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Analysts still love this Chinese supplier to Nike and Adidas

Hong Kong

SHARES of Shenzhou International Group Holdings Ltd, a Chinese manufacturer that is a top supplier to Nike Inc and Adidas AG, appear expensive when compared to its domestic peers. But analysts say the valuation premium is well deserved.

The optimism is partly driven by Shenzhou's strategy to boost investments in automation as well as spending on more research and development, which have resulted in a widening of its profit margin to near record highs. Investor faith in Shenzhou's outlook is also reinforced by its position as the country's largest maker of knitwear, as smaller manufacturers lose market share, amid a likely shakeout from growing trade tension with the US.

Jessica Fei Ye, an analyst with Jefferies Hong Kong Ltd, said: "Shenzhou can deliver faster than its competitors, so that's why they can take market share." Shenzhou is slowly gaining more of Nike's apparel business, she said; it took 13 per cent of Nike's apparel business last year, up from 8 per cent in 2008.

Shenzhou's stock valuation is far higher than that of rivals such as Yue Yuen Industrial Holdings Ltd, Crystal International Group Ltd and Regina Miracle International Holdings Ltd. Shenzhou is trading at nearly 24 times earnings estimated for 2018, against 12 times for Yue Yuen, 10 times for Crystal and 13 times for Regina Miracle, Bloomberg data shows.

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Shenzhou's price-to-book (P/B) ratio of 5.35 is more than thrice that of the peers. As of Friday's close, Shenzhen was the only China-based consumer-products company whose projected P/B value traded at a premium to the five-year P/B average.

Shenzhou's share price has lost more than 18 per cent from its peak in late August, under-performing the broader Hang Seng Index. Yet 29 in 30 analysts tracked by Bloomberg still have an equivalent of a "buy" rating on the stock, with a consensus 12-month price target representing a nearly 30 per cent gain from current prices, Bloomberg data shows.

The most recent "buy" recommendations come from Morgan Stanley, Credit Suisse and JPMorgan analysts; each has affirmed their ratings made since Oct 22. JPMorgan analysts said in an Oct 23 report that they expect Shenzhou to become a long-term winner in the textiles industry; it is second only to China Mengniu Dairy Co in a ranking of Greater China consumer stocks.

Shenzhou is benefiting from increasing sales from Nike and Adidas in China. Bloomberg Intelligence said in an October report that China-based suppliers for Nike and Adidas will likely produce and sell more at home as trade uncertainties weigh on overseas order growth. About two-thirds of Shenzhou's recent revenue came from Adidas, Nike and Uniqlo-owner Fast Retailing Co.

By introducing more automation into its factories, Shenzhou was able to lessen the impact of higher labour costs in China, it said in its interim report. Its net income margin of nearly 21 per cent last year was the highest since 2004 as its total staff costs as a proportion of income declined by about 2 percentage points in the first half. The net income margin of Yue Yuen, Crystal and Regina Miracle ranged between 4 per cent and 7 per cent in the last fiscal year, Bloomberg data shows. BLOOMBERG

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