Shenzhou International: Stock of the Week

Kate Lin: Investors interested in athleisure have been buying Lululemon stock, and as a result, it has been expensive for some time. If you want to play the athleisure trend, you could consider the Shenzhou International stock (02313), which is a at a top supplier to brands like Nike, Adidas, and Uniqlo. And if you really don’t want to let go of Lululemon, you’d be happy to know that Shenzhou supplies to Lululemon, as well.

Shenzhou stock has a 5-star rating, which means it is significantly undervalued. Plus, in a rare instance for a textile and garment manufacturer, the company also has an economic moat.

The Ningbo-headquartered manufacturer has large-scale integrated production lines for high-end knitwear, and it has entrenched client relationships with the world’s most well-known clothing brands. These have helped it developed intangible strengths, which contribute to its narrow economic moat rating.

The company also has one advantage over other retailers like Lululemon – its strong research and development capabilities, which make Shenzhou the go-to factory for innovative and premium products, despite heavy competition on the retail side. According to our analyst Ivan Su, because of this, Shenzhou has not lost a single one of its key customers in the past decade.

For Morningstar, I’m Kate Lin.

 Bulls Say

• Large-scale apparel manufacturers compete on the basis of specialization and the provision of additional apparelrelated services; with integrated Shenzhou atop of its peers in these areas.
• Shenzhou's current capacity is running behind demand, allowing Shenzhou to cherry-pick less price-sensitive clients with more stable earnings. This gives Shenzhou higher profitability and stability in orders.
• The company has plants in multiple countries and can therefore shift production to Cambodia or Vietnam to avoid any Chinese tariffs. 

 Bears Say

• Athleisure has come a long way, and signs of saturation are emerging. A slowdown in sportswear sales worldwide will damage Shenzhou’s top line.
• Retailers’ investments in automation technology poses a serious threat to the company as production might eventually move onshore.
• Competitors can step up expenditures to produce at Shenzhou’s level, and once enough companies do, their reduced costs could become the baseline for reduced prices across the indu