Shenzhou International Group Holdings Ltd (HKEx: 02313) shares are under review as CICC released a research report, adjusting its earnings forecasts and price target for the apparel manufacturer.

CICC lowered its 2026/27 earnings per share (EPS) estimates for Shenzhou International by 23% and 10% to RMB 3.13 and RMB 3.94, respectively, citing demand fluctuations and macroeconomic factors. The investment bank maintained its "outperform" rating on the stock. The target price was cut by 15% to HK$52.76, implying a 23% upside based on 15 times and 11 times the 2026/27 P/E, respectively, as CICC expects a recovery in profit growth in the second half of 2026.

Key Points from CICC's Report:

First-Half 2026 Profit Warning: The company guided that its attributable net profit for the first half of 2026 is expected to decline by approximately 38% to 43% year-on-year, corresponding to an estimated range of RMB 18.11 billion to RMB 19.70 billion. This preliminary result fell short of CICC's expectations. The profit decline is primarily attributed to weaker demand, rising raw material and labor costs, and the appreciation of the Chinese yuan.

Weak Demand Drives Slight Revenue Decline: Due to macroeconomic uncertainties, tariff policies, and inflation risks, end-customer demand for inventory has been conservative. Brand clients have become more cautious in placing orders, leading to increased order volatility during the period. Additionally, the company absorbed some tariff concessions, and coupled with exchange rate fluctuations, this exerted downward pressure on the yuan-denominated prices.

Significant Margin Pressure from Multiple Factors: 1) The average exchange rate of the yuan against the US dollar appreciated by about 4% year-on-year in the first half of 2026, impacting gross margins and causing exchange losses, compared to a RMB 126 million exchange gain recorded in the first half of 2025. 2) Rising wages and retirement benefit costs, along with an expansion of the workforce in Vietnam and Cambodia, and higher raw material costs for synthetic yarns due to rising international oil prices, collectively increased labor and manufacturing costs. These costs are difficult to pass on to end customers in the short term. 3) Tariff concessions made to mitigate trade policy impacts also had a negative effect. CICC noted that the textile manufacturing industry has lower barriers to entry than sectors like home appliances or automotive, and orders are gradually shifting to lower-cost Southeast Asian production bases. As of end-2025, about 39% of the company's production capacity was in China, where weak domestic demand led to underutilized capacity, dragging down gross margins. Overseas factories, operating at full capacity, cannot easily absorb the additional costs from domestic operations.

Outlook for the Second Half of 2026: Orders Expected to Turn Positive, Margins May Stabilize: With a lower comparison base (revenue growth of 15% and 2% year-on-year in the first and second halves of 2025, respectively), strong performance from Adidas and Uniqlo (which together accounted for 50% of revenue in 2025), and steady growth from domestic brands, CICC expects order growth to turn positive year-on-year in the second half of 2026. Furthermore, as the year-on-year pressure from tariff costs eases further, the cost pressures from labor and raw materials are also expected to be more effectively passed through to end customers. CICC forecasts a sequential improvement in gross margins in the second half of 2026. Additionally, the negative impact from exchange losses in the second half of 2026 is likely to narrow.

Key Risks: Slower-than-expected growth from downstream customers, fluctuations in raw material prices, and volatility in the yuan exchange rate.