Dunxin Financial Holdings Limited
Q2 2014 Earnings Call Transcript

Published: 11 Sep 2014

[Operator:]

Welcome everyone to China Xiniya Fashion Limited 2014 Second 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. I’d like to introduce Mr. Christian Arnell from Christensen. You may begin.

[Christian Arnell:]

Thank you. Good morning and good evening to all participants, and welcome to Xiniya's second 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 Web site or through PRNewswire. Joining me on the call today is Xiniya's Chairman and CEO, Mr. Qiming Xu and Mr. 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 Mr. Chairman Xu, who would like to take you through some introductory comments. I'll translate for him. Mr. Xu, please go ahead.

[Qiming Xu:]

Good morning and good evening to everyone, and thank you for joining us today. Before we go over this quarter’s financials, I’d like to take the time with you today to discuss the following topics. First, the current situation in China’s menswear market. Second, our view of the Chinese economy and menswear market over the next five years and third and final our strategic plan and use of our strong cash position. Let me begin with the current situation in China’s menswear market. China menswear industry experienced rapid expansion in brands up until 2012. The years that followed were characterized by gradual slowdown in China’s economy, which resulted in a substantial over supply in the menswear market with inventories increasing rapidly across the board. The supply and demand imbalance has led to excess inventory. In response, menswear companies began offering frequent discounts and promotions to reduce inventories which led to store closings and shrinking profits for all of the -- for all in the industry. We believe that closing retail shops actually reduces excess supply which will over the long run positively impact the development of the menswear industry. Many menswear brands are repurchasing excess inventory from their retail channels in order to improve performance and healthy development. In order to support our partners, we’re putting in place a program to repurchase excess inventory from our over 1,400 retail outlets, so that our authorized retailers and distributors can develop in a more healthy long-term manner. China’s branded menswear industry has largely been dependent on traditional distribution channels which revolve around department stores and retail outlets. This business model, however, is suffering from the rapid decrease in foot traffic caused by the rise of e-commerce and the resulting rise in inventory levels, this has (indiscernible). Faced with this situation, branded menswear companies began clearing inventories by selling outdated items online, were due to the results in even less foot traffic exacerbating the situation even further. This leads us to the current situation in China where branded menswear companies across the board are launching new products with lower prices in an effort to attract consumers and enhance their competitiveness. We expect the price competition to become increasingly intense. Next, I’d like to briefly discuss the Chinese economy and where we see the menswear market is headed over the next five years. In our view, China’s economy will continue to level off as it adjusts to lower GDP growth. Per capita disposable income is also likely to level off with gross growth increasing at a slower pace, which means that consumption of menswear products will continue to stroke. Consumers will migrate towards reasonably priced products with individuality, something that will make them stand out. This segment -- (indiscernible) segment and diversify the menswear market into a number of different age groups with varying taste in fashion. China’s menswear industry will gradually move towards a compressed business model, something that many menswear brands have already begun to do. We’ve seen other companies in the industry raise capital from the capital markets because they substantially curtailed [ph] [spending]. These companies have already begun investing in the optimization of their retail network and buying retail shop. The menswear industry remains challenging as many menswear companies have begun repurchasing excess inventory from their retail channels. Under such circumstances repurchasing excess inventory negatively affects the financial results of many companies, even results in operating losses. The entire business model must now be rethought given the inventory problem that has placed the industry. Based on our years of experience, we’ve concluded that only companies with the strong cash flow and cash position will survive these prices. Weaker brands will be -- will increasingly be bought or driven out of the market as those with cash expand their market share. According to what we’ve described about the current situation in China’s menswear market and our view of the Chinese economy over the next five years, we’ve set out our five-year strategic plan. As you can see it is now all about brands. But if you not have access to the capital markets or banks to sustain themselves and cannot easily borrow from banks, a number of them in Fujian and Guangdong provinces have already gone out of business or are on the verge of bankruptcy. In comparison, we’re in a position of strength financially and operationally as our business model continues to generate substantial amounts of cash. With the market shifting around us, we’re taking a number of preemptive steps during this window of opportunity to take advantage of our strength and reposition Xiniya so that will emerge stronger from the turmoil in this sector and thrive over the next five years. We believe that it is imperative that Xiniya adjusted business model in order to adapt to drastically different market dynamics. Our current business model is based on the distributor-operational model where products are sold to consumers through distributors and authorized retailers. All products received at significant price markup from each of the different layers within the business model before they’re sold to the consumer. We are implementing a compressed business model as we shift away from wholesale towards retail, which I believe will enhance the overall appeal and price competitiveness of our products and the long-term viability of our business. With this in mind, we’ve put together a long-term plan to deploy our cash into specific strategic areas of our business that we believe will enable us to eventually come ahead. To start, we estimate that we will need between RMB380 million and RMB760 million to build and optimize our retail network. This initiative to convert from a wholesale business model to a retail business model, its centered around opening retail shops and reducing intermediaries in our sales channels. We also plan to buy a few retail outlets in high put traffic shopping districts which tend to be difficult to get. Buying retail outlets in high traffic shopping areas will help in reducing the impact of constantly rising rates and serves as an effective cost platform for the shift in the business model from wholesale to retail. We estimate that between RMB140 million and RMB200 million will be needed to secure retail outlets in these designated areas. Depending on how the search goes and the availability of retail outlets for sale, we may increase our investment in retail shops. Traditional wholesale business models in China feature excessively long supply chains which have been -- has impeded the flow of information reducing a company’s ability to improve inventory management to rapidly respond to market shifts and changes in consumer tastes. It is crucial for Xiniya to engage in information management to better understand what is happening on the ground. We are investing in enterprise management system that will allow us to better manage our retail channels -- retail channel inventory via key customers, enhance via key customer service and retention, react to market shift and increase overall customer retention rates. We estimate that we will need approximately RMB50 million to invest in this enterprise management system. In terms of supply chain management, we will continue to work with our various suppliers, while at the same time developing the capabilities to produce our own products which will improve the price competitiveness. We will centralize our orders made through our major suppliers, while we continue to invest in R&D capabilities to increase our products fashion appeal, upgrading improved product delivery time, expand quality controls and lower procurement costs. We estimate that an investment of approximately RMB470 million will be needed to build our own production facility. As I’ve discussed before, we’re currently awaiting approval from the government. This includes RMB300 million in construction and design costs, RMB100 million for equipment, RMB50 million for logistics equipment and around RMB20 million to buy the land. Finally, as I mentioned earlier, the menswear market will become increasing segment into a number of different age groups with varying tastes and fashion. We want to create an integrated brand that can fully tap into China’s high-end customers. We are always on lookout for acquisition opportunities that will allow us to tap into new market segments and enhance our brand equity. We have earmarked between RMB300 million to RMB500 million for future acquisitions. To conclude, over the long-term, we plan to deploy our cash into specific areas of our business as we gradually implement a new compressed business model that takes into account the changing nature of the menswear market in China and shifts Xiniya from wholesale to retail. As we move into the second half of the year, we will continue to invest our cash prudently and leverage our strategy to seize market opportunities and drive future growth. All these initiatives will require investments in the range of RMB1.3 billion to RMB2 billion. I hope that you will understand that these strategic investments must be done as we take advantage of this golden window of opportunity in China’s menswear industry. China’s menswear market is worthy of investment. The market is still huge and many cities are yet to be penetrated by Xiniya. Over the next five years, many smaller brands will be limited with the majority of the industries market share being concentrated among top 10 branded companies, with strong financial resources. With the [technical difficulty] initiatives, I’m very confident Xiniya will be able to become a top 10 menswear brand. This strategy will result in the improved profitability and performance which I believe will create added value for our shareholders. With this justification enough for us not to part with any dollar that we have right now in the form of dividend. With the majority ownership in Xiniya, I’d be the largest beneficiary of a dividend payment, but I believe that it is prudent and in the best interest of all shareholders to protect our future and invest in the turnaround strategy, that we’re convinced will see us come through the difficult time stronger and ahead of most of our competitors. With that, I’d like to turn the call over to Chee Jiong, who will go through our financials.

[Chee Jiong:]

Thank you. Thank you, Qiming Xu. Let me now walk you through the financial and operational performance of our business in the second quarter. During the second quarter of 2014, Xiniya has revenue of RMB201 million, a decrease of 9.5% year-over-year. The Company delivered approximately 1.19 million units during the second quarter of 2014, compared with 1.27 million units during the second quarter of 2013. Xiniya network of authorized retailers had a net reduction of 93 retail outlets in the second quarter of 2014, consisting of 55 new retail outlets opened and 148 retail outlets closed. The total number of authorized retail outlets was 1,421 as of June 30, 2014. Gross profit decreased to RMB63.6 million during the second quarter of 2014, from 67.8 million during the same period last year. Gross margin was 27% compared with 28.5% during the same period last year. The decrease in gross margin was primarily due to increased expenses associated with the research and development of the Company’s latest collection in order to improve their competitiveness and fashion appeal. Selling and distribution expenses decreased to RMB4 million from RMB44.4 during the same period last year. The decrease was primarily due to a decrease in rack expenses for authorized retailers of around RMB5.5 million, as well as decrease in sales fair expenses and advertising expenditure. During the second quarter of 2014, the Company paid for shop rack, signage, and various outlet-related accessories for 55 new retail outlets and refurbished 26 existing retail outlets, which include expanding floor space for 5 existing retail outlets, as compared to 55 new retail outlets and 78 refurbished retail outlets during the same period last year. These expenses were approximately RMB21 million, or 10.4% of revenue, in the second quarter of 2014, compared with RMB26.5 million, or 11.9 million (sic) [11.9%] of the revenue during the same period of last year. Administrative expenses decreased to RMB7 million in the second quarter of 2014, from RMB8.4 million during the same period of last year, primarily due to reduction of office and other miscellaneous expenses. Net profit in the second quarter of 2014 increased to RMB13.3 million as compared to RMB9 million during the same period of last year. Earnings per ADS were US$0.04 in the second quarter of 2014 as compared to US$0.03 during the same period of last year. Now, moving on to financial position as of June 30, 2014, the Company had cash and cash equivalent of RMB959 million and with maturity over three months of RMB290 million. Now, let's turn over to guidance. Buying back inventory to improve our business is a crucial step. And as Chairman Xu has already mentioned, it has already begun which will negatively impact our top line in the quarters ahead. So (indiscernible) spend of buyback inventory. It’s been the size of excess inventory that we need to buyback and (indiscernible) of ability to do that. We don’t really have much visibility of our third and fourth quarters, therefore we’re suspending guidance temporarily during this time. This concludes our prepared remarks. We are now ready to take your questions. Operator?

[Operator:]

Yes, thank you. We will now begin our question-and-answer session. (Operator Instructions) The first question is from John Shi He. Please go ahead.

[John Shi He:]

Hello everybody. Thank you for that very detailed presentation, and thank you for taking my questions. Can you estimate the sell-through rate of your 2014 spring and summer collections?

[Chee Jiong:]

At the moment we don’t have fully implemented ERP, so we do not have precise information on the sell-through rate.

[John Shi He:]

Okay. And do you have any new strategies for Internet marketing and Internet sales?

[Chee Jiong:]

We do not have a direct Internet strategy -- direct sales from the Internet. But we do have retail Web site operated by our distributors to sell Xiniya products. The volume is not huge.

[John Shi He:]

So do you have any plan to do something bigger, do something more directly?

[Chee Jiong:]

We do have plan to have online sales which we will collaborate with the retail outlet on the ground whereby they can try on the clothing and then can buy on in the Internet.

[John Shi He:]

Okay. So like online, offline integration?

[Chee Jiong:]

Yes. Online, offline integration, yes.

[John Shi He:]

Okay. And thank you for the very detailed information about the strategic plan. Can you give us a little bit more detail about what changes we might see over the next three to six months?

[Chee Jiong:]

Qiming just mentioned that his partners are going through an operating crisis in terms of inventory. So we have devising a supporting plan for repurchase their inventory over the next three to six months. This is to ensure they’ve lesser pressure in operating -- operations and the orders that they’re going to place with will not be reduce drastically over the course of the next few sales risk (indiscernible) to support them to have a healthy development over the long run.

[John Shi He:]

Okay. And over the next three to six months, are we going to see any significant progress on the initiatives you mentioned like building and optimizing the retail network, high profile at acquisition, ERP system, production facility, acquisition of second brands?

[Chee Jiong:]

What we’ve just mentioned in detail our five-year plan, over the three to six months will not be clearly visible actions.

[John Shi He:]

Okay. And my last question is about the delisting notice that you received from the Exchange, do you have any plan to address that?

[Chee Jiong:]

We will do a relist stock split in December. This is the deadline set by the New York Stock Exchange. So that’s the plan for our -- this is our plan to address the deficiency.

[John Shi He:]

Okay. Thank you very much. Thanks for answering all my questions and thank you for the detailed presentation.

[Operator:]

Next question is from Peter Cyrus. Go ahead please.

[Peter Cyrus:]

Thank you. First, I just want to make a comment. I’ve been in the apparel business in the United States for 50 years and this is exactly what you’re talking about in China is exactly what happened in the United States, 40 years ago. So I think you’re doing all the right things. Now let me -- I’ve some questions I just want to understand. The top 10 companies in the apparel -- in your niche of the apparel business, what market share with the top 10 companies have today?

[Chee Jiong:]

Based on his understanding, the top 10 menswear brand in China now probably less than 10% of the market share and he feel that this is the golden opportunity coming.

[Peter Cyrus:]

I’m sorry CJ, what was the last comment?

[Chee Jiong:]

He said the top 10 men’s apparels in China markets is less than 10% and now it’s a golden opportunity (indiscernible) mentioned, smaller brands will be retired by the market [ph] [force] over the next five years.

[Peter Cyrus:]

Right. So the smaller brands, in addition to the fact that the smaller brands can’t invest the way you can, I also assume the smaller brands wont be able to get any money from the banks because there is a credit crunch, is that reasonable?

[Chee Jiong:]

Yes, we agree with your comments. This smaller brands, menswear brands, they have -- they don’t have collateralizable assets and the -- that the China’s banks are not lending them money. So they more likely to be retire by the market over the next five years. He observes that a few brands, menswear brands in Guangdong province and Fujian province, they -- smaller brands have been retired by the market. So he said over the next few years -- he say this trend will continue.

[Peter Cyrus:]

Okay. So if you were to look (indiscernible) for your company specifically, because a lot depends on fashion, but say over the next five years, let’s say the top 10 brands now have 5% -- five years, now what percentage with the top 10 brands have?

[Chee Jiong:]

He is of the view that the top 10 menswear brand will have bigger market shares than now and just like what happened in U.S -- United States 50 years ago is as many smaller brands now -- those market shares are contemplated in a few brands. So he tell that China will follow the trends -- follow that trends definitely.

[Peter Cyrus:]

But he doesn’t have any guess as to how big the consolidation will be? Because in the United States we went from thousands of small brands to a small number and small brands all grew very fast. So I’m just curious if he has any view as to, just how big the consolidation will be?

[Chee Jiong:]

He tell that the -- with the retirement of those small (indiscernible) over the five -- next five years that tends (indiscernible) will probably over 50% of the market share.

[Peter Cyrus:]

So that with this change in the structure of the industry, you guys should be in a position to over time to grow very fast and very profitably?

[Chee Jiong:]

Yes he agrees with your comment. With our financial results and our strategy planning that have in place, we believe our future profitability and operations will be much more stronger.

[Peter Cyrus:]

Thank you very much.

[Chee Jiong:]

Thank you.

[Operator:]

We are now in question-and-answer session. (Operator Instructions) Thank you. Our next question is from Jimmy (indiscernible). Go ahead please.

[Unidentified Analyst:]

Hi, gentlemen. Quick question for you -- actually a couple of quick questions. First one was I didn’t hear the answer that you gave on the delisting notice, what actions you’re going to take to address that? Can you just repeat that please?

[Chee Jiong:]

That is the efficiency on the under US$1. Its not delisting. So we have a cure period of six months. We can cure it in December by doing reverse stock splits.

[Unidentified Analyst:]

So you’re going to do a reverse stock split to get it back up over a US$1 to take your deficiency, okay. That’s unbelievable. Why are you guys a public company?

[Chee Jiong:]

(Indiscernible).

[Unidentified Analyst:]

That’s a serious question. As a shareholder, who basically watch the entire stock market go up, in excess of 50% recently yet watched this get more than cut in half, while your cash piled continues to build, yet you don’t buy any stock back in the open market even though the stock is trading at basically a fifth of cash. So you could literally buyback every single share in the entire market in this stock and create enormous value for all your remaining shareholders. I don’t know if too many other investment opportunities where you can basically put your money to work and know right off the bat that you’re getting four or five times your money is worth. Do you know any other investment opportunities that will yield you the same exact kind of return at easily, such as all these other efforts and plans that you’ve made in your five-year plan? Will those give us a 400% return on our capital?

[Chee Jiong:]

Let me just translate that for the Chairman.

[Unidentified Analyst:]

Sure, absolutely. Thank you CJ.

[Chee Jiong:]

Okay. He mentioned that we looking -- we look at things at long-term perspective. We will [technical difficultly] a brand with over 100 years. So we see things more of a long-term (indiscernible) short-term. We can’t (indiscernible) short-term, we want to be a listed company to -- (indiscernible) listed company we can access to the capital markets to build our brand, more profitability over the next five-years.

[Unidentified Analyst:]

So now that you’ve got an access to the capital markets via a listing, then obviously of a pilot cash, so I’m guessing, well I’m not going to guess, do you have intensions of raising additional cash in the capital markets?

[Chee Jiong:]

At the moment we don’t have plan to raise more capital, but as we progress in our development and within recognition by the investor on our strategic development, we may in future may have this more capital raising plan that goes in line with our strategic initiative and planning.

[Unidentified Analyst:]

Right. I unfortunately can’t explain this to you logically. You guys should be buying back stock. There is no doubt about that. That will get you back above a US$1 and cure the delisting notice. I don’t know why you guys don’t take the appropriate steps to help shareholders who have been in this thing for a while when the stock is trading at such a ridiculous discount cash, its like saying I can -- I will pay you US$0.20, you give me back a US$1. That’s basically what I’m telling you here and you’re telling me no, let’s not do it, let’s not pay US$0.20 to get a US$1. So I’m not sure exactly why you believed you’re doing the right thing for shareholders by investing this cash for a five-year plan. It will be potentially better for the business overall, but you will do nothing to help your shareholder. By reverse splitting this thing all you’re going to see is the stock prices going to go straight back down. So I don’t believe you have the best interest of shareholders in mind right now? I hope you change that view and I hope you do something extremely responsible in the near-term. Thank you.

[Operator:]

I think we’re running out of time now. And we thank you for all your questions. Now I’m going to pass it over for -- to Mr. Arnell for closing comments. Mr. Arnell please go ahead.

[Christian Arnell:]

Thank you. In closing, on behalf and on behalf of the senior management team, we would like to thank you for your interest and participation in today’s call. If you require any further information or have any interest in visiting the Company in China, please let us know. Thank you for joining us. This concludes the call.

[Operator:]

We 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.