Shenzhou International Group Holdings Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Shenzhou International Group Holdings Limited is a Chinese apparel manufacturer that provides textile products to large international brands.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Shenzhou International Group Holdings Limited (SHZNY) is a vertically integrated global garment manufacturer that specializes in knitted apparel. They handle all stages of the production process, from designing and fabric development to manufacturing and final product distribution. They primarily serve large, international sportswear brands like Nike, Adidas, Uniqlo, and Puma, acting as an Original Equipment Manufacturer (OEM) and Original Design Manufacturer (ODM).

  • Revenue Distribution: SHZNY generates its revenue primarily through long-term contracts with global sportswear brands, which constitute over 90% of sales. A large percentage is derived from contracts related to sportswear and athleisure.
  • Geographic: Over 60% of revenue comes from overseas markets and the remaining primarily from China,
  • Industry Trends: The apparel industry is experiencing a shift towards speed to market, requiring manufacturers to be flexible and responsive to evolving customer tastes. There’s increasing demand for athleisure wear, and brands are focused on sustainable and ethical manufacturing. Supply chain diversification is becoming important.
  • Competitive Landscape: The apparel manufacturing market is highly fragmented with low barriers to entry. However, long term relationships, vertical integration, technological advances and scale creates some advantages. Smaller players compete primarily on price and flexibility.
    • Some of the other competitors are textile manufacturers and other OEM/ODM suppliers based largely in Asia.

Competitive Advantages (Moat Analysis):

SHZNY possesses some, but not all of the characteristics of a very strong moat company. Therefore it gets a moat rating of 2/5.

  1. Scale and Efficiency: SHZNY is one of the largest vertically integrated knitted apparel manufacturers in the world with a massive scale that allows it to produce at high volumes and low prices. Its established manufacturing infrastructure gives them a clear scale advantage.

  2. Long-Term Customer Relationships: Having worked with global brands like Nike, Adidas, and Uniqlo for decades they have built strong and loyal relationships. This is beneficial for both parties because SHZNY can better anticipate client’s needs. This reduces the buyer power.

  3. Technological Capabilities: Through investing heavily in technology and automation in their processes they are able to increase production speed and reduce costs. Furthermore their in-house capabilities for design and fabric development give them a slight edge against others.

  4. Switching Costs: While switching costs in this sector may seem low, in practice, switching from SHZNY could be costly for a large established brand, given that they have to go through the process of switching manufacturers. This would include time for product development and changes in the supply chain. Also, the comfortability, reliability and trust built over decades also contributes to switching costs.

These advantages are relatively strong but not impenetrable, which is why it only gets a 2/5 in moat.

Risks to the Moat & Business Resilience:

  1. Customer Concentration Risk: The reliance on a few large customers could pose significant risks to the business if they decide to shift production to other suppliers or reduce orders. Furthermore, as long-term relationships are important, there are no guarantees that the current relationship with current customers continues to be strong.
  2. Intensified Competition: The global apparel manufacturing landscape is highly competitive and other companies are improving their manufacturing capabilities and gaining market share. They might offer better prices or more innovative options which could threaten SHZNY’s position.
  3. Geopolitical Risks: The company’s primary base of operations in China exposes it to various trade-related risks. Geopolitical uncertainties, trade disputes, tariffs and sanctions could materially affect the company.
  4. Supply Chain Disruptions: The company faces risks related to reliance on other countries for its inputs such as raw materials and energy.
  5. Technological Obsolescence: The company needs to keep pace with the latest technological developments. If it fails to maintain the pace of its innovation, it may suffer from the inability to reduce costs and keep up with market changes.

SHZNY has many strategies that will make them survive such risks, but no business is 100% safe. The company is mostly resilient.

Financial Analysis:

The company has shown impressive historical revenue growth over the past decades, which grew almost tenfold from $1,426 million in 2009 to 14,537 million in 2022. There has been a slight drop in 2023 to 19,207 million.

  • Margins: Gross profit margin was at 24.5% and net profit margin at 15.2% in 2022, they show signs of good profitability. There was a slight contraction in margins in 2023.
  • Revenue Growth: Their revenue grew by a CAGR of 19.39% over the past 14 years, which shows that they have high growth capabilities.
  • Balance Sheet: The company has low debt levels, a high cash balance, and healthy cash flows making it very financially stable.

Current data for the past couple of years has shown a small dip in operating profit margins, that should be looked into more closely.

Understanding the Business and its rating: 3/5 SHZNY’s operations are relatively easy to understand at a high level. It operates in a simple industry and manufactures textile products for well-known brands. However, its intricate nature of operations and long-term contracts, as well as having to stay on top of rapidly changing fashion trends makes understanding all its operations more difficult, giving it a 3/5 in understandability.

Balance Sheet Health: 4/5

The company has demonstrated a strong balance sheet with low debt, high liquidity, and consistent cash flow. This makes them extremely financially stable. Therefore it earns a balance sheet health rating of 4/5. However, it is noted that they have incurred some long-term liabilities, especially for leases. This is normal, but does add a level of risk.

Recent News and Controversies:

  • 2023 Weakness: In the earnings call of 2023, it was disclosed that high interest rates, inventory reductions from customers, and increasing wages reduced the performance of the company in 2023. In the short term, earnings have weakened and the stock price has dropped. But, in the long term it is expected that the company’s position will remain strong.
  • Supply Chain Diversification: In recent investor calls management has highlighted that they are continuing to diversify their manufacturing capabilities through establishing new factories in Vietnam and other countries. This helps hedge against possible trade risks.
  • Emphasis on technology: The company is committed to improving its manufacturing capabilities and automation, showing its willingness to invest in future growth.

In short, Shenzhou is a stable but a little troubled company, that is working to improve its competitive position in the new world economic order.

company name (ticker symbol) | Moat: / 5 | Understandability: / 5 | Balance Sheet Health: / 5

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