Zuoan Fashion Limited (NYSE: ZA) Remains a Buy

Shayne Heffernan upgraded  Zuoan Fashion Limited (NYSE: ZA) to a buy in a note to traders toda with a $6 price target for 2012.

Zuoan Fashion Limited (NYSE: ZA) (“Zuoan” or the “Company”), a leading design-driven fashion casual menswear company in China, today announced its financial results for the third quarter ended September 30, 2012.

James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, “Our revenue growth was a result of increased distributor sales volumes as well as increased sales volume from our direct stores.  We came in slightly below our third quarter top line revenue forecast largely due to an inventory shipment delay to distributors of approximately RMB58.8 million, resulting in a shift in revenue recognition to the fourth quarter instead of our third quarter.  Gross margin held steady as we benefited from increased wholesale prices implemented over the past year as well as increased contribution from our self-operated direct stores and flagship stores which contributed to higher overall gross margin.  Operating expenses trended higher than anticipated due to the increased cost associated with the expansion and management of our self-operated flagship stores and direct stores.  This was further compounded by a slowdown in consumer spending in China resulting in elevated inventory at the distributor and sub-distributor store level.  We are working with our distributors and sub-distributors to reduce inventory in their store channel.”

Interested in Investing in Asia? Hedge Funds, Real Estate, Trading

Linda Johnson,
Business Development Director – Private Client Group,
Heffernan Capital Management
Sales@Heffcap.com

Singapore

3 Raffles Place #07-01
Bharat Building Singapore 048617
Tel: +65 6329 6408
Fax: +65 6329 9699

“During the course of the third quarter, we made the decision to transition our 26 self-operated flagship stores over to our distributors.  As consumer demand in China has moderated recently, we felt it was important to streamline our internal operational infrastructure to lower expenses and improve performance. The distributors we work with are highly experienced in retail store operations and the transition of our flagship stores allows us to concentrate on design-driven casual menswear fashion, our core area of strength. This move, which will be fully implemented in the fourth quarter, is expected to reduce our future consolidated gross margin but can also lower our operating expenses, lower inventory levels at the company level and improve net margin.”

“We have a healthy balance sheet and a strong cash position of approximately $134 million at the end of the third quarter.  In spite of slower market conditions, recent economic data from China indicates the domestic economy is improving which can lead to a pick-up in consumer spending environment in the coming quarters.  We continue to execute on our initiatives to raise the visibility of Zuoan and broaden our presence in China.  We remain optimistic about the long-term growth opportunities in our business and are confident our revenue and profit can continue to grow with the expected recovery of the domestic economy along with our efforts to enhance our distribution network, maximize operational efficiencies and increase our brand recognition.” concluded Mr. Hong.

Third Quarter 2012 Financial Performance

Revenue for the third quarter was RMB476.3 million ($75.8 million), a 12.1% increase from RMB424.8 million ($67.6 million) in the same period last year.  The increase in revenue was driven by both distributor and direct store sales volume.  Third quarter distributor sales increased 11.3% to RMB450.2 million compared to RMB404.4 million in the third quarter of 2011. Third quarter 2012 self-operated direct store and flagship store sales were RMB26.1 million compared to RMB20.4 million in the prior year period. A total of 49 distributor and sub-distributor stores and 2 direct stores were opened in the third quarter of 2012, offset by the closing of 93 unproductive, older distributor and sub-distributor stores, resulting in a total of 1,289 store locations at the end of September 30, 2012 compared to 1,331 store locations at the end of June 2012.

Cost of sales increased 6.8% to RMB252.7 million ($40.2 million) in the third quarter of 2012 from RMB236.6 million ($37.7 million) in the same quarter of 2011, primarily as a result of the increase in sales volume. As a percentage of revenues, cost of sales decreased to 53.1% in the third quarter of 2012 from 55.7% in the third quarter of 2011.

Gross profit in the third quarter increased 18.8% year over year to RMB223.6 million ($35.6 million) from RMB188.1 million ($29.9 million) in the same period of 2011.  Third quarter 2012 gross profit margin was 46.9% compared to 44.3% in the same period last year.  Third quarter 2012 gross margin increased primarily due to greater sales from the Company’s higher margin self-operated direct stores and flagship stores. Gross margin at the Company’s self-operated direct stores and flagship stores was 65.4% and 73.0%, respectively.   Combined gross margin at Company self-operated locations was 72.1%.

Selling and distribution expenses in the third quarter were RMB84.1 million ($13.4 million), or 17.7% of revenue, compared to RMB46.6 million ($7.4 million), or 11.0% of revenue in the same period last year.  This percentage increase was primarily due to the increase in store expansion related rental charges and direct store expenses, advertising and promotion expenses, and costs of renovation and fittings of distributors’ new and existing stores.

Administrative expenses in the third quarter were RMB14.0 million ($2.2 million), or 2.9% of revenue, compared to RMB15.6 million ($2.5 million), 3.7% of revenue in the same period last year. This percentage decrease was primarily a result of the decrease in equity-settled employee benefit costs.

The effective tax rate in the third quarter decreased to 25.6% compared to 26.6% in the prior year period.

Net income for the third quarter increased 0.7% to RMB92.8 million ($14.8 million) from RMB92.2 million ($14.7 million) in the same period last year.  Third quarter net income as a percentage of revenue was 19.5% compared to 21.7% in the prior year period.

Diluted earnings per ordinary share was RMB0.83 ($0.13) in the third quarter of 2012, equivalent to RMB3.34 ($0.53) per ADS, compared to diluted earnings per ordinary share RMB0.83 ($0.13) in the third  quarter of 2011, equivalent to RMB3.31 ($0.53) per ADS. The Company’s diluted number of shares outstanding was 111.3 million in the third quarter ended September 30, 2012.

As of September 30, 2012, the Company had cash, cash equivalents of RMB841.6 million ($133.9 million), compared to RMB690.5 million ($109.9 million) as of December 31, 2011.  Net cash used in operating activities was RMB172.9 million ($27.5 million) in the three months ended September 30, 2012, compared to RMB4.3 million ($0.7 million) generated by operating activities in the three months ended September 30, 2011.

Financial Outlook

For the fourth quarter of 2012, the Company currently anticipates revenue in the range of RMB352-RMB372 million ($56.0 – $59.2 million), gross margin of approximately 44-46%, net income of approximately RMB43.7 – RMB47.8 million ($7.0 – $7.6 million) and basic and fully diluted EPS of approximately RMB0.39 ($0.06) – RMB0.43 ($0.07).  The Company expects to have approximately 111.3 million shares (27.8 million ADSs) outstanding during the quarter ending December 31, 2012.

Approximately 40 new retail stores and 2 flagship stores are expected to be opened by distributors and sub-distributors in of the fourth quarter of 2012. 

Conference Call Information

Zuoan’s management will host an earnings conference call on December 5^th, 2012 at 8:30 a.m. U.S. Eastern Time.  Listeners may access the call by dialing # 1-913-981-5507.  A webcast will also be available via www.viavid.net.  A replay of the call will be available through December 12^th, 2012.  Listeners may access the replay by dialing #1-858-384-5517, access code: 9427782.

Exchange Rate

This announcement contains translations of certain Renminbi amounts into U.S. dollars at specified rates solely for the convenience of readers. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the exchange rate of RMB6.2848 to US$1.00, as set forth in the H.10 statistical release of the Federal Reserve Board on September 28, 2012.

About Zuoan Fashion Limited

Zuoan Fashion Limited is a leading design-driven fashion casual menswear company in China, and is head-quartered in Shanghai.  Zuoan offers a wide range of products, including men’s casual apparel, footwear and lifestyle accessories, primarily targeting urban males between the ages of 20 and 40 who prefer stylish clothing that represents a sophisticated lifestyle.  Through extensive networks of distributors and retail stores, Zuoan sells its products in 30 of China’s 32 provinces and municipalities.  As of September 30, 2012, Zuoan had 1,289 stores located in China.

Safe Harbor

This news release may contain forward-looking information about Zuoan Fashion Limited, which is covered under the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical facts. These statements can be identified by the use of forward- looking terminology such as believe, expect, may, will, should, project, plan, seek, intend, or anticipate or the negative thereof or comparable terminology, and include discussions of strategy, and statements about industry trends and Zuoan Fashion Limited’s future performance, operations, and products.

Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Actual performance results may vary significantly from expectations and projections. Further information regarding this and other risk factors are contained in Zuoan’s public filings with the U.S. Securities and Exchange Commission.

All information provided in this news release and in any attachments is as of the date of the release, and the companies do not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under law.

Contact Information
John Low
Email: john.low@zuoancn.com

ICR, LLC
William Zima
Phone: +86-10-6583-7511

Zuoan Investor Relations Department
US: 1-646-308-1614