Everest's investment decision is built upon bottom-up research. Reading annual reports is only the start, deep research goes far beyond that. We believe understanding the basics of a business isn't something we can do from afar. There are so many things that we cannot truly understand unless we visit the true operation. It's best when we're right there and up close.
Today's postcard features a series of sharings that demonstrate Everest's due diligence process. Take one company, Shenzhou International, as an example. First, let me introduce it:
Shenzhou is one of the world's largest vertically integrated knitwear manufacturers. Put in simple words: it makes both fabric and clothing. You might think this is an old-fashioned business, but there are a few things that make Shenzhou stand out: (1) Sportswear focus: It specializes in sportswear, which contributed to over 70% of its 2023 revenue and is growing consistently. And these sports clothes need high-quality fabrics; (2) Top clients: It has a growing, strong and loyal base of high-quality clients like Nike, Adidas, Uniqlo, Puma and Lululemon etc.; (3) Efficiency and cost: It is efficient because it handles everything from fabric to finished clothes, keeping costs down and making it tough for clients to find another supplier that can match Shenzhou's efficiency and cost. We met with Shenzhou's senior management in 2018 and have been keeping a close eye on it ever since.
In the last two years, we've visited almost all the places where Shenzhou makes its products. These places are Ningbo in China, Phnom Penh in Cambodia, and Ho Chi Minh City and Tay Ninh in Vietnam.
We first visited its Ningbo factory in December 2022, right after the COVID restrictions were suddenly lifted in China. While many people were still staying home, Zhouzhou and I went out. The area around its Ningbo factory was pretty deserted. We spoke with every worker we came across. At that time, Shenzhou was facing a lot of tough times. Here are some of the issues: (1) COVID disruptions for three years affected their factories, sometimes forcing them to close temporarily; (2) The cost of cotton, a key material they use, went up a lot in 2021 and 2022; (3) There were problems with shipping their products from Asia to the rest of the world; (4) The highly unusual patterns of its customers’ inventory build-out (panic buying during the COVID) and then reducing orders when interest rates went up, which affected demand. But, we believed these issues were just temporary and might actually make it a good time to invest in Shenzhou for the long term.
In December 2022, our first grassroots trip to Ningbo right after the uplift of national COVID restrictions
In June 2023, I took another trip to visit its fabric and clothing factories in Phnom Penh, Cambodia, and in Ho Chi Minh City and Tay Ninh, Vietnam. It was a really educational experience, and I got to spend three full days with the senior management to understand what makes this business, which might seem ordinary on the surface, actually quite strong and impressive. This trip made us even more sure about the company's potential, and we decided to invest in the first half of 2024.
In June 2023, my first night in a youth hostel in Phnom Penh, Cambodia (US$9 per bed per night). No fancy 5-star hotel. Only frugality. This is in line with the value investing philosophy that we believe in - high quality and low price...
In June 2023, visiting Shenzhou's plant in Phnom Penh, Cambodia (shipments to Nike waiting in the back)
In October 2024, almost two years after our first visit to the Ningbo factor, we went back, as a long-term business owner. We were happy to see that things were getting better - the area around its factory was very busy. We talked with Shenzhou workers and interviewed the owners of verious small businesses near Shenzhou's plants, like noodle restaurants and fruit vendors.
In October 2024, using an e-scooter to visit Shenzhou's Ningbo plants and interview small business owners nearby
It's exciting to travel with the team and meet interesting people, and best of all, identify great investment opportunities that are undervalued by the market.
Please keep an eye out for our next postcard on our future grassroots trips.
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