Excluded from tax evasion Summa suffers from "reliability" in joining dealers?

On the day before, the China Securities Regulatory Commission (CSRC) reviewed the initial public offering (IPO) application of Zhejiang Senma Garment Co., Ltd. (referred to as "Summa Apparel"). Reports emerged suggesting that the company was allegedly involved in a tax evasion scandal worth 3 billion yuan, prompting investigations by over a dozen tax authorities nationwide. In response, Summa Apparel's director, Zheng Hongwei, denied the allegations, calling them baseless. However, the claims have not been entirely dismissed. Zheng Hongwei told reporters that the initial IPO application had already been approved by the CSRC. He emphasized that the media's report about the alleged 3 billion yuan tax evasion was unfounded and did not align with common sense. According to him, if the claim were true, the company’s sales would have reached around 100 billion yuan, which contradicts the data from the company's prospectus. According to the preliminary prospectus, Summa Apparel was established in 2002. Its operating income in 2007, 2008, and 2009 stood at 1.82 billion, 3.32 billion, and 4.25 billion yuan, respectively. Based on these figures, it is highly unlikely that the total revenue over the period from 2002 to 2009 could have reached 100 billion yuan. A source familiar with the matter revealed that in 2010, Summa Apparel was indeed reported for suspected tax evasion, leading to an investigation by relevant tax authorities. The company cooperated with the investigation, but it was not the company itself that was implicated—rather, some of its agents were under suspicion. Summa Apparel is considered a major taxpayer in Wenzhou, and while the alleged amount has been discussed, the specifics remain unclear. Summa Apparel operates under a typical asset-light model in the apparel industry. It does not own its own manufacturing facilities, instead outsourcing production to other factories. Its sales rely heavily on franchise dealers, with most retail outlets managed by third-party partners. While the number of direct-operated stores has been limited, this has gradually increased in recent years. As of June 30, 2010, Summa Apparel operated 3,556 retail outlets for its casual wear brand, including 3,433 franchised stores and 123 directly operated stores. Another children's wear brand, Ballarat, had 2,253 outlets nationwide. Most of these stores are located in second- and third-tier cities, where franchisees play a key role in managing operations. Data from the company shows that sales through franchise channels accounted for the majority of total revenue. For example, in January-June 2009, 2008, and 2007, the proportion of sales from franchises was 90.26%, 91.97%, and 94.86%, respectively. This highlights the strong reliance on the franchise model. Franchise dealers are given significant autonomy in managing their stores, including staffing, financial decisions, and inventory control. Summa Apparel’s influence is mainly limited to store layout and product display. Zheng Hongwei also stated that while he is unsure who made the original tax evasion report, the CSRC had already approved the IPO application after conducting its review. He claimed that the relevant authorities had investigated and confirmed the company’s compliance. In addition, Qiu Guanghe, chairman of Summa Apparel, reportedly commented that the incident was likely orchestrated by competitors. He maintained that the allegations were untrue and that the real situation was different. Overall, while the tax evasion allegations have raised concerns, the company continues to maintain its stance and insists that the claims lack credibility. The ongoing IPO process suggests that regulators have not found any substantial issues at this stage.

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