Earnings Transcript for DXF - Q4 Fiscal Year 2015

Operator: Welcome everyone to China Xiniya Fashion Limited 2015 Third Quarter and Fourth Quarter Earnings Conference Call. [Operator Instructions] Now, I would like to introduce Mr. Ng Chee Jiong, Chief Financial Officer. You may begin.

Ng Chee Jiong: Thank you. Good morning and good evening to all participants and welcome to Xiniya’s third and fourth quarter 2015 earnings conference call. You may find a copy of our earnings press release that we issued last night in the IR section of our IR website. Joining me on the call is Xiniya’s Chairman and CEO, Mr. Qiming Xu and myself Xiniya’s CFO. 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 this call. I would like to take this opportunity to summarize the results of 2015 and talk about our future plans. Apart from normal course of business, we have two major initiatives in 2015. They were inventory buyback and acquisition of retail network from distributors. I will talk about each initiative in great detail as they are important. Before I go into the details of inventory buyback, I think there is a need to discuss the cost of inventory buildup by our distributors. We believe there are several major factors caused the inventory buildup by our distributors. One of the most significant factors is the slowdown of China economy resulting in rich consumer spending. China consumers heavy shopping online also affect many offline brands. The slowing down in economy also affect us consumer spending habits. Many consumers are inclined to value for money apparels. At the same time, due to the impact of overseas economy, many China OEMs turned their excess manufacturing capacity to China’s domestic market resulting in excess clothing production. Weak demand and excess capacity caused a serious impact on many clothing brands, which led to excess inventory in the retail channel. In order to overcome this excess inventory situation, many brands attempt to clear their excess inventory through their heavy discount, but with very less effect. Brand with financial resources has repurchased their excess inventory from the channel. Brand without financial strength only exits the market and many small and medium brands have been forced to exit the market. For the past few years, due to economic situation, excess industry capacity, excess inventory in the retail channel, orders from distributors have been declining significantly. Faced with excess inventory in the retail network, we are trying to work with our distributors and authorized retailers to reduce their inventory by discounting, but with very little effect. Faced with this situation, we can choose to do nothing. If so, risk to have zero orders and zero sales for the next few quarters. Our retail store closure will be intensified. There is a strong possibility we may say with exiting the market. Despite the weak China economy and excess inventory situation, we are facing with an unprecedented historical opportunity. Many medium and small brands have forced to existing market. China huge domestic apparel market will be concentrated within a few brands in the future. We are very confident about our future. Once we overcome this difficult period, our brand will have a play in future apparel market. To overcome the excess inventory, although we do not have the obligation to buyback the excess inventory would choose to help our distributors and retail partners to buyback their excess inventory and reduce their excess inventory. With this buyback, their working capital is back on healthy track. Although inventory was replaced with newer and better inventories, the operation of distributors and our retail partners started positive. For growing reasons, we repurchased RMB286 million and RMB211 million of inventory from distributors during the third quarters of 2014 and second quarters of 2015 respectively. We repurchased the inventory at 10% discount. You may ask why at 10% discount, not a great discount. This is because….

Operator: Hello, ladies and gentlemen, we are now losing the moderator. Please stay on the line. Ladies and gentlemen, this is conductor speaking. I am sorry to keep you on hold, but it seems like the moderator.

Ng Chee Jiong: Fine.

Operator: Okay, I am sorry. So, moderator is back online, so please go ahead.

Ng Chee Jiong: Hello, ladies and gentlemen.

Operator: Yes. Hello, CJ. You can continue please.

Qiming Xu: Due to economic situation and excess capacity situation, five of our distributors became our interest in developing our brands. The plan to end the retail network build by them is a precaution of the planned action was huge. There will be a like domino effect that can cross connect in other provinces. Other provinces may follow their path ending their business and their retail network. In addition, if these five provinces and their business and their retail network, we may be unable to reduce the retail network in this cycle with us for the next 5 years as prospective retailers will have concerns why our brand appears certainly in these provinces. [indiscernible] faced with this challenging situation and contained the situation, we decided to acquire these 140 retail stores from these five distributors at RMB164 million. This RMB164 million was a negotiated price with the distributors and was different from upcoming segment. The negotiated price was based on the next five years gross margin contribution from this store. As a result of retail network acquisition, we also required to acquire all of the inventory as RMB155 million inventory. For the accounting treatment with higher professional value add to models position using discount, cash flow relation models, the value used the three-year historical store attrition rate for next 5 years store attrition. As our store attrition rate for the past two years was relative high, the recorded intangible assets amount to RMB40 million. Now, looking into the future, the budget of acquiring distributor retail network is enormous, a flattened business model will enable us to bring more value for money apparels for the market, which is catered to most consumers. Reducing business models layers we are much more easier to realize the online and offline business strategy. In 2016, we do not have plan to acquire more distributors. However, if the market situation is against us, we may make accordingly. In addition, we understand our shareholders are most concerned about our market capitalization will be below the New York Stock Exchange minimum $15 million market cap requirements. And we would take what kind of initiative to maintain our listing in New York Stock Exchange. At present, we have actively used this window period to initiate certain capital market activity, very actively in negotiating certain M&A and recently there are positive developments. But the time is right we will make announcements to the market. We believe that this initiative will have positive impact for the share price and will bring positive return to shareholders. With that, I would like to turn the call over to CJ who will go through our financials. Thank you.

Ng Chee Jiong: Okay, thank you. I believe most of you know will have more questions to ask me. We will take your questions after I go through the financials. For the full year of 2015, we had revenue of RMB472 million compared to RMB380 million in 2014. Our network of authorized retailers has a total decrease of 394 retail outlets in 2015. The total number of authorized retail outlets was 504 as of December 2015. Net loss for 2015 was RMB600 million as compared to net loss of RMB117 million in 2014. This translates into loss per ADS of $6.5 as compared to loss per ADS of $1.9. Now, moving on to our financial position, as of December 31, 2015, the company had cash and cash equivalents of RMB203 million. This concludes our prepared remarks. We are now ready to take your questions. Operator?

Ng Chee Jiong: Well, thank you. In closing, on behalf of the entire senior management team, we would like to thank you for your interest and participation in today’s call. If you require any further information or has any interest in visiting the company in China, please let us know. Thank you for joining us today. This concludes our call.

Operator: Ladies and gentlemen, we 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. Thank you. Goodbye.