Zuoan Fashion Limited Announces Fourth Quarter And Full Year 2010 Financial Results

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 fourth quarter and full year ended December 31, 2010.

James Hong, Founder, Chairman of the Board and Chief Executive Officer, commented, “We were pleased with our results for the fourth quarter and 2010 fiscal year. We enjoyed meaningful double digit growth over the prior year as measured by store count, revenue, gross profit, operating profit and net income. Our growth was primarily driven by distributor sales volume and the expansion of our sales network.”

“In order to accelerate the expansion of our successful distributor model, we plan to open direct flagship stores which we believe will motivate distributors to expand their distributor store network at a faster rate, stimulate distributor store sales in the nearby regions as well as to strengthen Zuoan’s brand equity. In order to focus on the opening of our flagship stores, we successfully transferred all 31 of our direct normal stores to our distributors in January 2011. In addition, we appointed three additional distributors in January 2011 in order to continue our sales network expansion efforts.”

“We have built an excellent platform for future growth through our initiatives including expanding our distribution network coverage, building our flagship store network and enhancing our marketing activities as well as strengthening our design capabilities. We are excited to continue to build our brand and improve our revenue and profit growth this year and beyond,” concluded Mr. Hong.

Fourth Quarter 2010 Financial Highlights

• Revenues in the fourth quarter of 2010 were RMB258.2 million ($39.1 million), an increase of 26.9% from RMB203.4 million in the same quarter of 2009.
• Gross profit in the fourth quarter increased 21.0% year over year to RMB103.8 million ($15.7 million) from RMB85.8 million ($13.0 million).
• Gross profit margin was 40.2% compared to 42.2% in the prior year period and 41.2% in the 2010 third quarter. Fourth quarter 2010 gross margin decreased primarily due to the Company’s efforts to effectively manage its inventory by reducing out-of-season inventory at prices discounted below the Company’s general wholesale price range as well as clearing shop level stock as the Company’s direct stores were transitioned to its distributors.
• Net income was RMB55.3 million ($8.4 million), an increase of 43.5% from RMB38.5 million in the same quarter of 2009.
• Basic and diluted earnings per share increased to RMB0.69 ($0.10) in the fourth quarter, equivalent to RMB2.77 ($0.42) per American depositary share (“ADS”), compared to basic and diluted earnings per share of RMB0.48 ($0.07), equivalent to RMB1.93 ($0.29) per ADS, in the fourth quarter of 2009.
• Pro forma diluted earnings per share, which takes into account convertible bonds converted since FY10 , increased to RMB0.66 ($0.10) in the fourth quarter, equivalent to RMB2.63 ($0.40) per ADS, compared to pro-forma diluted earnings per share of RMB0.46 ($0.07), equivalent to RMB1.85 ($0.28) per ADS, in the fourth quarter of 2009.

Full Year 2010 Financial Highlights

• Total revenue for the full year 2010 increased 25.8% to RMB872.1 million ($132.1 million) from RMB693.1 million in 2009.
• Gross profit increased 26.6% to RMB356.9 million ($54.1 million) in 2010 from RMB281.9 million ($42.7 million) in 2009 and gross profit margin increased by 20 basis points to 40.9% in 2010 from 40.7% in 2009.
• Net income for the full year 2010 was RMB183.0 million ($27.7 million), an increase of 18.9% from RMB153.9 million in 2009.
• Basic and diluted earnings per ADS increased 18.9% to RMB9.15 ($1.39), equivalent to $0.35 per share, compared to $1.17 diluted earnings per ADS, equivalent to $0.29 per share, in the prior year.
• Pro forma diluted earnings per ADS increased 18.8% to RMB8.75 ($1.33), equivalent to $0.33 per pro forma weighted average diluted share, compared to $1.12 pro forma diluted earnings per ADS, equivalent to $0.28 per pro forma weighted average diluted share, in the prior year.
• The number of Zuoan stores increased 10% to 1,101 at the end of 2010 compared to 1,000 stores at the end of 2009.

Fourth Quarter 2010 Financial Performance

Revenue for the fourth quarter was RMB258.2 million ($39.1 million), a 26.9% increase from RMB203.4 million ($30.8 million) in the same period last year. The increase in revenue was driven by both distributors and direct stores sales volume. Fourth quarter distributor sales increased 23.6% to RMB238.7 million compared to RMB193.2 million in the fourth quarter of 2009 while fourth quarter direct store sales increased 91.3% to RMB19.5 million compared to RMB10.2 million in the prior year period. A total of 26 distributor stores were opened in the 2010 fourth quarter resulting in a total of 1,070 distributor locations at the end of 2010 compared to 978 distributor locations at the end of 2009. There were no direct stores opened in the 2010 fourth quarter as the Company made plans to transition its 31 direct stores to its distributors in January 2011.

Cost of sales increased 31.3% to RMB154.4 million ($23.4 million) in the fourth quarter of 2010 from RMB117.6 million ($17.8 million) in the same quarter of 2009, primarily as a result of the increase in sales volume. As a percentage of revenues, cost of sales increased to 59.8% in the fourth quarter of 2010 from 57.8% in the fourth quarter of 2009.

Gross profit in the fourth quarter increased 21.0% year over year to RMB103.8 million ($15.7 million) from RMB85.8 million ($13.0 million). Fourth quarter 2010 gross profit margin was 40.2% compared to 42.2% in the same period last year and 41.2% in the third quarter of 2010. Fourth quarter 2010 gross margin decreased primarily due to the Company’s efforts to effectively manage its inventory by reducing out-of-season inventory at prices discounted below the Company’s general wholesale price range as well as clearing shop level stock as it transitioned direct stores to its distributors.

Selling and distribution expenses in the fourth quarter were RMB17.3 million ($2.6 million), or 6.7% of revenue, compared to RMB25.4 million ($3.8 million), or 12.5% of revenue in the same period last year. This percentage decrease was primarily due to the cancellation since January 2010 of brand promotion allowances that we provided our distributors as well as lower advertising expense compared to the same period last year.

Administrative expenses in the fourth quarter were RMB9.5 million ($1.4 million), or 3.7% of revenue, compared to RMB8.5 million ($1.3 million), 4.2% of revenue in the same period last year. This percentage decrease was primarily a result of tight control on growth of expenses while revenues were growing at a faster rate relatively.

Finance costs in the fourth quarter were RMB2.5 million ($0.4 million) compared to RMB0.3 million ($0.05 million) in the same period last year. This increase was primarily a result of the accrued interest for the subsidiary’s convertible loans and the increase in bank borrowings.

Effective tax rate in the fourth quarter remained flat at 26.0% compared to 26.0% in the prior year period.

Net income for the fourth quarter increased 43.5% to RMB55.3 million ($8.4 million) from RMB38.5 million ($5.8 million) in the same period last year. Fourth quarter net income as a percentage of revenue was 21.4% compared to 18.9% in the prior year period.

Basic and diluted earnings per share increased to RMB0.69 ($0.10) in the fourth quarter of 2010 from RMB0.48 ($0.07) in the fourth quarter of 2009. The Company had 80.0 million shares outstanding during the quarter ended December 31, 2010.

Pro forma diluted earnings per share increased to RMB0.66 ($0.10) in the fourth quarter of 2010 from RMB0.46 ($0.07) in the fourth quarter of 2009 after the adjustment to add back interest expense related to convertible loans assumed to be converted. The Company had approximately 86.5 million pro forma weighted average diluted no of shares outstanding during the quarter ended December 31, 2010.

Full Year 2010 Financial Performance

Revenue in 2010 was RMB872.1 million ($132.1 million), a 25.8% increase from RMB693.1 million ($105.0 million) in 2009. The increase in revenue was driven by both distributors and direct stores sales volume. Full year distributor sales increased 23.0% to RMB829.0 million compared to RMB673.9 million of 2009 while full year direct store sales increased 124.0% to RMB43.1 million compared to RMB19.2 million in 2009. A total of 92 distributor stores were opened in 2010 resulting in a total of 1,070 distributor store locations at the end of 2010 compared to 978 distributor store locations at the end of 2009. There were 9 direct stores opened in 2010 resulting in total of 31 direct stores at the end of 2010 compared to 22 direct stores at the end of 2009. Average selling price (“ASP”) in 2010 slightly increased to RMB131 compared to RMB130 in 2009.

Cost of sales increased by 25.3% to RMB515.2 million ($78.1 million) in 2010 from RMB411.2 million ($62.3 million) in 2009, primarily as a result of the increase in line with the sales volume. As a percentage of revenues, cost of sales decreased to 59.1% in 2010 from 59.3% in 2009.

Gross profit in 2010 increased 26.6% year over year to RMB356.9 million ($54.1 million) from RMB281.9 million ($42.7 million). Full year 2010 gross profit margin was 40.9% compared to 40.7% in 2009.

Selling and distribution expenses in 2010 were RMB61.5 million ($9.3 million), or 7.1% of revenue, compared to RMB53.4 million ($8.1 million), or 7.7% of revenue in 2009. This percentage decrease was primarily a result of the cancellation since January 2010 of brand promotion allowances that we provided distributors as well as lower advertising expense compared to 2009.

Administrative expenses in 2010 were RMB37.4 million ($5.7 million), or 4.3% of revenue, compared to RMB22.2 million ($3.4 million), 3.2% of revenue in 2009. This percentage increase was primarily a result of the increase in one-time charges relating to IPO related expenses, extension fee for the convertible loans as well as exchange losses, incurred in the nine months period of 2010, respectively.

Finance costs in 2010 were RMB8.6 million ($1.3 million) compared to RMB1.0 million ($0.15 million) in 2009. This increase was primarily a result of the accrued interest for the subsidiary’s convertible loans and the increase in bank borrowings.

Effective tax rate in 2010 increased to 26.9% compared to 25.4% in 2009 due to higher operating expenses incurred for the investment holding companies within the group.

Net income in 2010 increased 18.9% to RMB183.0 million ($27.7 million) from RMB153.9 million ($23.3 million) in 2009. Net income as a percentage of revenue was 21.0% compared to 22.2% in 2009 due to the increase in one-time charges relating to IPO related expenses, extension fee and accrued interest of the convertible loans as well as exchange losses.

Basic and diluted earnings per share increased to RMB2.29 ($0.35) in 2010 from RMB1.92 ($0.29) in 2009. The Company had 80.0 million shares outstanding during the quarter ended December 31, 2010.

Pro forma diluted earnings per share increased to RMB2.19 ($0.33) in 2010 from RMB1.85 ($0.28) in 2009 after the adjustment to add back interest expense related to convertible loans assumed to be converted. The Company had approximately 86.5 million and 83.4 million pro forma weighted average diluted no of shares outstanding during the year ended December 31, 2010 and 2009, respectively.

As of December 31, 2010, the Company had cash, cash equivalents of RMB367.7 million ($55.7 million), compared to RMB141.6 million as of December 31, 2009. Net cash provided by operating activities was RMB165.5 million ($25.1 million) in the twelve months ended December 31, 2010, up 300.9% from RMB41.3 million in the twelve months ended December 31, 2009.

Outlet Type:		2010		2009
Direct Stores		31		22
Distributor and Sub-distributor Stores		1,070		978
Total:		1,101		1,000

Initial Public Offering

On February 15, 2011, Zuoan’s ADSs began trading on the New York Stock Exchange under the ticker symbol “ZA.” Zuoan issued 6,000,000 ADSs, each representing four ordinary shares, at a price of $7.00 per ADS and received total proceeds of US$42.0 million.

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