Below is the 2014 Q3 earnings call transcript of China Xiniya Fashion Ltd (ADR) (NYSE:XNY). Shah Capital had a large position in China Xiniya Fashion Ltd (ADR (NYSE:XNY) at the end of the third quarter.
Host
Christian Arnell – Christensen
Company Representatives
Qiming Xu – Xiniya’s Chairman and Chief Executive Officer
Chee Jiong Ng – Xiniya’s Chief Financial Officer
Operator
Ladies and gentlemen, thank you for standing by and welcome to the China Xiniya Fashion Ltd (ADR (NYSE:XNY) Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. There would be a presentation followed by a question and answer session, at which time, if you wish to queue for question, you will need to press 0 followed by 1 on your telephone. Please note that this conference is being recorded today, December 29, 2014.
I’d now like to hand the conference over to your host, Christian Arnell from Christensen. Thank you, Christian. Please proceed.
Christian Arnell, Christensen
Thank you. Good morning and good evening to all participants and welcome to Xiniya’s third quarter 2014 earnings conference call. You may find a copy of our earnings press release that was issued last night on the IR section of IR website or through PRNewswire.
Joining me on the call is China Xiniya Fashion Ltd (ADR (NYSE:XNY)’s Chairman and CEO, Mr. Qiming Xu and C.J. Ng, Xiniya’s Chief Financial Officer. 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 now turn the call over to Chairman Xu, who would like to make some introductory comments. I will translate for him. Mr. Xu, please go ahead.
Qiming Xu, Chairman and Chief Executive Officer
Good morning and good evening to everyone and thank you for joining us for this call. We moved rapidly to execute our inventory buyback initiative during the quarter as the ongoing downturn in China’s menswear industry continued. I’d like to take the time today to focus on our inventory buyback and explain it in the context of the decrease in total value of purchases made at our Spring/Summer 2015 Sales Fair in September.
As we mentioned last quarter, our inventory buyback would negatively impact our top line to the extent of the amount we spent on the inventory buyback. In order to ensure that our retail network continues to attract customers and display new and innovative products, our buyback focused on removing the most outdated fashion products. The amount we spent was based on the analysis of conversations we had with our distributors on the amount of inventory currently in our sales channels.
Based on these conversations, we estimate that there is approximately RMB 1.1 billion worth of inventory in our sales network that has steadily built up over the past few years. The buildup happened in tandem with the worsening market situation. In 2009, when the situation was good, we managed to sell 98% of our inventory. This steadily decreased over time to 85% in 2010 and 2011 and got even worse decreasing to 79% in 2012 and 68% in 2013. Of the RMB 1.1 billion worth of inventory that was in our sales network, we repurchased approximately one-third during the third quarter of 2014. By working in close cooperation with our distributors and authorized retailers, we plan on selling another one-third through our retail network by offering discounts and promotions over the next year. This should leave a remaining one-third which is composed of more recent products that we believe is more than ample to maintain a healthy and flexible retail network. We may buyback more inventory as the situation evolves over the next year or two to make up for any shortfall or to provide further support to our partners.
Based on these calculations and taking into account the 1,200 franchise stores currently in our sales network, we believe that inventory levels should become increasingly more manageable over the coming year. With the oldest inventory now cleared, our retail network will now be able to focus on displaying Xiniya’s newest products and stabilize their cash flows.
Total value of purchase orders from our Spring/Summer Sales Fair in September 2014 declined in line with our expectations as we work on two fronts to clear inventory channels. We encouraged our partners to place conservative orders as to not fill up inventory again. I am confident that the rapid execution of our inventory buyback during the quarter will enable us to work off any inventory remaining from the years prior to 2013.
We will continue to efficiently deploy our cash into specific areas of our business which will allow Xiniya to develop in a more healthy long-term manner. While the implementation of our new compressed business model will take time to bear fruit, I am pleased to see positive initial results as we work diligently towards generating increased value for our shareholders.
With that I would like to now turn the call over to C.J. who will go through our financials. Thank you.
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Thank you, Mr. Xu. Let me now walk you through the financial and operation performance of our business in the third quarter. To start off, I would like to quickly go over the accounting details that lead into our inventory buyback. As Chairman Xu explained, we bought back approximately one-third of inventory currently in our sales channel. As of September 30, 2014, we bought back approximately 334 million of inventory. This amount includes 17% value-added tax. We repurchased at the original price we sold to our distributors. Since value-added tax can be claimed back from the government, the actual buyback amount was RMB 285 million. Accounting wise, we need to assign a value to the inventory bought back which we conservatively measure to be around 59 million or $0.31.
Taking this into account, the amount spent on inventory buyback was 197 million which appear as a line item in our income statement. During the third quarter of 2014, Xiniya had revenue of 205 million compared with 389.8 million during the same period last year. The decrease in revenue was mainly attributable to the reduction recorded by the distributors due to a challenging retail environment and softening of China economic growth. The company delivered approximately 0.9 million units during the third quarter of 2014 compared with 1.63 million units during the third quarter of 2013.
Xiniya’s network of authorized retailers had a net reduction of 207 retail outlets in the third quarter of 2014 consisting of 49 new retail outlets opened and 256 retail outlets closed. The total number of authorized retail outlets was 1,214 as of September 30, 2014. Selling and distribution expenses were 64.7 million in the third quarter of 2014 has decreased from RMB 104 million during the third quarter of 2013. The decrease was mainly due to a reduction in advertising expenditures and a decrease in rack expenses for authorized retailers.
Administrative expenses decreased to 5.9 million in the third quarter of 2014 from 10.5 million during the same period last year primarily due to reduction in headcount, office and other miscellaneous expenses. Net loss in the third quarter was 206 million compared to net profit of 6 million during the same period last year. This translates into a loss per ADS of $0.59 compared to earnings per ADS of $0.02 during the same period last year.
Now, moving on to our financial position – as of September 30, 2014, the company had a cash and cash equivalent of 804 million and time deposits held at banks with the maturity over 3 months of 350 million.
This concludes our prepared remarks. We are now ready to take your questions. Operator?
Operator
Thank you. Ladies and gentlemen, we will now enter the questions. Should you wish to ask a question, please press 0 followed by 1 on your touch type phone. If you wish to withdraw your question or your question is already answered, please press 0 followed by 2. I’ll just remind participants on the call, if you wish to ask your question, please press 0 followed by 1 on your touch type phone now.
I apologize to the speakers. Our first question asker was not able to give us their name or their company name when they joined the call. I will put the question asker through and I will ask the question asker if they could please identify themselves by giving us their name and their company name, please.
Peter Cyrus, Private Investor
Yes. My name is Peter.
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Peter?
Peter Cyrus, Private Investor
Yes. I am Peter Cyrus. Hey, C.J.
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Hi, Peter.
Peter Cyrus, Private Investor
Hey, Chris. I am curious I want to understand the overall market. First, do you have any sense as to at retail what the market is doing? Is this the market down in terms of retail sales, not your sales, but sales to the consumer, is it down, is it flat, what’s your assessment of what the retail market itself is doing?
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Hey, I will translate that to Mr. Xu and I will ask Mr. Xu to answer your question.
Mr. Xu said that in terms of the total retail questions, it’s increasing trend, but if you are focusing on the menswear clothing as a whole, there is oversupply situation and inventory as a channel. And with the internet sales that’s impacting the industry, the situations got worsened. We believe this is a consolidation process in the market. We believe in the future the menswear market still has lot of room to grow.
Peter Cyrus, Private Investor
So, let me talk about what you are doing and what other people are doing. I believe that, that what you are doing is the right thing to do, because you have got to clean out the inventory. Are other companies doing the same thing, what’s going on as far as the competition is concerned?
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Okay. He has said that many competitors doing the inventory buyback, they also initiate many discounting and promotional activities to help their retail networks to digest their inventory. He also says certain brands that do not have the financial muscle to do the buyback and the promotional and discount activity for their retail network. So, with that kind of lack of financial strength, it caused a lot of painful process for their network.
Peter Cyrus, Private Investor
Okay. Are you starting to see brands going away? I mean, what’s happening with consolidation? I mean, obviously you have less stores, everybody seems – stores what is their – are brands disappearing?
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Based on his observation and knowledge, he noticed a few brands has gone out of market with the closing to the year end and next year is coming, he expects to see more of this brand to get – being to go in the market.
Peter Cyrus, Private Investor
And last question and then I will get back in the queue, when do you expect to see this sort of clearance process and you start returning to profitability?
Chee Jiong Ng, Xiniya’s Chief Financial Officer
The consolidation process you have to see in two perspectives. First off, brands without the financial strength, they will be naturally being retired by the market. For those brands with financial strength, they cannot execute the new compressed business models, for example, Xiniya would be one of them. So, we expect to see after 2015, you will see better profitability from there.
Peter Cyrus, Private Investor
Okay, thank you. I will get back in the queue.
Operator
Thank you for your question, Peter. Ladies and gentlemen, should you wish to ask a question, please press 0 followed by 1 on your touch type phone now. Once again, I would like to encourage any new participants who would like to ask their question to press 0 followed by 1 on your touch type phone to join the question queue. We have another question from Peter’s line. Please proceed, Peter.
Peter Cyrus, Private Investor
Okay. Since nobody else is asking, I will ask. So, one other thing you are using cash for is to buyback inventory, but you still have the gigantic amount of cash. So, can we talk about other things that you are going to do with all this money?
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Okay. The total repurchase of the inventory that is the – to help our distributors to improve their confidence towards our brand. As the financial strength – very strong financial strength at Xiniya, we have initiated a 5-year plan to convert from wholesale business models to the retail business models. This has been mentioned during the last quarter’s call, which includes purchasing the high traffic volumes retail stores at the – to purchase to also to do a major acquisition to acquire other brands to improve our logistics initiatives, which include buying a land to build a plant and a logistics center. So, all these initiatives have been in progress. We are taking steps to materialize this initiative. As the very first step will be to stabilize the retail channels, which what we have done is to do the inventory buyback.
Peter Cyrus, Private Investor
Okay. So, just so I understand, your strategy is to buyback, clean out the bad inventory from the channel, stabilize your channel, then start to open your own company-owned stores, get more brands and improve logistics. Am I understanding that correctly?
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Perfect.
Peter Cyrus, Private Investor
Thanks. Thank you very much.
Chee Jiong Ng, Xiniya’s Chief Financial Officer
Your understanding is correct.
Peter Cyrus, Private Investor
Okay, great. Thank you.
Operator
Thank you, Peter. Again, ladies and gentlemen, should you wish to ask your question, please press 0 followed by 1 on your touch type phone now. I’d like to advise the speakers at this stage, we have no further questions.
Christian Arnell, Christensen
All right. Well, thank you very much for joining China Xiniya Fashion Ltd (ADR (NYSE:XNY)’s third quarter 2014 earnings conference call. If you ever happened to be in China or in Xiamen, please let us know. This concludes the call. Thank you very much.
Operator
Ladies and gentlemen, thank you for your attendance today. We kindly request that you now disconnect your lines. Thank you again.
