Morningstar | 02313 Updated Forecasts and Estimates from 26 Feb 2019
Despite the fact that narrow-moat Shenzhou continues to explore expansion opportunities, the apparel manufacturer remains overvalued. We maintain our fair value estimate for the firm at HKD 76, implying a 2018 P/E ratio of 21 times.While being a large-scale integrated player will help Shenzhou to sustain some intangible strengths, the business will most likely settle at a normalized level over the long term, given the improvement in automation technology moving some production volume back to developed countries like the U.S.
With the shares currently trading at around 28 times earnings for fiscal 2018, we think the market holds high expectations for the firm. Our HKD 76 fair value estimate assumes Shenzhou’s revenue increases by a five-year CAGR of 12%, driven by a 10% CAGR in production volume growth and a 2% CAGR in average selling price. We expect the group’s bottom line to expand at a pace slightly ahead of the top line, at a five-year CAGR of 14%.
Shenzhou International Group Holdings is an investment holding company. Through its subsidiaries, Co. is principally engaged in the manufacturing of knitwear on an Original Equipment Manufacturer basis. Co. focuses on producing sport wear and casual wear with major international clients including UNIQLO, ADIDAS NIKE, and PUMA. In addition, Co. is involved in property leasing in Hong Kong; import and export of commodities in China and Hong Kong; property management in China; trading company in Macau, Japan and China; and retail in China.
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