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Understanding Shenzhou International (HKEX: 2313): A Case Study In Global Manufacturing Excellence

One of the Nike and Adidas manufacturers.

China’s reputation as the “world’s factory” underscores its unparalleled capability to manufacture a wide range of products, from toys to automobiles, at a massive scale. This designation reflects the country’s efficiency and capacity to produce vast quantities of goods that cater to global demands.

Within this manufacturing ecosystem, a significant number of Chinese companies serve as original equipment manufacturers (OEMs). These OEMs play a critical role by producing goods for international brands, ranging from smaller entities to major global players.

One standout example of such an OEM is Shenzhou International Group Holdings (HKEX: 2313).

Shenzhou International is distinguished not only by its size but also by its business model. It stands as one of the world’s largest vertically integrated textile manufacturers. This means that the company oversees every step of its production process, from the procurement of raw materials to the final assembly of products. This integrated approach enables Shenzhou to maintain strict quality control and efficiency throughout its operations.

Shenzhou International’s prominence in the textile industry is further solidified through its partnerships with globally recognized brands such as Nike, Adidas, and Uniqlo. By manufacturing clothing for these high-profile companies, Shenzhou International plays a pivotal role in bringing popular fashion and athletic wear to consumers worldwide.

For investors looking into the textile and manufacturing sector, Shenzhou International represents an opportunity. Its strategic position as a key supplier to major international brands, combined with its operational efficiency and scale, makes it a noteworthy entity within China’s vast manufacturing landscape.

How Shenzhou International Grew To Be The World’s Go-To Clothing Partner

Founded in the year 2000 by Ma Jianrong, a former factory worker, Shenzhou International has undergone a remarkable transformation, evolving from a modest start-up into a leading global textile powerhouse. Ma Jianrong, who ascended from humble beginnings to become the company’s Chairman, has witnessed his net worth skyrocket to over US$7 billion, reflecting the extraordinary success and expansion of the business he initiated.

Shenzhou International has established its headquarters in Ningbo, China, strategically positioning itself within the Ningbo Economic and Technological Development Zone. This location serves as the company’s principal production hub, underpinning its manufacturing capabilities and operational excellence.

In its quest for growth and diversification, the company has extended its manufacturing footprint beyond China’s borders. The company has set up additional garment factories, including several production facilities in Vietnam and a factory in Phnom Penh, Cambodia. This international expansion has enabled the company to leverage global manufacturing efficiencies and access new markets.

Originally an OEM for Western brands, Shenzhou International’s significant growth followed its 2005 IPO, notably establishing a dedicated Nike factory in September 2006. The company listed its shares on the Hong Kong Stock Exchange at HK$2.60 each during its IPO, with the current share price at HK$75.70, offering investors a 28-fold return on their initial investment. Two years after the Nike factory, Shenzhou set up an Adidas-dedicated factory to meet the sportswear giant’s needs.

Shifting Production, Shedding Assets But Starting To See Slowdown

Shenzhou International’s proficiency in rapid and efficient knitwear production swiftly positioned it as a trusted partner for major global brands. This expertise not only solidified its reputation in the textile industry but also allowed it to venture into retail, owning 47 clothing stores across the Yangtze River Delta region during the 2010s. However, in a strategic move to concentrate on its primary knitwear production business, Shenzhou progressively divested these retail outlets.

The same period marked the company’s ambitious expansion into Vietnam, a move aimed at increasing its manufacturing capacity and benefiting from the lower labour costs prevalent in Southeast Asia. This expansion was part of a broader strategy to enhance supply chain efficiency and maintain competitive pricing for its international clientele.

Today, Shenzhou International boasts a workforce of over 90,000 employees worldwide and is responsible for producing 200,000 tonnes of high-end knitted fabric and approximately 500 million pieces of knitted garments annually.

Despite its industry dominance, the first half of 2023 presented challenges for the company, with a notable 15% decline in revenue year-on-year—from RMB 13.5 billion (approximately US$1.88 billion) in the first half of 2022 to RMB 11.6 billion. This downturn was accompanied by a 10% decrease in net earnings to RMB 2.1 billion in the same period. The primary factors contributing to this downturn were a softening in apparel demand in key markets such as the US and Europe, where the company experienced significant revenue declines.

The observed weakness in sportswear demand, mirrored by reduced earnings from industry leaders like Nike, further impacted Shenzhou International’s performance. However, looking forward, there is a sense of optimism regarding the company’s prospects. Analysts anticipate a recovery in Shenzhou International’s order book, fueled by an expected resurgence in sportswear demand in the fourth quarter of 2023 and into the first half of the following year. This optimism is based on market analyses predicting a rebound in consumer spending on sportswear, potentially driving a positive turnaround for the business.

Adjusting To Structural Trends

The “China + 1” strategy, which involves diversifying production away from China to other countries, is widely viewed as a manoeuvre that primarily benefits non-Chinese companies. However, this perspective overlooks the capacity of Chinese firms to adapt and thrive amidst these shifts.

Shenzhou International’s deliberate move to expand its production capabilities into Southeast Asia is a testament to its strategic agility. This relocation is not merely about circumventing rising labour costs or geopolitical risks in China; it’s also about tapping into new growth opportunities and enhancing operational efficiencies in regions with favourable production costs. The transition is seen as a strategic move that could significantly bolster the company’s gross margin, suggesting a positive outlook for its profitability as it adjusts to the changing dynamics of global manufacturing.

For dividend investors, Shenzhou International’s stock offers a dividend yield of 2.7%. While it cut its H1 2023 dividend slightly on weaker numbers, it did raise its dividend payout ratio during the period to 62.4% with a dividend per share of HK$0.95.

Read Also: China Mobile: The World’s Largest Telco

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