Earnings Transcript for DXF - Q4 Fiscal Year 2014

Executives: Christian Arnell - Christensen Qiming Xu - Chairman and Chief Executive Officer Chee Jiong - Chief Financial Officer

Analysts:

Operator: Thank you, Christian. Welcome everyone to the China Xiniya Fashion Limited’s 2014 Q4 Earnings Conference Call. [Operator Instructions] I would now like to introduce Mr. Christian Arnell. You may now begin.

Christian Arnell: Thank you. Good morning and good evening to all participants and welcome to Xiniya’s fourth quarter and full year 2014 earnings conference call. You may find a copy of our earning press release that was issued last night in the IR section of our IR website or through PRNewswire services. Joining me on the call today is Xiniya’s Chairman and CEO, Mr. Qiming Xu and Chee Jiong, Xiniya’s Chief Financial Officer. Please note that we will be making a number of forward-looking statements today and all such statements are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions mentioned today due to a variety of factors that affect the company, including the risks specified in the most recently filed Form 20-F with the U.S. Securities and Exchange Commission. Let me turn the call over to Chairman Xu, who would like to make some introductory comments. I will translate for him. Mr. Xu, please go ahead.

Qiming Xu: Good morning and good evening to everyone and thank you for joining us for this call. We continued to face -- focus on stabilizing our retail network during the quarter as China’s economy entered into the new normal period of slowing economic growth. As I am sure many of you know the period implied a shift from quantity to quality as well as from speed to efficiency in terms of development. The challenges China faces include sectors with excess capacity and the softening menswear market. On top of this, changing consumer behavior and the disruption brought by ecommerce have intensified the competition in the menswear industry. We completed the first phase of our inventory buyback from our distributors during the quarter. Through this inventory buyback, we reduced inventory and working capital pressure on our distributors and authorized retailers. We provide care and support to our distributors during the most difficult economic environments which further improved our distributors’ confidence in Xiniya’s future. In the next phase, we will pay close attention to our channel inventory situation and take appropriate measures when necessary. Most of the remaining inventory is composed of more recent products and allow us to focus on displaying and selling them through our retail network by offering discounts and promotions over the next year. This strategy will also allow us to stabilize cash flows and maintain a healthy and flexible retail network. Remaining flexible and adaptable is key to the future success of our strategy. We also implemented a number of cost cutting initiatives such as reducing advertising and promotional expenses during this transition stage. I am confident that these initiatives as well as the long term changes to our business model we are gradually rolling out over the next few years will further strengthen our brand’s popularity and allow us to weather these challenging times. Despite these challenges and given the size and fundamental strength of China’s economy and the opportunity it presents, we believe there are more growth opportunities for the company than ever before. We will have to work hard to find growth in the challenging menswear market undergoing transformation. With the Chinese economy continuing to perform strongly, especially relative to the growth rates of other major economies, we are very confident of the long term business growth prospects. With that, I would now like to turn the call over to CJ who will go through the financials. Thank you.

Chee Jiong: Thank you, Mr. Xu and Mr. Arnell. Let me now walk you through the financial and operational performance of our business in the fourth quarter. First, I would like to talk about inventory buyback in details. In recent years, the gradual slowdown in China economy results in the slowdown in menswear and in turn leapfrogged and potential over-supply in the menswear market with industries increasingly recently across the retail channels of menswear companies. The supply and demand imbalance led to excess inventories and menswear companies began offering frequent discounts and promotions to reduce inventories which led to stall projects and frequent [ph] pockets in the industries. Furthermore, some menswear brands are repositioning [ph] excess inventories on their retail channels in order to improve performance and healthy development of their partners. In 2014, although none of the distributors agreement contained any right of return provisions or similar rights, we implemented an initiative to buy back certain excess inventories. Manufacturers in the past years from certain distributors saw the relationship with our distributors and authorized retailers have been developing healthily in long term manner. We bought back RMB 452 million of inventories of certain distributors in 2014 and this inventory was written down by RMB 99.6. Moving to 2014, we sold part of this buyback inventory outside of China through the Chinese local distribution channels and incurred a loss of RMB 38.5 million. As of December 31, 2014 we sold remaining buyback inventory outside of China through the Chinese local distributor network. In addition, although none of the distributor agreement has right of return provisions or other rights, the inventory buyback initiative improvement in 2014 gives rise to a similar expectation from us that we may implement a similar inventory buyback initiative in 2015 which, in turn, gives rise to a constructive obligation. An unrealized loss of RMB136.2 million was provided for such constructive obligation. Now I would like to go through 2014 fourth quarter’s results. In 2014 fourth quarter, Xiniya had revenue of RMB201.1 million compared to RMB486 million during the same period last year. The company delivered approximately 0.88 million units during the fourth quarter of 2014, compared with 1.84 million units during the fourth quarter of 2013. Xiniya’s network of authorized retailers had a net reduction of 316 retail outlets in the fourth quarter of 2014. The total number of authorized retail outlets was 898 as of December 31, 2014. Selling and distribution expenses were RMB46 million in the fourth quarter of 2014, a decrease from RMB73 million during the same period last year. The decrease was primarily due to cost cutting initiatives in reducing advertising and promotion, packaging, sales fair, training and consultancy expenses. Administrative expenses remained essentially flat RMB8 million in the fourth quarter of 2014. Net loss in the fourth quarter was RMB4.5 million as compared to net profit of RMB49 million in the same period last year. This translates into a loss per ADS of $0.05 which includes the impact of the ADS-to-share ratio change on December 18, 2014 and this compared to earnings per ADS of $0.56 during the same period last year. Now, moving on to our financial position. As of December 31, 2014, the company had cash and cash equivalents of RMB985 million and time deposits with banks over 3 months with RMB70 million. This concludes our prepared remarks. We are now ready to take your questions. Operator?

Operator: [Operator Instructions] Our first question comes from the line of John Shi He [ph].

Unidentified Analyst: About six months ago you outlined a strategic plan. Could you go through the major items one by one and give us an update

Qiming Xu: [Foreign Language]

Chee Jiong: I will translate your question to Mr. Xu and he will go through each and every one, every initiative to you. Regarding the buying from other brands, Mr. Xu mentioned that we are entering into a phase, either we acquire somebody or somebody acquiring us, given our market penetration is relatively low we are working hard to look out for appropriate brands to be acquired, and given the current situation is, will it be more competitive in terms of price – pricing in acquiring the targets. Once we have complete information we will announce to the market and let everyone know.

Qiming Xu: [Foreign Language]

Chee Jiong: Regarding acquiring these – get the price of the retail shops, we have opting our distributors to help us to look for appropriate locations. These locations are usually high in demand and easy to get [ph]. Once we have more information we will announce in the market.

Qiming Xu: [Foreign Language]

Chee Jiong: As for the buying land for building our manufacturing and logistics facilities, we’re still waiting for the local government to grant us the land, and the approval has been delayed by the government which is beyond our control, and as a part of this, we may look for opportunities to buy or build up warehouse and logistics location, and given the economic environment now, we may build or find a bargain [ph].

Qiming Xu: [Foreign Language]

Chee Jiong: As for ERP, this year we plan to install -- around 10 to 20 ERP systems will be installed. If the result is encouraging, we may install more.

Unidentified Analyst: Thank you for all of that detailed information, and also I think you are planning to acquire your distribution network to integrate all of the outlets. Is that still part of your plan?

Chee Jiong: To buy the outlets?

Unidentified Analyst: To buy your distributors?

Chee Jiong: [Foreign Language] Regarding your questions, the plan is to reduce the layers on our business models. So we plan to convert these distributors into city retailers which they just look for a few cities. So if there is any distributors not willing to take this approach, we cut out of adding in the distribution channels. We may take them over and we will build up with the authorized retailers.

Unidentified Analyst: Okay, I understand that. And then another question, do you have any evidence that the rally in the Chinese stock markets does make your customers feel wealthier and more willing to spend money at your stores?

Qiming Xu: [Foreign Language]

Chee Jiong: Mr Xu’s personal view – the rally in the stock market will create wealth and we also improved the fundamental in the market. He is – particularly with this stock market rally which will – could lead to the consumer consumption.

Operator: [Operator Instructions] Our next question comes from the line of Peter Cyrus.

Unidentified Analyst: I like to understand the consolidation and I mean you’ve closed a lot of stores, a lot of your competitors have closed a lot of stores. Can you tell me sort of what’s the status of the consolidation and when do you see it start to stabilize and turn in the other direction?

Qiming Xu: [Foreign Language]

Chee Jiong: In these four regions, you’ll notice that many small brands had gone out of the market. They no longer stay in the market. And entering 2015, still the medium to small brands face even more difficulties. For those brands without financial strength, it’s very difficult to survive. With us, with our financial strength this gives us very good opportunity to look into sound brands to acquire. Given the consolidation status now, we believe there are lots of opportunities for us to making M&A deal.

Unidentified Analyst: And what about the bigger companies, SatWolf [ph] and all the rest, are they closing stores as well?

Qiming Xu: [Foreign Language]

Chee Jiong: For the bigger brands, they will become stronger after this strong consolidation. As for the smaller brands, they cannot survive this consolidation phase with their financial strength.

Unidentified Analyst: I guess the question I have is when do you see this stabilizing and your business starting to turn up because as you say a lot of smaller brands are going to go out of business, medium sized companies are closing stores. So when do we see the turn?

Qiming Xu: [Foreign Language]

Chee Jiong: He is of the view – he’s got an opinion is that 2013 and 2014 is some smaller brands gone out of market. 2015 is the medium brands facing difficulty and then they will go out of market. You see that in 2016 might be the turnaround time after all these smaller and medium sized brands going out of market.

Unidentified Analyst: I have two more questions. The first is, have you had your April’s Spring Fair yet and if so, how did it do?

Qiming Xu: [Foreign Language]

Chee Jiong: April sales – April, retail sales in the past is, last time we had fall and winter’s sales fairs together. For this, it’s just fall’s collection for the distributors to place orders. And given the products front, distributors and retailers they – the products are well liked by distributors and authorized retailers. And having a sale fair just focusing on the fall products, this gives them a more focus in placing their orders in our fall collection. And given we had our inventory buyback initiative that we implemented in 2014 our distributors and authorized retailers are more confident going forward. We don’t have the result yet. When we have the results we will make announcement.

Unidentified Analyst: And my last question is did you ever make take it back inventory and that you indicated you will continue to take back, you might continue to take back inventory this year. Have you thought about developing a plan for outlet stores or anything else that would help you dispose off that inventory?

Qiming Xu: [Foreign Language]

Chee Jiong: First of all, we’d like to make it clear that we don’t have contractual obligation to buy back the inventory from the distributors. What we have done is to at least pledge the inventory such as at the distributors and authorized retailers level. And our plan is to going through a sales and promotion activities during this year and letting the retail channel to digest the inventory. If they still have excess inventory such as at the retail channel, we then consider buyback initiative this year. End of Q&A

Operator: [Operator Instructions] As there are no further questions, I will hand the call back to Christian. Please proceed.

Christian Arnell: Thank you. In closing, and on behalf of the entire Xiniya management team, we’d like to thank you for your interest and participation in today’s call. If you require any further information or have an interest in visiting the company in China, please let us know. Thank you for joining. This concludes the call.

Operator: Thank you for your participation in Xiniya’s conference. There will be a webcast replay within an hour. Please visit www.xiniya.com under the investor relations section. You may now disconnect. Good bye.