Shenzhou Issues Weak Guidance Following Adidas Weakness; but Growing Entrenchment Underpins Moat

Narrow-moat Shenzhou reported first-half results above our and Pitchbook consensus expectations, but near-term guidance was disappointing. Management struck a cautious tone for the growth in the second half as its key clients (Nike and Adidas) have reduced orders due to weak demand in China. That said, we expect new orders to recover when channel inventory has stabilized, which we expect by the end of 2022, and this should support double-digit top-line growth and a much better profitability in 2023. Despite near-term challenges, Shenzhou demonstrated its competitive advantages by gaining market shares in the first half of the year within clients' supply chains. Therefore, we maintain our fair value estimate of HKD 140 and view ongoing destocking concerns as a buying opportunity for this narrow-moat company.