First Shanghai: Buying rating for Shenzhou International

Shenzhou International (2313, BUY): The majority shareholder's placement of the old shares is a personal act, and the company's operations are in line with previous expectations.

It is reasonable for major shareholders to place old shares to maintain their view of the company's normal operations:

The company announced the placing announcement on September 7, 2017. The controlling shareholder, the Ma family and related parties, placed 55 million existing shares to the market at a placing price of HK$58.6 per share, a discount of 6.76% to the previous closing price of HK$62.85. The announcement did not explain the reason for the placement. We refer to the historical share reduction behavior of the major shareholder, the company's lack of management equity incentive mechanism, the allotment of the share price, the relatively reasonable price discount, and the strict requirements of the regulator's major shareholder allocation to influence the fundamentals. The realization of the secondary allotment should be a personal financial management act and does not affect our fundamental views on listed companies.

Performance management is in line with market expectations:

In the first half of 2017, the company's top four customers Nike, Adidas, Uniqlo and Puma accounted for 79.2% of the revenue contribution (excluding Flyknit), reflecting the recognition and dependence of the world's leading customers on the company's products and production efficiency. At present, the company's cooperation with the four major customers is in line with previous market expectations. In the first half of the year, the sales volume of sports products in the US market recovered. The proportion of NIKE shipments increased, while the proportion of Adidas shipments decreased, mainly due to the occurrence of its management. Some personnel changes, and executive adjustments usually have a certain view on suppliers. I believe that after familiarizing with the differences between suppliers, Shenzhou's advantages will be reflected in the supply of Adidas.

Capacity continues to expand steadily:

The company's performance growth is closely related to the continued expansion of production capacity. In China, the company's operating efficiency and capacity have been expanded by improving the level of automation and operational efficiency. In detail, referring to the savings in water and electricity consumption after purchasing new fabrics from Vietnam, Ningbo is currently undergoing a gradual upgrading of fabric production. It is believed that after the replacement, the production capacity and cost savings will be significantly promoted.

Long-term optimistic integration advantage, target price 70.1 to maintain buy:

We are still optimistic about the advantages of the company's integration for a long time. With the international brand customer orders still in short supply, the production capacity will expand steadily, and the advantages of the company's integration will maintain its leading position in the market competition pattern of fierce garment production tending to be fast and single. Based on the FCFF model valuation, the company's fair value is HK$70.1, maintaining a Buy rating.