Highlights

• Shenzhou’s 1H26 earnings were at the mid-point of the profit warning. However, gross margin deteriorated by 4.5ppt yoy, due to wage increase, rising raw material prices, forex and tariffs.
   
• In 1H26, the revenue decline was due to volume decline, while ASP remained flat. Looking into 2H26, management expects stable order volumes, with declines for Nike and PUMA narrowing, while Uniqlo and Adidas continue to drive growth, alongside a recovering ASP. Gross margin is expected to show sequential recovery in 2H26.
   

• Maintain BUY, cut target price by 9% to HK$55.80.
   

Analysis

• 1H26 earnings in the mid-point of the profit warning but gross margin a miss. Shenzhou International Group Holdings (Shenzhou) reported 1H26 revenue of Rmb14,179m (-5% yoy, -12% hoh). Gross profit was Rmb3,197m (-21% yoy, -22% hoh), with gross margin at 22.6% (-4.5ppt yoy, -3.1ppt hoh). Net profit was Rmb1,905m (-40% yoy, -28% hoh), landing at roughly the midpoint of the guided range (profit warning range of a 38-43% yoy decline to Rmb1,811m-1,970m), with net margin at 13.4% (-7.8ppt yoy, -3.1ppt hoh). The sharp net profit decline can be attributed to: a) gross margin contraction, b) forex loss of Rmb506m (vs forex gain of Rmb126m in 1H25), c) higher SG&A ratio (+0.4ppt yoy), and d) lower government incentives at Rmb112m (vs Rmb274m in 1H25). The company declared an interim dividend of HK$0.88 per share, implying an interim dividend payout ratio of 61.5% (vs 60.0% in 1H25).