What Is The Current Situation Of Shenzhou International OEM Business?

The net income of income / mother is increased by 8.2%/12.2%. Shenzhou International (02313) income in 2019 was 22 billion 665 million yuan, an increase of 8.2%, OEM revenue increased by 10.1%, net profit 5 billion 95 million yuan, increased by 12.2%, excluding retail business losses, OEM revenue increased by 14.1%. Gross profit margin decreased slightly from 1.3PCT to 30.3%, mainly in contraction of retail business. The management fee rate dropped by 0.08PCT to 6.84%, and the sales expense rate decreased by 1.71PCT to 1.68%, mainly due to retail outlets, and the net interest rate increased by 0.81PCT to 22.5% in 2019.

(Shenzhou International Official Website screenshot)

Endogenous efficiency is enhanced and the growth of Yue / Cambodian productivity drives the steady growth of output. (1) in terms of capacity growth, the ODM business output increased by 7% in 2019, the unit price increased by nearly 3%, and the overall efficiency of the company increased by about 4% (of which, overseas factories increased by about 10%, and domestic promotion by about 3%). In 2019, overseas production capacity expanded smoothly and Vietnamese garment factories went into operation during the year. Overseas fabric production capacity now accounts for 45%+ of total capacity. (2) from the perspective of customers, the top four customers accounted for 82.8% (up 5.3PCT), while Nike / Adidas / UNIQLO / Puma grew by 8.3%/26.2%/16.3%/15.9%, accounting for 29.9%/22.2%/19.9%/10.8%. Domestic customers (Anta / Lining / XTEP) account for about 5%. (3) according to the category, sports category increased by 14.3%, accounting for 72%. The market demand of China and the United States increased, and leisure / underwear / other categories changed by 4.3%/-39.5%/-14.8% compared with the same period last year, accounting for 23.8%/3.5%/0.7%. (4) from the perspective of regions, domestic / EU / Japan / US / other regions have increased 13.2%/2.5%/9.5%/6.8%/6.0%, and domestic share has increased to 31.5%.

Short term public health shocks, stable supply chain is expected to bring 2020 stable income throughout the year. Affected by public health events, the global apparel industry chain has been impacted, and the overseas factories have been functioning normally. Domestic factories have resumed work in a timely manner and their capacity has been less affected. In 2020, the company's capacity release cycle was expected to exceed 10%. At the order level, we believe that the demand for quick response from suppliers to the leading brands will be higher in the future. Shenzhou International is a leader in its stable production and short term competitiveness, and the order is expected to be concentrated. We expect that the order of 2020H1 company will remain normal. The adjustment of 2020H2 order can be made up by some domestic customer orders, and the annual revenue is expected to increase steadily.

Investment advice. It is predicted that net profit from FY2020~FY2022 will be 53.66/62.78/74.23 billion yuan, increasing by 5.3%/17.0%/18.2%. The company's current price is 73.15 Hong Kong dollars, the market value is 110 billion 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 bind the quality customers in the downstream boom industry. The short-term impact will not affect our long-term judgement of the company. In the long run, with the increase of overseas capacity and production efficiency, it is expected to achieve steady growth in performance. Maintain "buy" rating.

Risk warning: the time and scope of public health events impact on the company's business more than expected; downstream customer orders fluctuations affect the company's operating income; overseas capacity expansion is less than expected, changes in the trade environment affect the profitability level; cotton price volatility risk; foreign exchange volatility risk.