Shenzhou International: Margin recovery remains uncertain, but valuation provides support; Goldman Sachs maintains Buy

Overview

This report is Goldman Sachs' earnings review of Shenzhou International Group (2313.HK). It notes that 2H25 net profit missed expectations, mainly because gross margin and operating margin were weaker than expected and foreign exchange losses were higher. Although the market had partly anticipated pressure on the OEM industry in 2H25, the 8% drop in the share price that day shows investors are still reassessing the margin slowdown and the 2026 outlook. Goldman believes 2026 revenue growth broadly matches the reset market expectations, but margin recovery will be slower, so it lowers earnings forecasts and the target price while keeping a Buy rating.

Core views

Goldman's core view is constructive but more cautious: on revenue, 2026 volume is expected to grow in the mid-single digits, with adidas and Uniqlo as the main growth drivers, and expansion in performance sports products plus a vertically integrated supply chain remain strengths; on margins, uncertainty around gross margin recovery has increased, and labor costs, capacity ramp-up, tariff sharing, exchange rates, and raw material prices may continue to pressure margins; on valuation, the current 10-11x 2026E P/E and roughly 6% dividend yield are considered to provide downside protection, so despite the target price cut, the Buy rating is maintained.

Analysis framework

The report combines earnings miss analysis, management meeting takeaways, customer and regional order tracking, capacity and labor cost analysis, earnings forecast revisions, and a P/E valuation framework to assess Shenzhou International's 2026-2028 volume, ASP, gross margin, net profit, and target price.

Methodology notes

• Valuation method13x 2026E P/E

  Target price valuation

  Goldman sets the 12-month target price at HK$57.0, based on 13x 2026E P/E; the valuation multiple was cut from 14x to 13x to reflect slower earnings growth.

• Earnings forecastEarnings Revision

  Forecast revision

  Goldman cut its 2026E-2027E net profit forecasts by 7%-8%, mainly reflecting a weaker-than-expected gross margin recovery trend, and introduced a 2028E forecast.

• Factor frameworkGS Factor Profile

  Growth, financial return, valuation multiple, and overall percentile comparison

  GS Factor Profile compares individual stocks with Goldman coverage and peers across growth, financial return, valuation multiple, and composite metrics.

• M&A frameworkM&A Rank

  M&A potential score

  Shenzhou International's M&A Rank is 3, indicating a relatively low probability of becoming an acquisition target and typically not included in target price valuation.

Asset mapping & comparison

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

• Shenzhou International Group (2313.HK)

  Core coverage name

  Strengths

  Client base includes adidas and Uniqlo; expansion in performance sportswear is progressing; the company has fabric R&D capability and a vertically integrated supply chain, while valuation is not high and the dividend yield provides support.

  Weaknesses

  2H25 gross margin and operating margin were below expectations; rising labor costs, underutilized capacity, tariff sharing, and foreign exchange losses are weighing on earnings.

  Comparison

  The report notes that the market has already focused on pressure across OEM peers in 2H25; versus overall industry sentiment, Goldman believes Shenzhou International's valuation and dividend yield offer better downside protection.

  Risks

  Demand recovery slower than expected, weaker-than-expected cost control, slower-than-expected ramp-up at new production bases, foreign exchange volatility, and geopolitical or tariff changes.

Key data

• RatingBuyGoldman Sachs maintains a Buy rating.
• 12-month target priceHK$57.0Previous target was HK$67; the cut reflects slower earnings growth and a lower valuation multiple.
• Implied upside19%Relative to the closing price cited in the report.
• Closing priceHK$48.04Shenzhou International Group price shown in the disclosed section.
• Market capHK$72.2bn / US$9.2bnKey report data.
• Enterprise valueHK$57.3bn / US$7.3bnKey report data.
• 2026E revenueRmb32,231mnDown 1.9% from the previous forecast of Rmb32,854mn.
• 2026E net profitRmb6,028mnDown 8.3% from the previous forecast of Rmb6,575mn.
• 2026E EPSRmb4.01Down 8.3% from the previous forecast of Rmb4.37.
• 2026E gross margin25.5%Down 1.7 percentage points from the previous forecast of 27.2%.
• 2026E P/E10.6xForecast valuation from the report.
• 2026E dividend yield5.7%Forecast dividend yield from the report.

Impact & implications

The report's investment implication is that Shenzhou International's share price may remain under pressure in the near term from margin debates, geopolitics, weaker Nike trends, and sentiment toward the OEM sector, but medium-term revenue growth has not clearly slowed. If the Cambodia plant becomes more efficient, the Vietnam fabric capacity expands, and performance sports orders scale up smoothly, there is room for margin recovery; otherwise, if tariff sharing, wage increases, foreign exchange losses, and raw material price increases persist, earnings recovery may continue to lag expectations.

Risks

• Demand recovery slower than expected may cause volume growth to fall short of management's mid-single-digit target.
• Weaker-than-expected cost control, especially labor costs, raw material costs, and capacity utilization pressure.
• Slower-than-expected ramp-up at new production bases, including efficiency improvements at the Cambodia plant and expansion progress at the Vietnam fabric plant.
• Foreign exchange volatility, especially RMB appreciation causing revaluation losses on USD assets.
• U.S. order tariff sharing and geopolitical changes may continue to pressure gross margin.
• Domestic demand remains under pressure, with mainland China revenue down 8.4% year on year in 2025.

What to watch

• Whether 2026 volume can achieve management's guidance of mid-single-digit growth.
• Whether order growth from adidas and Uniqlo can offset weakness from PUMA and other customers.
• After the 2H25 gross margin decline, whether gross margin can stabilize and gradually recover in 2026.
• Progress in improving efficiency and capacity utilization at the Cambodia plant.
• Whether the Vietnam fabric plant can increase output from about 100 tons/day to the 2026-2027 target of 200 tons/day.
• Whether U.S. tariff sharing remains at the 2H25 level or rises further.
• RMB exchange rate trends and whether 1Q26 foreign exchange losses continue.
• Whether new customers can start contributing revenue in 2H26.