distutils spits out a warning:

package init file 'xxx/__init__.py' not found (or not a regular file)

... when using Cythonized __init__.pyx instead. However, the installed package works absolutely fine, it can be imported & used perfectly, so this warning seems bogus.

I checked, and this warning is generated inside distutils/command/build_py.py in the build_py class in method check_package(). I suggest that this warning isn't generated in case a C extension is found for the __init__ module, checked in whatever way is appropriate at this stage (e.g. by seeing if there's an __init__.pyx)