Synutra International (SYUT) Q3 2016 Results - Earnings Call Transcript

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Synutra International, Inc. (NASDAQ:SYUT) Q3 2016 Results Earnings Conference Call February 5, 2016 8:30 AM ET


Bill Zima - IR, ICR

Clare Cai - CFO


Peter Siris - Hua Mei


Ladies and gentlemen, thank you for standing by. And welcome to the Synutra’s Third Quarter Fiscal 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-session. [Operator Instructions]

I would now like to hand the conference over to your host for today, Mr. Bill Zima with ICR. Please go ahead, sir.

Bill Zima

Thank you, operator. Thank you everyone and welcome to Synutra International’s third quarter fiscal 2016 earnings conference call. With us today is Ms. Clare Cai, Synutra’s Chief Financial Officer.

Before we begin, I will read the forward-looking statements. During this conference call, we will make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on our current expectations, assumptions, estimates and projections about Synutra International and its industry.

All statements other than statements of historical fact in this conference call are forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as anticipate, believe, continue, estimate, expect, intend, is/are likely to, may, plan, should, will, aim, potential or other similar expressions.

These forward-looking statements speak only as of the date hereof and are subject to change at any time. And we have no obligation to update these forward-looking statements.

With that said, I would now like to turn the call over to Synutra’s CFO, Ms. Clare Cai. Clare, please go ahead.

Clare Cai

Thank you, Bill. Good morning and welcome to Synutra International’s third quarter fiscal 2016 earnings conference call. Today, I will begin with update on our operational initiatives followed by a more detailed review of our financial results and outlook for fiscal 2016. After that, we will hold a question-and-answer session.

During the third fiscal quarter, our overall sales decreased by 5.3% year-over-year as we continued to see intense competition in the Chinese infant milk formula or IMF industry. However, we are pleased to report a meaningful expansion in our gross margins which increased from 45.7% to 50.7% in the third quarter. As we have discussed on our recent calls, we have maintained a consistent level of sales discounts in recent years, whereas many of our competitors have increased their promotional discount level, resulting inconsistent downward pressure on market prices.

As a result of our strategy, we continued to experience healthy improvements to margin expansion, which reflects our lower raw material input cost and the strong controls on sales discount and expenses.

During the third fiscal quarter, our net profit attributable to common shareholders was $12 million. Similar to last quarter, the depreciation of RMB against the U.S. dollar and euro negatively impacted our results by $2.4 million. Note that, we incurred only a nominal amount of income tax expenses in the third fiscal quarter of last year, as we benefited from income tax credit. Excluding the adverse foreign exchange impact on a pre-tax basis, net income was slightly higher than the results from the same period last year. We are pleased with our profitability results in light of a more challenging market environment this year.

Looking at our product segments, at our core Nutritional Food segment, we experienced a 9.7% decline in sales, which were impacted by a 5.5% decrease in ASP and a 4.5% decrease in sales volume. Among five branded factories sales under the Dutch Cow brand adult formula products as well as sales under the private label book group of brands increased year-over-year whereas sales under our mainstream Super brand, our direct to mom and baby store brand, My Angel and our specialty formula product decreased year-over-year. Despite increasing competition, as some of our peers in the IMF category entered the adult formula sector, sales of our Dutch Cow adult formula products increased 7% year-over-year. Similar to our strategy in the IMF market, we continued to emphasize the high end value proposition of the Dutch Cow brand and shifted more of our sales expense budget to the higher priced products. [Ph]

We are pleased with the performance of Dutch Cow thus far and are preparing to expand this brand into lower priced categories. We launched our Dutch Cow ultra high temperature liquid milk product in select regional markets as well as in our ThumbMall e-commerce channel in January 2016. Other planned Dutch Cow products include plain milk product.

As expected, sales of our specialty IMF products and the My Angel products continued to be negatively impacted by the newly proposed resolution regarding IMF production new licensing. Our specialty formula production is still limited to our OTC specialty IMF products, as the new regulations governing the issuance of specialty formula production license have not yet been finalized. This negative impact was expected and we remain confident that the situation will improve soon after the new resolutions are announced. Given that, Synutra’s Qingdao factory was the only factory in China that received a specialty formula production license. We believe we’re well-equipped to be among the first manufacturers to qualify under the new regulation.

With regard to how the newly proposed regulation will impact our general IMF products, our biggest change is the limitations of the number of brands each domestic factory can produce. However, we expect our French facility to commence operations in time to compensate for such limitations and we are also in the process of making necessary upgrades to our Inner Mongolia Meng Yuan factory, so that it can qualify for a license for new brand as well. With such preparations, we do not expect meaningful disruption to the overall number of brands we can manufacture across our several factories in the short to medium term, with or without the new regulations.

While we are confident with our production strategies, the buyers of our My Angel group of brands, the mom and baby store owners remain uncertain as to whether we can produce and deliver this group of brands prior to the opening of our French project. Hence, the negative impacts to our My Angel sales in the recent quarters.

Interestingly buyers of our private label group of products who are distributors that sales more brands to mom and baby store owners attempted to maximize their inventory before the new policy become effective to ensure continuity of brand sales. Given that we take prepayments on such orders and do not operate these brands, we see limited risk in taking their orders. Although the uncertainty of the regulatory environment temporarily impacted our sales of some products, we believe the new regulations, once enacted, will benefit us in the long run.

As mentioned earlier, recently the Chinese Food and Drug Administration released the draft of the guidance of registration, which limits each domestic factory to three brands and proposed stricter safety procedures. The new regulation which is expected to be effective soon, will immediately apply to the 120 plus IMF factories in China, including those operated by multinational and domestic brands. Similar limitation is expected to apply to overseas factories that import to China. Although the details of overseas implementation will take longer to finalize, which requires consent from international trade bodies, such as the WTO. As many of you may already know, the government has been pushing towards consolidations to raise overall safety and quality profile within China’s IMF industry. While such limitation may hinder Synutra’s ability to supply the private label market, note that we only derive 5% to 10% of our sales from this market. While overall small brands that are mostly made under private label arrangement account for approximately 20% to 30% of the total Chinese market.

If the limitations under the new regulations are strictly imposed, we welcome the opportunity for the market to open up, allow us to better compete. On the other hand, local enforcement of the central government regulations turns out to be loose as we have seen in some precedence in China. We will continue to serve all of our customers with our three factories.

Moving on, I want to provide you with an update on our online-to-offline or OTO membership service program. We continued to develop the ThumbMama membership community and the ThumbMall ecommerce platform in the third quarter of fiscal 2016.

The company has a public WeChat account called Mǔzhǐ Mama or ThumbMama under which we can assign one to three sub accounts to each of our nutritional consultants. These subgroups function just like a normal WeChat friend’s chat group but the company maintains ownership and backdoor monitoring of these groups. Since the beginning of fiscal 2016 when we formally launched our ThumbMall WeChat stores, which is linked to those ThumbMama sub accounts, we have seen monthly sales -- sales growth of 13 times through ThumbMall, which now accounts for over 25% of our sales of the Super brand IMF products, and that Super brand IMF products in turn account for about two-thirds of our total sales.

We now have approximately 8,000 part time nutritional consultants on the ThumbMama WeChat platform, in addition to the more than 6,000 full time in-store promoters who are also ThumbMama consultants.

In contrast to the full time promoters who expect to earn at least RMB 2,000 a month working for us, the part time consultants have no base salaries or total compensation expectations and are purely paid on commission after sales. As such, we have built up a significant team of promoters in addition to our traditional in-store promoters at very low costs, which promote both our products and ThumbMama and ThumbMall platforms. We believe this the primary reason we are able to maintain a rather consistent level of sales discounts in expenses, in spite of intensified market competition since the beginning of the fiscal year. We view this strategic initiative as a platform from which we will be able to derive sales sustainably over time, particularly as our premium imported products from our French facility are brought to market in the early part of next fiscal year.

We continue to execute on French projects, which includes two spray drying towers, one for whole milk powders and one for all oil-wrapped whey protein powders each with an annual capacity of 45,000 metric tons as well as mixing and canning capacity for powdered formula products of 60,000 metric tons per annum. The total budget for investment in building our major production related equipment for this project is €161 million.

During the third quarter of fiscal 2016, we continued to conduct test operations in the key drying towers. And we completed the mixing and canning line, and we manufactured the first batch of 8 cans of Super brand infant milk formula product in January ‘16 in France. However, the test operation at the two drying towers is taking longer than we previously expected due to some delay in the final installation and testing of the main drying and evaporation equipment. As such, we now expect the project to be fully operational no later than April 1, 2016, the beginning of our next fiscal year.

We expect to receive the necessary operation approval and import accreditation from the French and Chinese authorities, right after we start our commercial operations and to start importing into the Chinese market in the first quarter of fiscal 2017. The increased costs incurred by other construction or equipment suppliers due to the prolonged testing process is expected to be partially offset by the expected remediation from the supplier of the drying and evaporation equipment. However, we may incur additional management costs in the last quarter of fiscal 2016, as we have arranged for the staffing and raw material supplies for the French project with a starting date of January 1, 2016.

At this point, I would like to review our financial results as well as provide an outlook on business.

For the third quarter of fiscal year 2016, our net sales were $109.3 million, a decrease of 5.3% from $115.3 million for the prior year period. Net sales from our Nutritional Food segment which mainly includes branded powdered formula products was $96.3 million or 88.1% of net sales in the third quarter. This represents a decrease of 9.7% from the prior year period in which we recorded sales of $106.6 million or 92.4% of total sales.

Sales of Nutritional Food -- sales of powdered formula products decreased to $7,647 tons in the third quarter compared to 8,006 tons in the prior year period. Average selling price was $12,588 per ton compared to $13,316 per ton in the prior year period.

Net sales from the Nutritional Supplement segment were $10.6 million or 9.7% of net sales, an increase from $5.6 million in the prior year period. This segment is primarily comprised of sales of ingredients such as chondroitin sulfate to international pharmaceutical companies. As the quality of our products gains more recognition in the U.S. market, we’re able to pass more and more operations [ph] after a raw material cost fluctuations through to our customers and maintain stable sales volume and profitability going forward.

I would like to note that these sales are in U.S. dollars and thus are not impacted by foreign currency translation. We also plan to denominate all B2B sales of the output of our French project after its completion including the both packaged milk and whey powder or any private label sales in euros, which will also provide a natural currency hedge to our cost basis.

Net sales from the Other Business segment, which mainly consists of imported whole milk powder and whey protein sold to industrial customers was $2.4 million or 2.2% of net sales as compared to $3.1 million or 2.7% of net sales in the prior year period. These sales are always opportunistic. The year-over-year increase in the Other segment this quarter was mainly driven by the sale of one batch of the defective [ph] whole milk powder effective formula product. We received full compensation from the supplier of the milk powder which reduced our production cost in the Nutritional Food segment and sold the defective [ph] milk powder as feed-grade powder as C grade powder which was reflected in the Other segment.

Gross profit was $55.4 million in the third quarter of fiscal 2016 compared to $52.7 million in the prior year period. Gross margin was 50.7%, an increase from 45.7% in the prior year period. This increase was primarily due to a significant increase in the cost of whole milk powder used as raw material for our Nutritional Food segment and was partially offset by lower average selling prices. After a slight recovery in the second fiscal quarter, world-wide whole milk powder resumed its price decline due to supply pressure in New Zealand and we were able to benefit from the decline.

Selling and distribution expenses were $14.0 million in the third quarter of fiscal 2016 compared to $15.9 million in the prior year period. Advertising and promotional expenses were $12.8 million in Q3 compared to $10.5 in the prior year period. Our advertising expenses have increased as we shifted our advertising focus to e-commerce providers, mostly for our specialty infant formula products. Meanwhile, our selling and distribution expenses decreased slightly as lower employee bonus costs were incurred due to lower sales. Combined, these two expenses increased as a percentage of sales to 24.6% in the third quarter, compared to 22.8% in the same quarter last year.

General and administrative expenses were $8.0 million or 7.2% of sales compared to $7.3 million or 6.2% of sales in the prior year period. The increase was mainly due to the lower reversal of bad debt expenses.

Income from operations was $20.6 million or 18.9% of sales in the fiscal third quarter, compared to $19.2 million or 16.7% of sales in the prior year period. The increase in operating margin was mostly driven by the lower cost of whole milk powder.

Net interest expense was $1.9 million compared to $1.5 million in the prior year period, as a result of the increase in our loan balance.

Net foreign exchange loss was $2.4 million, compared to $0.5 million gain in the prior year period. This loss was primarily due to the differentiation of the RMB against the U.S. dollar and the euro during the quarter. While our main operating entities are all based in China and generate revenue in RMB, we have significant U.S. dollars and euro borrowings through our subsidiaries in China. In other words, relatively speaking, our U.S. dollar and euro denominated liabilities have become more extensive to us by roughly $2.4 million.

Our income tax expenses were $3.8 million, compared to $205,000 in third quarter of fiscal 2015. We benefited from losses carried forward in the first nine months last year, while our income tax expenses for the first nine months this year were based on our effective tax rates of approximately 27%.

Net income attributable to common stockholders was $12.0 million or $0.21 per share for the fiscal third quarter, compared to net income of $17.3 million or $0.30 per share in the same period last year.

Looking at the balance sheet, we ended the third quarter with cash and cash equivalents of $65.2 million and restricted cash of $224.1 million, which includes current and non-current portions. Total cash including restricted and non restricted portions was $289.3 million versus $291 million as September 30, 2016.

As of December 2015, total debt was $474.0 million, representing a decrease of $26 million from the end of the second fiscal quarter. Our net debt which is total debt less total cash was $184.7 million as of the end of the third quarter, representing a decrease of $24.3 million of our net debt position as at the end of second fiscal quarter because the favorable working capital conditions in our fiscal third quarter is the burden on our indebtedness.

Working capital condition in turn was due to the positive carry we enjoyed as we extended production in December of 2015 in preparation for the high season of January. Most of our CapEx expenses have been for the construction of the French project which continued to be the case in the third quarter. However, as construction for the French project is close to the end, the quarterly expenditure level has decrease as well. We have spent more than 90% of the fixed asset budget of the French project through the end of third quarter.

Net accounts receivable increased from $19.9 million at the end of the second quarter to $24.0 million as of December 31, 2015, reflecting increased sales in December as distributors get ready for the spring holiday in early February 2016. We would like to note that there have been no changes in our payment policies.

Our inventory position was $86.9 million compared to $93.5 million at the end of the prior quarter. As we discussed the last quarter, we increased our inventory position during the June quarter while whole milk powder prices were at a typically low levels and we have been utilizing this low cost inventory since then.

Before, I move on to our forecast for the year, I would like to provide an update on our share repurchasing program that we announced in September.

On September 10, 2015, our Board of Directors approved a share repurchase program, authorizing the repurchase of up to $20 million of our common stock over the next 12 months. Following the approval, we entered into a Rule 10b5-1 trading plan under the Exchange Act with an investment bank. And during the three months ended December 31, 2015, we repurchased 352,000 shares of our common stock under this plan at an aggregate cost of $1.8 million. The share repurchase program has been automatically terminated due to our public announcement of receiving a non-binding proposal letter from Mr. Liang Zhang, Chairman and CEO of the Company and an affiliated entity of his, proposing a going-private transaction.

Finally, I would like to discuss our outlook for fiscal year 2016. As mentioned on the previous call, we believe that the previously announced fiscal 2016 revenue guidance will be difficult to achieve, mainly due to expected lower sales in the Nutritional Food segment and the negative impact associated with foreign exchange in the current fiscal year.

We now expect total net sales for fiscal 2016 to be between $375 million and $400 million and net income to be between of $30 million to $35 million. Adjusting for the foreign exchange impact, we expect full year net income to be between $41 million to $46 million. Operating income for the current fiscal year, which is not expected to include major one-time items, is expected to be $60 million to $65 million, and we note that on a non-GAAP basis excluding one-time gains or expenses, our operating income for fiscal 2015 was $64.3 million.

Despite the lower expectations for fiscal 2016, we remain opportunistic about the growth potential for Synutra for fiscal 2017 and beyond, once its French facility becomes fully operational.

This concludes my prepared remarks for today’s call. Operator, please open up the call to questions.

Question-and-Answer Session


Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of [indiscernible] Please go ahead.

Unidentified Analyst

Just a question regarding the French facility, one, you said in the call that that’s supposed to start early in the fiscal year -- in the next fiscal year. Can you be more precise when it will be fully operational? But maybe more important than that, what I want to understand, when I walk through baby stores in China or the traditional stores and I look at the various cans on the shelves, a lot of them have a little label on the top saying imported. I just wondered, from a consumer point of you, does it make a difference if the brand imported is so called international brand or is it what I would call a local brand? I mean does consumer distinguish between a say an Enfamil or your brand? I’m just trying to understand the upside, when we’re moving, taking a local brand and imported, whether the consumer will really value that or will have a concern that it’s still a local brand compared to other international brands. I have a follow-up but if you are going to answer that first. Thanks.

Clare Cai

Okay. First of all, I want you to be clear that we expect the French facility to be fully operational before April 1, 2016. So, in the month of March, we expect it to be fully operational, meaning the two towers and mixing and canning facilities are fully functional. And we expect the two towers to be running at close to full capacity from the get go. So that’s for our projects.

And for the brand image, we agree that there is a premium attached to fully imported products. We would have for multinational brands when each of them do have wholly -- fully imported version and domestically manufactured version, both sold in China, we see a premium in price for these fully imported versions. And for the domestic brands which did not have overseas factory before but most of them are in the process, most of the major domestic brands are in the process of investing in overseas factories. What we expect is that the consumers of the domestic brands will appreciate the prestige attached to the same brand overseas factories. And for other consumers that are not domestic brand believers, the implication is that the line between multinational and domestic will become more blurred. So, domestic brands can have an overseas produced product while multinational brand can have a factory in China. So, the brand’s locality of manufacturing is more mixed and matched. And the consumers will evaluate the overall appeal of brand plus the manufacturing place.

Unidentified Analyst

Thank you. And once you have that product in the market in terms of the price point for your imported product and your local product, roughly what would be the difference? I mean, any color in that sense would help.

Clare Cai

We plan -- although we haven’t priced our imported product, I would say our plan -- we do not have plan to adjust our retail price, be it’s made in China or made in France because like I said our goal is to want to emphasize the quality assurance and the prestige coming with the brand rather than the locality of production. And honestly, we think the Chinese standard is already the most strict, highest standard in the world. It’s the consistent enforcement that we should focus on. So, we don’t want to emphasize the difference. However, we understand that our consumers do appreciate the feature of made in France and we plan to promote this feature without changing the price.

Unidentified Analyst

Thank you. And then just in terms of the e-commerce platform, can you just remind us what percentage of your sales are coming from e-commerce, maybe if you can be more precise on the growth of that business for your company? And when you talk about WeChat and other platforms, can you put that together with other companies? It seems that everybody is doing the same thing, or is there something special about the way Synutra is going about its e-commerce strategy? Thanks.

Clare Cai

We currently -- for the month of December, we had 25% of our Super brand sales coming from the WeChat or some more platforms. And our Super brand sales accounted for 60% of total sales in the last quarter. And that percentage fluctuates between 60 to 66. So, about 15% of our sales is from this WeChat channel. Note that we only launched the ThumbMall channel in the beginning of this fiscal year or April 2015, so it’s only nine months. Whereas for the platform e-commerce channel, meaning a flagship store Tmall or Jingdong or number store, we have done that since second half of 2012. And that platform channel sales only account for about 1% or 2% of our total sales. So, this growth of this WeChat ThumbMall channel is very impressive. We are very happy with its results.

And what’s more important is that we are able to attract a significant group of part time nutritional consultants as promoters and hosts of our WeChat groups. And the number is 8,000 now which already -- the total number is actually 20,000 but the active number with regular sales for their members is about 8,000. So each of them make up between 700 to 7,000 a month, by promoting our products on WeChat. They don’t have to go to a store, they don’t -- we don’t know if they have another occupation besides working for us and we don’t actually ask. So, of course we want them to testify that they are not criminals and things. But basically, it’s a very low cost form on building your promoters. It’s almost like a direct sales mode that we pay them only on commission and they do the brand building, the goodwill building, [indiscernible] all on themselves.

We are still not as efficient as our in-store promoters for whom we have developed and fine-tuned the sales method for many years. We are among the first to establish in-store promoter team for the domestic brands. So, we have developing skills, the selling point and regulator trainings. We are still to develop a comparable system for the online WeChat promoters. So, their efficiency level is roughly a quarter or 20% of an in-store promoter. So, consider the time, the very limited time it took to build this team and the very low cost. We think we have found a form to -- a way to build up our e-commerce strategy. And although some of our competitors also have this membership concept, some may -- when they talk about e-commerce, may refer to more to the platform e-commerce when they take pride inventing as top sellers in the Double 11 event or events like that. We see each manufacturers has its own distinctive e-commerce strategy. And even for those who also emphasize membership based promoters, the promoter, where they report and how they pay is different for each manufacturer.

Unidentified Analyst

If I may, just a couple of more. So, I’m a baby store owner there and I see that a company is becoming very aggressive with WeChat and some of these e-commerce platforms, do I worry that I may lose some business and as a result, maybe I don’t want to do so much business with you from a baby store point of view? Does that dynamic play out or not really, they don’t worry that companies are being aggressive in e-commerce also?

Clare Cai

Yes. This is getting more and more into our operation details. But I can share some with you that we actually open the channel to -- open this platform to mom and baby store owners. We call them baby store nutritional consultants. And in exchange for opening -- giving them another way to do business, we require them to add members to their group at certain pace. So, the baby stores, they are also concerned of the overall threat by e-commerce. It’s not how Synutra’s developed its e-commerce strategy, it’s the overall threat of e-commerce that they are aware and they want to adapt to. And our WeChat program and permitting or accommodating them into the WeChat program actually offers a way for them to adapt to the new era. And we -- by opening up their membership -- or to us, we offer them a more flexible way to do business. For example, the sales on WeChat, they don’t have to pay and store in their -- using their own working capital or store space. So, it’s another way for them to do business at roughly the same compensation or profitability. So, we see this as a win-win situation for the mom and baby store owners we want to open up to our new way of doing business.

Unidentified Analyst

Thank you. Just one last one, so this offer from the Buyer Group of $5.91, can you give us some color in terms of what are the metrics they are using to value the company; and why that price, what is the assumptions behind that?

Clare Cai

The company does not have any information beyond what’s been disclosed in accordance with SEC regulations. And we encourage you to keep updated and keep track of our announcements. Specifically to your question, the offer came from the majority shareholder and the board representing minority shareholders has formed a special committee to evaluate. So, I represented the company, I do not have any insight into legal side decision. But the special committee has hired a financial advisor who will evaluate the valuation aspect.

Unidentified Analyst

Is there a firm date, by when the special committee is supposed to give an answer whether they agree or don’t agree?

Clare Cai

I don’t know that.


[Operator Instructions] Your next question comes from the line of Peter Siris from Hua Mei. Please go ahead.

Peter Siris

I want to understand a little bit about the policy in China. Just taking from what you said first, with the domestic factories, each factory is going only be able to produce two brands, is that correct?

Clare Cai

The current draft I think is three brands per factory.

Peter Siris

Three brands per factory. So, what that should do is eliminate many of the smaller brands which should be beneficial to you because you are more in the moderate price segment, is that reasonable?

Clare Cai

I think that this decrease [ph] is not in price but in volume. There are many, many smaller brands, there are hundreds of them. And most of them are produced in smaller factories. Each factory lives on a group of 30 to 50 small brands to maintain its volume. If each factory is limited to only three brands, such essentially OEM factories do not have any three brands that are big enough to maintain their annual volume. So, such small factories would either have to exit from the market or to adapt their production method -- do something to adapt to the new regulation.

Peter Siris

Okay. But I just wondered, many of these smaller brands, are they -- do you have any idea of whether they’re sort of high end, medium end or low end price points?

Clare Cai

Their price points under retail level is actually comparable to the leading manufacturers. If the market averaged high to premium price points is 250 gram [ph] per can. Such smaller brands usually are priced at 250 but this comes to consumers at around 200 per can. The difference is in the price that they are sold to the mom and baby owners, they are sold between 50 per can to 80 per can and the babies -- and the store owners are able to keep the order spread between the purchase price to what they sell to their consumers. So, that’s why they love these smaller brands and they paddle hard for these smaller brands. Although the volume is low but for each one can that they can paddle out, they make a big spread of 100 to 150. And that’s why there are so many smaller brands.

Peter Siris

So, getting rid of smaller brands should be good for you. So, here is what -- two things I don’t understand. First, I don’t understand how the government can regulate the imported brands. And secondly, last year the government came out with a policy that said they wanted to increase the domestic share of the market. And it seems to me that the current policy is going to decrease the domestic share of the market and encourage more companies to start importing?

Clare Cai

Yes, the restriction is -- we believe similar restriction will be placed on factories who import to China basically each factory cannot import more than three brands into China. They can manufacture many more besides the three registered brands but the other many more brands are not meant for the Chinese market or are not at least are not endorsed or accredited by the Chinese bureau of inspection and quarantine. That said, such limitation is not prevailing or is not common in overseas markets. So, to convince foreign countries or international trade bodies to accept this limitation may take more time, then the CFDA can enforce their restriction on domestic factories. So that’s why we think for overseas factories, the limitation may take longer to take effect. And exactly because of this potential time difference, it could be that the overseas volume or international sales to China can increase as a percentage to total for a while. But eventually we believe that the Chinese government will be able to push through the three-brand per factory view for both domestic and overseas factories. And we also believe that the investments made by leading domestic brands in overseas markets will blur the line of the place of production. Eventually, it will be the brand that determines the domestic versus international line.


Thank you. There are no further questions. Please go ahead, ma’am.

Clare Cai

So, if there is no further question, I’d like to thank the operator and thank all the listeners for participating on today’s call. We look forward to speaking to you on our next earnings conference call. Thank you.


Thank you. Ladies and gentlemen, that does conclude the conference for today. Thank you all for participating. You may disconnect your lines now. Good day.

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