1 What are the standards for clothing brands to choose suppliers?

1.1 The basic criteria for brand selection of suppliers: cost, delivery time and risk controllable

For the brand selection of supplier standards, we adopted the “15 Purchasing Guidelines”, which was developed by Clothing Connect BV and began to be used by the garment industry in 2013 to evaluate, analyze and compare the competitiveness of suppliers. The standard shows that cost and reliable delivery time are the basic factors for brands to choose suppliers, and the ability of suppliers to have vertical integration and R&D and production of high added value is a priority for brands.

Based on the assumption that the above criteria are equally important, Clothesource believes that 50% of the balanced supply chain is a cost factor, 30% is a time factor, and 20% is a risk factor.

Based on surveys of brands and retailers, USFIA summarizes the factors that influence brand suppliers' perceived threats to supply chain risks. Among them, suppliers' social responsibility and ecological awareness rank first, and labor disputes rank second, indicating that brands are more We favor suppliers with social responsibility and a well-established employee benefits system. Nike uses the SSI (Sourcing & Manufacturing Sustainability Index) to judge the pros and cons of suppliers. The index divides suppliers into five grades (RED, YELLOW, by quantifying suppliers' lean production capacity, social responsibility and environmental awareness). BR ONZE, SILVER, GOLD), in which product quality, timeliness of delivery, procurement cost and sustainability indicators account for 25% of the rating of the supplier.

1.2 What kind of enterprises will be favored by consumers?

Based on research on the selection of supplier standards by brand owners, we believe that companies with the following characteristics will win the competition:

1 Ability to develop and produce high value-added products to help customers develop and produce high value-added products;

2 Have a high sense of social responsibility, pay attention to environmental protection, and be able to successfully solve labor and capital problems, thus ensuring the continuous operation of production capacity and improving the stability of the supply chain;

3 The production area layout is decentralized and reasonable, in line with the requirements of brand suppliers to diversify the supply chain regional risks and improve the efficiency of the supply chain;

4 With vertical, integrated or one-stop production capacity, it can guarantee the timeliness of delivery, reduce the procurement cost of brand owners, and improve their procurement efficiency.

2 Why can Shenzhou International become the largest supplier of many international clothing brands?

2.1 Industry and company profile

1) The industry is in the midst of the fourth global transfer

The textile industry experienced three industrial transfers after World War II, and formed the industrial comparative advantages of different countries in each transfer process. For example, the United States and Japan have advantages in the research and development of man-made fibers and fabrics, while China and Southeast Asian countries are in the garment industry. The link has a comparative advantage.

With the changes in regional relative costs and production efficiency, the global textile industry is currently undergoing a fourth shift, from China’s Yangtze River Delta and Pearl River Delta regions to mainland China and Southeast Asia. In recent years, Southeast Asian countries have reached more developed countries. With the free trade agreement and lower costs, the trend of the textile industry moving from China to Southeast Asian countries is more obvious. For example, the amount of textile exports in Vietnam is equivalent to about 15% of China's textile exports in 2008-2012, and the proportion increased to 23 in 2016. %. We believe that the process of industry transfer will lead to the re-integration of the industry chain and value chain. Textile companies that are in line with the trend will benefit from the changes in the industrial structure and cheaper production materials.

2) Vertical integrated knitwear suppliers growing together with quality customers

1 China's largest vertical integrated knitwear supplier

Shenzhou International is the largest manufacturer and exporter of knitted vertical garments in China. It is located in the middle and downstream of the industrial chain. Its production capacity is distributed in China, Cambodia and Vietnam. It produces fashion Clothes for international clothing brands such as Nike, Uniqlo, Adidas and Puma. Sports clothes and underwear and other products. At the same time, the company is also the largest supplier of Nike, Uniqlo, Adidas and Puma clothing brands, accounting for 12%, 14%, 30% and 14% of Nike, Adidas, Uniqlo and Puma clothing purchases, respectively.

The company is in the OEM mode of the garment production process, and the ODM mode in the Fabric production process, that is, according to the design and functional requirements of the customer, the corresponding fabrics are produced and produced, and the fabrics produced by the company are all used internally. In the production arrangement, the company has reached a rough capacity allocation plan with major customers every year. Customers place orders in January-March, and place orders once every quarter. The company purchases the corresponding raw materials according to the customer's order quantity and saves only one month. Raw material inventory, delivery cycle depending on customer order conditions ranging from 1 month to 2 months.

2 Growth companies, the compound growth rate of revenue and net profit in the past ten years reached 17%/22% respectively

The company's revenue has maintained a relatively steady growth over the years, with revenue growth of 24.7% in the first half of 2016. From the perspective of sales volume and product unit price change, the company's revenue is mainly contributed to sales volume. The average unit price of products has increased by about 5% annually. The company increased the proportion of sportswear products in 2007-2009, which led to an increase in the average price of the company's products. The company's gross profit margin and net interest rate. Since 2010, the company has maintained a relatively stable and high profitability. In the first half of 2016, it recorded the highest gross profit margin and net profit margin of 31.87% and 20.86%.

3 grow together with core customers

In terms of income structure, the company is concentrated in casual wear, with Japanese customers (Uniqlo) as sportswear and multiple customers. In the first half of 2016, Nike, Uniqlo and Adidas were the company's three major customers, accounting for They were 24.2%, 23%, and 21.3%, respectively, while in 2006, 53.7% of the company's revenue came from Uniqlo.

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2.2 What characteristics does Shenzhou have in order to gain favor from brand owners?

1) Adhere to technological innovation and production efficiency, and create high value-added products for brand owners

The company's R&D investment is about 2% of annual revenue, and the technical innovation expenditure is uncertain every year. According to data released by the China Intellectual Property Office, the company has added 188 patents since 2009. The company's research and development focuses on two aspects: product development and production efficiency improvement, 91 of which are product development (fabric development); 97 items It belongs to the aspect of production efficiency improvement (technical reform and equipment research and development). 13 and 14 years are the peak period of the company's fabric patent application. In 2015-2016, the company's technical transformation and equipment research and development patent application blowout, reflecting the company's efforts in lean management and production efficiency, which is also the company's gross profit rate has improved steadily in recent years. One of the reasons for this is that it is understood that the Ningbo plant will improve its per capita output by 10% in 2016 without any new equipment.

Shenzhou International has higher fabric research and development capabilities than its peers. The high value-added performance of fabrics mainly comes from the design of raw material formula (special functional fiber), the structural design of fabrics and the dyeing and finishing process, while the weaving links are not due to the convergence of production equipment. Have a threshold. Taking Shenzhou International's patent for “a multifunctional underwear fabric” applied in May 2013 (patent number CN201320261716.8), the fabric consists of an outer layer and an inner layer, and the outer layer is composed of cellulose fibers and elastic fibers. The inner layer is composed of coffee carbon fiber and cellulose fiber, and the outer layer and the inner layer are woven by weft-knitted double-sided multi-needle rib. At present, the patent is used in the production of “Coffee Carbon Thermal Underwear” by NetEase.

2) With vertical integration of production capacity, improve brand supplier supply chain efficiency

According to the USFIA survey, the procurement model of “purchasing directly from garment manufacturers, but brand designers designing products and designing fabric suppliers” still dominates the procurement model, but the proportion of brands that prefer to adopt this model is 2015. 93% of the decline to 68%, and the procurement model of “purchasing directly from garment manufacturers, garment manufacturers designing products and purchasing fabrics themselves” increased from 37% to 59%, reflecting the vertically integrated procurement model gradually being branded. Accepted by the business. For brand owners, vertical integration improves the efficiency of brand purchases, reduces procurement costs, and improves the ability of the supply chain to respond quickly.

In the traditional garment industry cycle, due to the disconnection between the fabric production process and the garment manufacturing process, the garment supplier could not receive the fabric within one and a half months after receiving the order from the brand, and the production cycle was up to 3 months. In the production cycle of vertical integration of fast fashion products, fabric production and garment manufacturing are carried out at the same time, the production cycle is only one and a half months, which provides brand owners with the ability to respond quickly to market demand. However, the proportion of companies with vertical integration capabilities is currently low. In Myanmar, Vietnam, and Cambodia, for example, about 2% of suppliers in Vietnam have vertical integration capabilities, while Myanmar and Cambodia do not. The ability to vertically integrate and improve the supplier's right to speak, we count the profit data of the stocks in the apparel manufacturing industry chain in Hong Kong and Taiwan, and the vertically integrated manufacturers have higher profitability.

Shenzhou International not only formed the vertical production capacity of fabric production and garment manufacturing in China, but also set up the production of the first phase of the Vietnam Fabric Factory in 2005 through the establishment and garment factory in Cambodia in 2005. .

3) Having a sense of environmental protection and social responsibility, in line with the requirements of brand owners to create a green sustainable supply chain

Environmental and social issues affect the reliability of the brand's supply chain and have an impact on shaping the brand image. For example, Adidas' requirements for environmental protection and energy conservation in the supply chain have required suppliers to increase energy and water use and waste data to the environmental data statistics system (EMeRet) for brand development since 2011. By evaluating the data provided by the supplier, Adidas proposed benchmarks for energy and water use and abandonment. For each supplier, Adidas compared it with the benchmark data, proposed differentiated energy-saving emission reduction targets, and finally achieved Adidas's proposal. By 2020, the total goal of reducing energy and resource consumption and waste generation by 20%. Brands and retailers such as Hummer, H&M, Nike, Wal-Mart and Gap have begun to use public data to establish a supplier search mechanism, which makes it possible to proactively identify pollution problems in the supply chain.

Shenzhou International is one of the first (2012) companies that meet the “Entry Requirements for Printing and Dyeing Enterprises”. In 2013, it began to disclose data related to energy conservation, emission reduction and social responsibility in its annual report. In terms of emission reduction, the company's carbon dioxide emissions are less year by year, and the wastewater discharge has increased by no more than 1% in the past two years. At the same time, in 2010, the company won the “Ningbo Energy Saving and Emission Reduction Advanced Enterprise”, while the competitor Futian Industrial 1.08, 0.01 , 0.94%, Jinxing International was classified as an environmentally-friendly enterprise in 2010 and 2011 respectively.

At the same time, Shenzhou pays attention to the training and welfare of employees. The data shows that the injury rate of Shenzhou employees in 2015 is 0.04% in 2015, while the number of employees injured in Adidas' own factory is 1.76% of the number of employees, reflecting Shenzhou's staff training and production process management. Has a big advantage. The turnover rate of Shenzhou employees is also decreasing year by year, which is 4.7% in 2015, indicating that Shenzhou's efforts in employee welfare, while the stability of employees is conducive to improving production efficiency and timeliness of order completion.

4) The company has strong management ability and is good at customer selection and management.

1The company's management ability is reflected in the judgment and grasp of development opportunities

Based on the judgment of the demand potential of sportswear in the Chinese market under the historical opportunity of the 2008 Olympic Games, the company introduced Nike and Adidas as key development customers during 2006-2008, actively adjusted the product structure and increased the proportion of high value-added sportswear. Under this strategy, the company's sportswear revenue accounted for more than 50% in 2009. The company's strategic adjustment of product structure is also in line with the trend of industry development. In 2009-2015, the market share of sports brands has improved compared with leisure brands, and the share of Nike and Adidas in the Chinese market has also increased to nearly 40%.

Another example of Shenzhou International's grasp of development opportunities is to take orders from Flyknit. In 2011, Nike invited its supplier Fengtai as a partner in the production of Flyknit upper technology. Fengtai first purchased 150 knitting machines for Nike and produced 700 pairs of Flyknit sports shoes. However, Fengtai believes that Flyknit technology is on the one hand. Whether it can promote the existence of uncertainty, on the other hand, the Flyknit production machine can not be used to produce products other than Flyknit, and the Flyknit production process is difficult to master, so the Flyknit production order was abandoned in 2012. Since then, Shenzhou International has purchased 2,000 units in 2012 and has undertaken all orders for Flyknit, which currently accounts for more than 70% of Flyknit uppers. In the first half of 2016, Flyknit's contribution to Shenzhou's revenue has also reached 6%.

2 The company's management capabilities are reflected in the management of competing customers

In the introduction of Nike Adi and Das as key development customers, the company built new Nike-specific factories and Adidas-specific factories in 2006 and 2007 to protect customers' trade secrets. This model is similar to Taiwan Baocheng. Bao became the largest supplier of Nike and Adidas sneakers. It has established the Nike and Adidas divisions, and is completely isolated in personnel management, product development and production. Therefore, it has partnered with both customers.

3 The company's management ability is reflected in the management's energetic and experienced experience.

The core management of Shenzhou International is rich and proactive, with rich experience and innovative consciousness. Compared with some competitors, it is more likely to grasp the historical opportunity of the fourth industrial transfer.

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3 The demand for clothing is changing, can Shenzhou maintain stable growth in the future?

We believe that Shenzhou International's growth logic comes from two aspects: first, the growth of core customers' revenue, and second, the increase in market share of Shenzhou International in core customer procurement.

3.1 Core customers maintain steady growth

1Nike: Flyknit is the star of tomorrow

Nike announced its development plan for 2020 in 2015. It expects its revenue to be $50 billion in 2020, compared to $32.3 billion in annual revenue as of May 2016.

At the same time, we believe that Flyknit upper technology will become the core product technology of Nike. The sneakers with Flyknit upper technology can meet Nike's design requirements for sports shoes “Fit” and “Light”, and the production process is energy-saving, environmentally friendly and highly automated, so it is important in Nike's sustainable development strategy. s position. Nike is gradually rolling out Flyknit on different product lines. Nike expects Flyknit series sales to exceed $1 billion in 2016 and said it will promote Flyknit technology on more product lines. Due to the technical advantages, about 75% of Flyknit's orders are completed by Shenzhou International, and Flyknit sales account for about 6% of Shenzhou International's revenue, and enjoy above-average gross margin. We understand that Shenzhou International has built a dedicated Flyknit plant in Vietnam and is expected to double its capacity after completion.

2 Adidas: the new expectation of fashion elements

Adidas announced its five-year plan for 2020 in 2015, with sales and net profit expected to maintain a high single digit and a 15% annual compound growth rate. Adidas began to pay attention to the fashion elements of products in 2015. This approach caters to the needs of millennials. Its sales growth is currently mainly dependent on trendy products such as leisure series and star cooperation limited editions. Such a strategy is effective in the short term. In 2015 and the latest quarterly revenue data, Adidas maintained a relatively fast growth rate and surpassed Nike.

3 Uniqlo: China is a strong engine

At present, the overall income growth of Uniqlo has slowed down and the channels have gone to the stage of inventory. As far as we know, Uniqlo’s orders for the second half of the year and expected orders for next year are better, reflecting the overall trend of better, and it still maintains rapid growth in China. In FY2014 and FY2015, the revenue growth rate was 66% and 46% respectively. UNIQLO parent company Fast Retailing Group disclosed its strategic plan for Greater China in 2014. It plans to add about 80-100 stores each year in the future, with an initial target of 1,000 stores and a long-term store target of 3,000, as of August 2015. Its number of stores in Greater China has reached 467, and the number of stores has exceeded 500.

3.2 The competitive advantage is obvious, in line with the preference of the brand, the market share of Shenzhou International will be improved.

More and more international brands have publicly announced “sustainable development strategies” and supplier lists. The results show that suppliers are gradually decreasing. Nike apparel suppliers have decreased from 497 in 2011 to 406 in 2015, including YELLOW and RED. Suppliers have the possibility of being eliminated, accounting for approximately 14.5%.

The number of suppliers of Adidas is also gradually decreasing. The number of own factories and cooperative factories decreased by 12.5% ​​from 1,214 in 2013 to 1,079 in 2015. Uniqlo increased its monitoring of suppliers' social responsibility level year by year. With the increase of the number of monitored suppliers and the transparency of supervision, the number of E-level suppliers increased significantly in 2015, and Uniqlo will take withdrawal orders from E-level suppliers. And other measures.

1The improvement of environmental protection standards, the brand of natural filter partially failed suppliers

80% of the sewage discharge from the textile industry comes from the dyeing and finishing process. Since 12 years, China has continuously improved the pollution discharge standards of textile dyeing and finishing enterprises. On the one hand, it has adopted an access policy for the printing and dyeing industry, on the one hand, it has eliminated the backward production capacity of printing and dyeing. However, in view of the current sewage discharge standards, some enterprises still fail to meet the standards. In Zhejiang Province, for example, the compliance rate of textile enterprises is about 80%, and 20% of enterprises still fail to meet the standards. At the same time, Vietnam, which undertakes the transfer of production capacity in China's textile industry, has a higher set of access standards for printing and dyeing projects due to its focus on tourism and agriculture. It is also stricter in domestic sewage discharge standards, such as the requirement for COD in wastewater discharge in Vietnam. Less than 50mg / L, and China's textile industry is 80mg / L.

Therefore, in view of the fact that dyeing and finishing enterprises are the main source of pollution in the textile industry, the improvement of sewage discharge standards has a greater impact on dyeing and finishing enterprises. Under the policy guidance of Yan Jinkuan, the dyeing and finishing industry is facing the process of backward production capacity withdrawal and market concentration improvement. In recent years, spinning, weaving, dyeing and finishing related enterprises have seen a more obvious centralization trend. At the same time, as the public pays attention to environmental protection and social issues, brand owners are paying more attention to the performance of suppliers in environmental protection and social responsibility issues. This is one of the reasons why brands are gradually concentrating their orders on quality suppliers.

2 The advantages of Shenzhou International's vertical integration make it the first choice for the brand

The ability of Shenzhou's vertical integration has improved the supply chain efficiency of the brand and met its rapid response to the needs of consumers, making Shenzhou the first choice for the brand. For example, in the first half of 2016, Shenzhou undertook the “rush order” of UNIQLO under the background of UNIQLO’s underperforming sales, and sales of Uniqlo increased by 25% year-on-year.

Strengthening the rapid response to consumer demand and improving supply chain efficiency is one of the main strategies of current brand owners. For example, in the strategic plan for 2020 proposed by Adidas in 2015, it is the primary strategy to shorten the development, manufacturing, and circulation of products. It is hoped that by 2020, 50% of its products will be shortened for development, manufacturing, and circulation. The product.

3.3 Vietnam's production capacity can be gradually released, Shenzhou's income growth is more certain

As of 2015, the company's garment production capacity is 270 million pieces. The company plans to continue to promote domestic capacity technology reform and capacity expansion in Southeast Asia in the next 2-3 years. We predict that the capacity of Shenzhou International will maintain a compound annual growth of 10-15% in the next three years.

At present, the company has completed the first phase of Vietnam's fabric production capacity (which has been put into production in November 2014) and the second phase (completed in 2015). The garment production capacity in Vietnam was also completed and put into production in 2015.

4 What is the company's historical valuation and future valuation?

4.1 What factors influence the company's historical valuation?

From the development history of the company's listing to the present, the market has an improvement process for the company's confidence and awareness: the company's valuation improvement path is 5 times - 10 times - 15 times - 20 times, and the market's cognitive improvement path for the company is “General OEM” – “Quality Supplier” – “Core Supplier and Brand Partner”.

1) 5-10 times valuation stage (2005-2012): general foundry

At this stage, the short-term profit margin of the company is affected by the national trade environment, raw material prices, labor costs, production efficiency and appreciation of the renminbi, which will benefit from the optimization of product structure in the long run.

At the same time, the company's valuation center at this stage has remained at around 10 times, which is consistent with the average valuation of OEMs in overseas markets. It can be considered that the market is not aware of the company's texture superior to the industry at this stage. On the other hand, the textile industry has a certain periodicity and is facing the impact of rising labor costs and the macro environment.

2) 10-15 times valuation stage (2013-2014): quality supplier

At this stage, the external environment improved, the downstream apparel retail recovered, and the market's perception of the company's texture further deepened. From “general OEM” to “premium brand quality supplier”, the company's valuation center was also 10 times. Increased to 15 times, the reasons for the increase in valuation are:

1 Downstream apparel retail recovery. The company's sportswear revenue accounted for more than 50% of the total. After the completion of destocking in 2012, the sports brand began to recover, and Uniqlo ushered in the domestic growth period;

2 Capacity is at the peak. In 2013, the production capacity of the second phase of Cambodia and Anqing was put into production. At the same time, the company raised a capital of HK$1.54 billion in June 2013 for the new capacity of Vietnam to enjoy the TPP dividend. In November 2014, Vietnam's production capacity was gradually put into production.

3 own brand store expansion. In 2011, the company launched its own brand, Mawei. In 2012, 2013 and 2014, the number of its own brand stores was 17, 24 and 38 respectively.

4 The external factors of the industry improved and the cotton price remained stable;

5 The market's perception of the company has changed. From 2005 to 2012, the company's valuation center remained at around 10 times, the market gave the company's OEM industry an average valuation, while the company's financial crisis in 2008-2009 and the downstream clothing retail destocking cycle in 2010-2012 The performance in Nike is better than that in the same industry. At the same time, the increase in the income ratio of Nike and Adidas in 2007-2012 also reflects the company's characteristics of quality suppliers. Therefore, the market has recognized the company from general OEMs to well-known brands. change.

3) 15-20 times valuation stage (2015 to present): core suppliers and brand partners

At this stage, the external environment has been further improved, mainly due to the decline in raw material prices and the renminbi's entry into the depreciation channel. In terms of industry, the sports brands led by Adidas and Nike have improved their prosperity. At the company level, Shenzhou International has become a core supplier of first-line brands with technological capabilities and economies of scale and further expanded its market share by improving production efficiency and new capacity. , which led to an increase in the valuation from 15 times to 20 times.

4.2 What is the future valuation?

Shenzhou International's TTM valuation is 21.6x, which is at a historically high level. According to the consensus of Wande, the EPS of Shenzhou International in 2016-2018 is 2.11/2.50/2.85 yuan respectively. It is 20.8/17.6/15.4x.

Editor in charge: Yang Bo