Textile material invisible champion: Growing fiber, fabric, accessories quality enterprise tour

(2) Competitiveness: advanced fabric research and development + leading clothing efficiency, strong joint to create scarce integrated capacity

Soft power: generous employee treatment, forward-looking environmental protection investment, ESG consolidate the moat

International big-name customers generally have high ESG requirements. For example, Nike continues to put forward sustainable development plans and targets, regularly evaluates the environmental and social performance of tier 1 factories, and cuts down low-rated factories; Adidas proposed six strategies for sustainable development, in 2024, all business products only use recycled polyester fiber, and in 2030, its own and suppliers' greenhouse gas emissions will be reduced by 30% compared with 2017.

Shenzhou attaches great importance to sustainable development investment and risk control to consolidate the moat. The company's key investment directions include customer information security, production automation, energy saving, environmental protection and emission reduction, employee empowerment and welfare, supply chain management, etc., while meeting high ESG, it can continue to invest to consolidate its own advantages. The company's specific measures include: 1) set up a dedicated factory, protect customer information, customized to meet customer needs; 2) Continuous automation and environmental protection and energy saving transformation to improve efficiency and reduce energy consumption; 3) High standard construction of environmental protection facilities, clean emissions; 4) Staff management, pay high attention to staff care, and continuously reduce the turnover rate under the pressure of labor shortage in the industry (<5%); 5) Supply chain management, optimize domestic and overseas high-quality leading raw material suppliers.

Energy saving and emission reduction and staff stability management have achieved remarkable results. From the perspective of the company's energy intensity, the overall energy consumption and emissions are at a good level and show a downward trend (more environmentally friendly natural gas is on the rise). From the perspective of the company's employee mobility, in the context of the continuous growth of the company's employees, the mobility has remained at a low level, and the monthly turnover rate has remained below 5%, and the overall trend has declined over the years.

(3) Growth: competitiveness determines share, and the penetration potential is enough to support double-digit growth for 10 years

We believe that the procurement share of suppliers in the brand mainly depends on the competitive advantages of suppliers and their own industry chain peers. On the one hand, the brand hopes to keep the supplier moderately decentralized and control the single supply risk, and on the other hand, it hopes to have the best quality supply resources. When a supplier has a significant advantage over its peers, the benefits gained by the brand in striving for its capacity resources are greater than the risk of supply concentration, and the supplier's share of brand purchasing is expected to increase. Therefore, we believe that Shenzhou International's share ceiling in leading brands mainly depends on its competitive advantage compared to other suppliers. The core assumption of the following calculation is that Shenzhou can maintain its competitive advantage in the future and expand its share by breaking through the bottleneck of production capacity.

1. Brand customers continue to integrate suppliers and improve the concentration of high-quality production capacity

Nike continues to increase the share of head suppliers, the increase in clothing is higher than that of shoes. Nike nearly a decade ago, the proportion of the top five shoe/clothing suppliers showed a continuous upward trend, reaching 61%/51% in fiscal year 2021, and the proportion of head clothing suppliers showed a continuous upward trend and there was a certain gap compared with the concentration of shoe suppliers; Adidas has expanded the number of suppliers in the past two years, but at the same time the proportion of core suppliers has further expanded. From the point of view of the number and proportion of core suppliers, it was significantly increased in 2019, and under the impact of the epidemic in 2020, the number of total suppliers of Adidas was significantly reduced, and it is expected to further focus on head suppliers.

2, the penetration potential can still support the company to maintain double-digit compound growth in the next 10 years

From 2014 to 2020, the company's purchasing share in the four major brands averaged +0.78p.p. per year. The company's purchase share in brand customers is mainly the share of knitwear category, in 2020, the four brands Nike, Adidas, Uniqlo and PUMA purchases accounted for about 17.5%, 20%, 11% and 40%. In order to obtain the past trend of the historical share, we use the operating cost of the four brands of clothing as the denominator to calculate Shenzhou's share in the four brands. Due to the unknown exact value of the gross profit margin of clothing categories and other procurement materials included in the cost, there is a slight difference between our calculation result and the actual share, but we think the overall change trend can be referred to. According to our standard, Shenzhou's total share of apparel procurement of the four major brands increased by 0.78p.p. per year on average in the past six years, and accounted for 14.4% of the total share of the four major brands in 2020 (affected by the epidemic in 20 years, customers of all brands declined, resulting in a large increase in share in that year).