The Zhitong Finance App learned that CICC released a research report stating that it maintains the Shenzhou International (02313) “outperforming the industry” rating, and that the 2023 results are in line with this forecast; however, considering the pace of brand order placement, the 2024 EPS forecast was lowered by 4% to 3.64 yuan, and the 2025 EPS forecast was introduced. The valuation was switched to 2024, and the target price was lowered by 12% to HK$81.77, taking into account the decline in the industry's valuation center. In the short term, the capacity utilization rate of both domestic and overseas factories in Shenzhou has returned to 100%. Management said that orders have been received relatively well since this year, and it is expected that there will be great opportunities for growth in the number of employees and efficiency in 2024.

The main views of CICC are as follows:

The decline in Europe, America, and sports dragged down the company's revenue, and the share of domestic brands continued to rise.

In 2023, the company's revenue also fell 10% to 25 billion yuan. Among them, due to inventory removal by brand customers, sales volume fell 14%-15%, the unit price of the US dollar also increased by 1%, and the unit price of RMB increased by 5% due to the decline in the RMB exchange rate. By brand, European and American sports brand customers are in the inventory removal stage in 2023, with revenue from Nike, Adidas, and Puma falling 11%/24%/28%, respectively. Uniqlo's retail performance was relatively good, and revenue from Uniqlo also increased by 3%. After 2 years of development, Lululemon's revenue share increased to 2% +. Domestic brands such as Anta and Li Ning accounted for about 11% of revenue, an increase of about 2ppt over the previous year. By region, although China's consumption is still in a weak recovery stage, the 1% increase in revenue performance is better than other regions. European and American revenue fell 19%/20%, respectively, and the total revenue contribution declined by 4ppt.

Production capacity utilization continued to recover, and overseas factories climbed downhill to increase gross margin.

As brand customers neared the end of inventory removal, the company's capacity utilization rate recovered. Combined with the improvement in the operation of new overseas plants and the elimination of unfavorable production environments in 2022, the company's gross margin increased by 2.2 ppt to 24.3% in 2023 under last year's low base. The gross margin during the year was repaired quarterly, and 2H23 gross margin increased to 26% +. The sales and management expense ratio increased slightly by 0.4ppt year over year. Net exchange income of $150 million (vs. $1.0 billion in 2022), net interest income of $440 million (vs. $50 million in 2022). The actual effective tax rate decreased by 4.5ppt to 8.8%, mainly due to an increase in the profit contribution of overseas bases with low tax rates. Net profit of 4.6 billion yuan was basically the same as the previous year (net profit also increased 11% after excluding the impact of government subsidies, exchange income, and interest income).

With diversified product development, Shenzhou lays a solid foundation for long-term growth.

Although orders are under pressure from Shenzhou in 2023, the company is still actively expanding the category. The bank expects to see Shenzhou expand to more chemical fiber products in the future, and is also expected to see the launch of more woven products. Continuing to expand product categories during the downturn of the industry gave the bank full confidence in the long-term growth of Shenzhou as an industry leader.

Risks: Downstream customer growth falls short of expectations, fluctuating raw material prices, and fluctuating RMB exchange rates.