As filed with the Securities and Exchange Commission on November 8, 2010

Registration No. 333-170368

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

 

Amendment No. 1
to

Form F-1

REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

 

 

 

 

 

Xiniya Industry Mansion
Xintang Development Area, Jinjiang
Fujian Province 362200, People’s Republic of China
(86-595) 8888 6166
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

 

 

Corporation Service Company

1180 Avenue of the Americas, Suite 210

New York, NY 10036

(1-212) 299-5600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

 

 

 

 

 

Approximate date of commencement of proposed sale to the public:   As soon as practicable after the effective date of this registration statement:

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.   o

 

 

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, the ADSs only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is current only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the ADSs.

 

We have not taken any action to permit a public offering of the ADSs outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of the ADSs and the distribution of this prospectus outside the United States.

CONVENTIONS THAT APPLY TO THIS PROSPECTUS

 

Unless otherwise indicated, references in this prospectus to:

 

 

 

 

Unless otherwise indicated, information in this prospectus assumes that the underwriters do not exercise their overallotment option to purchase additional ADSs.

 

Unless otherwise indicated, all historical share and per share data contained in this prospectus has been restated to give retroactive effect to a 20,000-for-one share split that became effective on November 4, 2010.

 

This prospectus contains translations of certain Renminbi amounts into U.S. dollars at specified rates. All translations from Renminbi to U.S. dollars were made at the rate as certified by the Federal Reserve Board of the United States. Unless otherwise stated, the translation of Renminbi into U.S. dollars has been made at the rate in effect on September 30, 2010, which was RMB6.6905 to $1.00. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. See “Risk Factors—Risks Relating to Conducting Business in the PRC—Fluctuations in foreign exchange rates may adversely affect our financial condition and results of operations.” On October 29, 2010, the certified exchange rate was RMB6.6705 to $1.00.

 

PROSPECTUS SUMMARY

	•	established and differentiated lifestyle brand in the PRC;
	•	extensive and well-managed nationwide authorized retail network;
	•	effective promotional and marketing strategies;
	•	strong design and product development capabilities; and
	•	experienced management team with an extensive background in the men’s apparel industry in China.

	•	further promote our brand and enhance our marketing and promotional strategies;
	•	further strengthen and expand our distribution network and increase retail coverage;
	•	expand and diversify our product offerings; and
	•	improve our product standardization and sales management capabilities.

	•	our ability to successfully maintain or promote our brand;
	•	the sustainability of the rate of economic growth, level of per capita disposable income and consumer spending patterns in the PRC;

	•	our relationships with, and the business performance of, our distributors, their authorized retailers and the department store chains that sell our products;
	•	our ability to manage distributors, authorized retailers and the department store chains over whom we have limited control;
	•	the high level of competition in our target markets;
	•	our relationships with, and the performance of, our contract manufacturers; and

	•	our ability to anticipate and respond in a timely manner to rapid changes in consumers’ tastes and preferences.

(1)		Wholly owned by Mr. Qiming Xu, our founder, chairman and chief executive officer.

Price per ADS		We currently estimate that the initial public offering price will be between $9.00 and $11.00 per ADS.

This offering:

ADSs offered by us		8,000,000 ADSs

Additional ADSs offered by the selling shareholders if the underwriters exercise the overallotment option in full		1,200,000 ADSs

 

ADSs outstanding immediately after this offering		8,000,000 ADSs (or 9,200,000 ADSs if the underwriters exercise the overallotment option in full).

 

Ordinary shares outstanding immediately after this offering		232,000,000 ordinary shares.

 

New York Stock Exchange symbol		“XNY”

 

Overallotment option		The selling shareholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,200,000 additional ADSs at the initial public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions.

 

The ADSs		Each ADS represents four ordinary shares, par value $0.00005 per share. The ADSs will be evidenced by American depositary receipts, or ADRs.

		The depositary will be the holder of the ordinary shares underlying the ADSs and you will have the rights of an ADR holder as provided in the deposit agreement among us, the depositary and owners and beneficial owners of ADSs from time to time.
		You may surrender your ADSs to the depositary to withdraw the ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.
		We may amend or terminate the deposit agreement for any reason without your consent. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.
		To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

Timing and settlement for ADSs		The ADSs are expected to be delivered against payment on          , 2010. The ADRs evidencing the ADSs will be deposited with a custodian for, and registered in the name of a nominee of, The Depository Trust Company, or DTC, in New York, New York. DTC, and its direct and indirect participants, will maintain records that will show the beneficial interests in the ADSs and facilitate any transfer of the beneficial interests.

Use of proceeds		We estimate that we will receive net proceeds of approximately $72.2 million from this offering, assuming an initial public offering price of $10.00 per ADS, the midpoint of the estimated range of the initial public offering price as set forth on the cover page of this prospectus, and after deducting the underwriter discounts, commissions and estimated aggregate offering expenses payable by us. We intend to use our net proceeds from this offering for the following purposes:

		• approximately $18.0 million to construct new manufacturing facilities in China that will increase our production capacity and also enhance quality control and process standardization of our products;

		• approximately $18.0 million to enhance the scale and frequency of our marketing and promotional campaigns;

		• approximately $10.0 million to open flagship stores in China;

		• approximately $10.0 million to establish dedicated research and development and sales and marketing centers;

		• approximately $8.0 million to develop new products, including establishing a sub-brand targeting younger customers between the ages of 20 and 30;

		• approximately $7.0 million to upgrade our data management systems, including rolling out an enterprise resource planning system, or ERP system; and

		• the remaining amount to fund our working capital and for other general corporate purposes, including product launches and new store launches.
		We will not receive any of the proceeds from the sale of the ADSs by the selling shareholders if the overallotment option is exercised.
Risk factors		See “Risk Factors” and other information included in this prospectus for a discussion of the risks you

		should carefully consider before deciding to invest in our ADSs.

Listing		We have applied for the listing of our ADSs on the New York Stock Exchange. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system.

 

Depositary		Deutsche Bank Trust Company Americas

 

Lock-up		We, all of our existing shareholders and Mr. Kangkai Zeng, who will become our shareholder upon the completion of this offering, have agreed with the underwriters not to sell, transfer or dispose of any ordinary shares, ADSs or securities convertible into or exchangeable or exercisable for any ordinary shares or ADSs for a period of 180 days after the date of pricing of the offering. See “Underwriting.”

 

Summary Financial Data

																		For the Nine Months
		For the Year Ended December 31,																Ended September 30,
		2007				2008				2009								2009				2010
		RMB				RMB				RMB				$				RMB				RMB				$
		(amounts in thousands, except for per share data)
Summary Statement of Comprehensive Income Data
Revenues
Business casual			222,746				411,576				622,538				93,048				367,270				475,053				71,004
Business formal			28,328				66,511				42,567				6,362				42,342				81,890				12,240
Accessories			824				1,624				6,970				1,042				5,596				8,753				1,308
Total revenues			251,898				479,711				672,075				100,452				415,208				565,696				84,552
Operating Costs and Expenses
Cost of sales			(169,991	)			(313,521	)			(438,773	)			(65,581	)			(279,480	)			(375,276	)			56,091
Selling and distribution expenses			(9,568	)			(15,925	)			(8,744	)			(1,307	)			(6,427	)			(9,035	)			1,350
Administrative expenses			(3,412	)			(6,813	)			(2,898	)			(433	)			(2,072	)			(4,053	)			606
Total operating costs and expenses			(182,971	)			(336,259	)			(450,415	)			(67,321	)			(287,979	)			(388,364	)			(58,047	)
Operating Income			68,927				143,452				221,660				33,131				127,229				177,332				26,505
Interest income			459				677				793				119				552				611				91
Income Before Tax			69,386				144,129				222,453				33,250				127,781				177,943				26,596
Income tax expense			—				(18,112	)			(28,109	)			(4,201	)			(16,212	)			(22,456	)			(3,356	)
Net Profit			69,386				126,017				194,344				29,049				111,569				155,487				23,240
Earnings per ordinary share, basic and diluted (1)			0.35				0.63				0.97				0.15				0.56				0.78				0.12
Earnings per ADS (2)			1.40				2.52				3.88				0.60				2.24				3.12				0.48
Dividends declared per share (3)			N/A				N/A				N/A				N/A				N/A				N/A				N/A

(1)		Earnings per share is calculated by dividing net income attributable to the equity holders of our company by the weighted average number of ordinary shares outstanding during each of the periods reported. The weighted average ordinary shares outstanding during the respective periods have been retrospectively adjusted to reflect the July 2010 capitalization that resulted in the issuance of 10,000 ordinary shares of China Xiniya Fashion Limited and the share split effected on November 4, 2010.

(2)		Each ADS represents four ordinary shares. Earnings per ADS is calculated by dividing net income attributable to the equity holders of our company by the weighted average number of ordinary shares outstanding during each of the periods reported and multiplying by four. The weighted average ordinary shares outstanding during the respective periods have been retrospectively adjusted to reflect the July 2010 capitalization that resulted in the issuance of 10,000 ordinary shares of China Xiniya Fashion Limited and the share split effected on November 4, 2010.

(3)		Dividends of RMB62.3 million ($8.6 million) and RMB113.3 million ($16.6 million), which were derived from profits for the years ended December 31, 2007 and 2008, respectively, were paid on January 21, 2008 and December 28, 2009, respectively. These dividends were not calculated or paid on a per share basis. Therefore, the rate of dividend and the number of shares ranking for dividends are not presented as such information is not meaningful. For the amount of dividends paid, the translation of Renminbi into U.S. dollars has been made at the rates in effect on the respective payment dates.

		As of December 31,																As of September 30
		2007				2008				2009								2010
		RMB				RMB				RMB				$				RMB				$
		(amounts in thousands)
Summary Statement of Financial Position Data
Cash and cash equivalents			100,056				156,639				142,302				21,269				242,396				36,230
Total current assets			103,732				217,104				283,714				42,406				539,638				80,657
Total non-current assets			3,811				3,294				2,776				415				8,519				1,273
Total assets			107,543				220,398				286,490				42,820				548,157				81,931
Total current liabilities			86,158				72,996				58,083				8,681				164,263				24,552
Total equity and liabilities			107,543				220,398				286,490				42,820				548,157				81,931

 

Investing in our ADSs involves a high degree of risk. You should carefully consider the risks described below and all of the other information set forth in this prospectus before deciding to invest in our ADSs. If any of the events or developments described below occur, our business, financial condition or results of operations could be negatively affected. In that case, the trading price of our ADSs could decline, and you could lose all or part of your investment in our ADSs.

 

Risks Relating to Our Business and Our Industry

 

We rely heavily on our Xiniya brand. Failure to successfully maintain or promote our brand may adversely affect our results of operations.

 

We sell all our products under our Xiniya brand, from which we derive all of our revenues. Therefore, our Xiniya brand is critical for our success as we believe market perception of a brand is one of the key factors for consumers to make decisions to purchase men’s apparel. Our Xiniya brand has been designed to portray a successful, stylish yet relaxed lifestyle philosophy. We spent approximately RMB7.4 million, RMB11.4 million, RMB4.5 million ($0.7 million) and RMB2.8 million ($0.4 million) on our advertising and promotion activities in the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively. If we are unsuccessful in promoting our Xiniya brand or fail to maintain our brand position, market perception and consumer acceptance of our Xiniya brand may be eroded, and our business, results of operations and prospects may be materially adversely affected. In addition, we engaged entertainment celebrities to promote our Xiniya brand, and thus we are dependent to some extent on the market perception and consumer acceptance of these entertainment celebrities, over whom we have no control. Our Xiniya brand has been recognized as a “Fujian Famous Trademark” by the Administration for Industry and Commerce of Fujian Province since August 2005 and as a “Well-Known Trademark of China” by the China Clothing Association since 2006. In 2006, our Xiniya brand was also judged to be a “Well-Known Trademark of China” by the Chenzhou Intermediate People’s Court of Hunan Province. Any negative publicity or disputes involving our Xiniya brand, products or celebrities who endorse our Xiniya brand or the loss of any award accreditation associated with our Xiniya brand as described above could materially adversely affect our business, financial condition, results of operations and prospects.

 

We rely on distributors and department store chains to distribute our products to end consumers, to expand our authorized retail network and to achieve our growth target. The loss of, or significant decrease in, sales to our distributors or the department store chains could have a material adverse effect on our financial condition and results of operations.

 

As of September 30, 2010, our products were sold at 1,365 authorized retail outlets, including 63 stores managed by our 26 distributors, 976 stores managed by retailers authorized by our distributors and 181 department store concessions managed by 35 department store chains authorized by our distributors, as well as 145 department store concessions managed by our 24 department store chain clients. We generate substantially all of our revenues from the sales of our products to distributors and the department store chains that sell our products. Sales generated by our five best-performing distributors accounted for 30.4%, 24.3%, 19.7% and 31.2% of our revenues in 2007, 2008, 2009 and the nine months ended September 30, 2010, respectively. During the same periods, sales to our single largest distributor accounted for 6.7%, 6.4%, 4.3% and 9.3%, respectively, of our revenues.

 

We are subject to the following risks arising from our reliance on our distributors:

 

 

 

As of the date of this prospectus, 204 new retail outlets have been opened in 2010. The number of new outlets does not include department store concessions placed under the management and supervision of distributors as a result of the restructuring of our authorized retail network. We plan to increase the number of retail outlets managed or authorized by our distributors by approximately 180 to 220 new outlets in 2011. Implementation of our growth strategy involves the maintenance and expansion of our authorized retail network, which is owned and managed by third parties, requires close cooperation by our distributors and the department store chains that sell our products and is subject to many factors beyond our control. In addition, the number and timing of new authorized stores actually opened during any given period, and their contribution to our distributors’ performance, which in turn will affect our results of operations, depend on a number of factors including, but not limited to, the following:

 

 

If we, our distributors or the department store chains that sell our products are unable to effectively manage these risks, we may not achieve our expansion goals and may fail to achieve our desired growth.

 

A distributor’s failure to distribute our products to the authorized retail network under its jurisdiction could materially adversely affect the business of the authorized retailers of an entire geographic area, as well as our reputation, brand image and results of operations.

 

As most of our distributors have exclusive distribution rights over a certain province, autonomous region or municipality, the failure by such distributor to perform obligations under its distributorship agreement with us may result in a material adverse effect on the business of authorized retailers in such area. If any of our distributors becomes unable or unwilling to supply our products to authorized retailers in the area over which it has exclusive distribution rights, the business of the authorized retailers operating in that area will be materially adversely affected. In addition, if any distributor fails to manage the distribution of our products among the authorized retail outlets located in its authorized region, some authorized retail outlets may have insufficient inventory of a particular product while others outlets have excess inventory of such product, which could adversely affect the sale of our products in that region. Moreover, distributors may favor the authorized retail outlets directly managed by them over the authorized retail outlets managed by third party authorized retailers when distributing popular products, which could result in a shortfall of inventory for such products at

the authorized retail outlets managed by third party authorized retailers. Any disruption in the retail network of our products may materially adversely affect our reputation, brand image and results of operations.

 

Starting from February 2010, we began to restructure our authorized retail network, which is owned and managed by third parties, by helping to establish cooperative relationships between our distributors and department store chains that sell our products with the goal of having the department store chains act as authorized retailers under the management and supervision of our distributors in their respective regions. We believe such change could help to eliminate competition within this authorized retail network and enhance its overall performance. We intend to complete the restructuring of our authorized retail network by the end of 2010. We expect our reliance on distributors to continue to increase as a result of such restructuring. The failure of any distributor to distribute our products according to the agreed terms may result in material adverse impact on our financial condition and results of operations.

 

Some of our distributors and the department store chains that sell our products have, in the past, failed to pay us for their purchases in a timely manner. Such failure to make timely payment could materially adversely affect our financial condition and results of operations.

 

From 2007 to December 2008, we sold our products to our distributors and the department store chains with a credit period of 60 days and 30 days, respectively. In December 2008, as a result of the global financial crisis and economic downturn, it became necessary to grant an extended credit period of 90 days to all of our distributors and 60 days to all of our department store chains. In 2010, we further extended the credit period to 90 days for our department store chains and continue to offer our distributors a credit period of 90 days primarily to afford them with greater liquidity as they are growing in size and purchase volume. The length of such credit period for an individual distributor or department store chain depends on our assessment of the financial condition of such distributor and department store chain. Although our distributors and the department store chains that sell our products place advance purchase orders at our biannual sales fairs, we may not be able to receive the payment for our products on time if the distributors or department store chains encounter financial difficulties. For example, as of December 31, 2009, approximately 11.3% of our accounts receivable exceeded their respective credit periods. These overdue accounts receivable were related to sales made in October 2009 and were collected within the first quarter of 2010. We perform ongoing credit evaluations of the financial condition of our distributors and department store chains and generally require no collateral from them to secure their payment obligations. As our sales increase, the amount of accounts receivable from our distributors and department store chains may increase. In addition, as we implement our expansion plans and require our distributors to increase the number of their self-managed and authorized retailers, we may decide to lengthen the credit periods we grant to our distributors. If any distributor or department store chain does not pay us for its purchases in a timely manner or at all, our financial condition and results of operations could be materially adversely affected.

 

Although China experienced significant economic recovery since 2009 from the global financial crisis and economic downturn, a global economic crisis of similar or more severe scale may reoccur. The impact of a future economic downturn on our distributors and department store chains that sell our products cannot be predicted and may be severe, causing a significant deterioration of their businesses. If that happens, they may reduce the volume of their purchase orders significantly and fail to pay us in a timely manner or at all. As a result, our financial condition and results of operations may be materially adversely affected. In addition, if there are not sufficient products in the authorized retail outlets due to the reduction in purchase volume by our distributors or department store chains, our brand image and reputation may be materially adversely affected.

 

Consumer sales of our products are conducted by distributors, authorized retailers and department store chains over whom we have limited control.

 

Among the 1,365 authorized retail outlets of our products in China as of September 30, 2010, 63 were owned and managed by our 26 distributors directly, 976 were managed by retailers authorized by our distributors, 181 were department store concessions managed by 35 department store chains authorized by our distributors, and 145 were department store concessions managed by our 24 department store chain clients. We sell a substantial part of our products to our distributors, who in turn distribute our products to consumers

through their self-managed retail outlets and authorized retailers. We do not have direct contractual relationships with the retailers of our products and we rely on the distributors to oversee their self-managed and authorized retailers. As we have no direct control over the authorized retailers, we are only able to require them to comply with our policies, such as exclusivity, customer service, store image and pricing, through our distributors based on the distributorship agreements. We also sell a significant portion of our products to large department store chains in our target geographies, which often enjoy strong bargaining positions due to their scale of business, reputation and location. Any deviation by our distributors, retailers and department store chains from our marketing and pricing policies or aggressive discounting of the retail prices of our products could result in the erosion of goodwill, a decrease in the market value of our Xiniya brand and an unfavorable public perception about the quality of our products, thus resulting in a material adverse effect on our business, financial condition, results of operation and prospects.

 

Our plan to manage new flagship stores may not succeed, and there may be competition among our company, our distributors, authorized retailers and department store chains.

 

We plan to use a portion of the proceeds from this offering to open up to five additional flagship stores in China by 2012. As we have only managed one flagship store in Jinjiang City, Fujian Province, we may not have sufficient experience and skills required for successfully managing such flagship stores. Moreover, as our authorized retail network owned and managed by third parties expands and market penetration of our products increases, there could be competition among our company, our distributors, authorized retailers and department store chains in the retail market. If we cannot succeed in our management of self-operated flagship stores or fail to coordinate well with our distributors, authorized retailers and department stores to minimize the competition within this retail network, our financial condition and results of operations could be materially adversely affected and we may not achieve our development goals.

 

We operate in a very competitive market and the intense competition we face may result in a decline in our market share and lower profit margins.

 

We operate in the business and leisure apparel sector of the overall men’s apparel industry in the PRC, which is highly competitive. Participants in this market include both international and domestic brands which compete in, among other things, brand loyalty, product variety, product design, product quality, marketing and promotion, retail network coverage, price and the ability to meet delivery commitments to distributors and retailers. This competition has led to leading brands continuing to gain market share at the expense of less established and lower-end brands. We may not be able to compete effectively against competitors who may have greater financial resources, greater scale of production, superior product design, better brand recognition and a wider, more diversified and established retail network. To compete effectively and maintain our market share, we may be forced to, among other actions, reduce prices, provide more sales incentives to our distributors and department store chains and increase capital expenditures on advertising, which may in turn materially adversely affect our profit margins and other results of operations.

 

We may not be able to accurately track the inventory levels at our distributors, retailers or department store concessions.

 

Our ability to track the sales by our distributors to third-party retailers and the ultimate retail sales by the retailers and department store concessions, and consequently their respective inventory levels, is limited. We implement a policy to require our distributors and department store chains to provide us with their sales reports on a weekly basis and we carry out random on-site inspections of our distributors, authorized retailers and department store chains to track their inventories. The purpose of tracking the inventory level is mainly to gather information regarding the market acceptance of our products so that we can reflect consumers’ preferences in the design and development of our products for the next season. The tracking of inventory level

also helps us to understand the market recognition of our products in a particular region, and thus allows us to adjust our marketing strategy if necessary. The implementation of the policy, however, requires the distributors, authorized retailers and department store chains to accurately report the relevant data to us in a timely manner, which is largely dependent on the cooperation of our distributors and department store chains. We may not always obtain the required data in time and the data provided to us by our distributors and department store chains may be inaccurate or incomplete.

 

We plan to use part of the proceeds from this offering to implement an enterprise resource planning system, or ERP system, that will allow us to track sales at the authorized retail outlets on a timely basis. Such system is expected to facilitate the processing of basic replenishment orders from our distributors, the movement of products through our authorized retail network, and the collection of information for planning and forecasting purposes. If we are unable to roll out the ERP system as planned, we would not be able to accurately track the inventory levels of our distributors, authorized retail outlets or department store concessions on a timely basis. Inaccurate, mistaken, incomplete or delayed data regarding inventory levels may mislead us to make wrong business judgments for our production, marketing efforts and sales strategies. If that happens, our operations and financial results may be materially adversely affected. In addition, if our distributors, authorized retailers or department store chains cannot manage inventory levels properly, their future orders of our products may be reduced, which would materially adversely affect our future business, financial condition, results of operation and prospects.

 

We are heavily dependent on certain of our key personnel and design and technical personnel. Our inability to attract, retain and motivate qualified personnel could adversely affect our business and growth prospects.

 

Our success depends heavily on our ability to attract, retain and motivate key personnel, including senior managerial, design and technical personnel. In particular, we rely on the continued services of Mr. Qiming Xu, Mr. Kangkai Zeng, Mr. Mingjiang Liu and Mr. Qifang Zhang, as well as our chief designer, Mr. Qiwen Yang. Many of them have been with us since the inception of our business. We have not subscribed for key-man life or similar insurance covering our key executives, design and technical personnel. If we lose the services of any of these key employees and cannot replace them with personnel with comparable experience and expertise in a timely manner, our business and prospects may be materially adversely affected.

 

Our operations could be materially adversely affected if we fail to effectively manage our relationships with, or lose the services of, our contract manufacturers.

 

We currently outsource most of our production to third party contractors in China. In the nine months ended September 30, 2010, we generated approximately 98.5% of our revenues from sales of products manufactured by our contract manufacturers. We currently use 50 contract manufacturers on a regular basis. In 2007, 2008 and 2009 and the nine months ended September 30, 2010, 34.2%, 42.4%, 30.1% and 23.8%, respectively, of our revenues were attributable to sales of products manufactured by our top five contract manufacturers. In January 2010, we ceased operation of four of our production lines at our manufacturing facility in Jinjiang due to our plans to phase out dated manufacturing facilities. As we do not enter into long-term contracts with our contract manufacturers, our contract manufacturers may decide not to accept our future purchase orders on the same or similar terms, or at all. If a contract manufacturer decides to substantially reduce its volume of supply to us or to terminate its business relationship with us, we may not be able to find a proper replacement in a timely manner and may be forced to default on the agreements with our distributors or department store chains that sell our products. This may seriously impact our revenues and adversely affect our reputation and relationships with our distributors and the department store chains that sell our products, causing a material adverse effect on our financial condition, results of operations and prospects.

 

Further, if any of our contract manufacturers fails to provide the required number of products meeting our quality standards, we may have to delay delivery of products to our distributors or department store chains, become unable to supply products at all, or even recall products previously dispatched. This could cause us to

lose revenues or market share and damage our reputation, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, some contract manufacturers may not fully comply with certain laws, such as labor and environmental laws. If any of our contract manufacturers is found to have violated laws and regulations in the PRC, media reports on such violations may negatively affect our reputation and image, resulting in material adverse impact on our business, financial condition and results of operations.

 

We also provide the designs of our products to the contract manufacturers, as well as guidance for manufacturing the products ordered by us. We do not have direct control over the contract manufacturers. If any of them is involved in unauthorized production and sale of goods using our Xiniya brand, our reputation, financial condition and results of operations may be materially adversely affected.

 

As we grow, our reliance on contract manufacturers may also grow as our added production capacity may not be sufficient to keep pace with the increased production requirements driven by our growth. We may not be able to find sufficient additional contract manufacturers to produce our products on the same or similar terms as our existing contract manufacturers, and we may not be able to achieve our growth and development goals.

 

We rely on a number of suppliers for certain raw materials. Unfavorable fluctuations in the price, availability and quality of raw materials could cause production delays and increase production costs.

 

Fabrics such as cotton, wool, polyester and blended fabrics and accessories, such as zippers and buttons, are the principal raw materials used in our production. All of our raw materials are sourced from PRC suppliers. Approximately 34.2%, 42.4%, 30.1% and 46.1% of our raw material purchases were from our top five suppliers in the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively. We do not enter into long-term agreements with our raw material suppliers. For each order, we enter into separate purchase contracts that include the terms regarding the price, purchase quantity, delivery terms and settlement terms. To the extent our suppliers do not continue to supply us with the raw materials we need to produce our products at similar prices or at all, our production may be seriously impacted and our reputation, brand image, results of operations, financial condition and prospects may materially suffer. Unfavorable fluctuations in the costs of our principal raw materials and our inability to pass on any increase in raw materials costs to our customers by increasing the suggested retail prices of our products or increasing the sale price to our distributors may materially adversely affect our cost of sales and our profit margins.

 

Our sales, results of operations and reputation could be materially adversely affected if we or our contract manufacturers fail to prevent interruption of our manufacturing operations, or fail to deliver products on schedule and at the level of quality expected by our distributors, department store chains, retailers and consumers.

 

The operation of our business requires successful coordination of several sequential and complex processes. The disruption of any of such processes could interrupt our revenue generation and result in a material adverse effect on our relationships with our distributors, department store chains, authorized retailers and consumers, our brand name and our financial performance. The manufacture of our products involves raw material and ancillary components selection, tailoring and sewing, assembly and packaging. When introducing new products, we and our contract manufacturers may experience delays in adjusting or upgrading production lines, delays in expanding manufacturing capacity, disruption in manufacturing processes and failure by our business partners to adequately perform the services we need. All these may have a material adverse effect on our sales and results of operations. In addition, a failure or an interruption could occur at any stage of our product development, manufacturing and delivery processes, resulting in products not meeting the expectations of our distributors, department store chains, retailers and consumers in terms of quality and delivery time, which could have a material adverse effect on our sales, results of operations and reputation.

We may not be able to anticipate and respond in a timely manner to rapid changes in consumers’ tastes and preferences.

 

As our men’s casual and business apparel and accessory products are closely linked with fashion and trends, our sales are dependent on our ability to cater to different consumer fashion tastes and preferences. We believe that a substantial portion of our revenues is dependent on market perception and consumers’ acceptance that our brand represents a successful, stylish yet relaxed lifestyle philosophy, which requires continued anticipation and responsiveness to rapidly changing market and fashion trends. Our failure to anticipate accurately and respond to market and fashion trends in a timely manner could result in our distributors experiencing lower sales volumes, lower selling prices and lower profits. This could in turn negatively affect our sales to our distributors in the future, as well as our financial condition and results of operations.

 

Failure to continue to engage Jacky Cheung as our brand spokesperson could harm our business.

 

Since October 2007, we have engaged Jacky Cheung, one of the most well-known pop singers in China, as our brand spokesperson to promote our products and brand image. We believe Jacky Cheung’s image embodies the successful and stylish gentleman our brand represents and resonates well with our target customers, who are male professionals between the ages of 25 to 45. Therefore, we believe the engagement of Jacky Cheung has contributed significantly to the sales of our products. Our engagement with Jacky Cheung will expire in February 2011. We plan to negotiate with Jacky Cheung to extend his term as our brand spokesperson and to expand the scope of our cooperation with him by the time our current engagement with him expires. However, we may not be able to continue to engage Jacky Cheung as our brand spokesperson on commercially reasonable terms or at all. If we fail to continue to engage Jacky Cheung and cannot secure an alternate celebrity of similar popularity, the sales of our products could be materially adversely affected and the image of our brand among consumers may be materially adversely impacted.

 

In addition, inappropriate actions taken or unsatisfactory performances by Jacky Cheung or any replacement brand spokespersons that harm their reputations could in turn harm our brand image and reputation, which could have a material adverse impact on our sales, financial condition and results of operations.

 

We may fail to execute our growth strategy or maintain our growth rate.

 

Our rapid growth will impose significant additional responsibilities on our management, including the need to raise working capital, to identify, recruit, train and integrate additional employees and to oversee the expansion of our production facilities and the coordination and cooperation with our distributors and authorized retailers. In addition, rapid and significant growth may place a strain on our administrative and operational infrastructure, in particular on our internal controls and financial reporting processes and systems. As our operations expand, we expect that additional resources will be required to manage new relationships with investors and additional distributors and department store chains, as well as other third parties including contract manufacturers, raw material suppliers, equipment providers, consultants and others. Our ability to manage our working capital, operations and growth will require us to continue to improve our operational, financial and management controls, reporting systems and procedures. If we are unable to effectively manage our growth, it may be difficult for us to execute our business strategies and a decrease in the market demand for our products and the corresponding drop in the sales of our products could result in an accumulation of inventory in the retail network and may materially adversely affect our business, financial condition, results of operations and prospects.

 

Our sales are subject to seasonality and weather conditions, which could cause our results of operations to fluctuate.

 

Our industry has historically experienced seasonality, which we expect to continue. We typically achieve higher revenues from the sales of our autumn and winter collections and lower revenues from the sales of our

spring and summer collections due to seasonality of demand for business casual men’s apparel and the differences in selling prices between our autumn and winter collections and our spring and summer collections. As a result, our revenues, operating income and net profit have typically been higher during the third and fourth quarters than the rest of the year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Selected Quarterly Results of Operations.” In addition, extreme or unusual weather conditions, such as extended periods of warm temperatures during the winter season or cool weather during the summer season could render a portion of our inventory incompatible with such unseasonable conditions, and thus may affect our sales. Our quarterly operating results may also fluctuate from period to period based on changes in fashion trends, consumer demand and the seasonality of consumer spending on men’s apparel. Therefore, any comparison of our operating results between interim and annual results may not be meaningful. Our results of operations are likely to continue to fluctuate due to seasonality.

 

Any material disruption of our operations or the operations of our suppliers, distributors and/or retailers from natural disasters, war, political unrest and epidemics could materially adversely affect our results of operations.

 

Our operations are subject to uncertainties and contingencies beyond our control that could result in material disruptions and adversely affect our results of operations. These include war, riots, public disorder, civil commotion, fire, earthquake, flood and other natural calamities, epidemics, outbreaks of infectious disease, terrorism, whether locally or nationwide, or incidents such as industrial accidents, equipment failures, power failures or disruptions, the breakdown, failure or substandard performance of equipment, the improper installation or operation of equipment and the destruction of buildings, equipment and other facilities due to natural disasters, malfunction of information systems, delays in the distribution and transportation of our products or other operational problems, strikes or other labor difficulties and disruption of public infrastructure such as roads, ports or utilities. Any such disruption of our operations or the operations of our suppliers, distributors and/or retailers could cause us to disrupt, limit or delay our production, prevent us from meeting customer orders, increase our costs of production or require us to make additional capital expenditures. We currently do not carry any property insurance or business interruption insurance, and any of such incidents could materially adversely affect our results of operations.

 

We may not be able to adequately protect our intellectual property rights, which could harm our brand and our business.

 

We believe our trademarks and other intellectual property rights are crucial to our success. Our principal intellectual property rights include our trademarks for the Xiniya brand. Although we rely on the registration of trademarks and applicable laws to protect our intellectual property rights, these measures may not be sufficient to prevent any misappropriation of our intellectual property rights. The legal framework governing intellectual property in the PRC is still evolving and the level of protection of intellectual property rights in the PRC differs from those in more developed jurisdictions such as the United States. As a result, we may not enjoy the same level of protection of our intellectual property rights as what is typically available in these jurisdictions.

 

There is no assurance that third parties will not infringe our intellectual property rights. Our efforts to enforce or defend our intellectual property rights may not be adequate and may require significant attention from our management and may be costly. We may have to initiate legal proceedings to defend the ownership of our trademarks or brand against any infringement by third parties. These legal proceedings may be costly and time-consuming and we might be required to devote substantial management time and resources in an attempt to achieve a favorable outcome. The outcome of any legal actions to protect our intellectual property rights may be uncertain. If we are unable to adequately protect or safeguard our intellectual property rights, our business, financial condition and results of operations and prospects may be adversely affected.

 

In addition, some websites operated by third parties which are not related to our company, our directors, management and shareholders, have domain names that are similar to our proprietary domain name, www.xiniya.com, including www.xiniya.com.cn and other websites that use the word “xiniya” or words similar

to our brand name. Consumers may view such websites as being operated by or related to our company, and if any contents of such websites infringe the rights of any consumers or other third parties, there may be lawsuits against us and negative news coverage involving us. If this happens, our reputation may be materially adversely affected and our sales, financial condition and results of operations may be harmed.

 

The legitimate use of trademarks or brands that are similar to our trademarks or brands by other parties may have a negative impact on the goodwill, value and image of our products.

 

The laws of the PRC permit other parties to register trademarks which may be similar to our registered trademarks under certain circumstances. Such activities may cause confusion among consumers. We may not be able to prevent other parties from using trademarks that are similar to ours. Consumers may confuse our products with lower quality third-party products with similar trademarks. If this happens, the goodwill and value of our trademarks and public perception of our brand and image may be adversely affected by the inferior quality of the products and services provided by third parties who use trademarks similar to ours. A negative perception of our brand and image could have a material adverse effect on our sales, and therefore on our business, financial condition and results of operations and prospects.

 

Our business could be adversely affected by claims by third parties for possible infringement of their intellectual property rights.

 

We may face claims from time to time that our products infringe upon the intellectual property rights of third parties, including our competitors. If any legal proceedings against us for infringement of intellectual property rights are successful, we may be ordered to be responsible for the losses incurred by the claiming parties due to our infringement of their intellectual property rights. Further, if we are unable to obtain a license for the usage of such intellectual property rights on acceptable terms, or at all, or unable to design around such intellectual property rights, we may be prohibited from manufacturing or selling products which are dependent on the usage of such intellectual property rights. In such cases, we may experience a material adverse effect on our business and reputation, and these types of proceedings and their consequences could divert management’s attention from our business, all of which could have a material adverse effect on our business and results of operations.

 

Our ability to obtain additional financing may be limited, which could delay or prevent the realization of one or more of our strategies.

 

We have, to date, financed our working capital and capital expenditure needs primarily through capital contributions and cash from operating activities. We expect our working capital needs and our capital expenditure needs to increase in the future as we continue to expand and enhance our production facilities, increase our design, research and development capabilities and as we continue to implement our other strategies. Our ability to raise additional capital will depend on the success of our current business and the successful implementation of our key strategic initiatives, financial, economic and market conditions and other factors, some of which are beyond our control. We may not be successful in raising the required capital at reasonable cost and at the required times, or at all. Further, equity financings may have a dilutive effect on our shareholders. If we are unsuccessful in raising additional capital or if new capital funding costs are higher than our prior capital funding costs, our operations and our development programs may be materially adversely impacted, with similar effects on our financial condition and results of operations.

 

We may be requested to make up any unpaid contribution to the social security insurance schemes and we and our responsible officers may be subject to a late charge and other penalties.

 

Under the PRC laws and regulations, our operating subsidiary in the PRC, Fujian Xiniya, is required to make mandatory contributions to a number of social insurance schemes for its employees who are eligible for such benefits. As advised by our PRC legal advisor, Beijing Mingtai Law Firm, under the applicable laws and regulations issued by the national and local governments in China, Fujian Xiniya, is required to contribute to

these social insurance schemes representing, in the aggregate, 29.2% of the wages payable to these employees, comprising contributions to (i) pension insurance at the rate of 18%; (ii) medical insurance at the rate of 7.5%; (iii) unemployment insurance at the rate of 2%; (iv) work-related injuries insurance at the rate of 1%; and (v) maternity insurance at the rate of 0.7%. The cumulative amount of contributions payable under the social insurance schemes for our employees as of September 30, 2010 was RMB6.3 million ($0.9 million).

 

However, the relevant laws and regulations are not enforced in a consistent manner across China, particularly in relation to migrant workers, who historically have not been granted the same level of benefits and protections as urban workers. As a large number of our employees are migrant workers, Fujian Xiniya did not establish a mechanism to make regular contributions to the social insurance schemes in accordance with applicable laws and regulations.

 

As advised by our PRC legal advisor, Beijing Mingtai Law Firm, Fujian Xiniya may be ordered by the relevant government authorities to pay the outstanding contributions within a prescribed time limit and late charges or penalties may apply. As of the date of this prospectus, Fujian Xiniya has not been ordered by the relevant government authorities to pay any outstanding contributions to any social insurance schemes. However, we may be punished for our failure to comply with such laws and regulations in the past and may be subject to negative publicity. If that happens, our business, results of operations and prospects may be materially adversely affected.

 

Our operations and financial performance may be adversely affected by labor shortages, an increase in labor costs, any change to the PRC labor laws and regulations or by labor disputes.

 

We operate in a labor-intensive industry. Although we currently outsource most of our production, we plan to use part of the proceeds from this offering to construct new manufacturing facilities and increase our production capacity. Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees. Qualified individuals are in short supply and competition for these employees is intense. We incurred labor costs of RMB15.7 million in 2007, RMB19.5 million in 2008, RMB22.2 million ($3.3 million) in 2009 and RMB6.4 million ($1.0 million) in the nine months ended September 30, 2010, representing 8.6%, 5.8%, 4.9% and 1.6% of our total operating costs in the corresponding periods. In line with the planned increase in in-house production capacity, we expect our labor costs to increase significantly. Labor costs in the PRC have increased and may continue to increase in the future. If the labor shortage intensifies, the labor costs in the PRC increase substantially and we cannot pass on such increase to our customers by increasing our sales prices, our business, financial condition, results of operations and prospects may be materially adversely affected.

 

On June 29, 2007, the PRC government promulgated a new labor law, namely, the Labor Contract Law of the PRC, which became effective on January 1, 2008. The Labor Contract Law imposes greater liabilities on employers and significantly impacts the cost of an employer’s decision to reduce its workforce. Further, it requires certain terminations to be based upon seniority and not merit. In the event we decide to significantly change or decrease our workforce, the Labor Contract Law could adversely affect our ability to enact such changes in a manner that is most advantageous to our business or in a timely and cost effective manner, thus materially adversely affecting our financial condition and results of operations.

 

Further, labor disputes, work stoppages or slowdowns at our facility or any of our contract manufacturers or suppliers or at construction or engineering firms engaged in the construction of our production facilities could significantly disrupt our operations or our expansion plans. Delays caused by any such disruptions could materially adversely affect our production and revenues, which could have a material adverse effect on our business and results of operations.

 

We are exposed to environmental liability. Changes in existing laws and regulations or additional or stricter laws and regulations on environmental protection in China may cause us to incur additional capital expenditures.

 

The production of certain products by us or our contract manufacturers, particularly leather men’s apparel, footwear and leather accessories, is subject to PRC environmental protection laws and regulations. These laws

and regulations require enterprises engaged in manufacturing products that may produce environmental wastes to adopt effective measures to control and properly dispose of industrial wastes. If an enterprise fails to comply with such laws or regulations and causes pollution, the environmental protection authorities may levy fines or even order the enterprise to be closed if the enterprise has caused serious pollution. Although we believe our current pollution control facilities and measures are effective and we are in compliance with any PRC environmental protection laws except that we are still in the process of applying for a pollutant discharge permit, we may, however, be subject to fines or even more severe administrative punishments if the PRC government imposes stricter environment protection laws with which we cannot comply by using our current pollution control facilities and measures. If the PRC government imposes stricter environment protection laws, we may have to incur additional expenditures on pollution control facilities and measures in order to comply with such stricter laws. If we are unable to pass on the additional expenditures to our customers through increasing the prices of our products, our financial condition and results of operations may be materially adversely affected.

 

Moreover, we have no direct control over our contract manufacturers. If any of them fails to comply with any PRC environmental laws or regulations, any such violations or any media reports on such violations may negatively affect our reputation and image, resulting in a material adverse impact on our business, financial condition and results of operations.

 

We may be exposed to product liability, property damage or personal injury claims, which may adversely affect our reputation and business.

 

All of our products are sold in China. We may be exposed to product liability claims and we may, as a result, have to expend significant financial and managerial resources to defend against such claims. Such product liability claim risks may increase as legal concepts in product liability begin to develop and mature in China and in other countries and regions where our products may be sold in the future. In line with common industry practice, we do not maintain product liability insurance coverage and our business, results of operations and prospects may be materially adversely affected by a successful product liability claim against us. In addition, we do not maintain third party liability insurance against claims for property damage or personal injury. Regardless of the ultimate merits of a claim or dispute, we may face significant costs and expenses to defend against such claims or enter into settlement agreements. We may suffer serious damage to our reputation, be subject to material monetary damages and be subject to government investigations. In such cases, it may lead to fines and sanctions against us and result in negative public perception of our brand, all of which could have a material adverse effect on our business, prospects, financial condition, results of operations and prospects.

 

We have a limited operating history and you should not rely on our historical financial data as an indicator of our future financial performance.

 

We have a limited operating history in the men’s apparel industry. We achieved revenue growth at a compound annual growth rate, or CAGR, of over 63.3% from 2007 to 2009 primarily due to the successful promotion of our brand. You should consider our business and prospects in light of the risks and difficulties we face with a limited operating history in the competitive men’s apparel industry and should not rely on our past results as an indication of our future performance. In particular, we may face challenges in planning our growth strategy and forecasting market demand accurately as a result of our limited historical data and limited experience in implementing and evaluating our business strategies. If we are unable to successfully address these risks, difficulties and challenges as a result of our limited operating history, our ability to implement our strategic initiatives could be adversely affected, which may in turn have a material adverse effect on our business, financial condition, results of operations and prospects.

Our independent registered public accounting firm has identified material weaknesses in our internal control over financial reporting. If we are unable to correct these weaknesses, our ability to accurately and timely report our financial results or prevent fraud may be adversely affected, and investor confidence and the market price of our ADSs may be adversely impacted.

 

Upon completion of this offering, we will be subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of the company’s internal control over financial reporting. In addition, an independent registered public accounting firm must report on the effectiveness of our internal control over financial reporting beginning with our annual report for the fiscal year ending December 31, 2011. Our management may conclude that our internal control over our financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may still issue a report with an adverse opinion if it is not satisfied with our internal control or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. Our reporting obligations as a public company will place a significant strain on our management, operational and financial resources and systems for the foreseeable future.

 

Prior to this offering, we have been a private company with a short operating history and limited accounting personnel and other resources with which to address our internal control and procedures over financial reporting. In connection with their audits of our financial statements for the years ended December 31, 2007, 2008 and 2009, our independent registered public accounting firm identified and communicated to us three material weaknesses in our internal control over financial reporting as defined in the standards established by the U.S. Public Company Accounting Oversight Board that there is reasonable possibility that a material misstatement in our annual or interim financial statements would not be prevented or detected on a timely basis by our internal controls. The material weaknesses identified by our independent auditors include: (i) lack of sufficient personnel with an appropriate level of accounting knowledge, experience and training in the application of IFRS commensurate with our financial reporting requirements; (ii) insufficient policies and procedures relating to the accounting for research and development expenses; and (iii) insufficient policies and procedures relating to our company’s expenses paid for by our controlling shareholder, Mr. Qiming Xu.

 

Although we have adopted several measures to improve our internal control over financial reporting, including (i) recruiting a chief financial officer in the second quarter of 2010 with extensive audit experience and knowledge of IFRS; (ii) implementing various procedures to ensure the proper controls and documentation are implemented with respect to our research and development expenses; and (iii) obtaining from our controlling shareholder, Mr. Qiming Xu, appropriate supporting documents for any company expenses paid for by him, they may not be sufficient to overcome these material weaknesses. We will continue to implement measures to remedy these material weaknesses as well as other deficiencies identified by our independent auditors and us in order to meet the deadline and requirements imposed by Section 404 of the Sarbanes-Oxley Act. If we fail to timely achieve and maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting. Moreover, effective internal control over financial reporting is necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to achieve and maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the market price of our ADSs. Furthermore, we anticipate that we will incur considerable costs and use significant management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act.

If we grant employee stock options and other share-based compensation in the future, our net income could be materially adversely affected.

 

Share-based compensation is important to attract and retain key personnel. Under our 2010 equity incentive plan, we have a significant number of ordinary shares authorized for future issuance. We may adopt other equity incentive plans in the future. Grants of share-based awards under such plans may lead to incurrence of share-based compensation expenses. We will account for compensation costs for all share-based awards using the fair value method and recognize the expenses in our consolidated statement of operations in accordance with the accounting guidance of share-based payment under IFRS, which may materially adversely affect our net income. Moreover, the additional expenses associated with share-based compensation may reduce the attractiveness of our current and future equity incentive plans.

 

Risks Relating to Conducting Business in the PRC

 

Almost all of our assets are located in the PRC and all of our revenues are derived from our operations in the PRC. As a result, our operations and assets are subject to significant political, economic, legal and other uncertainties associated with doing business in the PRC, which are discussed in more detail below.

 

Fluctuations in consumer spending caused by changes in macroeconomic conditions in the PRC may significantly affect our business and financial performance.

 

All of our revenues have been generated in the PRC. Our sales and growth are dependent on consumer consumption and the continued improvement of macroeconomic conditions in the PRC, which in turn depend significantly on worldwide economic conditions and their impact on levels of consumer spending, which have recently deteriorated significantly in many countries and regions and may remain depressed for the near future. There are many factors affecting the level of consumer spending, including but not limited to, interest rates, currency exchange rates, recession, inflation, deflation, political uncertainty, taxation, stock market performance, unemployment levels and general consumer confidence. In addition, we believe that our historical growth rates were largely dependent on the general growth of the PRC economy. According to the National Bureau of Statistics of China, or NBSC, China’s GDP increased from RMB18,493.7 billion in 2005 to RMB33,535.3 billion in 2009. We can provide no assurance that the PRC will continue to grow at historical rates, or at all, and any slowdowns or declines in the PRC economy or the world economy in general may materially adversely affect consumer spending, our prospects and operating results.

 

Our business may be materially adversely impacted by the recent global financial crisis and economic downturn.

 

The recent global financial crisis and economic downturn may materially adversely impact our business, financial condition, results of operations and prospects in a number of ways, including:

 

 

These risks may be exacerbated in the event of a prolonged economic downturn or financial crisis.

Changes in the laws, regulations and policies adopted by the PRC government, including in relation to the environment, labor and taxation, may adversely affect our business, growth strategies, operating results and financial condition.

 

The political, economic and social conditions in the PRC differ from those in more developed countries in many respects, including structure, government involvement, level of development, growth rate, control of foreign exchange, capital reinvestment, allocation of resources, rate of inflation and trade balance position. For the past three decades, the PRC government has implemented economic reform and measures emphasizing the utilization of market forces in the development of the PRC economy. Although we believe these economic reforms and measures will have a positive effect on the PRC’s overall and long-term development, the resulting changes may also have any adverse effect on our current or future business, financial condition or results of operations. Despite these economic reforms and measures, the PRC government continues to play a significant role in regulating industrial development, the allocation of natural resources, production, pricing and management of currency, and there can be no assurance that the PRC government will continue to pursue a policy of economic reform or that the current direction of reform will continue.

 

Our ability to successfully expand our business operations in the PRC depends on a number of factors, including macroeconomic and other market conditions and credit availability from lending institutions. Stricter lending policies in the PRC may affect our ability to obtain external financing, which may reduce our ability to implement our expansion strategies. We cannot assure you that the PRC government will not implement any additional measures to tighten lending standards or that, if any such measure is implemented, it will not adversely affect our future results of operations or profitability.

 

Demand for our products and our business, financial condition and results of operations may be adversely affected by the following factors:

 

 

These factors are affected by a number of variables which are beyond our control.

 

The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with this offering; any requirement to obtain prior CSRC approval could delay this offering and any failure to obtain this approval, if required, could have a material adverse effect on our business, results of operations and reputation as well as on the trading price of our ADSs, and may also create uncertainties for this offering. The regulation also establishes more complex procedures for acquisitions by foreign investors, which could make it more difficult to pursue growth through acquisitions.

 

On August 8, 2006, six PRC regulatory agencies, including the Ministry of Commerce, or MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective on September 8, 2006. The M&A Rules, among other things, include provisions that purport to require an offshore special purpose vehicle formed for the purpose of acquiring PRC domestic companies and controlled by PRC individuals to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by special purpose vehicles. The CSRC approval procedures require the filing of an application and supporting documents with the CSRC.

The application of the M&A Rules with respect to this offering remains unclear. Based on the advice of our PRC legal advisor, Beijing Mingtai Law Firm, we believe that no CSRC approval is required in the context of this offering as Fujian Xiniya, a wholly foreign-owned enterprise indirectly held by us through Xiniya Hong Kong, was incorporated in the PRC prior to the implementation of the M&A Rules. However, the CSRC may disagree with this assessment and if CSRC approval is later found to be required, we may face regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies. In that case, the relevant regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects. Meanwhile, any uncertainties or negative publicity regarding this CSRC approval requirement could have an adverse effect on the trading price of our ADSs.

 

The regulation also established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. In the future, we may grow our business in part by acquiring complementary businesses. Complying with the requirements of this regulation to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOFCOM, may delay or inhibit our ability to complete such transactions. Any delay or inability to obtain applicable approvals to complete acquisitions could affect our ability to expand our business or maintain our market share.

 

PRC regulations relating to offshore investment activities by PRC residents and PRC citizens may increase the administrative burden we face and may subject our PRC resident beneficial owners or employees or PRC citizen stock option holder to personal liabilities, limit our subsidiary’s abilities to increase its registered capital or distribute profits to us, limit our ability to inject capital into our PRC subsidiary, or may otherwise expose us to liability under PRC law.

 

SAFE has promulgated regulations that require PRC residents and PRC corporate entities to register with local branches of SAFE in connection with their direct or indirect offshore investment activities. These regulations may apply to our shareholders who are PRC residents and may apply to any offshore acquisitions that we make in the future. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is required to update his or her registration with the relevant SAFE branches, with respect to that offshore company, any material change involving an increase or decrease of capital, transfer or swap of shares, merger, division, equity or debt investment or creation of any security interest. Moreover, the PRC subsidiaries of that offshore company are required to coordinate and supervise the filing of SAFE registrations by the offshore company’s shareholders who are PRC residents in a timely manner. If a PRC shareholder with a direct or indirect stake in an offshore parent company fails to make the required SAFE registration, the PRC subsidiaries of such offshore parent company may be prohibited from making distributions of profit to the offshore parent and from paying the offshore parent proceeds from any reduction in capital, share transfer or liquidation in respect of the PRC subsidiaries, and the offshore parent company may also be prohibited from injecting additional capital into its PRC subsidiaries. Furthermore, failure to comply with the various SAFE registration requirements described above may result in liability for the PRC shareholders and the PRC subsidiaries for foreign exchange registration evasion.

 

Our shareholders who are PRC residents are in the process of making the required SAFE registrations according to the relevant regulations. However, we have certain shareholders that are residents of Hong Kong. There is uncertainty concerning under what circumstances residents of other countries and regions can be classified as a PRC resident. However, the PRC government authorities may interpret our beneficial owners’ status differently or their status may change in the future. Moreover, we may not be fully informed of the identities of the beneficial owners of our company and we cannot assure you that all of our PRC resident beneficial owners will comply with the SAFE regulations. The failure of our beneficial owners who are PRC

residents to make any required registrations may subject us to fines and legal sanctions, and prevent us from being able to make distributions or pay dividends, as a result of which our business operations and our ability to distribute profits to you could be materially adversely affected.

 

On March 28, 2007, SAFE issued the Operating Procedures on Administration of Foreign Exchange regarding PRC Individuals’ Participation in Employee Share Ownership Plans and Employee Stock Option Plans of Overseas Listed Companies, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to register with SAFE and complete certain other procedures. We and our PRC employees who may be granted stock options will be subject to the Stock Option Rule when our company becomes an overseas publicly listed company. If we or our PRC employees fail to comply with such regulation, we or our employees may be subject to fines and legal sanctions.

 

Restrictions on foreign exchange and payments of dividends may limit our operating subsidiary’s ability to remit payments to us.

 

At present, the Renminbi is not freely convertible to other currencies, and conversion and remittance of foreign currencies are subject to PRC foreign exchange regulations. Under current PRC laws and regulations, payments of current account items, including profit distributions, interest payments and operation-related expenditures, may be made in foreign currencies without prior approval from SAFE, but are subject to procedural requirements including presenting relevant documentary evidence of such transactions and conducting such transactions at designated foreign exchange banks within China who have the licenses to carry out foreign exchange business. Strict foreign exchange control continues to apply to capital account transactions. These transactions must be approved by or registered with SAFE, and repayment of loan principal, distribution of return on direct capital investment and investment in negotiable instruments are also subject to restrictions. Under our current structure, our source of funds primarily consists of dividend payments from our subsidiary in the PRC. We cannot assure you that we will be able to meet all of our foreign currency obligations or to remit profits out of China. If future changes in relevant regulations were to place restrictions on the ability of our subsidiary to remit dividend payments to us, our liquidity and ability to satisfy our third-party payment obligations and our ability to distribute dividends in respect of the ADSs could be materially adversely affected.

 

We are a holding company that heavily relies on dividend payments from our subsidiary for funding.

 

We are a holding company incorporated in the Cayman Islands and operate our core business through our subsidiary in the PRC. Therefore, the availability of funds to us to pay dividends to our shareholders depends on dividends received from this subsidiary. If our subsidiary incurs debt or losses, such indebtedness or losses may impair its ability to pay dividends or other distributions to us. As a result, our ability to pay dividends will be restricted. PRC laws require that dividends be paid only out of the net profit calculated according to the PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions, including International Financial Reporting Standards, or IFRS, and U.S. Generally Accepted Accounting Principles. PRC laws also require foreign-invested enterprises to set aside a part of their net profit as statutory reserves. These statutory reserves are not available for distribution as cash dividends. In addition, restrictive covenants in bank credit facilities or other agreements that we or our PRC subsidiary may enter into in the future may also restrict the ability of our subsidiary to provide capital or declare dividends to us and our ability to receive distributions. Therefore, these restrictions on the availability and usage of our major source of funding may impact our ability to pay dividends to our shareholders and ADS holders.

 

Fluctuations in foreign exchange rates may adversely affect our financial condition and results of operations.

 

Under our current corporate structure, our income primarily consists of dividend payments from our subsidiary in the PRC, whose sales are made in Renminbi. The value of the Renminbi against foreign currencies is

subject to changes in the PRC government’s policies and international economic and political developments. The Renminbi was pegged solely to the U.S. dollar prior to July 21, 2005. Effective from July 21, 2005, the Renminbi is no longer pegged solely to the U.S. dollar. Instead, it is pegged against a basket of foreign currencies determined by the People’s Bank of China, against which it can rise or fall within a regulated band each day. This change in policy caused the Renminbi to appreciate by more than 20% against the U.S. dollar in the following three years. During the period between July 2008 and June 2010, the Renminbi traded within a narrow range against the U.S. dollar. However, on June 19, 2010, the People’s Bank of China announced the adoption of certain measures to further reform the currency exchange system of the PRC to allow broader fluctuation of the Renminbi. In addition, the PRC government has allowed international transactions to be settled in Renminbi in 20 provinces, autonomous regions and municipalities in China. Such measures may lead to further appreciation of the Renminbi.

 

There has been pressure from foreign countries on the PRC to adopt a more flexible currency system that could also lead to further and more significant appreciation of the Renminbi. The Renminbi may be revalued further against the U.S. dollar or other currencies, or may be permitted to enter into a full or limited free float, which may result in an appreciation or depreciation in the value of the Renminbi against the U.S. dollar or other currencies. It is uncertain if the exchange rates of the U.S. dollar against the Renminbi will further fluctuate. Any appreciation of the Renminbi may subject us to increased competition from imported men’s apparel. Also, since our revenues and profits are denominated in Renminbi, any depreciation of the Renminbi could materially adversely affect our financial position and the value of, and any dividends payable on, our ADSs in foreign currency terms, as well as our ability to fulfill our foreign currency obligations. Moreover, fluctuations in the exchange rate between the U.S. dollar and Renminbi will affect our financial results in U.S. dollars even when there is no change in our underlying business or results of operations.

 

Any change in our tax treatment, including an unfavorable change in preferential corporate tax rates in the PRC, may have a negative impact on our operating results.

 

On March 16, 2007, the National People’s Congress of the PRC promulgated the Enterprise Income Tax Law of the PRC, or the New Tax Law, which came into effect on January 1, 2008 and superseded both the Foreign-invested Enterprise and Foreign Enterprise Income Tax Law and the Provisional Regulations on Enterprise Income Tax of the PRC. The New Tax Law consolidates the two separate tax regimes for domestic enterprises and foreign-invested enterprises and imposes a unified enterprise income tax rate of 25% for both types of enterprises.

 

Under the New Tax Law, foreign-invested enterprises that enjoyed a preferential tax rate prior to the New Tax Law’s promulgation will gradually transition to the new tax rate over five years from January 1, 2008. Foreign-invested enterprises that enjoyed a tax rate of 24% have had their tax rate increased to 25% in 2008. Enterprises which enjoyed a fixed period of tax exemption and reduction prior to the New Tax Law’s promulgation will continue to enjoy such preferential tax treatment until the expiration of such prescribed period, and for those enterprises whose preferential tax treatment has not commenced before due to lack of profit, such preferential tax treatment commenced on January 1, 2008.

 

Under the prior tax regime, our operating subsidiary in the PRC, Fujian Xiniya, being a foreign-invested enterprise engaged in manufacturing, was entitled to an enterprise income tax exemption for two years commencing from the first profit-making year (after offsetting all tax losses carried forward from previous years), and a 50% tax reduction for the following three consecutive years. Fujian Xiniya enjoyed a full exemption from enterprise income tax in 2006 and 2007, as well as a 50% reduction of its current enterprise income tax rate of 25% in 2008 and 2009, which had a significant positive effect on our profit after taxation during the corresponding periods. Under the New Tax Law, we expect that Fujian Xiniya will continue to be entitled to a 50% reduction of the phased-in enterprise income tax rate of 25% for the year 2010, and will thereafter be subject to a 25% tax rate from January 1, 2011 onwards. We expect that upon the expiration of the partial exemption from enterprise income tax previously enjoyed by Fujian Xiniya, other considerations aside, the amount of our tax payments will increase from January 1, 2011 onwards. Any discontinuation of tax

preferential tax treatment or any increase of the enterprise income tax rate applicable to Fujian Xiniya could have a material adverse effect on our financial condition and results of operations.

 

Our future worldwide income may be subject to PRC income tax.

 

Under the New Tax Law, if an enterprise incorporated outside the PRC has its “actual management” located within the PRC, such enterprise may be recognized as a PRC tax resident enterprise and be subject to the unified enterprise income tax rate of 25% on its worldwide income. Since most of our management is currently located in the PRC, we may be subject to PRC income tax at the rate of 25% on our worldwide income. According to the New Tax Law, dividends received by a qualified PRC tax resident enterprise from another qualified PRC tax resident enterprise are exempted from enterprise income tax. However, given the short history of the New Tax Law, it remains unclear what the detailed qualification requirements for such exemption are and whether dividends declared and paid by Fujian Xiniya to Xiniya Hong Kong will be exempted from enterprise income tax. Our financial performance will be adversely affected if such dividends are subject to PRC income tax.

 

Dividends from Fujian Xiniya and dividends on our ADSs or ordinary shares and gains on the sales of our ADSs or ordinary shares may be subject to PRC withholding taxes.

 

We are a Cayman Islands holding company and all of our income is ultimately derived from dividends that are paid by our subsidiary in the PRC. The prior tax regime specifically exempted withholding taxes on dividend payments from our PRC subsidiary to foreign investors. However, under the New Tax Law and its implementation rules, dividends payable to foreign enterprise investors that are non-resident enterprises that do not have an establishment or place of business in the PRC, or that have such establishment or place of business but the relevant income is not effectively connected with the establishment or place are subject to a 10% withholding tax, which may be reduced if a foreign enterprise investor is eligible for the benefits of a tax treaty with the PRC that provides for a different withholding arrangement. Pursuant to a tax arrangement between the PRC and Hong Kong, companies incorporated in Hong Kong may be subject to withholding taxes at a rate of 5% on dividends they receive from their PRC subsidiaries of which they directly hold at least 25% equity interests. As dividends from our PRC subsidiary will be paid to us through Xiniya Hong Kong, our Hong Kong subsidiary that owns 100% equity interests in our PRC subsidiary, those dividends may be subject to a withholding tax at the rate of 5%. However, on October 27, 2009, the State Administration of Taxation, or the SAT, promulgated the Circular on How to Understand and Recognize the “Beneficial Owner” in Tax Treaties, or Circular 601. Circular 601 clarifies that a beneficial owner is a person having actual operations and this person could be an individual, a company or any other entity. Circular 601 expressly excludes a “conduit company” that is established for the purposes of tax avoidance and dividend transfers and is not engaged in actual operations such as manufacturing, sales and management, from being a beneficial owner. It is still unclear how Circular 601 is being implemented in practice by the SAT or its local counterparts. If Xiniya Hong Kong is not deemed to be a beneficial owner of Fujian Xiniya, those dividends may be subject to withholding tax at the rate of 10% instead of 5%.

 

Moreover, under the New Tax Law and its implementation rules, as discussed above, we may in the future be treated as a PRC tax resident enterprise by the PRC taxation authorities. In that case, dividends on our ADSs and ordinary shares and capital gains from sales of our ADSs and ordinary shares realized by foreign shareholders may be regarded as income from “sources within the PRC” and may be subject to a 10% withholding tax, subject to any reduction by an applicable tax treaty. If foreign shareholders are required to pay PRC withholding tax on dividends on our ADSs or ordinary shares or capital gains from any sales of our ADSs or ordinary shares, the value of the investment in our ADSs may be materially adversely affected.

It may be difficult to effect service of process on, or to enforce any judgments obtained outside the PRC against, our directors or our senior management members who reside in the PRC.

 

Substantially all of our operating assets, officers and directors are located in the PRC. Accordingly, it may not be possible for investors to effect service of process upon these persons or to enforce against them court judgments obtained outside of the PRC, as the PRC does not have treaties providing for the reciprocal recognition and enforcement of judgments awarded by courts in many developed countries, including the United States and the Cayman Islands. Hence, the recognition and enforcement in the PRC of judgments issued by a court in any of these jurisdictions in relation to any matter not subject to a binding arbitration agreement may be difficult or even impossible.

 

The PRC legal system has inherent uncertainties regarding the interpretation and enforcement of PRC laws and regulations which could limit the legal protections available to investors.

 

Substantially all of our operations are conducted in the PRC. The PRC legal system is a civil law system based on written statutes, and prior court decisions can only be cited as reference and have almost no precedential value. Since 1979, the PRC government has been developing a comprehensive system of laws, rules and regulations in relation to economic matters, such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because of the limited volume of published cases and their non-binding nature, the interpretation and enforcement of these laws, rules and regulations involve some degree of uncertainty, which may lead to additional restrictions and uncertainty for our business and uncertainty with respect to the outcome of any legal action investors may take against us in the PRC. In addition, we cannot predict the effect of future developments in the PRC legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws. Any changes to such laws and regulations may materially increase our costs and regulatory exposure in complying with them.

 

Any recurrence of severe acute respiratory syndrome, or SARS, pandemic avian influenza or an increase in the severity of H1N1 influenza or any other widespread public health problem could materially adversely affect our business and results of operations.

 

Our business could be adversely affected by the effects of SARS, pandemic avian flu, H1N1 influenza or other epidemics or outbreaks. China reported a number of cases of SARS in 2004. Since 2005, there have been reports of occurrences of avian flu in various parts of China, including a few confirmed human cases. In 2009 and 2010, China and other countries and regions have reported a number of occurrences of H1N1 influenza. Any prolonged recurrence of SARS, avian flu, H1N1 influenza or any other adverse public health developments in China may have a material adverse effect on our business operations, because such incidents could result in quarantines or closures of our offices, manufacturing facilities and retail outlets travel and transportation restrictions, import and export restrictions and a general slowdown in the PRC economy. In addition, the World Health Organization and the PRC government may recommend or impose other measures that could cause significant interruption to our business operations. Any of the foregoing events or other unforeseen consequences of public health problems could materially adversely affect our business, financial condition and results of operations.

 

Risks Relating to This Offering

 

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

 

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have applied for the listing of our ADSs on the New York Stock Exchange. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially adversely affected.

The initial public offering price of our ADSs is determined by negotiations between us and the underwriters and may bear no relationship to the market price of our ADSs after this initial public offering. An active trading market for our ADSs may not develop and the market price of our ADSs may decline below the initial public offering price.

 

The liquidity, trading volume and trading price of our ADSs may be volatile.

 

The market price of our ADSs is likely to be highly volatile and could fluctuate widely due to factors beyond our control. This may happen because of, among other reasons, actual or anticipated fluctuations in our or our competitors’ operating results, announcements by us or our competitors of new products, capacity changes, significant contracts, acquisitions, strategic alliances or strategic investments, our and our competitors’ growth rates, the financial market and general economic conditions, changes in stock market analyst recommendations regarding us, our competitors or the men’s apparel industry generally, lack of analyst coverage of our ADSs, conditions in our industry in the PRC, additions or departures of key personnel, release of lock-up or other transfer restrictions on our outstanding ordinary shares or sales of additional ADSs, potential litigation or regulatory investigations, fluctuations in market prices for our products or the costs of raw materials and changes in accounting principles. Any such developments may result in large and sudden changes in the volume and price at which our ADSs will be traded. In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also have a material adverse effect on the market price of our ADSs. As a result of these factors, you may not be able to resell our ADSs above the initial public offering price and you may suffer losses on your investment.

 

Prior dividend distributions are not an indication of our future dividend policy.

 

Fujian Xiniya, our wholly owned subsidiary in China, declared a dividend of approximately RMB38.6 million, RMB62.3 million and RMB113.3 million with respect to its reserves for the years ended December 31, 2006, 2007 and 2008, respectively. See “Our Corporate History and Structure.” All declared dividends have been fully settled. The sources of funding for payment of such dividends are its operating cash flow.

 

The foregoing dividend distributions were made prior to this offering and we have not declared any dividend distribution since the establishment of our company. Historical dividend distributions are not indicative of our future distribution policy and we give no assurance that dividends of similar amounts or at similar rates will be paid in the future. Any future dividend declaration and distribution by us will be at the discretion of our directors and will depend on our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that our directors deem relevant. Any declaration and payment as well as the amount of dividends will also be subject to our constitutional documents and the Cayman Islands Companies Law, including (where required) the approval of shareholders. In addition, our future dividend payments will depend upon the availability of dividends received from our subsidiary in the PRC, which may be subject to PRC withholding tax as described in “—Dividends from Fujian Xiniya and dividends on our ADSs or ordinary shares and gains on the sales of our ADSs or ordinary shares may be subject to PRC withholding taxes.” For further details of the dividend policy of our company, see “Dividend Policy.”

 

The interests of Mr. Qiming Xu, or the controlling shareholder, may not always coincide with the interests of us and our other shareholders, and the controlling shareholders may exert significant control or substantial influence over us and may take actions that are not in, or may conflict with, public shareholders’ best interests.

 

The controlling shareholder will control the exercise of voting rights of 57.7% of the shares eligible to vote in the general meeting of our company immediately after the completion of this initial public offering. Therefore, the controlling shareholder will continue to be able to exercise controlling influence over our

business through his ability to control actions which do not require the approval of independent shareholders. Subject to our company’s memorandum and articles as well as the Cayman Islands Companies Law, the controlling shareholder will also be able to control the election of our directors, alter our share capital, make amendments to our memorandum and articles, determine the timing and amount of our dividends, if any, and pass resolutions to acquire or merge with another company not connected with the controlling shareholder. The controlling shareholders may cause us to take actions that are not in, or may conflict with, the interests of us or the public shareholders. In the case where the interests of the controlling shareholder conflict with those of our other shareholders, or if the controlling shareholder chooses to cause us to pursue objectives that would conflict with the interests of our other shareholders, such other shareholders could be left in a disadvantageous position by such actions caused by the controlling shareholder and the price of our ADSs could be adversely affected.

 

Because the initial public offering price of our ADSs is substantially higher than our net tangible book value per share, you will incur immediate and substantial dilution.

 

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of approximately $7.77 per ADS, representing the difference between our net tangible book value per ADS as of September 30, 2010, after giving effect to this offering and the assumed initial public offering price of $10.00 per ADS, the mid-point of the estimated price range set forth on the cover of this prospectus. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of outstanding or to-be-issued share options. See “Dilution” for a more complete description of how the value of your investment in our ADSs will be diluted upon completion of this offering.

 

Substantial future sales or perceived sales of our ADSs in the public market could cause the price of our ADSs to decline.

 

Sales of our ADSs or ordinary shares in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 232,000,000 ordinary shares outstanding, including 32,000,000 ordinary shares represented by 8,000,000 ADSs. All ADSs sold in this offering will be freely transferable without restriction or additional registration under the United States Securities Act of 1933, as amended, or the Securities Act. The remaining ordinary shares outstanding after this offering will be available for sale, upon the expiration of the 180-day lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 under the Securities Act. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the lead underwriter. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

 

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

 

We have adopted our amended and restated articles of association, which will become effective immediately upon completion of this offering. Our new articles of association limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation

preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially adversely affected. See “Description of Share Capital—Anti-takeover Provisions in the Amended and Restated Memorandum and Articles of Association.”

 

Certain actions require the approval of a supermajority of at least two-thirds of our board of directors which, among other things, would allow our non-independent directors to block a variety of actions or transactions, such as a merger, asset sale or other change of control, even if all of our independent directors unanimously voted in favor of such action, thereby further depriving our shareholders of an opportunity to sell their shares at a premium.

 

Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise those rights.

 

Holders of ADSs do not have the same rights as our shareholders and may only exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under our amended and restated articles of association, minimum notice period required to convene a general meeting is seven days. When a general meeting is convened, you may not receive sufficient notice of a shareholders’ meeting to permit you to withdraw your ordinary shares to allow you to cast your vote with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to you in a timely manner, but you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to vote and you may lack recourse if your ADSs are not voted as you requested. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

 

The depositary for our ADSs will give us a discretionary proxy to vote our ordinary shares underlying your ADSs if you do not vote at shareholders’ meetings, except in limited circumstances, which could adversely affect your interests.

 

Under the deposit agreement for the ADSs, if you do not vote, the depositary will give us a discretionary proxy to vote our ordinary shares underlying your ADSs at shareholders’ meetings unless:

 

 

The effect of this discretionary proxy is that if you do not vote at shareholders’ meetings, you cannot prevent our ordinary shares underlying your ADSs from being voted, except under the circumstances described above. This may make it more difficult for ADS holders to influence the management of our company. Holders of our ordinary shares are not subject to this discretionary proxy.

 

You may be subject to limitations on transfers of your ADSs.

 

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems necessary or advisable in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the

depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

 

Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings and you may not receive distributions with respect to the underlying ordinary shares if it is impractical to make them available to you.

 

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

 

In addition, the depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property and you will not receive such distribution.

 

We are a Cayman Islands company and, because judicial precedent regarding the rights of shareholders is more limited under Cayman Islands law than under U.S. law, you may have less protection of your shareholder rights than you would under U.S. law.

 

Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Law of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, the rights of minority shareholders to institute actions, and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the Companies Law and the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, the latter of which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in the United States. In particular, Cayman Islands has a less developed body of securities laws as compared to the United States. Some states in the U.S., such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

 

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

 

Certain judgments obtained against us by our shareholders may not be enforceable.

 

We are a Cayman Islands company and all of our assets are located outside the United States. Substantially all of our current operations are conducted in the PRC. In addition, most of our directors and

officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the United States federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the PRC may render you unable to enforce a judgment against our assets or the assets of our directors and officers. For more information regarding the relevant laws of the Cayman Islands and the PRC, see “Enforceability of Civil Liabilities.”

 

We will incur increased costs as a result of being a public company.

 

As a public company, we will incur a significantly higher level of legal, accounting and other expenses than we did as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the United States Securities and Exchange Commission, or the SEC, and the New York Stock Exchange, have required changes in corporate governance practices of public companies. We expect these new rules and regulations to increase our legal, accounting and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

You should not rely on any information contained in press articles or other media regarding us or this offering.

 

Prior to the publication of this prospectus, there has been press and media coverage regarding us and this initial public offering which included certain information about our company that does not appear in this prospectus. We have not authorized the disclosure of any such information in the press or media and do not accept any responsibility for any such press or media coverage or the accuracy or completeness of any such information. We make no representation as to the appropriateness, accuracy, completeness or reliability of any such information or publication. We disclaim all responsibilities and liabilities for any information appearing in publications other than this prospectus. Prospective investors should not rely on any such information and should only rely on information included in this prospectus in making any decision as to whether to purchase the ADSs.

 

We may be or become classified as a passive foreign investment company, which could result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs or ordinary shares.

 

A non-U.S. corporation will be considered a passive foreign investment company, or PFIC, for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income. We do not expect that we will be a PFIC for our current taxable year ending December 31, 2010. However, a separate determination must be made at the close of each taxable year as to whether we are a PFIC for such year. In addition, our PFIC status will depend upon the composition of our income and assets from time to time, including the value of our ADSs at any such time. Our PFIC status will also depend, in part, on how, and how quickly, we spend the cash raised in this offering. Accordingly, there can be no assurance that we will not be a PFIC for our current taxable year or any future taxable year. If we were treated as a PFIC for any taxable year during which a U.S. person holds our ADSs or ordinary shares, certain adverse U.S. federal income tax consequences and additional reporting requirements could apply to that U.S. person. See “Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

 

This prospectus contains forward-looking statements that relate to our current expectations and views of future events. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Our Business.” These statements relate to events that involve known and unknown risks, uncertainties and other factors, including those listed under “Risk Factors,” which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

 

In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include, among other things, statements relating to:

 

 

This prospectus also contains data relating to the business casual men’s apparel market worldwide and in China. These market data, including market data from Frost & Sullivan, include projections that are based on a number of assumptions. The market may not grow at the rates projected by the market data, or at all. The failure of the market to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. In addition, the rapidly changing nature of the business casual men’s apparel market subjects any projections or estimates relating to the growth prospects or future condition of our market to significant uncertainties. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.

 

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

We estimate that we will receive net proceeds from this offering of approximately $72.2 million, after deducting the underwriting discounts and commissions and estimated aggregate offering expenses payable by us, and assuming an initial public offering price of $10.00 per ADS, the midpoint of the estimated range of the initial public offering price as set forth on the cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per ADS would increase (decrease) the net proceeds to us from this offering by $7.4 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no other change to the number of ADSs offered by us as set forth on the cover page of this prospectus.

 

We intend to use the net proceeds we receive from this offering for the following purposes:

 

 

 

 

 

 

 

 

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest the net proceeds to us in short-term bank deposits, direct or guaranteed obligations of the U.S. government or other short-term money market instruments.

 

We will not receive any of the proceeds from the sale of ADSs by the selling shareholders if the underwriters exercise the overallotment option.

 

The following table sets forth our capitalization, as of September 30, 2010:

 

 

 

The information on an as adjusted basis below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

You should read this table together with our financial statements and the related notes included elsewhere in this prospectus and the information under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

 

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results from the fact that the initial public offering price per ordinary share of our ADSs is substantially in excess of the book value per ordinary share attributable to the existing shareholders for our presently outstanding ordinary shares. Our net tangible book value as of September 30, 2010 was approximately RMB383.9 million ($57.4 million), or $0.29 per ordinary share and $1.15 per ADS. Net tangible book value represents the amount of our total tangible assets, less the amount of our total liabilities.

 

After giving effect to our sale of the ADSs offered in this offering, assuming an initial public offering price of $10.00 per ADS, the midpoint of the estimated range of the initial public offering price as set forth on the cover page of this prospectus, and after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted net tangible book value as of September 30, 2010, would have increased to $129.6 million or $0.56 per ordinary share and $2.23 per ADS. This represents an immediate increase in net tangible book value of $0.27 per ordinary share and $1.08 per ADS, to the existing shareholders and an immediate dilution in net tangible book value of $1.94 per ordinary share and $7.77 per ADS, to investors purchasing ADSs in this offering.

 

The following table illustrates such dilution on a per ordinary share and per ADS basis:

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per ADS would increase (decrease) our adjusted net tangible book value after giving effect to the offering by $7.4 million, the adjusted net tangible book value per ordinary share and per ADS after giving effect to this offering by $0.03 per ordinary share and $0.13 per ADS and the dilution in adjusted net tangible book value per ordinary share and per ADS to new investors in this offering by $0.22 per ordinary share and $0.87 per ADS, assuming no change to the number of ADSs offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and other expenses of the offering payable by us. The adjusted information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

The following table summarizes, on an as adjusted basis, as of September 30, 2010, the differences between existing shareholders and the new investors with respect to the number of ordinary shares (in the form of ADSs or ordinary shares) purchased from us, the total consideration paid and the average price per ordinary share paid before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The information in the following table is illustrative only and the total consideration paid and the average price per ordinary share is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per ADS would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and the average price per ADS paid by all shareholders by $8.0 million, $8.0 million and $0.14, respectively, assuming no change in the number of ADSs sold by us as set forth on the cover page of this prospectus, without deducting underwriting discounts and commissions and other expenses of the offering payable by us.

 

Fujian Xiniya, our wholly owned subsidiary in China, was incorporated on October 18, 2005 and it declared a dividend of approximately RMB38.6 million, RMB62.3 million, and RMB113.3 million with respect to its reserves as of December 31, 2006, 2007 and 2008, respectively, to its then sole shareholder Mr. Hing Tuen Wong, who transferred such dividends to Mr. Qiming Xu, our founder, chairman and chief executive officer. Mr. Xu exercised effective control over Fujian Xiniya through contractual agreements entered into with Mr. Hing Tuen Wong. All declared dividends have been fully settled. Mr. Xu subsequently distributed these dividends to the three investors who lent Mr. Xu HK$10 million for the registered capital of Fujian Xiniya. See “Our Corporate History and Structure.” The source of funding for payment of such dividends was Fujian Xiniya’s operating cash flow.

 

The foregoing dividend distributions were made prior to this offering and we have not declared any dividend distribution to our shareholders since the establishment of China Xiniya. Historical dividend distributions are not indicative of our future distribution policy and we give no assurance that dividends of similar amounts or at similar rates will be paid in the future.

 

Our board of directors has complete discretion on whether to pay dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

We are a holding company, and we rely on dividends paid by our operating subsidiary in China for our cash needs, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur and pay our operating expenses. The payment of dividends in China is subject to limitations. Regulations in the PRC currently permit payment of dividends by our PRC subsidiary, Fujian Xiniya, only out of its accumulated profits as determined in accordance with accounting standards and regulations in China. Fujian Xiniya is required to set aside at least 10% of its after-tax profits each year to contribute to its reserve fund until the accumulated balance of the reserve fund reaches 50% of its registered capital. Fujian Xiniya is also required to reserve a portion of its after-tax profits to its employee welfare and bonus fund, the amount of which is determined by its board of directors. These funds are not distributable in cash dividends.

 

Effective January 1, 2009, the Federal Reserve Bank of New York discontinued publication of foreign exchange rates certified for customs purposes. Effective January 5, 2009, the Federal Reserve Board of the United States reinstituted the publication of the daily exchange rate data in a weekly version of the H.10 release. The certified exchange rate for RMB published by the Federal Reserve Board of the United States was RMB6.6705 to $1.00 on October 29, 2010.

 

The following table sets forth information for the RMB concerning (i) the noon buying rate in New York City for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York for the period from January 1, 2004 to December 31, 2008 and (ii) the certified exchange rates as published by the Federal Reserve Board of the United States for the period subsequent to and including January 5, 2009, expressed in RMB per U.S. dollar, for the periods indicated:

 

 

We publish our financial statements in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the rate as certified by the Federal Reserve Board of the United States, on September 30, 2010, which was RMB6.6905 to $1.00. No representation is made that the Renminbi amounts referred to in this prospectus could have been or could be converted into U.S. dollars at any particular rate or at all.

 

We are incorporated in the Cayman Islands to take advantage of certain benefits associated with being a Cayman Islands exempted company, such as:

 

 

However, certain disadvantages accompany incorporation in the Cayman Islands. These disadvantages include:

 

 

Our constitutional documents do not contain provisions requiring that disputes, including those arising under the securities laws of the United States, between us, our officers, directors and shareholders, be arbitrated.

 

Substantially all of our current operations are conducted in China, and substantially all of our assets are located in China. A majority of our directors and officers are nationals or residents of jurisdictions other than the United States and a substantial portion of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us or such persons, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States.

 

We have appointed Corporation Service Company as our agent to receive service of process with respect to any action brought against us in the United States District Court for the Southern District of New York under the federal securities laws of the United States or of any state in the United States or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

 

Maples and Calder, our counsel as to Cayman Islands law, and Beijing Mingtai Law Firm, our counsel as to PRC law, have advised us, respectively, that there is uncertainty as to whether the courts of the Cayman Islands and the PRC, respectively, would:

 

 

Maples and Calder has further advised us that a final and conclusive judgment in the federal or state courts of the United States under which a sum of money is payable, other than a sum payable in respect of taxes, fines, penalties or similar charges and which is neither obtained in a manner nor is of a kind the enforcement of which is against natural justice or the public policy of the Cayman Islands, may be subject to enforcement proceedings as a debt in the courts of the Cayman Islands under the common law doctrine of obligation.

 

Beijing Mingtai Law Firm has advised us further that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between the PRC and the country where the judgment is made or on reciprocity between jurisdictions.

 

Fujian Xiniya

 

Our operating subsidiary in China, Fujian Xiniya, was established as a wholly foreign-owned enterprise on October 18, 2005 with a registered capital of HK$10.0 million. Mr. Hing Tuen Wong, a resident of Hong Kong and friend of our founder, chairman and chief executive officer, Mr. Qiming Xu, was registered to be the sole shareholder of Fujian Xiniya. The business scope of Fujian Xiniya includes the manufacturing of garments, knitted fabrics, knitted belts and woven labels and the retail and wholesale of garments. Prior to the establishment of Fujian Xiniya, we operated our business through Shishi Xiniya, a company established in July 2000 that was controlled by Mr. Xu and his father. Upon the establishment of Fujian Xiniya, Shishi Xiniya ceased to conduct any business relating to the manufacturing and sale of garments and Mr. Xu and his father disposed of their equity interests in Shishi Xiniya through two transactions in 2008 and 2009. As of January 2009, all the equity interests of Shishi Xiniya were owned by an independent third party.

 

Mr. Wong and Mr. Xu had previously entered into written contractual agreements in January 2005 and September 2005. These written agreements, together with the oral agreement between Mr. Wong and Mr. Xu at that time, provided Mr. Xu with effective control of Fujian Xiniya. Accordingly, Mr. Xu was the controlling person and beneficial owner of the economic interests of Fujian Xiniya. As a result of these agreements, Mr. Xu subsequently became a principal shareholder of our company through the arrangements described below. In addition, under the agreement Mr. Wong and Mr. Xu entered into in January 2005, Mr. Xu was required to cause Shishi Xiniya to license the Xiniya trademark to Fujian Xiniya for nil consideration in the first two years and 1% of Fujian Xiniya’s revenues for the following year.

 

Mr. Xu contributed HK$10.0 million to Fujian Xiniya as its registered capital. In connection with the capital contribution, Mr. Xu entered into a loan agreement with three individuals, Mr. Tung Kwo Li, Mr. Xiaolong Shi and Mr. Lun Kai Tung, all of whom are residents of Hong Kong (Mr. Li, Mr. Shi and Mr. Dong are collectively referred to as the “Investors”) in December 2005, under which Mr. Xu borrowed HK$10.0 million from the Investors. In return, in the event that Fujian Xiniya had incurred a loss in any of 2006, 2007 and 2008, Mr. Xu was required to return all of the capital paid by the Investors together with the accrued interest at an annual interest rate of 10%. In the event that Fujian Xiniya achieved aggregate profits of at least HK$100.0 million during those three years, Mr. Xu was required to cause an aggregate of 20% equity interest in Fujian Xiniya to be transferred to the Investors or their affiliates. In the event that Fujian Xiniya achieved aggregate profits of less than HK$100.0 million during these three years, the Investors had the right to require Mr. Xu to either return their capital with the accrued interest or cause an aggregate of 20% equity interest in Fujian Xiniya to be transferred to them or their affiliates. Fujian Xiniya achieved aggregate profits of more than HK$100.0 million in 2006, 2007 and 2008. As a result, the Investors, by a notification to Mr. Xu in May 2010, required Mr. Xu to transfer an aggregate of 20% equity interest in China Xiniya (in lieu of an equity interest in Fujian Xiniya) to the Investors and two entities designated by the Investors for no consideration. To satisfy the terms of this agreement, Mr. Xu has transferred an aggregate of 20% interest in China Xiniya to the Investors and the entities designated by the Investors in July 2010.

 

Xiniya Hong Kong

 

Xiniya Hong Kong was incorporated in Hong Kong on January 16, 2009 as a limited liability company with an authorized share capital of 10,000 ordinary shares of HK$1.00 each and an issued share capital of 100 ordinary shares of HK$1.00 each. Mr. Hing Tuen Wong was the sole shareholder and sole director of Xiniya Hong Kong at the time of its establishment and he held the equity interests in Xiniya Hong Kong on behalf of Mr. Qiming Xu. According to a written agreement entered into in January 2009, as well as the oral agreement between Mr. Wong and Mr. Xu at that time, Mr. Xu was the controlling person and beneficial owner of the economic interests of Xiniya Hong Kong. On February 9, 2009, Xiniya Hong Kong entered into an agreement to acquire a 100% equity interest in Fujian Xiniya from Mr. Wong for consideration of HK$10.0 million. In January 2010, the Fujian Provincial Government approved this transaction, Xiniya Hong

Kong became the sole shareholder of Fujian Xiniya and a new business license was issued to Fujian Xiniya. Mr. Wong subsequently waived his right to claim the HK$10.0 million in consideration from Xiniya Hong Kong on July 3, 2010. On April 28, 2010, Mr. Xu was appointed as a director of Xiniya Hong Kong and, effective from July 14, 2010, Mr. Wong resigned as a director of Xiniya Hong Kong.

 

China Xiniya Fashion Limited

 

Primarily for the purpose of facilitating this offering, Mr. Xu, as the sole shareholder, incorporated China Xiniya in the Cayman Islands as an exempted limited liability company on June 24, 2010. On July 13, 2010, China Xiniya acquired a 100% equity interest in Xiniya Hong Kong from Mr. Hing Tuen Wong for consideration of HK$100.0.

 

The following diagram illustrates our corporate structure immediately upon the completion of this offering:

 

 

 

The following selected statement of comprehensive income data for the years ended December 31, 2007, 2008 and 2009, and the selected statement of financial position data as of December 31, 2007, 2008 and 2009 are derived from the audited financial statements included elsewhere in this prospectus. These financial statements have been audited by GHP Horwath P.C., an independent registered public accounting firm. The selected statement of comprehensive income data for the nine months ended September 30, 2009 and 2010 and the selected statement of financial data as of September 30, 2010 are derived from the unaudited financial statements included elsewhere in this prospectus. The following selected statement of comprehensive income data for the period from October 18, 2005 to December 31, 2005 and for the year ended December 31, 2006 and the selected statement of financial position data as of December 31, 2005 and 2006 have been derived from unaudited financial statements, which are not included in this prospectus. The unaudited financial information includes all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial position and operating results for the periods presented. You should read the selected financial data in conjunction with those financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. These financial statements are prepared and presented in accordance with IFRS as issued by the IASB. Historical results do not necessarily indicate results expected for any future periods.

 

We have omitted the selected financial data for the period from January 1, 2005 to October 18, 2005, as such information is not available on a basis that is consistent with the financial information for period from October 18, 2005 to December 31, 2005 and the years ended December 31, 2006, 2007, 2008 and 2009, and cannot be provided on a basis consistent with IFRS without unreasonable effort or expense. Moreover, such information would be of limited relevance to investors given the significant expansion in our business from 2006 to 2009.

 

 

 

 

 

 

 

 

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Financial Data” and our financial statements and the related notes included elsewhere in this prospectus. In addition to historical information, the following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We are a leading provider of men’s business casual apparel in China. We design and manufacture men’s business casual and business formal apparel and accessories, which we market under the Xiniya brand and sell through our distribution network that includes 26 distributors and 24 department store chains. Our products are sold to consumers at over 1,300 authorized retail outlets owned and managed by third parties located in 21 provinces, five autonomous regions and four municipalities in China. According to Frost & Sullivan, we ranked fifth in terms of retail sales revenues for the year ended December 31, 2009 within the business casual men’s apparel market in China. We focus on creating products that feature a high standard of style, design, fabrics and craftsmanship. Our authorized retail network, which is owned and managed by third parties, focuses on second- and lower-tier cities, where increasing affluence has led to an improvement in living standards and most international men’s apparel brands do not have a significant presence. Our target consumers are male working professionals in China between the ages of 25 and 45 who seek fashionable clothing to suit their working and lifestyle needs. We operate our business through Fujian Xiniya, our wholly owned subsidiary in China.

 

We currently derive all of our revenues from the sale of men’s casual and business apparel products, including business casual collections comprising jackets, pants, shirts, T-shirts, sweaters and overcoats, business formal collections and accessories. All of our products are sold to customers in China and are sold under our Xiniya brand. We sell the majority of our products to our distributors who then resell our products to retail customers through retail outlets managed or authorized by them. We also sell a significant portion of our products to large department store chains in our target geographies. As of September 30, 2010, our products were sold at 1,365 authorized retail outlets, including 63 stores managed by our 26 distributors, 976 stores managed by retailers authorized by our distributors, 181 department store concessions managed by 35 department store chains authorized by our distributors, and 145 department store concessions managed by our 24 department store chain clients. The department store concessions are discrete areas within department stores exclusively devoted to displaying and selling our products. The retail outlets owned and managed by third parties within our authorized retail network are designed by us for a uniform look and feel that fits our brand image, with in-store displays that accentuate the quality and style of our products. All of these retail outlets within our authorized retail network, including department store concessions, are required to sell our products exclusively. We also have one flagship store owned and managed by us. In 2007, 2008, 2009 and the nine months ended September 30, 2010, we sold approximately 2,398,000, 3,791,000, 5,104,000 and 4,291,000 units of garments, respectively, among which approximately 36.7%, 34.7%, 26.4% and 4.4%, respectively, were manufactured by us at our own production facility in Jinjiang City, Fujian Province. We outsourced the production of the rest of our products to PRC-based third party contract manufacturers.

 

Our revenues increased from RMB251.9 million in 2007 to RMB479.7 million in 2008, and further to RMB672.1 million ($100.5 million) in 2009, representing a CAGR of 63.3%; and our net profit increased from RMB69.4 million in 2007 to RMB126.0 million in 2008, and further to RMB194.3 million ($29.0 million) in 2009, representing a CAGR of 67.3%. In the nine months ended September 30, 2010, our revenues were RMB565.7 million ($84.6 million) and our net profit was RMB155.5 million ($23.2 million), representing an increase of 36.2% and 39.4%, respectively, from the nine months ended September 30, 2009.

Factors Affecting our Financial Performance and Results of Operations

 

We believe the most significant factors affecting our financial performance are:

 

 

Economic Growth, Level of Per Capita Disposable Income and Consumer Spending Patterns in the PRC

 

We conduct all of our operations in the PRC and our financial results may be materially affected by changes in economic conditions, level of per capita disposable income and consumer spending patterns in the PRC. Economic growth in China contributes to the growth in disposable income and consumer spending, which is a critical driver for all consumer products, including ours. According to NBSC, per capita annual disposable income of urban households, which represent the primary consumers of our products, grew from approximately RMB10,493 in 2005 to RMB17,175 in 2009, representing a CAGR of 13.1%. We believe that consumer purchasing power typically increases as a result of the increase in disposable income. In addition, the rapid development of the PRC economy increases opportunities for business and leisure travel in China, which creates significant demand for leisure and business menswear products. As the middle class in China is rapidly expanding along with the growth of the PRC economy, we believe both the number of our target consumers and their spending power will increase accordingly, which will positively contribute to our results of operations. On the other hand, any slowdown or decline in the PRC economy may adversely affect consumer demand in general and the demand for our products and therefore negatively affect our financial performance and results of operations. See “Risk Factors—Risks Relating to Conducting Business in the PRC—Fluctuations in consumer spending caused by changes in macroeconomic conditions in the PRC may significantly affect our business and financial performance.” In addition, any change in consumption patterns in the PRC or a less than expected increase in consumer spending for men’s leisure and business apparel could materially adversely affect our financial condition and results of operations.

 

Our Relationships with, and the Business Performance of, Our Distributors, Their Authorized Retailers and the Department Store Chains That Sell Our Products

 

We sell the majority of our products to our distributors who then resell our products to end consumers through retail outlets managed or authorized by them. We also sell a significant portion of our products to large department store chains in our target geographies. Our ability to achieve higher revenues through increasing sales volume and the average unit prices of our products is directly affected by the performance of our distributors, their retail outlets and the department store chains that sell our products. As most of our distributors are exclusively in charge of the sales of our products in a particular region, we may lose our market share in an entire region if any of our distributors breaches its distributorship agreement with us, decides not to renew its distributorship agreement with us or becomes bankrupt. We motivate our distributors by providing our top 20 performers in terms of total purchase value every year sales incentive rebates of a fixed percentage of their respective purchase values from us. Such rebates are settled by offsetting the accounts receivable from each of these top performers at the end of the year. In the years ended December 31, 2007,

2008 and 2009, we provided rebates to our top 20 distributors in an aggregate amount of RMB9.0 million, RMB14.3 million and RMB18.6 million ($2.8 million), respectively. We accrued RMB21.7 million ($3.2 million) of rebates for sales made by our top 20 distributors during the nine months ended September 30, 2010.

 

We are in the process of restructuring our authorized retail outlet network by transferring the department store chains as authorized retailers under the management and supervision of our distributors in charge of their respective jurisdictions. All of the department store chains will eventually purchase our products from our distributors instead of directly from us. We believe such change will help to eliminate competition within our distribution network and enhance the overall performance of this network as well as our customer management efficiency. We believe that the department store chains will benefit from the restructuring by receiving stronger support from the distributors. We intend to complete the restructuring of our distribution network by the end of 2010. Once such restructuring of our distribution network is completed, our reliance on distributors will increase. Our five largest distributors accounted for an aggregate of 30.4%, 24.3%, 19.7% and 31.2% of our revenues for the years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively. We expect the restructuring to have a positive impact on our revenue growth in the long term by enhancing the overall performance of our sales network. However, this positive impact could be partially offset by the increase in the total amount of our sales rebates offered as a result of the increased purchase value attributable to the department store chains newly included in the respective jurisdictions of our distributors. Based on the historical revenues generated from sales to the department store chains, the additional rebates would have represented less than 1% of our total revenues, and we expect such impact to continue to be minimal.

 

As we do not have direct contractual relationships with the operators of the retail outlets, we rely on the distributors to manage and supervise the operation of the retailers and on the department store chains to manage the retail concessions. These retail outlets have a significant influence on consumers’ perception of our products. Any deviation by the retailers from our retail policies may adversely impact the popularity of our products and our business reputation. In addition, we rely on our distributors and the department store chains to expand the sales networks of our products by opening more retail outlets themselves or developing more third-party retailers.

 

Therefore, the achievement of our business goals and the expansion of our operations are dependent on our relationship with, our ability to supervise and manage, and the business performance of, our distributors, their retail networks and the department store chains that sell our products. If we cannot maintain and strengthen our relationship with the distributors and department store chains, or if a number of our distributors or the department store chains that sell our products experience difficulties with their operations, our financial performance and results of operations may be materially adversely affected. See also “Risk Factors—Risks Relating to Our Business and Our Industry—We rely on distributors and department store chains to distribute our products to end consumers, to expand our authorized retail network and to achieve our growth target. The loss of, or significant decrease in, sales to our distributors or the department store chains could have a material adverse effect on our financial condition and results of operations,” “Risk Factors—Risks Relating to Our Business and Our Industry—A distributor’s failure to distribute our products to the authorized retail network under its jurisdiction could materially adversely affect the business of the authorized retailers of an entire geographic area, as well as our reputation, brand image and results of operations,” and “Risk Factors—Risks Relating to Our Business and Our Industry—Consumer sales of our products are conducted by distributors, authorized retailers and department store chains over whom we have limited control.”

 

Our Ability to Maintain and Enhance the Recognition of Our Xiniya Brand

 

We currently sell all our products under our Xiniya brand, from which we derive all of our revenues. Therefore, the strength of our Xiniya brand is a critical component of our success. We spent approximately RMB7.4 million, RMB11.4 million, RMB4.5 million ($0.7 million) and RMB2.8 million ($0.4 million) on our advertising and marketing activities for the years ended December 31, 2007 and 2008 and 2009 and the nine months ended September 30, 2010, respectively, as our distributors have assumed responsibility for the

marketing and promotion of our products. We also work closely with our distributors, authorized retailers and the department store chains in devising localized marketing strategies and campaigns that are partly subsidized by us through a sales incentive rebate program to the top 20 performers in terms of total purchase value from us every year. We plan to continue to work closely with our distributors, authorized retailers and the department store chains to promote our Xiniya brand as we expand our business. We expect our target consumers will become increasingly brand conscious as they are presented with more product options in the leisure and business menswear market. If we are unsuccessful in promoting our Xiniya brand or fail to maintain our brand position, market perception and consumer acceptance of our brand may be eroded, and our business, results of operations and prospects may be materially adversely affected. See “Risk Factors—Risks Relating to Our Business and Our Industry—We rely heavily on our Xiniya brand. Failure to successfully maintain or promote our brand may adversely affect our results of operations.”

 

Our Ability to Address the Needs and Preferences of our Target Consumers in a Timely Manner

 

Our target consumers are male working professionals between the ages of 25 and 45. The acceptance and popularity of our products among our target consumers are largely determined by our ability to satisfy their evolving needs for business and leisure travel, anticipate and reflect their rapidly changing fashion preferences in our products and price our products within an acceptable range. In this regard, we currently implement a policy to track the inventory levels of our distributors and department store chains by requiring them to provide sales reports on a weekly basis, mainly to gather information regarding the market acceptance of our products so as to reflect consumer preferences in the design of our products for the next season. Our failure to anticipate accurately and respond to market and fashion trends in a timely manner could result in our distributors, authorized retailers and the department store chains that sell our products experiencing lower sales volumes, lower selling prices and lower profits, which in turn could materially adversely affect our results of operations and prospects. See “Risk Factors—Risks Relating to Our Business and Our Industry—We may not be able to anticipate and respond in a timely manner to rapid changes in consumers’ tastes and preferences.”

 

Seasonality

 

Our industry has historically experienced seasonality, which we expect to continue. We typically achieve higher sales for our autumn and winter collections and experience lower sales for our spring and summer products due to seasonality of demand for business and leisure menswear and the differences in selling prices between our seasonal collections. As a result, our revenues, operating income and net profit have typically been higher during the third and fourth quarters than the rest of the year. In addition, extreme or unusual weather conditions, public holidays and the seasonality of consumer spending on menswear products may cause our results of operations to fluctuate. For example, a warm winter may affect the sale of our winter products, while a cool summer may affect the sale of our summer products. Therefore, any comparison of our operating results between interim and annual results may not be meaningful. See “Risk Factors—Risks Relating to Our Business and Our Industry—Our sales are subject to seasonality and weather conditions, which could cause our results of operations to fluctuate.”

 

We may not be able to compete effectively against competitors who may have greater financial resources, greater scale of production, superior product design, better brand recognition and a wider, more diversified and established retail network. To compete effectively and to maintain and increase our market share, we may be forced to, among other actions, reduce prices, provide more sales incentives to our distributors and department store chains and increase expenditures on advertising, which may in turn materially adversely affect our profit margins and other results of operations. See “Risk Factors—Risks Relating to Our Business and Our Industry—We operate in a very competitive market and the intense competition we face may result in a decline in our market share and lower profit margins.”

 

Our Relationships with, and the Performance of, our Contract Manufacturers

 

We currently engage contract manufacturers to manufacture substantially all of our products, including suits, wool sweaters and jeans, which are then sold by us to our distributors and the department store chains that sell our products. In 2007, 2008, 2009 and the nine months ended September 30, 2010, we had 46, 38, 47 and 50 contract manufacturers, respectively, and outsourced the production of approximately 61.7%, 65.3%, 76.4% and 98.5% of our products in terms of unit volume to PRC-based third party contract manufacturers, respectively. We ceased the operation of four of our production lines at our manufacturing facility in Jinjiang in January 2010 and, as a result, outsourced production as percentage of our total sales volume increased substantially in 2010. See “Risk Factors—Risks Relating to Our Business and Our Industry—Our operations could be materially adversely affected if we fail to effectively manage our relationships with, or lose the services of, our contract manufacturers.” As the cost of sales of outsourced production is generally higher than the cost of sales of our own production, our profit margin may be adversely affected as we outsource a larger portion of production to contract manufacturers in the future.

 

We believe that our outsourcing arrangements allow us to leverage the expertise and resources of contract manufacturers, and meet the increasing demand for our products during peak production seasons. However, we are also subject to risks as a result of such outsourcing arrangement. For example, if an contract manufacturer determines to end its business relationship with us or fails to provide the required number of products meeting our quality standards in a timely manner, we may be forced to default under our agreements with our distributors and department store chains, which could have an adverse effect on the sales of our products to end consumers at the retail outlets. Our reputation and brand name may also be adversely affected by possible violations of laws and regulations by our contract manufacturers. See “Risk Factors—Risks Relating to Our Business and Our Industry—Our operations could be materially adversely affected if we fail to effectively manage our relationships with, or lose the services of, our contract manufacturers.”

 

Taxation

 

The preferential tax treatments currently enjoyed by Fujian Xiniya will expire on December 31, 2010 and our tax expenses may increase significantly afterwards, which could have a material adverse effect on the growth of our net income. See “—Taxation—PRC Enterprise Income Tax and Dividend Withholding Tax.”

Description of Selected Income Statement Line Items

 

 

Revenues

 

Our revenues increased from RMB251.9 million in 2007 to RMB479.7 million in 2008, and further to RMB672.1 million ($100.5 million) in 2009, representing a CAGR of 63.3%, primarily due to the increase in the number of units of garments we sold and the increase in the average unit selling price of our products. Our revenues increased by 36.2% from RMB415.2 million in the nine months ended September 30, 2009 to RMB565.7 million ($84.6 million) in the nine months ended September 30, 2010. The following table sets forth our revenues, cost of sales, gross profit, gross profit margin, number of units sold and average unit selling price of our products for the periods indicated:

 

 

Breakdown of Revenues by Product Line

 

We currently derive all of our revenues from the sale of men’s casual and business apparel products, including business casual collections comprising jackets, pants, shirts, T-shirts, sweaters and overcoats, business formal collections and accessories. Our products feature progressive designs, high-tech fabrics and high quality craftsmanship that complement our sophisticated yet casual brand image.

 

The table below sets forth a breakdown of our revenues by product line for the periods indicated: