Kenji Chan, financial controller of Shenzhou, speaking with Andrew van Buren. Photo by Mark LeeSHENZHOU INTERNATIONAL Group Holdings, China’s biggest vertically integrated knitwear manufacturer, is betting that its steady shift in emphasis to OEM sportswear manufacturing from its traditional reliance on casual wear will bring tremendous benefits to its shareholders. The company, which listed on the mainboard in Hong Kong in November 2005, is also China’s biggest knitwear exporter and the country’s largest garment supplier to Japan.
With a focus on casual wear, Shenzhou has also entered the sportswear ring in recent years, and counts Nike, Adidas, and Puma among its major international renowned clients.
“Sportswear is to be a growing emphasis,” said Mr. Kenji Chan, Financial Controller & Company Secretary.
In an interview with NextInsight, Mr. Chan said the gradual shift to sportswear versus casual wear is backed by simple math as the former enjoys a 20% profit margin per per unit.
Despite the global economic meltdown in the second half of last year, the company still managed a surprisingly robust 2008 performance, with turnover and net profit up 31.9% and 71.9%, respectively.
Revenue last year rose to 4.82 bln yuan, while net profit was up to 699 mln yuan, with the company attributing the stellar results to “continual growth in sales of sportswear and the domestic market, and success in worldwide market development under a challenging market environment.”
In 2007, casual wear revenue was 2.25 bln yuan, or 61.5% of the total, and in 2008: 2.40 bln yuan/49.7%. This compares with sportswear: 2007: 1.17 bln yuan/31.9% versus 2008: 2.04 bln yuan/42.3%.
While Shenzhou still relies heavily on top buyer Japan and top-selling product casual wear, both constitute a smaller portion of total revenue, and a cursory glance at recent improvement over the past few years proves the wisdom of these shifts.
Growth in sales to both Europe and back home in China grew much faster than to Japan. In 2008, Shenzhou’s gross profit margins were 23.8%, up from 22.3% in 2007 and 21.4% in 2006.
Revenue last year rose to 4.82 bln yuan, while net profit was up to 699 mln yuan. The Group employs 40,000 workers.
Overall, 2008 sales to Japan were higher at 2.44 bln yuan or 50.5% of total revenue, versus 2.18 bln yuan in 2007 or 59.6% (from 89.1% in 2004). Meanwhile, sales last year to Europe were higher at 751 mln yuan or 15.6% of the total, versus 516 mln yuan in 2007 or 14.1% (from 1.6% in 2004).
And as for the domestic market, 2008 sales to China were higher at 917 mln yuan or 19.0% of the total, compared with 394 mln yuan in 2007 or 10.8% (from 4.1% in 2004).
“Uniqlo (of Japan) took over 30% of our sales, and it is trying to be like the Giordano of Hong Kong. Meanwhile, Adidas, Nike, Puma, Kappa and Decathalon combined for 48% of our sales. PRC market sales revenue was up 20% in 2008. And every month, two new Uniqlo shops open in the PRC,” said Mr. Chan.
He said that Shenzhou would remain a powerhouse in casual wear due to the nature of the product.
“Casual wear must have very quick turnaround as fashions change so quickly. So only large players like us thrive, as they control upstream and downstream processes. Two months is the industry average from order-to-output turnaround, but we only take 38 days to meet orders.”
He said Shenzhou was also benefiting from strong demand from its ladies underwear products in Japan.
“Quality is very important, and 100% of our ladies underwear output goes to Japan, giving us 95% average capacity utilization for the product. Uniqlo (orders) sometimes operates at full capacity. Sales of ladies underwear to Japan will be major driver going forward.”
He added that Shenzhou benefited from being virtually self-reliant on raw materials. But the company was growing increasingly keen on sportswear orders, primarily due to higher profit margins.
“Sales increased a lot last year vis-à-vis casual wear. For the latter, quality/durability is less important. We are also big on quality control up and down the supply chain. We control it well.” With a production base in eastern China’s Ningbo and a garment factory strategically located in Cambodia, the group has also established sales offices and branch offices in Shanghai, Hong Kong and Osaka.
Currently, the group has nearly 40,000 employees with factory space of 1.1 mln square meters, with annual knitwear capacity of over 138 mln pieces.
New Quzhou & Anqing plants to benefit turnover and reduce labor cost
Shenzhou’s new plant in western Zhejiang province city of Quzhou, is expected to both increase the good kind of turnover, and reduce the bad. Mr. Chan said that the new garment factory, currently under construction, is expected to come online in the third quarter and will employ some 4,000 workers.
Another new garment factory in the Anhui province city of Anqing was opened in 1Q09 and will employ about 6,000 workers.
“We chose Anqing for its worker localization benefits. The city doesn’t attract as many migrant workers as our plant in (the coastal city of) Ningbo, where they have higher (job) turnover as they change jobs a lot,” he said.
Revenue growth this year is expected to be in the double digits.Mr. Chan said the new plant will also benefit from relatively depressed wages, averaging 1,200 yuan per month, versus 2,000 yuan at its current Ningbo plant. He said he hopes the two new plants (Quzhou and one recently opened in Anhui province) will boost production by a further 20%.
Forecasts, fiscal stimuli
Widespread factory closures have spurred the government to step in to protect factory jobs with one of the favorite tactics being returning more export taxes to exporters on sluggish external demand in order to keep them in business.
“Export tax rebates are very beneficial to us. Since August of 2008, rebates rose from 11% to 16%. They should stay at this level for all of 2009 which is good because last year we exported around 80% of our total output,” Mr. Chan said.
He also said that the company enjoyed other government-led benefits.
“We have signed some 20-year contracts for water usage rights with local governments and been given preferential policies.” He also shed some light on just how the tough labor market was benefiting the bottom lines of many surviving industries, and just how important the government took its job of maintaining maximum employment.
“Since the end of last year, there is temporarily no minimum factory wage in China. So minimum wages are on hold. This goes for the whole country, for all industries because many factories were forced to close down, especially in Southern and Eastern China.”
Despite the limp economy, the company still outperforms its peers, and kept a 32% dividend payout in 2008.
“We want a stable dividend policy,” Mr. Chan said.
