GTHT Securities has issued a research report stating that, taking into account gross margin pressure in 2026H1 and short-term foreign exchange disturbances at SHENZHOU INTL (02313), the firm forecasts attributable net profit of RMB 4.30/5.18/6.00 billion for 2026-2028, assigns a 2027 PE of 13X, and based on HKD 1 = RMB 0.86, derives a target price of HK$52, maintaining its "Buy" rating.

Affected by multiple factors including foreign exchange losses, rising labor costs, raw material price increases, and tariffs, 2026H1 results came under pressure, and the firm awaits stabilization and recovery in 2026H2; capacity continues to shift overseas, and overseas capacity efficiency is expected to gradually improve in 2027.

The main views of GTHT Securities are as follows:

2026H1 results under pressure. 2026H1 revenue reached RMB 14.179 billion, down 5.3% year-on-year, or about 1.8% lower in USD terms; gross margin was 22.6%, down 4.5 percentage points year-on-year; attributable net profit was RMB 1.91 billion, down 40% year-on-year. The profit decline was significantly larger than the revenue decline, mainly due to gross margin pressure and foreign exchange losses arising from the revaluation of USD net current assets. Excluding non-operating fluctuations such as foreign exchange, operating net profit is estimated to have fallen about 22% year-on-year. The interim dividend was HK$0.88 per share.

Weak sportswear demand in Europe and the US, with customer structure broadly stable. 1) By category, 2026H1 sportswear revenue was RMB 9.04 billion, down 10.7% year-on-year, the main source of the revenue decline; casualwear and underwear grew 4.5% and 6.1%, respectively. 2) By region, 2026H1 revenue from Europe, the US, and mainland China fell 8.9%, 11.7%, and 5.2%, respectively, while Japan grew 2.6%. Weak sportswear demand in Europe and the US, a slower customer restocking pace, and declining orders from international sportswear brands in the Chinese market weighed on the sportswear category and major export markets. 3) By customer, customer concentration was broadly stable, with the top three customers accounting for 33.5%, 23.8%, and 18.6% of revenue in 2026H1, respectively.

Three major factors led to the net profit decline, and overseas capacity efficiency is expected to gradually improve in 2027. The firm judges that the net profit pressure in 2026H1 was mainly due to: 1) the average RMB/USD exchange rate appreciating about 4% year-on-year, reducing RMB-reported revenue and gross profit and causing non-cash foreign exchange losses; 2) total labor costs increasing by about RMB 140 million year-on-year, with labor costs as a share of revenue rising about 2 percentage points, as changes in the domestic and international workforce structure and the ramp-up of new employees in Cambodia weakened efficiency; 3) rising chemical fiber raw material prices and US tariff sharing further squeezed gross margin. Capacity continues to shift overseas, with the second fabric plant in Vietnam already capable of 100 tons per day; Cambodia added about 7,000 employees, still in the training and efficiency release stage; the Indonesia project is expected to begin contributing capacity in 2028. Brand customers are pushing for regional supply chain diversification, shorter lead times, and greater product complexity, and Shenzhou's integrated and global delivery capabilities remain advantageous, but new capacity in the ramp-up phase first recognizes labor and fixed costs. The firm expects profit recovery in 2027 to mainly come from efficiency improvements in Vietnam and Cambodia, domestic automation, and product mix upgrading.

Risk warning: raw material price fluctuations, efficiency improvement falling short of expectations, etc.