Shenzhou Reports Mixed Results, but Demand Recovery Is in Sight; Shares Undervalued

We see Shenzhou International's second-half 2022 results as a mixed bag. On the positive side, revenue growth remained healthy despite operating under a challenging industry environment. With key clients reporting a gradual recovery in China, we think Shenzhou's demand outlook will gradually improve. On the negative side, profitability fell more than our expectations as capacity utilization rates fell, and this headwind will likely remain in the first half of 2023. We are maintaining our HKD 140 fair value estimate for the narrow-moat company and see the shares as materially undervalued from a long-term perspective.