Eason Technology Ltd (DXF) 2011 Q1 法說會逐字稿

Good day and welcome to the China Xiniya Fashion Limited first-quarter 2011 conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)

Please also note this event is being recorded. I would now like to turn the conference over to CJ. Please go ahead.

Thank you. Good morning and good evening to all of our participants. Welcome to the Xiniya first-quarter earnings call. You may find a copy of our earnings release -- press release that we issued today in the IR section of our website, IR.Xiniya.com, or through the newswires.

Joining on the call is our chairman and CEO, Mr. Qiming Xu. 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 prospectus.

Let me turn the call over to Chairman Xu, who would like to make some introductory comments.

(interpreted) Okay, thank you for so much for participating on the call with us. We are proud to report another quarter of solid results following our IPO last November. Our sales momentums continue as we dedicate more resources to marketing and advertising to support the Xiniya brand. Those efforts are taking off, as evidenced by the 89% sales increase at our most recent biannual sales fair.

We plan to have a supplementary sales fair in mid-September to gather additional orders for our winter collection. Our brand remains vibrant and we expect to continue to deliver solid results for the rest of the year.

I would like to thank all of you for your interest and continued support as we continue to execute our strategic plan and build a Xiniya into a leading menswear brand in China.

Thank you, Qiming. We're pleased to report another solid quarter result. During the first quarter of 2011, Xiniya reported revenue of RMB459 million, an increase of 30%, 30.1% compared with prior year. This slightly exceeded our guidance range, which was for 29% to 30% increase.

Volume growth was 9.2%. The number of units sold increased to 1.1 million units and ASP increased by 19.2% year-over-year. We also realized a benefit of about 11% from the change in product mix and about an 8% increase in material and labor costs.

During the first quarter of 2011, our authorized network of retailers opened 42 new retail outlets compared to 35 new retail outlets last year. As of March 31, 2011, the total number of stores selling Xiniya brand was 1425. [Please should] refer to the press release for a breakout of the retail stores by outlet type.

Just to provide some more colors on the pace of store openings, thus far in the second quarter as of the end of May 2011, a total of 83 new retail stores have been added compared to 76 new stores added in the first five months of 2010.

Gross profit increased 35% to RMB53.6 million in first quarter of 2011 from RMB39.7 million in first quarter of 2010. Gross profit margin expands 110 basis points to 33.6% compared with 32.5% in the first quarter of 2010. This increase was driven by ASP growth as Xiniya was able to pass on higher material and labor costs to our retailers and consumers.

Selling and distribution expenses increased to RMB9.1 million compared to RMB2.2 million, due to a significant increase in marketing efforts to support our brand. During the quarters to expand RMB7.2 million or 4.5% of the revenue, compared with 0.8% -- RMB0.8 million or 0.7% of the revenue in the first quarter of 2010.

The Xiniya brand appears on billboards and on national television. Many of you know that Jacky Cheung, one of the leading pop stars in China, is Xiniya main spokesperson. During the quarters, Xiniya sponsors Mr. Cheung's Half Century concerts tour in selected cities. The timing of the media attention is correspondent with our biannual sales fair and supports another solid turnaround -- turnout by our customers, which results in nearly a 30% sales increase. I will discuss sales fair in more details in a few moments.

Xiniya also launched its first TV advertising campaign as a public company with sponsorship on China's national television station. We ran an advertising campaign on CCTV5, which is a nationwide sports channel similar to ESPN in the United States.

[Adjustments] sponsorship on the CCTV12 during a primetime show that is equivalent to 60 Minutes in the US is continuing. The ads would have been aired over 1800 times over the 12 months. We are pleased by the consumer's recognition for the Xiniya brand that these efforts are generating.

During the first quarter of 2011, administrative expenses was significantly higher, rising to RMB3.5 million in the first quarter of 2011 from RMB1.1 million last year. The increase is due to additionals to the administrative and sales staff, public company listing fee of approximately RMB0.8 million, and share-based compensation expenses of approximately RMB0.2 million.

Income tax expense was RMB 10.8 million compared to -- with a tax expense of RMB5 million in the first-quarter of 2010, due to an increase of the expected tax rates to 25.2%. Last year the company effective tax rate was only 13.8%. The increase is due to the separation of the preferential PRC tax treatment which occurred at the end of 2010.

Net income was RMB28 million in the first quarter of 2011 compared with RMB31.6 million in the first quarter of 2010. Earnings per ADS was $0.08 per ADS in the first quarter of 2011, which was within the range of prior guidance of $0.08 to $0.09 per ADSs. This compared with earnings-per-share ADSs of $0.10 last year.

However if the earnings for the first quarter of 2010 was subject to a 25% tax rate and as if the sheer count was constant at 58 million ADSs shares outstanding, earnings would have been at $0.07 per ADS. So while it does not appear that Xiniya earnings grew, growth was actually 14% year-over-year on an apples-to-apples basis.

Looking at our balance sheet as of March 31, 2011, Xiniya had cash and cash equivalents of RMB662.1 million. Time deposits held at bank and with maturity over three months was RMB252.7 million and prospective time deposits of RMB100 million -- RMB100.6 million.

The total cash position on the company amounted to RMB1.1 billion or $2.67 per ADSs. This compared to a closing price for the company shares on June 15 of $3.31. As of March 31, Xiniya has trade receivables of RMB152.5 million arising wholly from sales recognized in the first quarter of 2011.

Trade receivables as of March 31 were down from RMB221.4 million in trade receivables as of December 31, 2010, which were entirely related to sales recognized in the fourth quarter of 2010. The three-month moving average trade receivable turnover days was 67 days and 63 days as of December 31, 2010 and March 31, 2011 respectively.

We also wanted to highlight some figures on the distribution front that should add greater efficiency within our channels and strengthen our sales in certain provinces. In May, Xiniya reported two new distributors, one in Anhui province and another in Shantou district of Guangdong province.

Previously we had one distributor that was managing both Anhui and Zhejiang provinces. With the appointment of new distributors in Anhui province, the existing distributors can now fully focus on the distributorship in Zhejiang province, while the new distributors can fully focus on distributorship in Anhui province.

As of May 31, 2011, Xiniya has 142 authorized retail stores operated by retailers in Zhejiang province and 28 authorized retail stores operated by retailers in Anhui province.

In addition, Xiniya recorded another new distributor in Shantou district, a district located in the eastern regions of Guangdong province. As of May 31, 2011, the Company had five authorized retail stores operated by the retailers in the Shantou district of Guangdong province.

With the recruitment of new distributors, we can focus on distributorship an extension of real new retail stores in Shantou district. The financial contribution by these new distributors is expected to be minimal in 2011.

Now let's turn to guidance. We will be providing guidance for the first half, the second half, and for the full year. First we reiterate our guidance for the first half of 2011 that we provide during our last earnings call. We expect revenue growth in the first half of 2011 to be in the range of 27% to 30% in RMB terms compared to the same period in 2010.

We project unit volumes to increase about 16% to 17% and ASP growth of 10% to 11%. Gross margin is expected to be in the 32% to 33% range, compared with 31.9% in the first half of 2010. As many of you are already aware, Xiniya held its biannual sales fair last April and we were pleased by another strong reception of our brand.

We reported a 39% sales increase for our upcoming collections. [Usually] will occur between July and December, flat January 2012. As a result, we expect to realize revenue growth of approximately 24% to 29% in the second half of 2011.

We project unit volumes increase of approximately 8% to 10% and about 15% to 17% growth in ASP. Gross margin in the second half of 2011 is expected to be in the range of 34% to 35% compared with 35.5% in the second half of 2010. For the full years of 2011, Xiniya expects to realize revenue growth of approximately 24% to 29% with unit volume growth of 10% to 13%. And approximately 12% to 14% growth in ASP.

Gross margin for the full year is expected to be in the range of 34% to 35% compared with 34.5% for the full years of 2010. For the full year of 2011 we are on track to add a total of 180 to 220 new stores opened by our authorized -- our network of authorized retailers.

One last thing before we take your questions. We are absolutely proud of our brands and the innovations of our talented design team, which has successfully responds in a marked pace each season. We would like to invite all of you to meet them at our next sales fair, which will be helped on December 15. This will be a great opportunity for you to meet our management and design team and to preview the upcoming spring and summer 2012 collections.

We will be hosting the sales fair at our new fashion and design center located in Xiamen Software Park in Fujian province. So you will be able to visit our new facilities. We will also have a special guest in attendance. Jacky Cheung, Xiniya spokesperson and one of China's favorite pop stars, will be joining us.

We hope to be seeing you as well. We will be sending out a save-the-date soon and more details about the event, so please mark your calendar today.

This concludes our prepared remarks. We are now ready to take your questions.

(Operator Instructions) Adrienne Tennant, Jenny Capital Markets.

Good morning, Chairman Xu and CJ. I had a couple of questions.

First clarifying, CJ, why are the sales for the second half up 24% to 29% when the sales fair numbers you already have -- and those were up 29%? That's the first one.

Then a housekeeping question on what is the exchange rate that you use for conversion from renminbi to dollars? And then when do you expect to pay down the revolver? I know that there was -- so if you can re-explain that translation from outside of the PRC and then explain why does that reverse itself. And when do you pay down the revolver?

And if you also explain sort of the restructuring of the department stores, that would be helpful, what's going on there that's pressuring the gross margin in the back half of the year. Thank you.

Okay, for the first questions, the reported sales fair result is 29% and it is net of deliveries from July to December. Sometimes it may cross over to January, so on the conservative side I project on 24% to 29% sales fair sales. If everything goes as planned, if all the deliveries go as planned, it will hit 29%.

Okay, what would cause somebody to sort of hold off on delivery? I would think that since it's fall season products they would certainly want it to be there for the November-December time period, so what would cause a slippage of some of the sales?

The potential situation I can think of would be the production and then they would want to get -- the [solid] retailers, and they will want to get the products as quickly as possible because the momentum of our new store openings, they will want to get more profits, more products earlier rather than later. And so that's the situation. It could be -- (multiple speakers)

Okay, so the odds are that the sales fair figure should be -- you should get closer to that?

Very (inaudible) closer to that if everything opens as planned.

Okay.

On the housekeeping for F&D, it [seems from the units] 6.5483. From the line drawdown, it will be repaid once we got in the money from the offshore to the onshore. The IPO profits are sitting at the offshore and once we have got the money, then we will pay down the other line.

So when do you expect that to happen?

It will be this quarter.

Okay, great, and then on the restructuring of the department stores, so explain what's happening with the rebates there, please.

Okay, during the past the rebates will be in 2010 we basically [paid] to the top 20 distributors. The department stores are not within the top ring in top 20, so under the restructuring, the department stores will be put under the management of the distributors. So the sales coming from the distributors will be higher this year and as a result we will pay more rebates for these top 20 distributors.

Our sales are reported net of sales, gross sales minus sales rebates. So that was this year when we have the full impact of restructuring. The sales [provisions] increased because of the restructuring department stores under the remanagement of the distributors.

Okay, is that restructuring over at the end of this year or does that carry forward into spring of 2012?

Next year you will be compared apples-to-apples basis. This year you will -- the restructurings and as of December 2010. So we will feel the full impact of the increase of sales rebates this year and next year you will compare apples-to-apples and you will see the impact on this restructuring.

Okay, and my last question is so you give us some color on gross margins. Can you help us translate that into operating margin for the back half? Should we just flow through the gross margin pressure down to the op margin line?

Because it also sounds like there's some SG&A marketing and some of these administrative dollars that are going to be up. So I am just try to figure out what is it about appropriate operating margin to use in the second half.

We plan to spend about 2 to 3 percentage points on our sales and marketing -- on the advertising. So you could reasonably gauge what would be the operating margin.

Using our 2010 operating margin might take away the 2 to 3 percentage points in terms of the increase in the advertising. We will keep it as it is right now and we will continue to speak with you and other analysts as to what will the numbers look like. (multiple speakers)

Okay, all right. Thank you very much and good luck.

(Operator Instructions) I am showing no further questions at this time, so I'm going to conclude the question-and-answer session. I would like to turn the conference back over to our speakers for any closing -- actually we do have a question that is just showing in the queue. I apologize. Tom Kernan, Cowen.

Thanks for taking the questions. It's actually John. I guess the guidance on the income statement stuff was helpful. I just want to take a few questions on the balance sheet.

The receivables line grew a little bit in that total sales. Is there something seasonally related to that? Where do you expect receivable DSOs to finish? What's your goal for receivable DSOs by the end of the year? And then I have a follow-up question related to CapEx. Any help on the receivable DSOs would be appreciated.

The receivable we collect 100% in full every three months. So the way I compute my [census] turnover on DSOs on three-month moving average basis. We expect the receivable DSO at the end of the year would be trending similar to what you see as of December. So we'll be ranging from 60 to 70 [COP], in that range, 60 to 70 days kind of DSO from three-month moving average kind of computation basis.

Okay, so I know you plan on spending some CapEx this year in terms of building a manufacturing facility and I know that there is a restriction -- that the Chinese government has restrictions on how much cash you can actually bring off your balance sheet into mainland China to invest.

Are you still planning on building that? When will we start to see some CapEx flow through the cash flow statement related to the manufacturing facility? I think that was part of the proceeds from the IPO were going to be used toward that and I know it has a benefit to your -- a long-term benefit to your gross margin and your costs. So when are we going to see some progress with that manufacturing facility?

We have submit -- we are in the process of submitting all the necessary documentations to the government and we have [to train] the documentations set the stage and if everything goes well we probably can spend the CapEx on the new plants this year, towards the back half of this year.

The plan is about RMB100 million to RMB150 million and we will set up a subsidiary for this plant and with this subsidiary we can bring in the cash from offshore to onshore. Then we can use the proceeds from the IPO.

Okay, then my last question I guess is for the supplementary sales fair. How much could that potentially add to your top line? Could it be a few percentage points? How much do we expect this supplementary fair to maybe benefit your top line?

Well, why don't I get this question to Qiming to answer.

(interpreted) So we continue to develop the new products and for this supplementary sales fair. The chairman says what's really important is that these new products can help us increase the vibrancy of the retail store and to have some [strong impact] from this new product to bring more sales for existing products.

And depending on the progress of the new store openings, the new products we will develop -- we will continue to develop new products to satisfying the new store openings, because the strength -- the momentum of this new store opening has been growing from strength to strength. He felt that what really is important is we can continue to come out with new products to the market. It's [sometimes] more important than having a percentage point of sales.

The chairman would like to add that the -- this supplementary sales fair is the strategy this year and the -- we will hold our spring and summer sales fair at the same time, so you will not cost -- you will not increase our expenses as a result of this additional sales fair because it will be held in conjunction with the spring and summer sales fair.

This new strategy this year we are having -- of having this supplementary sales fair, and if it's successful, we will continue to do its year-over-year and in many years to come.

Okay, great. Thanks, guys.

[Johnson Lin,] Marshall Wace.

CJ, it's Johnson here. I actually have a question regarding these receivables as well, trade receivables, because I see that on your cash flow statement it is actually an inflow, which means a decrease in receivables. But in your balance sheet there's actually an obvious increase. I'm just trying to reconcile the two numbers.

The cash flow is from December. The working [out of] cash flow is from December in March, so December's accounts receivable is higher than the March accounts receivable. This drives has increases of inflow.

All right. So what you're saying is that the balance sheet is on a year-end -- March year-end to March year-end of the 2010 and 2011, right? But the cash flow statement just refers to the last quarter. Is that what it's supposed to be?

Yes, [some quarters,] it was one quarter.

I see, because the label seems to be misleading. Okay, my second question is regarding that your -- then on your balance sheet you have about RMB1 billion of cash, which if I understand correctly that is actually still offshore at the moment, right?

Most of it, yes.

Can I ask you what your plans --? I didn't really catch the CapEx things properly about how exactly you are going to spend this RMB1 billion if you get it.

We will head up a subsidiary and with that subsidiary we will have the capital injection in [test] subsidiary. And when the site is ready for us to acquire from the government, then start spending the profit.

Yes, can you tell me let's say this year, the next -- after December 31 or your fiscal year, how much of the CapEx will be from this pool of RMB1 billion proceeds?

Based on the projection it's RMB100 million to RMB150 million.

Renminbi, right?

In RMB, yes.

For this year only?

Yes.

Then because you have RMB1 billion of it, so I'm just thinking it's going to be a drag on your return on equity, right? So what's the plans or thoughts regarding it?

It's projected for use over a course of three to five years, so we will spend it over a course of three to five years.

On the use of proceeds, you can see that in the prospectus we had earmarks on things like new plants, (inaudible), new R&D and marketing centers, a subbrand for the working capital, for ERP.

Okay, but I'm just wondering in terms of the return on investments, I'm not sure that any of these investments will be better than purchasing your own shares at the current levels, because the whole market cap is equivalent to the cash power right now. But I'm just wondering whether your management has any thoughts about how to address the share price discount because of what's going on with the rest of the US-listed names and whether either a Company buyback or is there any form of management buyback shares just to show confidence in stock?

I will have to ask the chairman to answer it.

We had a discussion with our bankers and various advice on taking these share buybacks. We, as mentioned earlier, I would you to the use of profit in the prospectus. We have earmarked these proceeds for this all these initiatives which I mentioned earlier and we need to operate all the system in synchronization and we need to ensure that we have sufficient cash available to make sure that all these projects are funded.

This doesn't [set out] these initiatives. Because of funding, the impact will -- the negative -- it will be negatively impact on this initiative and it will impact our results. And we believe that having a share buyback, it's a short-term quick fix kind of solutions.

We believe building our fundamentals, eventually the share price will catch up with the fundamentals. We will continue to work hard on this fundamentals.

Yes, CJ, thank you very much. I understand that, but I would like just to point out that maybe the investment hurdle rates of your current investments, which are -- of course you didn't plan for your share price to plunge before, right? But I'm sure that the investment and returns are very different from buying back your own shares and sticking to the original plan, because otherwise -- we are not shareholders of your Company yet, but we are thinking of the existing shareholders who brought in the IPO.

You are spending 10 -- RMB100 million to R&D 150 million, about 10% to 15% of your cash every year. And you are asking them to wait three to five years, otherwise it will affect your results. But actually buying back shares or -- would actually help in terms of the returns at the EPS levels. It is not something that is not operational but actually financial.

We hear you, thank you.

The other thing is regarding your auditors, are you --? The last time when we spoke, there were plans to change auditors to some, let's say, a more recognizable one. Can you just give us an update on that?

(interpreted) We had meetings and discussions with the big four and given that their situation happened for big four and non-big four and we need to be cautious in this move, we target to have a -- to have big four between 2011 full-year results. And once we have fully permission, we will issue a press release to inform everyone.

Okay, I understand that of course there are issues that cropped up between big fours and non-big fours, but in the course of changing auditors, obviously those guys who are already [indicated] will do a much better job in terms of auditing. It will give investors a lot more confidence as well, so I definitely recommend that the Company think carefully about it.

Yes, thank you.

That's all from me. Thank you very much.

(Operator Instructions) John Kernan, Cowen.

So I'm getting -- my phone is not so great. I'm on a cell phone right now. Did I hear you correctly, CJ, you guys are considering changing auditors to a big four auditor by the end of 2011 or did I mishear that?

That is the target.

The target. You are setting a target to change -- switch to a big four US-based auditor by the end of 2011?

That is the plan, yes.

The plan, okay. Thank you.

This concludes our question-and-answer session. I would like to do the conference back over to your speakers for any closing remarks they may have.

Okay, Chairman Xu will do a conclusion, concluding remarks.

(interpreted) We achieved the desired results of our advertising in CCTV5 and CCTV12 year. Our orders in per sales share increased 29%. We plan to have a supplementary sales fair in September, to take on reorders for our winter collection and to increase our revenue in 2011.

We plan to have our spring and summer sales fair in mid-September. Our brand spokesperson, Jacky Cheung, will host a press release on that day. We would like to take this opportunity to invite the investors and analysts to attend and to experience the vibrancy and enthusiasm of our distributors and our retailers.

We hope you could take this opportunity to -- in deepening your understanding of our Company. You could also reach our new sales and marketing and R&D headquarters in Xiamen. We will announce joining details shortly.

As a result of our successful advertising campaign, we have successfully [input] two new distributors. We are progressively taking steps to achieve two new -- two distributors per province so that we can expand quickly. We plan to recruit more distributors and we will release a press release to inform the investment community when we have more details.

Our momentum on new store openings remain strong. As of the end of May 2011, a total of three new retail stores has been added, compared with 76 new stores added in the first five months of 2010. In May, our sales and marketing department went to a few China cities where Jacky Cheung had his Half Century concert to promote Xiniya and court retailers. This campaign has been very successful.

The business has been progressing according to plan for the new plant and we have in preparations of the [presentation] submission to the local government for approval.

As for the [factory store,] we expect to make good progress in near terms and we will make announcement in due course.

As for the ERP with 24 other companies to further understand the capability of various ERP systems by various service providers to see whether this ERP can meet our requirements.

As for the subbrand, we have engaged a brand consultant to plan and provide proposals in the third quarter.

Okay, thank you everyone for participating in the call. Thank you.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this event.