China Xiniya Fashion's (XNY) CEO Qiming Xu on Q1 2014 Results - Earnings Call Transcript

Jun. 5.14 | About: China Xiniya (XNY)

China Xiniya Fashion Limited (NYSE:XNY)

Q1 2014 Earnings Conference Call

June 5, 2014 8:00 a.m. ET

Executives

Christian Arnell - Christensen

Chee Jiong - CFO

Qiming Xu - Chairman and CEO

Analysts

Operator

Welcome everyone to China Xiniya Fashion Limited 2014 First Quarter Earnings Conference Call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question-and-answer session. Please follow the instructions given at that time if you would like to ask a question. And for your information, a webcast replay will be available within an hour after this conference is finished. Please visit www.xiniya.com under the Investor Relations sections.

Now, I'll like to introduce Mr. Christian Arnell from Christensen. Please begin.

Christian Arnell

Thank you. Good morning and good evening to all participants, and welcome to Xiniya's first quarter 2014 earnings conference call. You may find a copy of our earning press release that we issued last night in the IR section of our newly updated Web site or through PRNewswire.

Joining me on the call today is Xiniya's Chairman and CEO, Mr. Qiming Xu and Chee Jiong, 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 Qiming Xu, who would like to make some introductory comments. I'll translate for him. Mr. Xu, please go ahead.

Qiming Xu

[Foreign language – Chinese] Christian?

Christian Arnell

[Interpreted] Good morning, and good evening to everyone, and thank you for joining us today. Chinese economy continues to soften affecting the industry as a whole. Inventory levels have spiked as our competitors cut costs and closed stores across the board.

Despite these negative effects, revenue during the first quarter came in at the higher end of our guidance, while we managed to keep gross margins stable. While I'm not pleased with these results, [open] (ph) market situation in general, I'm pleased that we managed to meet guidance.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] The situation this quarter deteriorated rapidly. We, along with our competitors have seen our financial and operational results under pressure. Many of our competitors such as Septwolves, Joeone, (indiscernible) and Kaiser has first quarter revenue decline between 17 to 31%. Compared to them, our revenue declined only 7%.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Our sales fair in April was also affected, where we saw purchase orders decrease in the mid double-digit when compared to the total value of purchase orders placed during the same period last year. We expected these results with ample resources to support the brand, I'm confident in our ability to navigate through these short-term difficult times.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] We had always run our business prudently and we've encouraged our partners to remain cautious and conservative when placing orders in order to ensure their profitability and more inventory levels. This cautious approach has clearly impacted our financial and operational results in the short-term, but I believe that it is a good investment that will yield longer term value.

By implementing our focus strategy now, we're providing support to our partners when they're most in need giving them the support needed to navigate on market that is facing increasing downward pressure. The reduction in sales orders was a result of year to high growth followed by slowdown of the Chinese economy which caused demand to fall and inventories to increase.

We've always been very cautious in running our business and given the current economic environment, we will -- we're being even more cautious and conservative in our initiatives so as to ensure that our partners can continue to grow in a healthy way by reducing their inventory pressure.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Our recommended retail prices during the sales fair remains stable however, which demonstrates the continued fashion appeal of our product. We will continue to invest in our future by increasing R&D expenses as we work to improve the competitiveness of our future products and to increase the breadth and depth of our selection in order to drive future sales once the market turns for the better. Also, with our strong cash position and the number of other initiatives we've put in place at different levels, we strongly believe that it will yield strong future results.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] With a very strong cash position, we will expand and deepen our initiatives to support our partners. Our initiatives this year include, but are not restricted to, expanded sales rebates, continued longer credit periods to our distributors, providing tailor training programs to inexperienced retailers to help them improve operational efficiency and increase sales, continued advertisings across China so as to increase brand equity and comprehensive shopper ad support for retailers.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Despite the difficult economic conditions, we remain profitable during the first quarter. We believe these difficult conditions will continue for a period of time. So, our very strong cash position provides us with the tools to support and overcome these times. We will continue to work towards integrating our upstream and downstream business and execute our multi-brand operating strategy to create a more powerful Xiniya.

Once this strategy begins to bear fruits and the market trends for the better, we'll reward our long-term shareholders.

I will now turn the call over to Chee Jiong, who will go over the financials.

Chee Jiong

Thank you, Qiming Xu. Let me now walk you through the financial and operational performance of our business in the first quarter. During the first quarter of 2014, Xiniya has revenue of RMB204 million, a decrease of 7.5% year-over-year. The company deliver approximately 1.05 million units during first quarter of 2014 compared with 1.18 million units during the first quarter of 2013.

Xiniya network of authorized retailer has a net reduction of 69 retail outlet in the first quarter of 2014, consisting of 13 new retail outlet open and (indiscernible) retail outlet close. The total number of authorized retail outlet was 15-14 as of March 31, 2014.

Gross profit decreased to RMB60 million during the first quarter of 2014, a decrease from 67 million during 2013. Gross margin during first quarter was 29.6 compared with 30.7 during the same period last year. The decrease in gross margins was primarily due to increased expenses associated with the research and development of the company latest collection in order to improve their competitiveness and session appeal.

Selling and distribution expenses during the first quarter of 2014 increased to RMB20.4 million from RMB16.9 in the first quarter of 2013. The increase was mainly due to the printing costs associated with the company's 2014 spring and summer collection magazines and shopper carrier bags.

During the first quarter of 2014, the company payable (indiscernible) outlets related accessory for 13 new retail outlets and refurbished 32 accessing retail outlets, which includes (indiscernible) existing retail outlet as compared to 37 new retail outlet and 38 refurbished retail outlets during the first quarter of 2013.

The refurbishment of existing retailer outlet is expected to operate the order retail support image help attract male consumers and improve the presentation of Xiniya products all in effort to enhance retailers out of sales in the future. These expenses were approximately RMB11.8 million or [5.8%] (ph) of the revenue in the first quarter of 2014 compared with 11.5 million or 5.2 billion -- or 5.2% of the revenue during the first quarter of 2013.

Amortized expenses increased to RMB9.1 million in the first quarter of 2014 from RMB 8 million in the first quarter of 2013 primarily due to amortization of ERP systems.

Net profit in the first quarter of 2014 declined by 19.9% to RMB26 million as compared to 33 million in the first quarter of 2013. Earnings per ADS were $0.08 in the first quarter of 2014 as compared to $0.09 per ADS in the first quarter of 2013 increased above the prior guidance of $0.03 to $0.07 per ADS.

Now, moving on to our financial position as of March 31, 2014, the company had cash and cash equivalent of RMB827 million and (indiscernible) how a bank with maturity over three months of RMB350 million. Net cash flow operated from -- net cash generator from operations was RMB238 million.

Now, let's turn to guidance. We expect to see revenue decline approximate 10% to 15% during the second quarter of 2014 while earnings plus ADS are expected to be mid range of minus $0.04 and plus $0.01.

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

Question-and-Answer Session

Operator

Yes. Thank you. (Operator Instructions) The first question is from (indiscernible), Private Investor. Go ahead please.

Unidentified Analyst

Hello, everybody. Thank you for hosting the call and thank you for taking my questions. I just wanted to ask about the sales fair results. The press release said that fall/winter sales or orders were down 48%, is that the correct number? And if that is the correct number, are you planning to close a large number of stores over the remainder of this year?

Christian Arnell

Okay. Let me translate that and I'll let chairman to answer your questions [Foreign language – Chinese].

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] For the first question, the sales fair result is correct. And this year we plan to open approximately 160 new outlets, and we have plan to refurbish about 180 assisting outlets. The reduction in the sales fair results could be what we've just mentioned earlier. That's the China economy went through many years of high growth and which -- and then met with the slowdown in economies which cause us the demand for our products to reduce and cause the inventory in the China to increase. And as a result, many of our competitors has been doing these carving on their products. And we to be in the site of prudence in order to long-term survivability and profitability of our business partners, we are encouraging to reduce the orders. So that is -- the result, it's in a way expected.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

Sorry, the Chairman …

Unidentified Analyst

Okay. So, if you have the same number of stores, but they have fewer orders then how can that stores survive? How can they pay their own expenses for rent and for their salaries? What would be the health of your partners if they have this much lower volume of orders?

Christian Arnell

Okay. I'll translate that and -- [Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] They are reducing sales pay orders. We -- which mean they have some inventory at their level, so we are [looking] (ph) to combine the new products and their all inventory and sell it in their store. So that should address one of your questions. And we will continue to close down those less efficient stores this year same as last year.

Unidentified Analyst

So it might take six months or 12 months to clear the level of excess inventory and then it's possible that the stores could go back to their previous level of business, is that correct?

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Apart from (indiscernible) sales assessing inventory at the stores we will continue to increase our initiatives in R&Ds development to have more focus on what the consumer wants. And we also -- we are introducing lower price products to meet the current environment and we also tailor training program for adults retailers and let them have a better service to the consumers and enhance their sales.

Unidentified Analyst

Okay. And it still seems that there is a big contrast between this shrinking volume of sales and the company's very strong financial conviction with cash and deposits of approximately $190 million or working capital that works out to about $4.25 per share. I think is there an opportunity to do something bolder to invest some of the company's assets to more aggressively enhance the long-term value instead of just sitting on this money. And another opportunity to invest company's assets in the business would be repurchasing stock when the price is low there will be another way to invest in the company's own business if you believe in it.

Christian Arnell

You mean share buyback?

Unidentified Analyst

Right, or do something, don't just sit on this large asset and just leave it idle. You have all of these strong financial resources. Is there an opportunity for you to do something bolder?

Christian Arnell

Okay. Let me ask the question [Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Okay. To address your questions I'd like to talk about the China menswear industry competitive landscape. Our competitors, for example, (indiscernible) they have been listed for many years and they have very concrete supply chain. They have their own factory. They implemented ERP. They purchased high traffic volumes stores. They operate multiple brands, compare them with us. We are having just one Xiniya brand. We still have to fuel our own plant. We still need to resurface to implement ERP. We have not gotten any highly value -- high traffic volumes stores in those commercial districts. We although plan to have our multi brand strategy. The cash is sitting in a bank, initial comes. All these initiatives need resources to build to realize.

Unidentified Analyst

Yes. That's been the company's plan that you've described for several years to build the supply chain, the flagship stores and establish multi brand strategy, but it haven't happened yet, so when is that going to happen?

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] We have applied for the land to build our factory. The government taking a long time to approve the land, so this is something we can't control over. For the ERP, we have been using it in-house. And they are still from minor fine tuning the forward roll out, and given the current economy environment those brands without access to cable market. They faced even more difficulty. As Xiniya as a very highly -- is a better brand than most of them. And they also -- Xiniya also face the same down in our revenue and our business results. So they even face more pressure in their operation results which give us a great opportunity to look into them.

Unidentified Analyst

Okay. And then my last question. I would like to ask what role does online sales play in your business and also online promotion of your brand?

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] In just the e-commerce is the way to go. And right now at the moment, we -- this e-commerce opportunity to one of our distributors. And the main function now is to reduce inventory.

Unidentified Analyst

Okay, thank you very much. That's all I wanted to ask.

Christian Arnell

Thank you.

Operator

Okay. Next question is from (indiscernible). Go ahead please.

Unidentified Analyst

Hello. Can you hear me?

Operator

(Indiscernible) please go ahead and ask the question.

Unidentified Analyst

My first question is a follow up on online strategy. I am wondering you have started selling new products on Alibaba. So I am just wondering why not expand the strategy to sell your goods overseas or you could run your design or your brand overseas.

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] We think the China's market is to have a -- allowed white space to us to extend. And we are very familiar with the China market. So we don't have the plan to sell overseas. And Alibaba is -- they are just selling -- they are not selling kind of clothing that …

Unidentified Analyst

Okay. The second question, could you update us about your laser, shoes by sales of business.

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] The brand licensing of our laser goods, they are still adjusting. So given the current economic environments the pace is relatively slower than expected. So after the adjustments they may extend quickly and given that the economic condition is in favor of them.

Unidentified Analyst

Okay. My last question again, you are profitable right now. I know you have almost RMB1.1 (indiscernible) cash, and also you have positive operating cash flow. Why not give out dividend or have a regular dividend policy like you competitor just did recently?

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] We have cash in our bank and as just now mentioned that our competitors has a complete supply chain and our cash are required to build those initiatives we just mentioned. And given the sitting cash that we have, the best use of cash is to build big and great Xiniya to create more shareholder value.

Unidentified Analyst

Okay. My last question; so again a lot of investors ask about buyback, I am just curious how we sold on going private like most of the companies do.

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] We don't have plan for share buyback or going private. When we have that plan we will make announcement to the market.

Unidentified Analyst

Okay. That's all of my questions.

Operator

We are now in question-and-answer session. (Operator Instructions) Next question is from [Peter Styris] (ph), Private Investor. Go ahead please.

Unidentified Analyst

I have three questions. The first question I have is you talk about your -- the orders, do you have any way of monitoring what the actual sales in the stores are because you talk about that there was extra inventory. So how much are the actual retail sales down or up versus what your sell-ins are?

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] We haven't had our ERP implemented. So we do not have very accurate information.

Unidentified Analyst

So that's what ERP is important. I mean my guess is that retail sales in China have not declines or it may have, it's very small. My guess is what's happening to you and everybody else is there was too much inventory in the channel. Do you think that's reasonable?

Christian Arnell

[Foreign language – Chinese]

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Okay. The reducing orders is primarily due to a number of factors. One of which, what you mentioned the inventory in the channels. And also as a result that we closed some of the stores and we are focused to ensure profitability of our retailers and it's their long-term success also the contributing factors (indiscernible) order so much.

Unidentified Analyst

Okay. In this country we have -- and I was in the apparel business for a long time, we have ways of helping the stores move through our inventory with outlet stores and markdown money and there are three or four different strategies that we use. Are you guys looking at some ways of helping your stores moved their old inventory better?

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Of course we've increased our effort in reducing the inventory. Many sectors we are considering will be -- many initiative we are considering will be planned for them to increase their sales, especially during (indiscernible) season kind of sales trends that we're going to share with them. And we also advertised (indiscernible) to increase the brand equity, make more consumer aware of our brands and we may consider for those (indiscernible) some of their stores -- some of their inventory.

Unidentified Analyst

Okay. You talked about Septwolves and Lilang and some of the large companies, but my guess is that all the large companies have less than 1% share. Given the lousy market and the credit issues in China, do you see a lot of small companies starting to close? What's happening with all the little small companies who make up most of the market?

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Based on information that I have I heard that many brands going through very difficult times and they have great difficulty in the operations and they may face closure.

Unidentified Analyst

So, as those people close your business and the business of the other large companies should go up very sharply. Is that reasonable?

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Yes, he agree with your statements (indiscernible) give us room for increasing our market share and demands our economic start of growth. Our sales will increase tremendously.

Unidentified Analyst

Okay. I have one comment to make, which is I understand that you do not want to do a stock buyback or pay dividend because you think you need the money for ERP for buying more brands and for doing other things? If that is your strategy I think it would be useful to investors for you to give us more understanding of how much money you're going to spend on ERP, on the new factories, on the new distribution center and buying new brands, some idea of what the long-term strategy for using that capital would be?

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] He says that the cash that is planned for the -- plan the ERP, the multiple brand, especially our competitors has been very established in this area, so, our cash (indiscernible) for all these initiatives and projects.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] In the future the key is to have a bigger scale of Xiniya that would have a better leverage in the market. All those (indiscernible) business, which will put us in a very strong position. So he felt a view that we -- I should have more communication with the capital market to make them understand the use of cash in this area.

Unidentified Analyst

(Indiscernible) I understand his answer. What I'm saying is it would be helpful to us if we knew, if you in the next call you talk about the amount of money that you're going to spend on each of these initiatives? I understand why you and he want to do this strategy. It would just be useful for us to understand how much each of these pieces is going to cost in a relative sense. That was my comment.

Qiming Xu

[Foreign language – Chinese]

Unidentified Analyst

(Indiscernible), thank you.

Operator

Our last question is from (indiscernible) Capital. Go ahead, please.

Unidentified Analyst

Hey, gentlemen. How are you doing today? Everybody has already seemed to ask a very similar question to the one that I was going to go for basically looking at your capital plan and your plan to use the cash. I think you're getting the idea based on the number of investors that have actually asked this question, but having a plan for the cash is of the utmost importance at this point. The market has totally discounted the fact that the cash is even narrow at this point as well. Your stock trades at less than a third of what the amount of cash that you have on hand. That is a total detachment from reality and what you gentlemen need to do is you need to inspire people to understand what the use of the cash is otherwise they just figure it will go bye-bye and disappear on them.

So, as the last caller said, having a plan for the cash and highlighting it and sharing it with the investment community would be very helpful to all current shareholders that bought the stock at a steep discounted cash and it's not trading at an even steeper discount to cash. So, that just doesn't work for investors typically, but no, not that. I am going to lose for words otherwise, so please do share with everybody else's to what your plans for the cash are? I appreciate it.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] He says that (indiscernible) the initiatives will help the company in a great way in the future. So he understand that we should give our numbers to make you guys more understand his strategic directions.

Unidentified Analyst

That would be very helpful. We'd appreciate it. Thank you.

Qiming Xu

[Foreign language – Chinese]

Christian Arnell

[Interpreted] Thank you. We thank you for all your questions, and 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 disconnect now. Good bye.

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