申洲国际(02313) 　　Textile product growth healthy: we are confident that SZ’s textile businessrevenue will reach our forecast of up 16% YoY in 2H16. The growth shouldbe sustainably driven by one of SZ’s major sports clients and SZ’s majorcasual wear client. We witnessed strong sellthrough of vintage jackets,functional (warm) base layer shirts etc. driving sustainable rush ordersfrom the casual wear client during 3Q16.? High value-added products driving ASP: we expect SZ to have deliveredaccelerated ASP growth YoY in 3Q16, thanks to the growing shipment ofhigher value-added products for one of its major sports clients.? We are comfortable with our 2H16 gross margin forecasts: despite aregular wage increase recently, we remain confident in our 2H16 grossmargin forecast of 31.8% (up 0.5% YoY and flat HoH).? Shoe upper in good demand: we believe SZ is on track to ramp up its newshoe upper plant in Vietnam. We continue to see strong demand for shoeuppers from SZ’s client.? Accelerating worker recruitment progress at the Vietnam garment plant:following a wage adjustment, we expect it will become easier for SZ torecruit and ramp up its garment plant in Vietnam.Initial peek into 2017We think SZ has likely finished initial capacity planning for 2017 with its majorclients. We expect textile volume growth of 10-12% YoY in 2017. However wenote this is subject to revision, and could have upside potential if (1) wintersellthrough is stronger than we expect in China and US, and/or (2) the capacityramp up in Vietnam is faster than we expect.Valuation and risksWe use discounted cash flow (DCF) as the primary approach to reach ourtarget price, as we expect investors to focus more on SZ's long-term valuecreation. In our DCF model, we derive a WACC of 8.35% with cost of equity of8.94% (risk-free rate=3.9%, beta=0.9, market risk premium=5.6%) and cost ofdebt of 4.0%. We assume a long-term growth rate of 2%. Downside risks: (1)Significant competition (2) High volatility in raw material prices (3) Yield rateissue with new textile capacity. (4) Sharp reduction in Flyknit demand.