, the cooperation intention between our domestic customers and Shenzhou is stronger. If the short-term orders fluctuate in the international market, we can judge that the company can also coordinate the international / domestic customers to avoid the problem of the decline in productivity and interest rates.

2, why the long-term competitiveness of the company can not be shaken, and will become more prominent?

In the long term, we think: 1) the company has the capability of R & D and comprehensive production management, and has an integrated industrial chain and the perfect layout of production capacity at home and abroad, attracting high-quality customers with long-term stable cooperation, forming a difficult competitive barrier.

R & D level: 1) the company positioned itself as an overseas middle and high-end fabric. Since its inception, it has firmly invested in equipment and technology to build production strength. Through the high input of equipment (annual capital expenditure accounts for more than 30% of net profit ratio), modular production mode has been built to improve production efficiency (intelligent storage fabric daily throughput of 12 million tons). 2) the company attaches great importance to fabric R & D, sweaty / breathable / functional fabric Airism developed jointly with UNIQLO, and lightweight / thermal / breathable fabrics TechFleece and knitted vamp developed jointly with NIKE.

In terms of production management, we attach importance to employee welfare management, employee costs account for more than 20% of revenue, and production teams are stable. The average monthly turnover rate dropped from 6.68% in 2012 to 4.33% in 2018. The self-contained management system can be copied directly in overseas factories, and the climbing period is faster.

Industrial chain layout: the company's vertical production chain integrating R & D design, weaving and dyeing, cutting and sewing can guarantee quality and delivery time. And looking forward to the layout of Southeast Asian capacity, enjoy preferential trade policies, and the company to build special factories for NIKE and ADIDAS, and form long-term stable cooperation. The growth of downstream quality customer performance has led to the growth of the company's orders, while the trend of streamlining suppliers has benefited the supplier of the head.

In addition, we believe that with the change of global terminal consumer demand, the leading brands will have a higher demand for quick response to suppliers in the future. The supply chain needs timely adjustment of orders and quick turnover according to the needs of brands. On the other hand, the stability of small and medium sized manufacturing enterprises during this health event is challenged. Short term competitiveness is highlighted, and orders are expected to be concentrated.

We believe that business revenue will continue to grow steadily in the long run as the company expands its capacity. In the period of 2019~2020, construction capacity is expected to increase by about 10%. In 2021, the new plant began to release capacity.

3, how to view the valuation center of a company?

Shenzhou International has been listed on the three level since its listing in 2006, rising from the valuation level of about 10 times at the beginning of the listing to the current valuation level of about 30 times. The valuation premium comes from the global leading position of the company through the globalization layout, vertical integration and focusing on the head customers.

The general processing stage (PE 5~10 times): enjoy the valuation of the general processing manufacturers, and increase the power of the valuation from the leading layout of overseas capacity, while cutting into the high fashion sports shoes and clothing industry. Although the company's valuation level declined in 2008 during the financial crisis, the industry crisis promoted the integration of the industry to the leading companies. In 2009, the company's orders gradually resumed, the income / net profit increased by 25%+/70%+, and the valuation was quickly repaired.

Advantage supplier stage (PE 10~20 times): enjoy high quality supplier valuation, upgrading power from core customer cooperation deepening and global layout landing. Since 2013, the cooperation between the company and its core customers has been deepened. The contribution rate of NIKE sales revenue has increased from 18.3% in 2013 to 24.8% in 2015. At the same time, the company's globalized layout continues to push up the valuation level of the company. In 2013, when the Kampuchea fabric factory was put into operation, the capacity bottleneck was released, and the design and research, production capacity and other aspects were recognized by the market. The company's valuation level increased to 16 times. In 2015, the company continued to invest and build factories in Vietnam, and the valuation level was further enhanced.

The leading stage of global manufacturing (PE 20~30 times): enjoy the high valuation premium level of leading manufacturers of globalization, and at the same time, the overseas orders caused by trade wars are fragmented to enhance the valuation of companies. In 2016, the company became the largest apparel supplier of NIKE, ADIDAS, UNIQLO and PUMA respectively. Strong fabric research and development capabilities, vertically integrated production and so on continue to enhance Shenzhou international bargaining power in the industry, have the ability to screen high-quality orders, and continuously improve market share. The growth rate is stable at 20%~30%, and the valuation level has a leading valuation premium. Since 2018, the Sino US trade war has lifted import and export tariffs, and the company has raised its valuation level to 30 times by solving the overseas orders with the global layout.

Investment suggestion

As we mentioned before: we judge that the order has not changed in the first half of the year, and the early production end has little effect, and it is expected to make up for the optimization through 3 and April. In the second half of the year, due to the stability of its supply chain and the existence of domestic alternate customers, the impact is also expected to slow down. In view of this, we maintain the original performance forecast, predict that the net profit in FY2019~FY2021 is 52.59/61.38/72.30 billion yuan, the same as increasing 15.8%/16.7%/17.8%. The company's current price is 84.05 Hong Kong dollars, the market value is 126 billion 300 million Hong Kong dollars, corresponding to 2020/2021 PE is 17/14 times. As the largest vertical integrated garment manufacturer in the world, the company will be able to bind the quality customers in the downstream boom industry and master the strength of technology research and development. In the future, with the increase of overseas production capacity and production efficiency, the company is expected to achieve steady growth in performance. Maintain "buy" rating.

Risk warning

The impact time and scope of health events are more than expected, which will adversely affect the company's business. The spread of health events in the world is likely to bring adverse effects to the company, such as factories failing to start normal work, shrinking downstream demand and changing customer orders.

Fluctuations in downstream customer orders affect company revenue. Company customer concentration is high, if downstream customer orders fluctuations will directly affect the company's revenue level.

Overseas capacity expansion is less than expected, and changes in the trade environment will affect profitability. The company is a productivity driven company, and its capacity is mainly expanded in Southeast Asia. If capacity expansion is not as good as expected, it will directly affect the company's order. At the same time, the Southeast Asian factory enjoys preferential tax policies. If the trade environment / tax policy changes, it will affect the company's profitability.

Source: Ju pin fashion

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