Eason Technology Ltd (DXF) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to China Xiniya Fashion Q2 2011 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions).

I must advise you that this conference is being recorded today, Thursday, August 18, 2011. I would now like to hand the conference over to your speaker today, Mr. CJ Ng. Sir, please go ahead.

Thank you. Good morning and good evening to all of our participants. Welcome to Xiniya's second-quarter earnings call. You may find a copy of our earnings press release that we issued earlier today in the IR section of our Website at ir.xiniya.com or from the newswire. Joining me 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 to the Chairman, please, who would like to make some introductory comments.

(Interpreted) Good morning and good evening. Thank you for joining our call today. We are pleased to report another quarter of outstanding results. Our sales momentum continues as we dedicate more resources to marketing and advertising to support the Xiniya brand. Those efforts are taking hold, as evidenced by the 29% orders increase at our [April] biannual sales fair.

We plan to have a supplemental sales fair in mid-September. At this juncture, I would like to invite investor and analysts to attend the upcoming sales fair on September 15th. We expect to have approximately 1,000 retailers and 28 distributors to attend the sales fair.

On the September 15 morning, we plan for you a retail store visit and visit our new sales and marketing center in Xiamen. In the afternoon, we will be showcasing our spring and summer collections with fashion show around 3 p.m. Our spokesperson Jacky Cheung will host a press conference. After the press conference, we are happy to arrange a one-on-one photo-taking session with Jacky. And later, you can see how retailers place their own orders during the sales fair.

Please send in your attendance -- application of attendance as soon as possible and take this opportunity to enhance your understanding towards Xiniya.

Moreover, our distributors have opened three flagship stores in several Tier II cities. Other distributors are actively looking for suitable sites to open more flagship stores. Operating flagship stores requires a significant amount of investment by the distributors. The opening of flagship stores by distributors demonstrates strong distributor confidence towards Xiniya brand.

In addition, we believe our share price is clearly undervalued. With strong confidence in our performance and future growth prospects, we have announced a $1.8m share repurchase program by the Company. In addition, I personally commit to purchase up to $200,000 ADSs. And our CFO, CJ, has also committed up to $50,000 of his personal funds to buy back shares. We have strong confidence towards Xiniya future.

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

Let me turn the call back to Mr. Ng, who will review the financials in details.

Thank you, [Xudong]. We are pleased to report another solid quarter of results. During the second quarter of 2011, Xiniya reported revenue of CNY176.9m, an increase of 30.4% compared with the prior year. This slightly exceeded our guidance range of 27% to 30%.

During the second quarter of 2011, our authorized network of retailers opened 49 new retail outlets compared to 53 new retail outlets last year. As of June 30, 2011, the total number of stores selling the Xiniya brand was 1,495. Just to provide more color on the pace of store opening thus far in the first quarter, as of the end of July 2011, a total of 107 new retail stores have been added compared to 106 new stores added in the first seven months of 2010.

Gross profit increased 34.3% to CNY57.3m in the second quarter of 2011 from CNY42.7m in the second quarter of 2010. Gross profit margin expanded 90 basis points to 32.4% compared with 31.5% in the second quarter of 2010.

Selling and distribution expenses increased to CNY13.3m compared to CNY2.6m, due to a significant increase in marketing efforts to support our brand. During the quarter, we spent CNY10.6m or 6% of our revenue compared with CNY0.8m or 0.6% of revenue in second quarter of 2010. The Xiniya brand appears on billboards and on national television. Jacky Cheung, one of our leading pop stars in China, is Xiniya spokesperson.

We also continued our television advertising campaign with sponsorship on national television. We run an advertising campaign on CCTV5, which is the nationwide sports channel similar to ESPN in US. Our (technical difficulty) sponsorship on CCTV12 during the prime time show is the equivalent of 60 Minutes in the US is continuing. The ads would have been aired over 1,800 times over the 12 months. We are pleased with our advertising efforts to promote our brand nationwide.

During the second quarter, administrative expenses were higher, rising to CNY4.8m in the second quarter of 2011 from CNY1.4m last year. This increase was mainly due to additions to the administrative staff and sales staff, public listing -- and public company listing expenses, and share-based compensation.

Income tax expenses was CNY11.1m compared to income tax expense of CNY4.6m in second quarter of 2010, due to the increase in the effective tax rate to 23.9%. Last year, the Company's effective tax rate was only 11.8%. The increase is due to expiration of a preferential PRC tax treatment, which occurred at the end of 2010.

Net income was CNY35.4m in the second quarter of 2011 compared with CNY34.3m in the second quarter of 2010. Earnings per ADS were $0.09 per ADS in the second quarter, which was within the range of prior guidance of $0.07 to $0.09 per ADS. This compares to earnings per ADS of $0.10 last year. However, if earnings for the second quarter of 2010 were subject to a 25% tax rate and if the share count was constant at 58m ADS shares outstanding, earnings would have been $0.08 per ADS in the second quarter of 2010. So while it does not appear that Xiniya's earnings grew, growth were actually over 12% on an apples-to-apples basis.

Looking at our balance sheet, as of June 30, 2011, the Company had trade receivables of CNY119m, arising wholly from sales recognized in the second quarter of 2011. Trade receivables as of June 30, 2011, were done from CNY152.5m in trade receivables as of March 31, 2011, which were entirely related to sales recognized during the first quarter of 2011. Trade receivables outstanding as of March 31, 2011 had been fully collected as of June 30, 2011.

As of June 30, 2011, the Company had restricted time deposits with a bank in the amount of CNY15m for the purpose of providing collateral for the short-term bank loans. The Company's short-term bank loans in the amount of CNY15m outstanding as of June 30, 2011, were fully repaid in July 2011.

The increase in other receivables and prepayments as well as other payables and accruals were mainly due to the prepayments to the suppliers amounting to CNY154m. This prepayment was funded primarily from deposits and prepayments collected from distributors for April 2011 sales fair orders amounting to CNY124m.

The prepayments to the suppliers are for goods to be delivered to the Company during the second quarters of 2011. The Company will deliver the goods received from the suppliers to its distributors over the same period. This process enables the Company's suppliers to procure raw materials in advance and at lower prices while also enable the Company to maintain price competitiveness in the market.

Now let's turn to guidance. We'll be providing guidance for the third quarter and for the full year. First, we expect revenue growth in the third quarter of 2011 to be in the range of 20% to 24% in CNY terms, compared to the same period in 2010.

Gross margin is expected to be in 33% to 34% range compared with 35.1% in the third quarter of 2010. For the full year for 2011, Xiniya expects to realize revenue growth of approximately 24% to 29%, which assumes an increase in unit volume of approximately 10% to 13% and approximately 12% to 14% in ASP.

Gross margin for the full year of 2011 is expected to be in the range of 34% to 35% compared with 34.5% for the full year of 2010.

The negative impact of sales rebates increase as a result of restructuring of department store chains operated by department store operators from the 2011 onwards, a process completed by the end of 2010, which is expected to increase sales rebates in 2011, thereby negatively impacting our gross margin. We are on track to add a total of 180 to 220 new stores opened by our network of authorized network of retailers in 2011.

This concludes our financial review. Before we begin our Q&A, I would like to remind you of our upcoming sales fair, which will be held on September 15 in Xiamen. This will be a great opportunity for you to meet our management and design team and to preview the upcoming spring and summer 2012 collection.

We will also have a special guest in attendance. Jacky Cheung, our senior spokesperson and one of China's favorite pop stars, will be joining us. We hope to see you as well. We will be sending out another reminder and invitation soon with more details about the event. So please kindly mark your calendar today.

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

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Diana Katz from Lazard. Please ask your question.

Hi. Thank you for taking my questions. Nice revenue growth in the quarter. It slightly exceeded your guidance range. Maybe you can comment on some of the feedback, even anecdotally, you're getting on the effectiveness of your marketing campaign. And also, perhaps you can break out how much of sales were generated from existing business or same-store sales versus new distribution?

Same-store sales versus new distribution?

Yes, how much was generated from opening up -- your distributors opening up new stores over the -- that haven't anniversaried yet versus the businesses that you've had in place there for the last 12 months.

Okay. For the second quarter, our same-store sales growth is about 26%. The -- for sales generated from the -- you see, the way we generate our revenue is coming from the sales orders, sales placed in the sales fair. So given is the sales fair, there's a built-in element of new store openings for the next six months.

So our distributors will place orders for the -- in upcoming store openings. The orders already been placed in September last year. So the growth actually is a mixture of the same-store sales growth plus the new store openings.

Okay. And then any anecdotal feedback on the effectiveness of your marketing campaign?

Okay. Why don't I direct to the question to Mr. Xu to comment on it? (spoken in Chinese)

(spoken in Chinese)

The Chairman has commented that a couple of areas that have a positive impact arising from the advertising campaign. First of all, in the April sales fair we had, we had about 29% orders growth.

And secondly, as you have -- as we have previously mentioned in the last quarters, Jacky Cheung will be having -- is having and will be having 50 concerts around China. And we have been doing the recruitment of retailers during his concerts at particular cities. And we have received very good response. And many of the potential retailers have indicated interest, they want to join us. And this will help us in the store growth momentum.

And also, we have successfully recruited two new distributors this year, which we mentioned in the last quarter's earning call. And coupled with the flagship store openings, which demonstrates the strong confidence of the distributor towards the Company brands arising from this advertising campaign that we had. Yes, that's the commentary by Xu.

Great. And then, CJ, perhaps you could break out your current inventory balance, any color on how much of the inventory is to secure goods at lower prices. Is there any carryover inventory in there?

The inventory balance as of the June is for the April sales fair orders. And that will be delivered in the month of July. How it works is that, once a year, suppliers complete the goods that were delivered to the Company headquarters. And we will do the unpacking and repack into a smaller portion to each individual distributor. And this process usually takes 10 days. So the current inventory sitting in our books is the unpack-repack process. And we are fully delivered out in the month of July. So there's no carryover stock. We do not hold inventory.

Okay. And then how should I be modeling the tax rate for the year?

For the year, it will be 25%.

Okay. Any changes in this quarter?

No change. The full year will be 25%.

Okay. All right. Thank you very much.

Thank you.

Thank you. The next question comes from Adrienne Tennant from Janney Capital Markets. Please ask your questions.

Yes, thank you. Good morning, Chairman and CJ. My first question is on the growth rate for Q3. It's 20% to 24%. It's a deceleration from the second quarter. I know it has to do with timing of deliveries. Should we expect the fourth quarter to bounce back to this high 20% level in order to get to the high end of your full-year range? That's my first question. I'll let you answer that.

We deliver -- the orders placed on the distributors is 29%. And we will expect to deliver for a course of -- from over six to seven months from July onwards. If everything goes well, we'll deliver according to the order placed by them. So it's just the timing of delivery.

Right. So that means in the fourth quarter, we should see north -- close to like -- back to high 20% top line growth, right?

Yes.

Okay. So just the timing of delivery. Okay. That's good. Are you seeing any -- the cotton costs are now coming down. So cotton, raw materials, spot prices are coming down now. And so my question is, what are you seeing in the factories? I know there's a lead time obviously. But are you seeing what we're hearing is that some of the spinners, maybe some of the manufacturers may have been hoarding cotton and that that may exist and that sort of cotton in the channel, the manufacturing channel, may continue to be there through the end of the year? So as you kind of see the manufacturers and have kind of daily interaction with them, what are you hearing about the cotton spot prices coming down and any excess inventory that they may be carrying?

Okay. Let me ask Xu about this. (spoken in Chinese)

(spoken in Chinese)

Xu mentioned that there's constant interaction by -- with our suppliers in closely monitoring the cotton prices. He believes that the -- China is doing something on ensuring that there's no runaway on the cotton prices. And also, our retail price of our product side generally lower than our competitors. And the way we price our products is cost plus margin. And as for the spring and summer products, the cotton only constituted 50% to 60% of our products.

And with our cash in hand, even the situation arise, we can prepay our suppliers in advance for our suppliers to buy the raw materials at a lower price. They can buy early so they can buy at a lower price. And also, that could help us to maintain the price competitiveness in the market. So that's the response from the Chairman.

Okay. And so that brings me to this whole notion of, is there change in the way that you're doing the payment structure with the prepayments? I haven't seen that happen in any of the past quarters as I look back. And I guess, one of my questions is, you're allowing them to lock in prices on raw materials earlier. But as we look at the cotton, cotton's actually coming down.

And I just -- I guess I'm trying to get comfort with -- are they really locking -- if you're locking in, in the second quarter, looks like this program started during the second quarter. Cotton was certainly higher before July than it is today. So is there any risk that we get caught or that your supplier or your customers get caught in the opposite direction as cotton comes down? I just don't quite understand the prepayment. It sounds like you're locking in the prices during the second quarter. Is that correct?

We locked in the prices in the second quarter, yes, although the cotton price is coming down, the cotton price coming down is in the first quarter. Right now, the cotton prices are fluctuating around CNY20,000 to CNY25,000 per ton. So the price coming down is during first quarter around CNY30,000 per ton or CNY30,000 per ton. So there's still a lot of fluctuation in the cotton price. And it's not a coming-down trend for the second quarter. And our total cotton constitutes only 50% to 60% of our product. For the fall and winter products, the cotton constitution is less of an impact.

Okay. Maybe we'll talk about it offline. I guess my question is I just -- it's a new structure. And I'm just wondering how do you know when to stop doing the locking in the prices? And I don't want to spend too much time more on that.

Can you give us an update? Last call, you had talked about perhaps moving to a big four accounting firm. If you can give us any update on that.

And then my last question really will be on the PT&E. Obviously, it went up. I just was curious what that was.

Yes, I'll direct the question to Xu. (Spoken in Chinese)

(Spoken in Chinese)

For the big four project, because there's a lot of situations happening in second quarter and the first quarter, so we want to be cautious in this move. So -- and this quarter, we'll be actively talking with them. And if there's any progress, we'll make announcement in the market. We'll target to complete the project in -- by the end of this year.

And as for the increase in PT&E, we have prepaid -- we'll make some payments for the land. And we have spent some money on the renovation of the new headquarters in Xiamen. And if you attend the sales fair, you will see what we have spent on. And that's the bulk of the increase in PT&E.

Okay. Thank you very much, CJ. I wanted to commend you on the share repurchase activity. And best of luck.

Thank you.

Thank you. Our next question comes from the line of John Kernan from Cowen. Please ask your questions.

Hi. Thanks for taking my questions. I wanted to focus a little bit on the Q3 guidance at first, particularly the implied guidance for selling and distribution expense. Looks like it's coming in a little bit higher in terms of dollars and as a percent of sales. And I was looking for -- is there some type of shift going on there? Can we expect that type of run rate in terms of as a percent of sales to continue into Q4? What's driving that higher? Is it the marketing expenses and the expenses associated with Jacky?

We didn't give out guidance on the Q3 sales and the advertising as a percentage of revenues. What we gave out is the second quarters of the -- our advertising spend as a percentage of revenue. The reasons, one is because mainly because of the CCTV5 in March and April, when we have advertised. And after that, that will be gone. And in the first quarters of the advertising spend, we expect to be lesser than the second quarter.

The reason second quarter is 6% of the revenue is because our revenue is highly seasonal and 70% of the revenue coming from the second half, so our spending on advertising expenses peaked in March and April. In Q3, you'll -- our revenue will go up. And our advertising expenses will come down. So in percentage terms, it'll be lower.

Okay. But I guess in terms of what I was trying to get at, for Q3, is there a shift in ad spending that will go away as we go into Q4? Or is that -- is the level of selling and distribution expenses as a percent of sales from Q3 going to continue into Q4?

It'll be lower than the Q1 and Q2 as a percentage of sales.

Right. I understand that. I'm just trying to get if there's some type of expense shift from Q3 into Q4 and why maybe I misforecasted selling and distribution expense line.

Okay. Has there been -- I guess, shifting to the balance sheet, has there been any change in the aging of your receivables portfolio? Is that portfolio still -- have you seen any change there?

No, it's still within the credit limits that we get to them. And we collect 100% of it every three months.

Okay. And then I guess a little bit of a follow up to Adrienne's question, the other receivables and prepayments line and the other payables and accruals line, that will normalize in the back half of the year, correct?

Yes.

You'll see that start to shift away?

At the end of the year, at the end of the year.

By Q4.

Yes.

Okay. And then I guess another -- a longer-term question, where the gross -- you're guiding for gross margin this year is significantly below your long-term goal. As we look into 2012 and the sourcing environment gets a little bit more favorable in terms of raw materials at least, is there any reason to believe you guys would not be able to see gross margin expansion as we head into 2012?

It seems like you're raising prices successfully. The sourcing environment's getting a little bit more favorable. As we look into 2012, do you think there's margin expansion opportunities, particularly on the gross margin line?

I'll ask this question. (Spoken in Chinese)

(Spoken in Chinese)

He says that the trend will be to maintain the current GP margin level given the fact that -- I'll just -- I'll add onto what he says. I think the plan is to maintain the price competitiveness in the market and to make sure that we are still competitive, very competitive in the market. And we want to -- there's a lot of uncertainty in the environment, also the increasing interest rate and the inflation. So we want to make sure that our price -- our products remain competitive.

Okay. So just kind of a goal to maintain gross margin next year.

Yes.

That's what it seems like.

Yes.

Okay. And then my final question, the -- is the manufacturing facility -- has there been any update there? I know you're waiting to receive some of the cash from the IPO transaction. But has there been any progress towards that manufacturing facility?

(Spoken in Chinese)

(Spoken in Chinese)

For the progress of the land acquisitions, we have set up a subsidiary under the Hong Kong holding company. Hong Kong holding company is under the Xiniya Company. So this company will hold this -- will be the company that buys the land. And because there are some changes in the administrative procedures, that's lengthened the time for us to get the application process. However, having said that, the first stage of application has been through. So there are other administrative governmental process, which we need to run through. And we expected to get the process of land acquisition finalized very soon.

Okay, guys. Good luck and talk to you later. Thank you.

Thank you.

Thank you. (Operator Instructions). There are no further questions at this time. CJ, please continue.

Okay. Thank you, everyone, for attending the call. There's no further questions. We can conclude our conference call today.

Thank you very much, ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.

Portions of this transcript that are noted Interpreted were interpreted on the conference call by an Interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.