7 october 2013 - gw.com.cnrdfile.gw.com.cn/d4/3f/d43fb3d052045dafca83d20b081f7dca.pdf · include...

PREPARED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (TAIWAN) CO LTD THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 19

The bigger gets bigger

n Initiate at BUY with a DCF-based TP of HKD31.6

We are bullish on Shenzhou because of its: 1) solid manufacturing

integration from fabric to garment, supported by solid R&D, 2) new

capacity creation, which should lift volume growth, 3) diversification

into ASEAN to improve cost competitiveness, 4) increasing sales to

Japan and US clients, thereby reducing dependence on domestic

brands, and 5) impressive margins and balance sheet.

n Solid long-term outlook for the leading apparel OEMs/ODMs

Leading apparel makers are gaining market share, due to: 1) clients’

stringer requirements on lead-time and supply-chain management, 2)

ability to provide value-added services, including fabric R&D, 3) cost

competitiveness and operating leverage, 4) better control on CSR

issue, and 5) good long-term relationship with clients.

n Impressive margin trend vs. peers

Shenzhou generates higher gross margins and operating margins

than peers, thanks to its production integration, large scale and

efficiency. This is despite the fact that the company’s labour costs

and cotton costs are higher than that of manufacturers outside China.

n Our TP is based on DCF, implying 15.9x 2014PE

We forecast y-y net income growth of 12.9% for 2013 and 19.7% for

2014. Our DCF model assumes WACC of 12.2% and terminal growth

of 3%.

Revenue breakdown by market, 1H13

Sources: Shenzhou International; BNP Paribas

Japan33.6%

Europe17.0%

US8.1%

Other countries21.7%

Domestic sales19.5%

7 OCTOBER 2013

INITIATION 19TAIWANCHINA / CONSUMER DURABLES & APPAREL

SHENZHOU INTERNATIONAL 2313 HK

BUY UNCHANGED

TARGET PRICE HKD31.60

CLOSE HKD27.10

UP/DOWNSIDE +16.6%

HKD15.00 CHANGE IN TP +110.7%

HOW WE DIFFER FROM CONSENSUS MARKET RECS

TARGET PRICE (%) 6.5 POSITIVE 12

EPS 2013 (%) (4.3) NEUTRAL 0

EPS 2014 (%) (3.1) NEGATIVE 1

Michelle Cheng [email protected]

+886 2 8729 7061

Patricia Lee [email protected]

+886 2 8729 7063

Our research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for

authorisation. Please see the important notice on the back page.

KEY STOCK DATA

YE Dec (RMB m) 2012A 2013E 2014E 2015E

Revenue 8,938 9,968 11,688 13,706

Rec. net profit 1,620 1,829 2,191 2,539

Recurring EPS (RMB) 1.24 1.32 1.57 1.81

EPS growth (%) (9.1) 6.4 18.3 15.9

Recurring P/E (x) 17.2 16.2 13.7 11.8

Dividend yield (%) 1.8 2.5 2.4 2.9

EV/EBITDA (x) 11.8 10.1 8.4 7.1

Price/book (x) 3.6 2.9 2.5 2.2

Net debt/Equity (%) (18.3) (30.0) (31.2) (32.8)

ROE (%) 22.9 19.8 19.7 20.0

Share price performance 1 Month 3 Month 12 Month

Absolute (%) 10.6 23.5 103.8

Relative to country (%) 6.0 12.8 92.3

Next results March 2014

Mkt cap (USD m) 4,887

3m avg daily turnover (USD m) 6.0

Free float (%) 40

Major shareholder Ma Family (60%)

12m high/low (HKD) 27.10/13.30

3m historic vol. (%) 40.8

ADR ticker -

ADR closing price (USD) -

Issued shares (m) 1,399

Sources: Bloomberg consensus; BNP Paribas estimates

(2)

18

38

58

78

98

13

18

23

28

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13

(%)(HKD) Shenzhou International Rel to MSCI Hong Kong

Shenzhou International 2313 HK Michelle Cheng

2 BNP PARIBAS 7 OCTOBER 2013

Investment thesis

We initiate coverage of Shenzhou International with a BUY rating and a target price of HKD31.6, based on a DCF model. At our target price, the stock would trade at 18.8x 2013E P/E and 15.9x 2014E P/E.

We are bullish on Shenzhou because of its: 1) solid manufacturing integration from fabric to garment, supported by solid R&D, 2) new capacity creation, which should lift volume growth, 3) diversification into ASEAN to improve cost competitiveness, 4) increasing sales to Japan and US clients, thereby reducing dependence on domestic brands, and 5) impressive margins and balance sheet.

Catalyst

Key catalysts are capacity expansion, rising shipments, improving ASP, stabilizing raw material prices, operating leverage, and Chinese government’s changes in cotton subsidy programme.

Risks to our call

Downside risks to our target price are: 1) slower-than-expected order inflow, 2) higher-than-assumed costs related to raw material and labour, and 3) weakening economic growth vs. apparel spending globally.

Company background Key assumptions

Shenzhou is one of Asia’s leading integrated apparel

ODM/OEM companies and is the largest knitwear exporter in

China. Its production is mainly based in China (Ningbo, Quzhou

and Anqing – 88% of its garment production capacity) and

started to expand into Cambodia in 2005 and Vietnam in 2013.

Shenzhou started by manufacturing casual-wear products but

has increased its exposure to higher-margin sportswear and

lingerie products. Major clients: Fast Retailing, adidas, Nike,

Puma, among others.

2013E 2014E 2015E

Sales growth (%) 11.5 17.3 17.3

Gross margin (%) 28.8 29.2 29.5

OP margin (%) 20.6 21.1 21.5

Sources: Bloomberg consensus; BNP Paribas estimates

Principal activities, revenue split (2012) Earnings sensitivity

----- Bear case ----- ----- Base case ----- ----- Bull case -----

2013E 2014E 2013E 2014E 2013E 2014E

(RMB) (RMB) (RMB) (RMB) (RMB) (RMB)

Sales (m) 9,968 11,688 9,968 11,688 9,968 11,688

Gross margin (%) 27.8 28.2 28.8 29.2 29.8 30.2

Change (%) (1) (1)

1 1

Gross Profit 2,771 3,296 2,871 3,413 2,971 3,530

Changes(ppt) (3.5) (3.4)

3.5 3.4

Net profit 1,750 2,097 1,829 2,191 1,909 2,284

Change (%) (4.4) (4.3)

4.4 4.3

Key executives Sources: Bloomberg consensus; BNP Paribas estimates

Age Since Title

Mr. Ma Jianrong 49

- Executive Director and Chairman

Mr. Huang Guanlin 48 - Executive Director and the general manager of the Group

http://www.shenzhouintl.com

Raw material cost and labour costs are the main factors

affecting Shenzhou’s earnings.

We estimate every 1ppt change in gross margin would

impact gross profit by 3.5%/3.4% in 2013/2014.

We estimate every 1ppt change in gross margin would

impact net profit by 4.4%/4.3% in 2013/2014.

Sportswear56.1%

Casual wear33.6%

Lingerie7.9%

Other knitting2.4%



Initiating with BUY and TP of HKD31.6

We initiate coverage of Shenzhou International with a BUY rating and a target price

of HKD31.6, based on a DCF model. At our target price, the stock would trade at

18.8x 2013E P/E and 15.9x 2014E P/E.

Shenzhou is one of Asia’s leading integrated apparel ODM/OEM companies and is

the largest knitwear exporter in China in terms of sales. The company’s production

base is mainly in China (Ningbo, Quzhou and Anqing, representing 88% of its

garment production capacity) and it expanded into Cambodia in 2005 and Vietnam in

2013. Shenzhou started from manufacturing casual-wear products but has increased

its exposure to the higher-margin sportswear and lingerie products. Major clients

include Fast Retailing, adidas, Nike, Puma, among others.

We are bullish on Shenzhou based on the following factors.

1 Solid integrated player with strong R&D on fabric to create value

Shenzhou offers customers services across the supply chain: customised fabrics,

dyeing and finishing services, printing and embroidery services, cutting and

sewing, and packaging and logistics. These integrated services are essential to

Shenzhou, as: 1) it can quickly respond to customers’ needs and transform

concepts into real products at reasonable costs; 2) generate superior margins,

thanks to an efficient production flow, and 3) ensure better quality control.

Fabric R&D relies on the ability to mix different functional yarns to develop

functional fabrics based on client requests. While there is no patent on the

developed fabric, capability to be the pioneer to transform concepts into real

products at reasonable costs gives Shenzhou a competitive edge. For example,

the company has successfully worked with Uniqlo on the heat-tech and AIRism

clothing in the recent seasons.

2 Capacity expansion to kick-in from 1H13 to support volume growth

Shenzhou is expanding its capacity in Anqing (Anhui, China from 2Q13),

Cambodia (second stage from 2H12), and Vietnam (from 2014). The production

will be ramped up gradually. The company plans to undertake a two-stage

expansion in Vietnam. The production of first stage is due to start from 2014 and

to be fully operational in 2015. The second stage of investment is due to start

from 2015. Management guides to a steady annual increase in its capacity of 10-

15% y-y. Continuous efficiency improvement should also support volume growth.

3 Diversification to Cambodia and Vietnam to improve cost competitiveness

Shenzhou entered Cambodia in 2005 and Vietnam in 2013. Aside from

benefitting from lower labour costs and favorable trade agreements with Europe,

the US and Japan, Shenzhou says it will accelerate expansion in Southeast Asia

to improve its cost competitiveness. Shenzhou is also considering diversifying

into Myanmar or other ASEAN countries.

4 Increasing exposure to US/Japan clients to reduce dependence on the

domestic sportswear brands

Shenzhou has a diversified geographical exposure: Japan contributed 33.6% of

sales in 1H13, Europe 17.0%, China 19.5%, US 8.1%, and other countries 19.5%.

In China, sales to the international brands (i.e., adidas, Nike, Puma and Uniqlo)

continued to rise in 1H while those to local brands continued to slide due to

excess inventories and loss of brand attraction. Shenzhou continues to see

increasing sales to Top 3 clients while the negative impact on sales of local

Chinese brands is decreasing.

5 High margins, strong cash-flow, and healthy balance sheet

Shenzhou delivered the highest gross margin and operating margin among the

major Asian apparel OEM/ODM companies since 2007 on the back of its

integrated business model, economies of scale, continuous efficiency

improvement and product mix/client mix enhancement. Besides solid profitability,

Shenzhou also has strong cash-flow and is sitting on a net cash position.



We forecast sales growth of 11.5% and 17.3% y-y in 2013 and 2014, and net income

growth of 12.9% and 19.7% y-y, respectively. We believe earnings growth will

resume into 2013 and 2014 along with steady volume growth and continuous

enhancement in products, clients and production bases mixes to improve margins.

EXHIBIT 1: Sales vs. operating profits vs. net income EXHIBIT 2: Gross margin vs. operating margin

Sources: Shenzhou International; BNP Paribas estimates Sources: Shenzhou International; BNP Paribas estimates

Our target price of HKD31.6 is based on a DCF model, where we assume WACC of

12.2% and terminal growth of 3%. At our target price, the stock would trade at

18.8x/15.9x 2013E/2014E P/E and 3.3x/2.9x 2013E/2014E P/B for ROE of

19.8%/19.7%. Shenzhou traded at an average of 7-9x P/E during 2005-11 but has

been re-rated to 11-15x PE since 2012.

We think the leading apparel ODM/OEM makers have a positive long-term outlook

and have been re-rated thanks to a more stable raw material costs trend, industry

consolidation on the supplier side, rising concerns over social responsibility, and

higher requirement on the supply chain management from the customers.

In comparison, Shenzhou’s Asian apparel OEM are trading at 20.9x/18.4x 2013/2014

PE and 3.8x/4.0x 2013/2014 P/B with earnings growth of 29.8%/21.1% and ROE of

19.3%/24.3%, based on Bloomberg consensus estimates (please see the peer

valuation table later in this section of the report for details).

0

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EXHIBIT 3: Shenzhou's DCF calculation

(%)

Leveraged beta 0.60 Risk free rate 4.1

Unlevered beta 0.59 Mkt risk prem. 13.9

Unlevered cost of capital (%) 12.3 Cost of debt 2.4

Tax rate (%) 20.0 Growth rate 3.0

Weighted Average Cost Of Capital (WACC)

Debt (D) (RMB m) 786

Equity (E) (market value) (RMB m) 37,913

Equity Weight (E / (D+E)) (%) 98.0

Debt Weight (D / (D+E)) (%) 2.0

Leveraged beta 0.60

Leveraged cost of capital (%) 12.4

WACC (%) 12.2

Year 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Net income (RMB m) 2,191 2,539 2,919 3,270 3,662 4,028 4,431 4,741 4,979 5,227

(-) Equity investment (RMB m) 0 0 0 0 0 0 0 0 0 0

(+) Depr & amort 468 535 535 535 535 535 535 535 535 535

(-) Capex (RMB m) 800 800 800 800 800 800 800 800 800 800

(-) changes in WC (RMB m) 555 653 685 719 755 793 833 858 884 884

FCF (RMB m) 1,303 1,621 1,969 2,285 2,641 2,970 3,333 3,618 3,829 4,078

PV of future cash flow (at WACC) (RMB m) 1,303

NPV of future cash flows (at WACC)(RMB m) 31,723

Net debt (RMB m) (3,127)

Equity value (RMB m) 34,851

Shares outstanding (m) 1,399

NPV of FCF per share (RMB) 24.9

(WACC Method)

FX 1.27

Target price (HKD) 31.6

Source: BNP Paribas estimates

EXHIBIT 4: Peers' valuation

Name BBG code Price ---------- P/E ---------- --------- P/BV --------- ---------- ROE ---------- ---------- Yield ---------- --- EPS growth --- Mkt cap

FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY1 FY2 FY3 FY0-FY1 FY1-FY2

(LC) (x) (x) (x) (x) (x) (x) (%) (%) (%) (%) (%) (%) (%) (%) (USD m)

Garment OEM

Makalot Industrial co ltd 1477 TT 165.0 19.5 15.3 12.0 5.4 4.9 4.3 29.0 33.9 38.3 3.7 4.4 5.7 17.8 28.0 917

Eclat textile Company ltd 1476 TT 277.5 25.9 19.3 14.7 8.5 6.9 5.4 36.3 40.1 40.3 2.3 3.1 3.5 40.9 34.1 2,373

Nien Hsing Textile co ltd 1451 TT 30.3 13.6 13.0 na 1.1 na na 7.4 na na na na na 25.6 4.0 412

Tainan Enterprises co ltd 1473 TT 34.7 10.8 na na 1.0 na na 9.5 na na 7.8 na na 170.6 na 174

Luen Thai Holdings 311 HK 3.0 59.6 50.7 44.7 8.2 7.2 6.5 14.4 15.0 15.3 0.5 0.6 0.7 30.8 17.6 405

Shenzhou International Grp 2313 HK 27.1 16.2 13.7 11.8 2.9 2.5 2.2 19.8 19.7 20.0 2.5 2.4 2.9 6.4 18.3 4,889

Pacific Textiles Holdings 1382 HK 10.1 13.5 12.0 9.9 3.3 3.0 2.7 26.4 28.0 30.0 5.2 5.9 6.9 16.1 13.1 1,876

Youngone Corp 111770 KS 32,100.0 12.7 10.8 9.2 1.8 1.5 1.3 15.6 15.4 15.5 0.6 0.7 0.7 (13.3) 18.2 1,326

Hansae Co Ltd 105630 KS 16,050.0 16.5 12.2 10.3 2.3 1.9 1.5 15.4 17.9 18.1 na na na (26.3) 35.2 599

Willbes & Co Ltd/The 008600 KS 1,135.0 na na na na na na na na na na na na na na 61

Average

20.9 18.4 16.1 3.8 4.0 3.4 19.3 24.3 25.4 3.2 2.9 3.4 29.8 21.1

Sources: Bloomberg consensus estimates (for all except Makalot and Shenzhou); BNP Paribas estimates for Makalot and Shenzhou



EXHIBIT 5: PB band vs. ROE EXHIBIT 6: PE band

Sources: Bloomberg; BNP Paribas estimates Sources: Bloomberg; BNP Paribas estimates

Shenzhou’s share price also has a high correlation with that of its largest client, Fast

Retailing. Shenzhou is one of the key partners for Fast Retailing’s manufacturing in

China.

EXHIBIT 7: Shenzhou's share price vs. Fast Retailing

Sources: Bloomberg; BNP Paribas

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(HKD) Price (LHS) ROE (RHS)

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(HKD)(JPY) Fast Retailing (LHS) Shenzhou (RHS)



Shenzhou’s SWOT analysis

The global apparel market is fragmented for both brands and manufacturers. Brands

need to attract consumers with quality products, good design, reasonable pricing,

clear branding, and solid retail management. In our view, what makes an apparel

company stand out from its peers is supply chain management that helps it offer

better quality products with shorter lead times. We believe the entry barrier for

apparel manufacturing is NOT capital only. Instead, management skills, long-term

relationship with clients, fast response to a dynamic operating environment and

changing consumer tastes, and capability to run a global business are essential.

Most leading apparel makers are not pure manufacturers but supply chain managers.

While different apparel makers have different business models (please see the

section on competitive landscape in this report), we believe Shenzhou has

established a strong leading position as the largest knitwear exporter in China and its

management continues to enhance its competitiveness by optimising its product

portfolio, client list, production bases, and geographical structure.

EXHIBIT 8: Shenzhou International's SWOT analysis

Strengths Weaknesses

1 Integrated business model from fabric development to garment manufacturing

2 Strong R&D capability in multi-functional fabric

3 Economies of scale and continuous efficiency improvement

4 Diversified market exposure

5 Long-term relationship with key clients

6 Solid management team

7 Strong cash flow and balance sheet

1 High exposure to China production and rising labour costs

2 Higher cotton costs relative to non-Chinese manufacturers

3 Exposed to raw material cost volatility vs. ASP change

4 Production management relies on trading agreements between different

countries

Opportunities Threats

1 Starting to diversify the production base to other Southeast Asian markets

2 Potential changes in China’s cotton subsidy programme to improve cost

competitiveness

3 New client base

1 Currency volatility

2 Rising costs in Southeast Asian countries

Source: BNP Paribas

Strengths

1 Integrated business model from fabric development to garment

manufacturing for higher entry-barrier and better margins

Shenzhou has developed a vertically integrated model for knitwear manufacturing

and focuses on offering customers the following services across the supply chain:

customized fabrics; dyeing and finishing services; printing and embroidery

services; cutting and sewing; and packaging and logistics. These integrated

services are essential because 1) Shenzhou can quickly respond to customers’

needs and realise the concepts into real products at reasonable costs; 2) it can

achieve better margins thanks to an efficient production flow; and 3) it can have

better quality control. We believe this is one of its most important competitive

edges that has made it the largest knitwear exporter in China and helped it to

build long-term relationships with its clients.

Currently, Shenzhou has fabric production facilities in Ninbo (Zhejiang) and is

setting up a fabric facility in Vietnam to capture any business opportunities in

Vietnam potentially after the commencement of the Trans-Pacific Partnership

(TPP) agreement in 2014/2015(please see our sector report for details). Based on

the company’s current plan, its fabric capacity in Vietnam will reach 50% of that in

Ninbo (where it has a capacity of 300 tonnes per day). Fabric produced in Ninbo

would be used for garment manufacturing in China while fabric produced in

Vietnam would support other overseas facilities.

The company’s garment manufacturing facilities are located in Ninbo, Quzhou

(Zhejiang), Anqing (Anhui) and Cambodia. Besides the new fabric production



base in Vietnam, Shenzhou is also considering the establishment of garment

manufacturing in Vietnam. Management has said that overseas expansion could

be speeded up in its pursuit of cost competitiveness.

Thanks to its fully-integrated capability, large scale, and continuous efficiency

improvement, Shenzhou has much higher gross and operating margins compared

with its Asian apparel OEM/ODM peers, despite rising labor costs and higher

cotton costs than those of manufacturers outside China. Management continues

to adjust the product mix, client breakdown, and production bases to improve

margins in the long run.

EXHIBIT 9: Shenzhou’s production bases—1H13 EXHIBIT 10: Shenzhou has superior margins—2012

Sources: Shenzhou International; BNP Paribas Sources: Companies; BNP Paribas

2 Strong R&D capability in multi-functional fabric

Shenzhou started by making casual wear products but has successfully

diversified into sportswear and lingerie products, which offer higher margins. In

the recent years, functional apparel products are getting popular for both casual

wear and sportswear. Shenzhou continues to enhance its R&D capability in fabric

development. Usually, apparel brands develop the concepts of their products (for

example, Uniqlo’s heat-tech and AIRism clothing). Shenzhou works with different

yarn suppliers and develops new fabric by mixing different kinds of yarns to

achieve certain functionalities. Shenzhou fully uses its fabric production and does

not sell or purchase fabric to/from third-parties in order to control quality.

EXHIBIT 11: Sales trend by product line


Ninbo70%

Quzhou3%

Anqing15%

Cambodia12%

(5.0)

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(%) Sportswear Casual wear Lingerie Other knitting



3 Economies of scale and continuous efficiency improvement

According to the 2011 China Government report on the development of China’s

garment industry and the 2011 annual report on China’s international trade in

textiles and clothing, Shenzhou is the largest knitwear and garment exporter in

the country. With a bigger scale, it has operating leverage, which explains its

lower operating expense ratio as a percentage of sales vs. that of its peers.

Shenzhou’s sales scale is also much larger than that of Asia’s leading players.

Besides, Shenzhou continues to improve its operating efficiency in terms of

product/client portfolio, labour quality, equipment upgrade, etc., with the aim of

achieving stable long-term margins.

EXHIBIT 12: Sales comparison, 2012 EXHIBIT 13: Operating expenses as a % of sales, 2012

Sources: Companies; BNP Paribas Sources: Companies; BNP Paribas

4 Diversified market exposure

Shenzhou has a diversified market exposure, with Japan being its largest market

(33.6% of total sales in 1H13), followed by China at 19.5% and Europe at 17.0%.

Sales to US clients are increasing and were 8.1% of the total in 1H13. In

comparison, the company had higher exposure to Japan at 90.2% sales in 2003.

Management has been diversifying the client and market exposure to reduce the

single account risk. We think Shenzhou can benefit from the better economic

outlook for US and Japan, and a potential recovery in Europe. In addition,

Shenzhou continues to reduce its business with local Chinese brands in view of

excess inventory issues. In 1H13, the domestic brands represented only 1.5% of

Shenzhou’s sales vs. 4.4% in 2008.

5 Long-term relationship with key clients

Shenzhou has been doing business with key Japanese clients (including

sourcing agents and apparel brands) for more than 10-20 years, especially in

casual wear. However, the company has been successfully expanding its product

lines and client list on the sportswear side since 2005. Currently, Uniqlo remains

its largest client, contributing around 25.3% of sales in 1H13, followed by 22.4%

for adidas, and 18.2% for Nike. Management continues to see orders from the

US and Japan clients rise.

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Luen Thai

Willbes

(%)



EXHIBIT 14: Sales by market EXHIBIT 15: Sales by customer, 1H13

Sources: Shenzhou International; BNP Paribas Sources: Shenzhou International; BNP Paribas

6 Solid management team

Shenzhou’s has a solid track record as a leading apparel OEM maker, as evident

in its long-term relationship with key Japanese clients and successful penetration

into new accounts over the past eight years. Management has focused on the

sustainability of the business and continues to improve the service and quality of

its products and manufacturing process, rather than just volume increases

In addition, Shenzhou also cares about its social responsibility, including the work

environment for its employees and their safety, protection of the environment, etc.

We think this makes it stand out as a leading apparel company as, after several

tragedies in garment manufacturing plants in Bangladesh, global leading apparel

brands/retailers and US/EU governments have been under pressure to pay

closer attention to the manufacturers’ quality.

7 Strong cash-flow and balance sheet

Shenzhou is sitting on a solid cash pile of RMB2,115m as at the end of 1H13.

Historically, it has generated solid free cash flow along with delivery of healthy

earnings performance. The company has spent around RMB500m-650m

annually on capacity expansion in recent years. Its recurring cash flow can

largely cover this unless it becomes more aggressive in its expansion plans.

Shenzhou issued new shares in Apr-12 and Jun-13, respectively, generating

cash of RMB940m and RMB1,217m. For the first placement, the use of the

proceeds included fabric and garment capacity expansion in China (representing

77.7% of the money raised), short-term bank loan redemption (13.7%) and retail

network expansion (8.6%). Proceeds from the second placement will be used for

fabric capacity expansion in Vietnam, including 50.9% of the amount raised for

the first stage in 2013 and 2014, and the rest for the second stage in 2015 and

beyond. This is in line with management’s target to speed up overseas expansion

to diversify production bases.

Weaknesses

1 High exposure to China production and rising labor costs

About 88% of Shenzhou’s production capacity is based in China. With the rising

labour costs, Shenzhou continues to see an increase in employee expenses as a

percentage of sales. Labour costs represent around 27% of Shenzhou’s COGS.

According to management, improving efficiency and lifting up product value will

help to offset part of the salary increases. In 1H13, Shenzhou’s labour costs rose

around 12% y-y. However, efficiency improved by around 15% y-y. Shenzhou

says it will upgrade equipment and increase automation for fabric production (but

garment manufacturing still relies on a huge labour force).

0

10

20

30

40

50

60

70

80

90

100

2005 2008 2012 1H13

(%) Japan Europe US Other countries Domestic sales

Uniqlo25.3%

Adidas22.4%

Nike18.2%

Puma11.4%

Others22.8%



A huge turnover of employees is also an issue for manufacturers in China.

Shenzhou says it is trying to develop a good working environment/benefits,

including a performance-based reward system and free meals/accommodation

for workers. Hence, it has a lower employee turnover vs. the industry (5-8% in

China and 12% in Cambodia) compared with 23.6% in China (2012 data; please

see chart below).

Shenzhou started to diversify its production base to Cambodia in 2005 (for

garment manufacturing) and to Vietnam in 2013 (for fabric). China remains an

important base for the textile industry in view of its comprehensive supply chain

and high-quality labour, but management says it is surveying more alternative

bases for production and will speed up overseas expansion.

EXHIBIT 16: COGS breakdown—1H13 EXHIBIT 17: Salary expenses as a % of total sales

Sources: Shenzhou International; BNP Paribas Sources: Shenzhou International; BNP Paribas

EXHIBIT 18: Labour cost trend in China EXHIBIT 19: Turnover of employees in China

Sources: NBSPRC; BNP Paribas Sources: Tower Watson

2 Higher cotton costs relative to non-Chinese manufacturers

Chinese apparel makers are at a disadvantage compared with other Asian

manufacturers with regards to the cotton costs. In order to protect cotton farmers,

the Chinese government has set an acquisition price of RMB20,400/tonne for

cotton produced in China, 6.4% higher than the current market price of

RMB19,170/tonne and 20-30% higher than the current international price if we

consider import duties and other costs. While the apparel’s ASP quotation is

usually based on raw material costs mark-up and refers to the international cotton

prices , Chinese apparel makers including Shenzhou suffer because of the higher

costs.

There have been discussions between the government and the apparel industry

regarding the need for a change in the subsidy programme, from the setting of an

Yarn35.2%

Accessories14.0%

Other raw materials8.8%

Labour27.0%

Utility6.6%

Depreciation4.5%

Others4.0%

0.0

5.0

10.0

15.0

20.0

25.0

2005 2006 2007 2008 2009 2010 2011 2012

(%)

0

2

4

6

8

10

12

14

16

18

20

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Mar-04

Aug-04

Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-07

Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

Nov-10

Apr-11

Sep-11

Feb-12

Jul-12

Dec-12

May-13

(%)(RMB) Average labor cost (Accu.) y-y

13.3 13.7 13.9 14.2 14.2

16.7 17.9

19.4

24.6 26.3

23.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(%)



acquisition price to giving subsidies directly to the cotton farmers. If this happens,

Chinese apparel makers should be able to improve their competitiveness and

margins. However, there is no certainty or timeline for this.

EXHIBIT 20: Cotton price trend comparison, China vs. international

EXHIBIT 21: Shenzhou’s yarn costs breakdown

Sources: Bloomberg; BNP Paribas Sources: Shenzhou International; BNP Paribas

3 Exposed to raw material cost volatility vs. ASP change

Around 58% of Shenzhou’s COGS is related to materials: 35% for yarns,14% for

accessories and 9% for other raw materials. During the past few years, volatile

cotton prices have impacted the ASP trend for apparel makers. During 2010 and

2011, cotton prices rose 45.6% but declined 42.1% during 2011 and 12. This,

along with the rising labour costs, led to a margin decline from 31.7% in 2009 to

28.5% in 2012.

As cotton prices have now stabilised, the ASP trend should also stabilise.

Shenzhou continues to enhance its product mix with more high-margin products

to lift up its blended margins and to cope with the cost volatility.

4 Production management relies on trading agreements between different

countries

Before 2005, there was a quota system for textile products; thus getting a quota

and choosing production bases accordingly were priorities for textile companies.

However, the quota system was removed in 2005, so labour costs became the

key criteria. Thus, China emerged as a key production hub for the US and EU.

Now, there are free-trade agreements for certain products between some

countries. For example, based on the EC-Cambodia Trade in Textiles Agreement,

all textile products exported from Cambodia to the EU are duty-free. Under the

TPP, Vietnam would become a duty-free trading partner of the US and Japan.

These trade agreements impact textile companies’ choice of manufacturing base.

Opportunities

1 Starting to diversify the production base to other Southeast Asian markets

In order to diversify the production base and improve cost competitiveness,

Shenzhou started to move out from China to Cambodia in 2005 and to Vietnam in

2013. While it made me less flexible compared with other regional players in

Taiwan and Korea that have accumulated experience in running multi-national

operations, we think Shenzhou is gradually ramping up its overseas facilities.

Management has also said that it will speed up the company’s overseas

expansion.

2 Potential changes in China’s cotton subsidy programme to improve cost

competitiveness

As highlighted above, given the declining competitiveness of Chinese apparel

makers, owing to high cost pressure from both labour and cotton costs, there

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Feb-03

Sep-03

Apr-04

Nov-04

Jun-05

Jan-06

Aug-06

Mar-07

Oct-07

May-08

Dec-08

Jul-09

Feb-10

Sep-10

Apr-11

Nov-11

Jun-12

Jan-13

Aug-13

(RMB/tonne) China Cotton Price

International Cotton Price

Cotton70%

Polyester30%



have been discussions between the apparel makers and the Chinese

government, which may decide to change its subsidy programme for cotton

farmers. If this happens, it will likely be positive for Shenzhou’s margins.

3 New client base

Shenzhou has been successfully diversifying its high exposure to Japanese

clients over the past few years. Management expects sales to the top three

clients (i.e., Uniqlo, adidas, Nike) to grow, but Shenzhou is also cultivating its

smaller clients in the US, Korea, HK, Singapore, etc. The sales contribution of

these new clients is small at the moment because of Shenzhou’s capacity

constraints. However, management said the planned expansion in Vietnam (even

into garment manufacturing) will help support medium-term sales growth to new

clients.

Threats

1 Currency volatility

About 80% of Shenzou’s sales are denominated in the USD while almost 100%

of costs are in RMB. Change in currency rates impact Shenzhou’s profitability.

Thus, management partly hedges its FX risks by entering into 1) some USD loans

and 2) USD forward contracts.

EXHIBIT 22: Hedge revenues as a % of sales vs. the USD/RMB trend


2 Rising costs in Southeast Asian countries

Wage costs in the Southeast Asia countries have been rising over the past few

years. However, the costs are still below those in China, and workforce supply

remains abundant. Thus, we believe Southeast Asia will remain the alternative

production hub in the medium term. Besides, tariff incentives (such as zero tariffs

for Cambodia-made apparel products sold to Europe and, potentially, for

Vietnam-made products to the US, if Vietnam signs the TPP) are another

attraction for apparel makers.

Own-brand retail business

Shenzhou runs 19 retail stores under its own-brand Maxwin in Shanghai, Suzhou,

Hangzhou and Ninbo. The stores sell simple/lifestyle apparel for everyone,

regardless of gender or age. It is still loss-making but management says it will not

aggressively expand the number of retail stores. Instead, it sees these as a way to

develop and improve the company’s design capability to serve ODM/OEM clients.

We believe the own-brand retail business is challenging and requires further

investment in advertisement and marketing, if Shenzhou intends to increase its

scale. Besides, physical retail stores need more capex relative to online-only sales.

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

7.6

7.8

8.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012

(USD/RMB)(%) Hedge revenue as % of sales (LHS) USD/RMB (RHS)



Earnings forecasts and assumptions

Shenzhou’s sales stagnated in 2012 as 1) an economic slowdown in its top two

markets, i.e., Japan and Europe, while its domestic sportswear brands also suffered

because of excess inventory; 2) new capacity was just starting to ramp up; and 3)

the ASP declined on the back of sliding international cotton prices.

However, we expect a recovery in volume growth and a stable ASP trend in 2013

and 2014 thanks to 1) a gradual increase in capacity in Cambodia and Anqing

(Anhui, China); 2) a sales recovery in Japan, the US, China, and, potentially, Europe;

3) stable cotton prices. Thus, we estimate sales growth of 11.5% and 17.3% in 2013

and 2014.

Shenzhou also suffered from rising labour costs in China and higher cotton costs in

the country vs. international prices, which resulted in a gross margin contraction from

31.7% in 2009 to 28.5% in 2012. But thanks to continuous improvement in operating

efficiency in terms of product mix (more high-margin sportswear and lingerie), client

portfolio, production base (increasing exposure to lower-cost Southeast Asia

countries), labour quality, etc., we expect gross margin to improve to 28.8%/29.2% in

2013/2014 and operating margin to expand to 20.6%/21.1% in 2013/2014 from

20.1% in 2012. Therefore, net earnings growth should resume with 12.9% and

19.7% in 2013 and 2014, respectively. (Please refer to Exhibit 1 and 2 for the sales

and margin trends.)



Competitive landscape: Emergence of Asian OEM/ODM textile companies

Apparel manufacturing is a highly fragmented industry. Shenzhou’s revenue

represented just 1.3%, 0.1%, and 0.2% of Japan, Europe and US apparel imports in

2012. As Asian countries are cost competitive, Shenzhou’s major competitors are

mainly located in China, Hong Kong, Korea and Taiwan.

We identify several leading apparel ODM/OEM players in Asia including Shenzhou,

Makalot, Eclat, Tainan Enterprise, Nien Hsing, Luen Thai, Hansae, Willbes and

Youngone.

EXHIBIT 23: Asian’s leading garment OEM companies by revenues

Company BBG code Mkt cap Business model Product lines

Production base Key clients

Gross margin

OP margin -Earnings grth - ROE

Net gearing

Pay-out ratio Employees

2012 2012 2013E 2014E 2013E 2012 2012

(USD m) (%) (%) (%) (%) (%) (%) (%) (#)

Makalot* 1477 TT 917 Garment manufacturing

Comprehensive: knit and woven, cotton and polyester

Indonesia, Cambodia, Vietnam, Philippines, China

Kohl's, Target, Gap, Wal-mart, JC Penny, Fast Retailing, Zara, etc

19.9 9.4 19.3 28.5 28.9 (57.5) 89.5 24,000

Eclat 1476 TT 2,372 Fabric and garment manufacturing

Functional sportswear

Taiwan, China, Vietnam

Lululemon, JC Penny, Champion, Kohl’s, Walmart, Nike, adidas, etc

27.9 16.5 40.9 34.1 36.3 (0.2) 64.5 ~10,000

Nien Hsing 1451 TT 412 Fabric and garment manufacturing

Denim Taiwan, Vietnam, Cambodia, Lesotho, Mexico, Nicaragua

Levi's, Lee, Gap, Kohl's, etc

6.6 0.4 25.6 4.0 7.4 (3.9) 79.3 25,000

Tainan Enterprises

1473 TT 174 Garment manufacturing and apparel brands

Mid-high end casual wear

China, Indonesia, Cambodia, Taiwan

Gap, Mast, Ann Taylor, Macy's, Talbots, etc

21.1 (0.1) 170.6 na 9.5 8.3 84.0 na

Shenzhou* 2313 HK 4,889 Fabric and garment manufacturing

Sportswear, casual wear, lingerie, other knitting products

China, Cambodia

Nike, Adidas, Puma, Anta, Uniqlo, etc

28.5 20.1 12.9 19.7 19.8 (18.3) 31.7 51,400

Luen Thai 311 HK 405 Garment/accessories manufacturing

Knit and woven wear, accessories (i.e. handbags)

China, Philippines, Indonesia, Vietnam, Cambodia, Bangladesh

Coach, Polo Ralph Lauren, Liz Claiborne, Limited Brands, Uniqlo, Adidas, etc

17.2 4.0 30.8 17.6 14.4 (13.8) 29.7 33,000

Pacific Textile 1382 HK 1,876 Fabric manufacturing

Knit fabric China, Sri Lanka, Vietnam

Uniqlo, Gap, Adidas, Nike, Walmart, etc

17.8 16.0 16.1 13.1 26.4 (41.3) 85.9 6,500

Hansae 105630 KS 598 Garment manufacturing

Specialized in knit but expanding woven

Vietnam, Indonesia, Nicaragua, Guatemala

A&F, American Eagle, Gap, JCPenny, Jones, etc

19.8 5.6 (26.3) 35.2 15.4 34.8 9.1 23,000

Willbes 008600 KS 61 Garment manufacturing

Knit wear, sweater, woven wear, swim wear

Korea, China, Cambodia, Indonesia, Honduras, Haiti, Dominican

Gap, Old Navy, Target, Wal-mart, H&M, JCPenny, Disney, etc

14.7 (0.8) na na na 67.3 na na

Youngone 111770 KS 1,326 Fabric and garment manufacturing, accessories (i.e. shoes and accessories)

Sportswear, outdoor wear

Bangladesh, Vietnam, China, El Salvador

The North Face, Nike, etc

27.8 17.5 (13.3) 18.2 15.6 (8.8) 6.9 na

Prices as at 4 October 2013 Sources: Companies’ data; BNP Paribas estimates for Makalot and Shenzhou; estimates for all others (Not rated) are based on Bloomberg consensus



EXHIBIT 24: Garment manufacturing process

Source: BNP Paribas

1 Business model: Shenzhou, Eclat, Nien Hsing and Youngone are vertical

integrators, manufacturing fabric for garment production. However, Shenzhou’s

fabric is 100% for internal use while Eclat and Nien Hsing also sell the fabric to

other garment makers. Makalot, Luen Thai, Hansae and Willbes focus on

garment manufacturing only. Tainan Enterprises also runs a huge brand retail

business, on top of manufacturing garments. Pacific Textile mainly focuses on

fabric manufacturing.

2 Product lines: Shenzhou started with casual wear manufacturing but has

successfully penetrated into high-margin sportswear and lingerie products in

recent years. Eclat also focuses on sportswear products but mainly targets

mid/high-end flexible functional fabric. Nien Hsing is a dedicated jeans

manufacturer. Youngone focuses on outdoor wear. On the other hand, Makalot,

Luen Thai, Hansae and Willbes have diversified products.

3 Production bases: Taiwanese and Korean garment makers have been in the

industry for a longer time and have experience in running multinational

operations. HK-listed players have penetrated into Southeast Asia in the recent

years in view of the rising production costs in China.

4 Key clients: Shenzhou’s key clients include a casual wear brand (Uniqlo) and

sportswear brands (adidas, Nike, Puma, etc). Makalot is more focused on the US

market and is expanding its list of Japan and European clients. Other players

have a diversified client base in terms of geography. The mass merchant

retailers, department stores and specialty stores are key clients of most garment

makers.

5 Scale: Shenzhou has the largest scale in terms of revenues and number of

employees. Besides, Shenzhou does not use outsourcing partners while peers,

including Makalot and Eclat, leverage outsourcing OEM plants to adjust their

utilisation rates. Shenzhou’s economies of scale translate into operating leverage

and partly explain its higher margins.

6 Margins: Shenzhou stands out in terms of margin performance, even though it

faces rising labour costs in China and higher cotton costs vs. the international

market. Aside from its solid integration and continuous efficiency improvement,

the economies of scale translate into operating leverage, especially on the fabric

side. Other vertical integrators, such as Eclat and Youngone, generate higher

gross margins, at around 28%. Makalot’s gross margin has been steady

compared with around 20% for other pure garment makers in the past few years.

Other garment makers’ gross margins are 15-20%. In terms of expense ratio (as

a percentage of sales), pure garment makers usually have a higher ratio (10-

15%) while integrated players achieve a 5-10% expense ratio.

7 Financial strength: Taiwanese and HK-listed names have strong balance sheets

with net cash positions. Makalot had the strongest balance sheet and the highest

dividend pay-out in 2012. We think this was a result of solid profitability, no

capital-intensive investment, strict management of account receivables and

flexible outsourcing to adjust production.

Raw materials: Polyster, cotton

Yarn FabricDyeing and finishing

Garment manfucaturing

Shenzhou, Eclat, Nien Hsing, Youngone

Makalot. Luen Thai, Hansae,

Willbes

Pacific Textile



Financial statements Shenzhou International

Profit and Loss (RMB m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E

Revenue 9,043 8,938 9,968 11,688 13,706

Cost of sales ex depreciation (6,110) (6,031) (6,689) (7,808) (9,128)

Gross profit ex depreciation 2,933 2,906 3,280 3,881 4,578

Other operating income 0 0 0 0 0

Operating costs (622) (744) (817) (953) (1,096)

Operating EBITDA 2,311 2,163 2,462 2,928 3,481

Depreciation (331) (362) (409) (468) (535)

Goodwill amortisation 0 0 0 0 0

Operating EBIT 1,979 1,801 2,053 2,460 2,947

Net financing costs (28) 12 (5) 40 48

Associates 0 0 0 0 0

Recurring non operating income 109 193 240 240 180

Non recurring items 0 0 0 0 0

Profit before tax 2,059 2,005 2,288 2,740 3,175

Tax (355) (384) (458) (548) (635)

Profit after tax 1,705 1,621 1,831 2,192 2,540

Minority interests (1) (1) (1) (1) (1)

Preferred dividends 0 0 0 0 0

Other items 0 0 0 0 0

Reported net profit 1,704 1,620 1,829 2,191 2,539

Non recurring items & goodwill (net) 0 0 0 0 0

Recurring net profit 1,704 1,620 1,829 2,191 2,539

Per share (RMB)

Recurring EPS * 1.37 1.24 1.32 1.57 1.81

Reported EPS 1.37 1.24 1.32 1.57 1.81

DPS 0.29 0.39 0.54 0.52 0.63

Growth

Revenue (%) 34.6 (1.2) 11.5 17.3 17.3

Operating EBITDA (%) 29.5 (6.4) 13.9 18.9 18.9

Operating EBIT (%) 33.5 (9.0) 14.0 19.8 19.8

Recurring EPS (%) 34.0 (9.1) 6.4 18.3 15.9

Reported EPS (%) 34.0 (9.1) 6.4 18.3 15.9

Operating performance

Gross margin inc depreciation (%) 28.8 28.5 28.8 29.2 29.5

Operating EBITDA margin (%) 25.6 24.2 24.7 25.1 25.4

Operating EBIT margin (%) 21.9 20.1 20.6 21.1 21.5

Net margin (%) 18.8 18.1 18.4 18.7 18.5

Effective tax rate (%) 17.2 19.1 20.0 20.0 20.0

Dividend payout on recurring profit (%) 21.5 31.8 40.8 33.4 34.5

Interest cover (x) 73.4 - 461.6 - -

Inventory days 112.4 117.3 113.0 112.3 112.1

Debtor days 44.6 55.4 53.2 51.2 51.2

Creditor days 29.3 27.0 23.0 22.5 22.4

Operating ROIC (%) 32.0 25.7 26.0 27.8 29.5

ROIC (%) 30.1 25.5 26.4 27.9 29.0

ROE (%) 31.3 22.9 19.8 19.7 20.0

ROA (%) 21.6 17.5 16.6 16.6 17.1

*Pre exceptional, pre-goodwill and fully diluted

Sources: Shenzhou International; BNP Paribas estimates



Financial statements Shenzhou International

Cash Flow (RMB m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E

Recurring net profit 1,704 1,620 1,829 2,191 2,539

Depreciation 331 362 409 468 535

Associates & minorities 1 1 1 1 1

Other non-cash items (8) (108) 0 0 0

Recurring cash flow 2,028 1,876 2,239 2,660 3,075

Change in working capital (470) (300) (363) (555) (653)

Capex - maintenance 0 0 0 0 0

Capex - new investment (347) (646) (700) (800) (800)

Free cash flow to equity 1,211 929 1,177 1,304 1,622

Net acquisitions & disposals 0 (1) 0 0 0

Dividends paid (381) (539) (755) (732) (876)

Non recurring cash flows (69) 58 0 0 0

Net cash flow 761 447 422 573 746

Equity finance 20 940 1,217 0 0

Debt finance (185) (458) 0 0 0

Movement in cash 595 928 1,638 573 746

Per share (RMB)

Recurring cash flow per share 1.63 1.44 1.62 1.90 2.20

FCF to equity per share 0.97 0.71 0.85 0.93 1.16

Balance Sheet (RMB m) Year Ending Dec 2011A 2012A 2013E 2014E 2015E

Working capital assets 3,568 3,653 4,059 4,687 5,427

Working capital liabilities (1,203) (987) (1,030) (1,104) (1,191)

Net working capital 2,365 2,666 3,028 3,584 4,236

Tangible fixed assets 2,975 3,314 3,605 3,938 4,203

Operating invested capital 5,340 5,980 6,634 7,521 8,439

Goodwill 657 644 644 644 644

Other intangible assets 0 0 0 0 0

Investments 0 0 0 0 (1)

Other assets 2 9 9 9 9

Invested capital 6,000 6,633 7,287 8,175 9,092

Cash & equivalents (1,347) (2,275) (3,914) (4,486) (5,232)

Short term debt 1,235 786 786 786 786

Long term debt * 0 0 0 0 0

Net debt (113) (1,489) (3,127) (3,700) (4,446)

Deferred tax 0 0 0 0 0

Other liabilities 0 0 0 0 0

Total equity 6,078 8,087 10,380 11,840 13,504

Minority interests 34 35 35 35 35

Invested capital 6,000 6,633 7,287 8,175 9,093

* includes convertibles and preferred stock which is being treated as debt

Per share (RMB)

Book value per share 4.69 5.92 7.42 8.46 9.65

Tangible book value per share 4.18 5.45 6.96 8.00 9.19

Financial strength

Net debt/equity (%) (1.8) (18.3) (30.0) (31.2) (32.8)

Net debt/total assets (%) (1.3) (15.0) (25.6) (26.9) (28.7)

Current ratio (x) 2.0 3.3 4.4 4.9 5.4

CF interest cover (x) 55.8 - 378.7 - -

Valuation 2011A 2012A 2013E 2014E 2015E

Recurring P/E (x) * 15.6 17.2 16.2 13.7 11.8

Recurring P/E @ target price (x) * 18.2 20.1 18.8 15.9 13.7

Reported P/E (x) 15.6 17.2 16.2 13.7 11.8

Dividend yield (%) 1.4 1.8 2.5 2.4 2.9

P/CF (x) 13.1 14.9 13.2 11.3 9.7

P/FCF (x) 22.0 30.0 25.1 22.9 18.5

Price/book (x) 4.6 3.6 2.9 2.5 2.2

Price/tangible book (x) 5.1 3.9 3.1 2.7 2.3

EV/EBITDA (x) ** 11.6 11.8 10.1 8.4 7.1

EV/EBITDA @ target price (x) ** 13.5 13.8 11.9 9.9 8.4

EV/invested capital (x) 4.6 4.2 3.7 3.2 2.8

* Pre exceptional, pre-goodwill and fully diluted ** EBITDA includes associate income and recurring non-operating income

Sources: Shenzhou International; BNP Paribas estimates



Disclaimers and Disclosures

APPENDIX

DISCLAIMERS AND DISCLOSURES APPLICABLE TO NON-US BROKER-DEALER(S) (BNP Paribas Securities (Taiwan) Co Ltd)

ANALYST(S) CERTIFICATION

Michelle Cheng, BNP Paribas Securities (Taiwan) Co Ltd, +886 2 8729 7061, [email protected].

Patricia Lee, BNP Paribas Securities (Taiwan) Co Ltd, +886 2 8729 7063, [email protected].

The analyst(s) or strategist(s) herein each referred to as analyst(s) named in this report certify(ies) that (i) all views expressed in this report accurately reflect the personal view of the analyst(s) with regard to any and all of the subject securities, companies or issuers mentioned in this report; and (ii) no part of the compensation of the analyst(s) was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst herein. Analysts mentioned in this disclaimer are employed by a non-US affiliate of BNP Paribas Securities Corp., and are not registered/ qualified pursuant to NYSE and/or FINRA regulations.

IMPORTANT DISCLOSURES REQUIRED IN THE UNITED STATES BY FINRA RULES AND OTHER JURISDICTIONS "BNP Paribas” is the marketing name for the global banking and markets business of BNP Paribas Group. No portion of this report was prepared by BNP Paribas Securities Corp (US) personnel, and it is considered Third-Party Affiliate research under NASD Rule 2711. The following disclosures relate to relationships between companies covered in this research report and the BNP entity identified on the cover of this report, BNP Securities Corp., and other entities within the BNP Paribas Group (collectively, "BNP Paribas").

The disclosure column in the following table lists the important disclosures applicable to each company that has been rated and/or recommended in this report:

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securities issued by this company. The financial interest is in the common stock of the subject company, unless otherwise noted. 8. The analyst (or a member of his/her household) is an officer, director, or advisory board member of this company or has received compensation from the

company.

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1. The performance of obligations of the Company is directly or indirectly guaranteed by BNP Paribas Securities Korea Co. Ltd (“BNPPSK”) by means of payment guarantees, endorsements, and provision of collaterals and/or taking over the obligations.

2. BNPPSK owns 1/100 or more of the total outstanding shares issued by the Company. 3. The Company is an affiliate of BNPPSK as prescribed by Item 3, Article 2 of the Monopoly Regulation and Fair Trade Act. 4. BNPPSK is the financial advisory agent of the Company for the Merger and Acquisition transaction or of the Target Company whereby the size of the

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BNPPSK acts in the capacity of the agent for the tender offer designated either by the Company or by the target company, provided that this provision shall apply only where tender offer has not expired.

7. the listed company which issued the stocks in question in case where 40 days has not passed since the new shares were listed from the date of entering into arrangement for public offering or underwriting-related agreement for issuance of stocks

8. The Company is recognized as having considerable interests with BNPPSK. 9. The analyst or his/her spouse owns (including delivery claims of marketable securities based on legal regulations and trading and misc. contracts) the

following securities or rights (hereinafter referred to as “Securities, etc.” in this Article) regardless of whose name is used in the trading. 1) Stocks, bond with stock certificate, and certificate of pre-emptive rights issued by the Company whose securities dealings are being solicited. 2) Stock options of the Company whose securities dealings are being solicited. 3) Individual stock future, stock option, and warrants that use the stocks specified in Item 1) as underlying.



History of change in investment rating and/or target price

Shenzhou International (2313 HK)

Michelle Cheng started covering this stock from 07-Oct-2013 Price and TP are in local currency

Valuation and risks: Downside risks to our target price: 1) slower order inflow, 2) higher raw material costs & labour costs, 3) weakening economy growth vs apparel spending globally

Sources: Bloomberg; BNP Paribas

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Date Reco TP

6-Oct-09 BUY 8.8

6.85

11.85

16.85

21.85

26.85

Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13

(HKD) Shenzhou International Target Price



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All share prices are as at market close on 4 October 2013 unless otherwise stated.

RECOMMENDATION STRUCTURE

Stock Ratings Stock ratings are based on absolute upside or downside, which we define as (target price* - current price) / current price. BUY (B). The upside is 10% or more. HOLD (H). The upside or downside is less than 10%. REDUCE (R). The downside is 10% or more. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on market price and the formal recommendation. * In most cases, the target price will equal the analyst's assessment of the current fair value of the stock. However, if the analyst doesn't think the market will reassess the stock over the specified time horizon due to a lack of events or catalysts, then the target price may differ from fair value. In most cases, therefore, our recommendation is an assessment of the mismatch between current market price and our assessment of current fair value.

Industry Recommendations Improving (é): The analyst expects the fundamental conditions of the sector to be positive over the next 12 months. Stable (previously known as Neutral) (çè): The analyst expects the fundamental conditions of the sector to be maintained over the next 12 months. Deteriorating (ê): The analyst expects the fundamental conditions of the sector to be negative over the next 12 months. Country (Strategy) Recommendations Overweight (O). Over the next 12 months, the analyst expects the market to score positively on two or more of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Neutral (N). Over the next 12 months, the analyst expects the market to score positively on one of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity. Underweight (U). Over the next 12 months, the analyst does not expect the market to score positively on any of the criteria used to determine market recommendations: index returns relative to the regional benchmark, index sharpe ratio relative to the regional benchmark and index returns relative to the market cost of equity.

RATING DISTRIBUTION (as at 7 October 2013)

Total BNP Paribas coverage universe 654 Investment Banking Relationship (%)

Buy 340 Buy 5.6

Hold 200 Hold 1.5

Reduce 114 Reduce 3.5

Should you require additional information concerning this report please contact the relevant BNP Paribas research team or the author(s) of this report.

© 2013 BNP Paribas Group

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