Eason Technology Ltd (DXF) 2011 Q4 法說會逐字稿

Thank you for standing by and welcome to the Q4 2011 China Xiniya Fashion Limited earnings conference call. At this time all participants are in a listen-only mode. Later there will be a question and answer session following the presentation. As a reminder, today's call is being recorded today, March 27, 2012. I would now like to turn the call over to CJ Ng. Please go ahead.

Thank you. Good morning and good evening to all our participants. Welcome to Xiniya fourth-quarter and year-end 2011 earnings conference call. You may find a copy of our earnings press release that we issued last night or this morning in the IR section of our website, at ir.xiniya.com, or through our PR Newswire. Joining me on the call is our Chairman and CEO, Mr. Qiming Xu.

Please note that we'll 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 recent filed form 20-F. Let me turn the call to Chairman Xu, who would like to make some introductory comments.

(Interpreted). Good morning and good evening, everyone, and thank you all for joining us today. I am very happy to report strong quarterly results, having completed our first year as a public company. We continue to build our position as a leading provider of men's business casual apparel in China, that our sales momentums continue with revenue and gross margin that beats our previous stated guidance.

Our [wideworld] brands gained strength with our highly successful advertising campaign on CCTV-2, CCTV-5 and CCTV-12. Our (inaudible) not only reliant on our focus on building Xiniya brand equity and supplying high-quality products through our more than 1,600 outlets and flagship stores, but also our commitment to execute Xiniya's sustainable growth plan into the coming years, which we remain optimistic about.

In terms of flagship stores, our distributors reflected that our flagship stores have a positive impact in recruiting new retailers. Many distributors have indicated that their interest in opening new flagship stores will enhance our support in operate -- in opening the new flagship store this year. Our advertising campaign in 2011 has achieved the desirable result, which improves Xiniya visibility and brand equity. We plan to increase our advertising campaigns in 2012.

In terms of the progress of the new production and logistic facilities we have completed the application process at the local governmental level at Jinjiang City. Our application process has been submitted to the higher authority for approval.

In terms of ERP we have signed a contract with Burgeon and ERP (inaudible) in January 2012. Now we are in discussion with Burgeon on the planning and implementation details. We anticipate the test use the ERP system this July internally for about six months. Upon internal testing completion we will test the system in selected retail outlets.

In terms of the progress of the new sub-brand market facility study was completed. As there are uncertainties in China economic conditions we will delay the implementation of the sub-brand strategy.

I would like to thank all of you for your interest and continued support as we continue to execute our strategic plan and build Xiniya into our leading menswear brand in China. Now let me turn the call back to CJ who will review the financials in detail.

We are pleased to report another solid quarter of results. On the financial operation front we see strong momentum across all segments. First, I would like to go over our quarterly results.

During the fourth quarter of 2011 Xiniya reported revenue of CNY482.8m, an increase of 44.7% year on -- year over year. This greatly exceeded our guiding range, which was for a 25% to 30% increase. Approximately 7%, or CNY23.3m, of the revenue increase was attributed to the goods in transit recorded during the third quarter of 2011 which were delivered and recognized in the fourth quarter of 2011.

During the fourth quarter of 2011 our authorized network of retailers opened 40 new retail outlets, compared with 40 -- as compared with 38 new retail outlets during the same period last year. As of December 31, 2011 the total number of stores serving Xiniya brands was 1,607. Press release -- refer to the press release for a breakdown on retail store by outlet types.

Gross profit increased 41.8% to CNY169.6m in the fourth quarter of 2011, from CNY109.6m (sic - see press release) in the fourth quarter of 2010. Gross margin was 35.1%, compared with 35.9% in the fourth quarter of 2010. The decrease in the gross margin was mainly due to the increase in sales rebates to distributors as a result of the Company's authorized restructuring -- restructuring of the retail network completed in 2010.

Thus beginning in 2011 department store chains have been managed and supervised by distributors and purchase products from the distributors instead of directly from the Company, which has increased the purchases attributed to the distributors and, thus, the total amount of rebates as a percentage of purchases.

Selling and distribution expenses increased to CNY17.4m, compared with CNY3m during the fourth quarter for 2010 due to increase in advertising and promotion expenses, rack expenses for authorized retail outlets and new flagship store expenses. During the quarter we spent about CNY8.8m, or 1.8% of the revenues, on advertising and promotional expenses, compared with CNY1.1m, or 0.3% of revenue, in fourth quarter of 2010.

Following conversion of the first full year Xiniya advertising campaigns on CCTV-5 and CCTV-12 and CCTV-2 were all well received with great success. The Company will continue promoting its brand equity in 2012 to further support strengthening our brand equity and to add the opening of a new retail outlets and our flagship store, such as the newest one opened in November 2011 in Quanzhou City, Fujian Province.

During the fourth quarter of 2011 administrative expenses was CNY9.1m, up from CNY6.1m last year. The increase is due to an increase in the numbers of administrative staff and related salaries, along with costs associated with being a public company.

Income tax expenses was CNY37.5m, compared with a tax expense of CNY14m in the fourth quarter of 2010 due to increase in effective tax rate from 25%, from last year's 12.6%. The increase is due to expiration of the Company's preferential PRC tax treatment at the end of 2010.

Net profit was [CNY112.5m] in the fourth quarter of 2011, compared with CNY96.9m in the fourth quarter of 2010. Earnings per ADS were $0.31 per ADS in the fourth quarter of 2011, exceeding prior guidance of $0.21 to $0.25 for ADS. This compared to earning per shares of ADS of $0.27 during the fourth quarter of 2010.

I would like now to quickly review our full year's 2011 result. For full-year 2011 Xiniya recorded a total revenue of CNY1.18b, an increase of 31.2% year over year. This exceeded our guidance range, which was for a 24% to 29% increase. The increase in revenue was primarily attributable to 14.2% increase in the ASP and 14.9% increase in unit volume, which was higher than the prior guidance of 12% to 14% increase in ASP and 10% to 13% increase in unit volumes.

Gross margin was 34.3% in 2011, which was within our guidance range of 34% to 35%. Total profit for the year was CNY251.7m. Earnings per ADS were $0.69 per ADS in 2011, exceeding prior guidance of $0.59 (sic - see press release) to $0.63. A net total of 203 new retail outlets were opened in 2011, of which 235 were new retail outlets, offset by 32 retail outlets that were closed.

Looking at our balance sheet, as of December 31, 2011 Xiniya had cash and cash equivalent of CNY1.03b, or $2.83 ADS -- per ADS. As of December 31, 2011 trade receivables were CNY335.2m, which result entirely from sales during the fourth quarter of 2011. Trade receivables outstanding at the end of fourth quarter have been fully collected as of December 31, 2011.

Now I would like to go through some recent business and distribution developments. In 2011 the Company announced sales and following our sales fair held last September increased by 26% as compared to the previous year.

In January 2012 we signed an agreement with Burgeon to begin implementing the ERP software. The implementation is currently in preliminary phase and we expect that to be gradually rolled out over the next 12 months. Thereafter it will be tested in up to 400 points of sales, which account for approximately 25% of our current outlets. We expect this implementation will cost approximately CNY12.9m over the course of three years to five years.

Now let's turn to guidance. We'll be providing guidance for the first quarter of 2012 at this time. We will provide full-year guidance after our Spring Sales Fair, which will take place on April 10, 2011 (sic) in Chengdu, Sichuan Province. [This is] our fourth sales fair, which was held last September. We expect to realize earning growth approximately 23% to 28% in the first quarter of 2012. Earnings per ADS expected to be in the range of $0.04 to $0.09.

One last thing before we take your questions. We are extremely proud of our brand and the innovation of our talented design team, which successfully respond in the marketplace each season. As such, we'd like to invite you to our analyst day and investor tour during our Fall and Winter Sales Fair on Tuesday, April 10, 2012 in Chengdu, Sichuan Province.

Participants will attend the sales fair and be briefed on the recent developments, and meet with our designers, distributors, and visit retail outlets, including the Chengdu flagship store which opened in July 2011. We welcome you to this event. If you'd like to participate in this tour please contact myself or the contacts at Christensen.

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

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. And you have a question from the line of Chenyi Lu of Cowen Group.

Great, thank you. I have three questions. The first question is can you give us the 2012 store expansion plan? And then after you answer the question I will follow -- I will have two follow ons. Thank you.

(Interpreted). Okay, on your first question, we plan to increase about this year, new store, 150 to 250 and we plan to upgrade or restructure 2006 and 2007 stores, about 200 stores.

Okay. So the question is -- so what's the net addition in 2012?

(Interpreted). Okay. The question is what is the net additions of the store. We plan to upgrade or restructure seven stores that open in 2006 and 2007. Some of these stores will be relocated to better locations or expand their (inaudible) area. Certain store if they can't -- certain locations can't be changed or can't be expand, they are not suitable for upgrade, perhaps we close about 50 to 100 stores this year.

So what's the net addition, then?

(Interpreted). It's about -- it's 100 above.

Okay, above 100. Okay, great.

Okay, my second question is can you give an update how many distributors you have today? And then I know that you just say that you are going to add one or two distributors this year, so that would bring us to how many?

(Interpreted). Last year we have added two, from 26 to 28 distributors, and this year we may increase one to two distributors.

Okay, and then my final question regarding the inventory levels at the distributors. Can you give us a view as to inventory for the fall and winter 2011 collections at the retail store or distributor stores?

(Interpreted). This year 2011 the winter tend to be a bit warmer during January, but subsequent after January the weather turn cold. So in terms of the inventory at our retail channels, after we have gather information from our distributors it appear that the inventory level is quite healthy and this shouldn't affect our upcoming Sales Fair.

My understanding is the inventory should increase slightly year over year due to the warmer winter, right?

(Interpreted). The inventory appear to be increase by a little -- very little, so we don't expect that would affect our upcoming Sales Fairs -- orders on the upcoming Sales Fairs.

Okay, thank you. That's all my questions.

Thank you. Operator, next --

(Operator Instructions). Your next question comes from the line of Adrienne Tennant of Janney Capital.

Hi, this is Brian Sandak calling on behalf of Adrienne Tennant. First, let me just say congratulations on the quarter and the full-year performance.

I was wondering -- my first question -- I have a few questions. First, I was wondering if you guys could give some color and a little more comments on where the upside came from for this quarter. I see that revenue is obviously up significantly, about 45%, based over a guidance of 25% to 30% originally. And I see approximately 7% came from in-transit goods, but I was wondering if you could comment a little bit more where the upside came from this quarter.

(Interpreted). When we report our guidance we tend to [be] conservative in giving out our guidance. The upside -- one of the upside is coming from the goods in transit, whereby the revenue was recognized in the fourth quarter instead of our third quarter. And also we had additional orders from distributors, so that brings up the numbers, so three factors. One is a conservative guidance, the goods in transit and the additional orders from the distributors.

Okay, great. Thank you.

And then my next question in relation to next year's guidance. For first quarter you got a 23% to 28% increase for revenue and with your October Sales Fairs I know that you get spring bookings for the upcoming year. And I was wondering how we should think about modeling our second-quarter revenue if the first quarter is 23% to 28%. If you have any idea -- you can give any color on how we should look at second quarter.

Okay. We announced the Sales Fairs numbers last September, which is the increase by 26%. For the 26% that will mean for the first six months of 2012 the full six months will be increased by 26%. Now, if the first quarter is, let's say, 28%, that will mean the second quarter will be a lower number because the full six months will be 26%.

Okay, perfect. Thank you.

And then if I could ask another question about the cost environment that you guys are seeing as far as labor and wage inflation with the Chinese workforce, or how you're looking at cotton trends in the upcoming year now that cotton is down year over year.

The way we price our product is cost plus GP margin, so the -- although the price is down so -- that would only affect the -- our ASP overall. It will not affect our gross margin.

Okay, great.

And then (multiple speakers) on that point of gross margins, if I could ask one final question. If you could give us any guidance of how we should think about gross margin in the first quarter and possibly, [vacating] throughout the full-year '12, how we should be modeling gross margin. Thank you.

It should be a similar trend as last year. Okay, this year -- the first quarter, based on my model, the margin will be slightly above last year Q1. But overall this year the gross margin will be slightly lower because we're going to give out sales rebates for -- to all our distributors. So all 28 of our distributors will receive the sales rebate. In the past only the top 20 received a sales rebate.

The reason we want to do this is that it will help us to recruit more distributors. If we have more distributors and we have more hands to help us to open more stores we can grow our store base faster. So it's a give-and-take situation.

Absolutely. All right, great, thank you very much. That's very helpful and good luck.

(Operator Instructions). We'll pause for just a moment to compile the Q&A roster. And there are no audio questions. I would like to turn the call over to management for any closing remarks.

Yes, I have no further remarks. Thank you, everyone, for participating on this call. Thank you very much.

Thank you for your participation. This concludes today's conference. You may now 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.