Raising Shenzhou’s FVE to HKD 171 on Lululemon Order Win

Shenzhou's 2021 first-half earnings were below our estimates, due to a number of non-operating factors. We think ongoing focus should be on: 1) potential of further downside risk in the rest of 2021; and 2) more importantly, what long-term demand will look like once Vietnam gets COVID-19 under control. We trim assumptions for 2021 to reflect weak first-half earnings, and extended COVID-19-related factory shutdowns in the second half, but lift our longer-term forecast to factor in Shenzhou’s recent Lululemon order win. After these adjustments, our fair value estimate rises to HKD 171 from HKD 138. We now expect the firm to record five-year revenue CAGR of 20% (previously 14%) and five-year net profit CAGR of 23% (from 16%). We believe recent bearish sentiment around COVID-19-induced factory shutdowns have created a good buying opportunity for narrow-moat Shenzhou.