1H profit decline exceeded expectations; maintain Buy but lower target price to HKD66.90

Overview

Shenzhou International Group issued a profit warning on August 7, 2026, expecting 1H26 profit to decline 38% to 43% YoY to CNY1.81bn to CNY1.97bn. The decline is not only significantly worse than Bloomberg consensus but also below the capital market's already conservative prior expectations. Nomura consequently lowered its medium-term revenue and earnings forecasts, but believes the 1H weakness will not undermine the company's long-term competitive advantages in the sportswear supply chain, and therefore maintains its Buy rating.

Core views

In the short term, the company faces multiple pressures including weak order demand, ramp-up costs for new overseas capacity, rising yarn prices and RMB appreciation, with Nike and Puma considered the main drags on 1H orders. In the medium term, as utilization of new capacity improves, costs are passed on to customers through repricing, U.S. tariff policy becomes clearer and the low-base effect in 2H25 emerges, orders and margins are expected to recover marginally in 2H26. In the long term, the company has a vertically integrated production system, overseas capacity footprint, efficiency technology upgrades and a continuously expanding customer portfolio, and its industry leadership remains solid.

Analysis framework

The report starts from the gap between the company's profit warning and market consensus expectations, breaking down three earnings drivers: demand, costs and exchange rates. It then adjusts FY26F to FY28F financial forecasts and uses a next-12-month P/E relative valuation method to determine the target price, while assessing the 2H recovery potential and long-term investment value based on customer orders, overseas capacity ramp-up and industry competitive position.

Methodology notes

• Relative valuationNext-12-month P/E valuation method

  Target P/E multiplied by forecast earnings

  Nomura applies a 15.0x next-12-month target P/E to FY26F adjusted earnings, corresponding to 0.5 standard deviation below the company's three-year historical average valuation, deriving a target price of HKD66.90.

• Earnings forecastScenario-driven forecast adjustment

  Revise forecasts based on sales, margins and external operating variables

  Based on weak 1H results, the report assumes sales and margins more conservatively, lowering FY26F to FY28F revenue forecasts by 4% to 5% and earnings forecasts by 3% to 4%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Shenzhou International Group (2313.HK)

  The listed company directly covered by this report

  Strengths

  A large global vertically integrated knitted apparel manufacturer with capacity in China, Cambodia and Vietnam; customers include Nike, Adidas, Puma and Uniqlo. Overseas capacity expansion, efficiency technology upgrades and an expanded customer portfolio support long-term competitiveness.

  Weaknesses

  Short-term orders are relatively dependent on large international brand customers; ramp-up of new overseas capacity pushes up labor and pension costs, and earnings are also vulnerable to raw material prices and RMB/USD exchange-rate changes.

  Comparison

  The current FY26F P/E is 10.1x, while the target valuation is 15.0x, the latter 0.5 standard deviation below the company's three-year historical average; the stock benchmark index is the HSI.

  Risks

  Larger-than-expected order cuts by major customers, delays in Vietnam factory ramp-up, weaker-than-expected cost pass-through, continued adverse FX movements, and uncertainties in the macro economy and U.S. tariff policy.

Key data

• 1H26 profit warningCNY1.81bn to CNY1.97bnExpected to decline 38% to 43% YoY.
• Market consensus earnings forecastCNY2.94bnBloomberg consensus, significantly above the company's profit warning range.
• Target priceHKD66.90Lowered from HKD67.80, based on 15.0x FY26F P/E.
• Closing priceHKD42.80As of August 7, 2026.
• Implied upside56.3%Calculated based on the target price and the closing price listed in the report.
• FY26F revenue forecastCNY31.055bnPrevious forecast was CNY32.395bn.
• FY26F net profit forecastCNY5.800bnPrevious forecast was CNY6.331bn.
• FY26F P/E10.1xThe report considers the current valuation not high.
• FY26F dividend yield6.0%Forecast dividend payout ratio is 60.4%.
• Year-to-date exchange-rate changeRMB appreciated 4% against the USDAffects trading activities, RMB financial statement translation and USD asset revaluation.

Impact & implications

The profit warning means short-term earnings expectations still need to be revised down, and slower orders, cost rigidity and FX pressure may continue to weigh on margins and market sentiment. However, the limited target price cut reflects Nomura's view that the main pressures are cyclical. If orders recover in 2H, capacity ramp-up stabilizes and costs are successfully passed on to customers, the current 10.1x FY26F P/E may provide room for valuation recovery; if major customers further cut orders or Vietnam capacity ramp-up is delayed, earnings and the target price will still face downside risks.

Risks

• Order cuts by major customers such as Uniqlo, Nike, Adidas and Puma may exceed expectations.
• Capacity ramp-up at Vietnam factories may be delayed, affecting expansion progress and causing order losses.
• Labor and pension costs from new overseas capacity may remain elevated.
• Rising costs of raw materials such as yarn may further compress margins.
• Continued RMB appreciation against the USD may drag on trading activities, RMB-denominated financial statement performance and USD asset revaluation.
• U.S. tariff policy, inflation and macroeconomic uncertainty may continue to suppress ordering by brand customers.
• Repricing with major customers may fail to fully or promptly achieve cost pass-through.

What to watch

• The final landing point of 1H26 official results within the profit warning range.
• Order recovery from Nike, Puma, Adidas and Uniqlo in 2H26.
• Ramp-up speed, utilization rate and unit cost changes of new overseas capacity such as Vietnam.
• Progress in repricing with major brand customers and cost pass-through.
• Trends in yarn prices, labor costs and pension costs.
• RMB/USD exchange rate and its impact on financial statements and USD asset revaluation.
• Final implementation of U.S. tariff policy and changes in brand customers' procurement strategies.
• Whether gross margin can gradually recover from the FY26F forecast of 26.0% to 27.0% in FY28F.