Shenzhou Earnings: Sales and Margin Recovery in Full Gear

Narrow-moat Shenzhou’s 02313 first-half results were below our and Refinitiv consensus expectations, but the improving gross margin is an encouraging sign for a return to long-term earnings growth. Management struck a cautious tone for growth in the fourth quarter and beyond, supporting our forecast for double-digit sales growth and a return to normalized profitability in 2024. We keep the bulk of our assumptions unchanged and maintain our fair value estimate of HKD 140. We continue to be of the view that the current share price presents an attractive buying opportunity for long-term investors.

In the first half of 2023, Shenzhou’s revenue declined 15% year over year. This was worse than expected and reflects a drop in sportswear orders from Nike, Adidas, and Puma. That said, revenue in September already recovered to the same level in 2022 and we expect growth to return in the fourth quarter as the global sportswear industry works through excess inventory.

We were surprised by how well profitability has held up in the first half despite the sharp drops in sales. Gross margin, the key metric used to examine Shenzhou’s core profitability, was 22.4% in the first half, largely unchanged compared with the same period last year. Management also said that gross margin—24%-plus in the second quarter—is improving in the third quarter, giving us confidence that gross margin should recover to near the 30% mark that we are accustomed to seeing from Shenzhou.