.

hi, momoeagle,

there are reasons why i throw back the questions back to u. Criticise them is easy but to actually offer a viable, practical solution that fits reality is not easy. if the distributors need to invest few millions to open several shops, u do need that long term credits in order to make that happen.

hongxing is still in sportswear and being a big company (including XStep as well), it can't evolve and adjust as fast as Eratat. Eratat is heading the right direction, expand fast in a year, consolidate its position in the following year and then expanding fast again in the following year.

seriously, which manufacturer will be in the right mind to cut down the number of distributors? isn't it the "more the distributors, the merrier"? think abt why Eratat is doing the reverse way by focusing on Quality distributor instead of Quantity distributor. The larger the number of distributors, the less responsive it is to respond to market changes.

If u ask me how long to wait, i don't know. In the short term, I can't predict when the share price will move. But in the long term, within three years, Eratat should be able to grow to a much much bigger size than what it is now.

For young and growing company, one needs to be patient. If u want to maximise capital returns, three years will be a good investment horizon. if u buy at a good price, just hold for three years. Anything that happen in between, just try not to bother with it. so long as u meet the management, can trust them to execute their strategy, then the returns will come. if can't wait three years, then go for mature company, but the capital return will be smaller.

as u know, momoeagle, i once worked in a tech startup company (from a program i told u before.) The mindsets of VC and angel investing are also very different from the mindset of a retailer investor in a stock market. although i am not qualified or hv the capital to invest like a VC and angels... There are super wealthy ppl that don't invest in stock markets. They buy unlisted company when is young and wait for it to grow and exit when the company gets acquired or enters IPO.

tat's why when ethan999 mentioned about lin jiancheng's parent-in-law making huge profits from the sale, i am not surprised at all. but of course, investing in a growth company has a lot of inherent risks. if u want a safer return, then go for value investing in a mature company lol.

As for eratat, if the risk appetide doesn't suit u, then don't buy. I am not doing recommendation on Eratat as well but I will still to continue to hold because i still see value, until subsequent quarters prove me wrong.

Hi newbiestock,

you are basically throwing all questions and problems that a CEO should solve to me, and taking upon yourself to answer questions that the management should be answering.

The fact that "If they don't extend credit beyond 90 days, how to get distributors to work with them to open shops?" tells that no one wants to sell their products unless being given huge incentives.

As for trade receivables, anything above 60 days is a very long time, and beyond 90 days? To me, this is a red herring.

And if
"so, 1), 2), 3) - either way also wrong and got investors worry here and worry there."
the question becomes, why bother to invest if all possible ways are wrong?

I don't see their strategy as being good at all. From the way I see it, the management has no idea how to solve their problems, and having such a huge trade receivables made them puppets of their distributors; their distributors can just walk out on them without any blow to their personal assets if Eratat does not agree to their terms.

I have also posted before why I view their placement very negatively, given their acceptance of a lower placement price when the earlier failed. Was it even necessary to accept it so hastily when the market was down? Wasn't it them who said earlier that they had no necessity for it, and would prefer to wait for a better price, when CMIA first expressed interest?

With the latest report by them, by using subsidies to offset trade receivables, this is to me a 2nd red herring. Of course, I do hope I'm catastrophically wrong and Eratat will rise back to 30cts for investors around, but objectively based on my understandings, this company is done. Ask to give more time, and more time, and more time? I agree, that time will tell if this company is indeed what it claims to be. For me, I'm not going to risk my hard earned money like this.

*In case you are wondering why I have interest in all these textile companies, I had once studied the textile industry, and was once vested in Hongxing and China Sky. Fortunately, I have managed to escape with nett profit before things get blown up. Precisely because I recognized that it is a market that is already crowded due to a low entry barrier.*

hope this will be the last pt i made for the receivable.

"Curbing revenue growth doesn't sound all that great. Margins don't increase substantially."

- Think:

1) If they don't extend credit beyond 90 days, how to get distributors to work with them to open shops?

2) if raise revenue and book order, so long as credit remains above 90 days, receivables will continue to increase every quarter release. And, when receivables rise, investors also complain.

3) if set a cap on revenue but focus more on margin, it will reduce receivables over time. But investors also complain and worry about growth.

so, 1), 2), 3) - either way also wrong and got investors worry here and worry there. U tell me how u can reduce receivables, yet increase revenue and margins, yet the distributors are willing to put cash in to open new shops? momoeagle, if u are the CEO, tell me how u can achieve all the three things? what strategy can u implement? The distributors only have limited cash. They also need to pay labour and salary, so do Eratat as well. if u got good suggestions, pls suggest it to the management. And, in china, it's hard to borrow money due to high interest rates.

it's like our famous Cheaper, Better and Faster rally call from our labour union. Tell me how one can achieve all three things at one go.

Premium just newly launched and individual apparel piece of orders are not large. Naturally, the higher cost will offset the higher price. Wait a while. as no of apparel shops increase, orders increase, as it scales up, average costs will drop. actually, for 38% to 42% of gross margin for an apparel is already very good. Outside international brands, also gt around that gross margin. u can't expect 60% to 80% gross margin for apparel bah. while footwear drop, overall gross margin will increase. that's the most impt.

There's always uncertainty in every business or investments. just wait for them to finalise the discussion lah. I trust they will do their best to negotiate a good subsidy for the interests of the long term business. 

ever since Eratat got IPO, they only do placement once lol.

I don't like telco industry. it's just service provider and margins are not good, though it's a stable stalwart. both starhub and singtel this quarter gt profit drop.

check this:

http://www.nextinsight.net/index.php/story-archive-mainmenu-60/914-2011-chinahk-companies/4550-vodone-target-hiked-75-qinfa-surges-28-in-2-days-on-maa

“We believe the fact that the mass market is crowded due to a low entry barrier among the sportswear segments prompts us to believe Xtep is more vulnerable to the current deteriorating industry environment.”

- come to think of it. Lin jiancheng is a visionary CEO. Eratat has been evolving and fast responding well to the industry changes. if nt, they would hv followed the footsteps of XStep. The CEO already foresees this few years back and hv been making quick adjustments to their strategy.

Hi newbiestock,

there are a few questions I would like to point out on your conclusions:

"I already expected trade receivables to increase. My opinion is Eratat is deliberately trying to curb revenue growth and trying to increase its margin by offering a higher apparel product mix, so that its receivables can be capped at a certain level for next yr."

The important consideration isn't your opinion, but whether if that is the management's plans and directives. No point second guessing on uncertainties as you aren't a controlling shareholder at all.

Curbing revenue growth doesn't sound all that great. Margins don't increase substantially.
Furthermore, they are planning to offset some trade receivables with subisidies on renovations?

How many shops are they going to upgrade? How much are they going to subsidize?

Let's do a rough estimate:
Num of shops to upgrade: 1000 (as per AR2010, more than 1000 retail shops. 2011 was supposed to have growth isn't it? So 1000 is a good estimate.)
Cost of renovation: Est 0.5mil RMB  (Abt $100k SGD, which is quite cheap for a big floor space. But this is China, so I gave some discount.)

Total cost of renovation: 500mil RMB
A subsidy of 10% will give around 50mil RMB, and hey presto! 50mil RMB taken off trade receivables!

An even higher subisidy to give HUGE support and a BIGGER encouragement to the retailers would be nicer of Eratat right? What's the advantage? Even larger reduction in trade receivables! That would make it the best of both worlds!

What's the cost? A reduction in reported NAV! How? Simple, explain it off again that these subsidies are needed for future growth! And more growth! And more growth! The question is, till when? 

There are just too many questions and uncertainties that I seriously believe the risks are not worth the rewards. And I see no point in explaining for the management; they should be the one addressing, not you or me. :x

"It takes time for execution to show. When u launch a new product, expect at least a year or slightly more to see result. btw, all stocks are down due to the poor macro sentiment. Not just eratat."

Not all. Telcos aren't really down much.
Anyway, this isn't any reason not to consider the possibility of major shareholders exiting on the quiet because of internal events.

"Why not? Young company needs time to grow and for the execution to show result. It can't happen overnight. PREMIUM is just newly launched. Eratat needs to rest and consolidate as well after an explosive growth in 2011. After enough resting, it will grow explosively another time again. When the explosion comes again, that will be the time that Eratat shows another big jump in share price."

I don't see Eratat as having grown at all in 2011. Most of the asset growth comes from substantial increase in trade receivables, which should be treated with due caution.

BTW, for others, I'm not vested.

Hi, momoeagle, my reply below:

Hi newbiestock,

this is momoeagle from CNA forums.

I believe I'm actually repeating this, but I just have to point out again (it's almost the same for the past many quarters) that trade receiveables is up yet again.

We can see from the latest balance sheet that Eratat has once again raised its total assets substantially, via the substantial increase in trade receivables (again).

As mentioned before, the problem with trade and other receivables is that these are trade deposits placed with other companies. It is thus not easy to audit such receivables and verify it. Essentially, if you are paying for "assets" that is not yet collected, that is at the mercy of other distributors.

Trade receivables are hence usually valued at a much lower valuation than they are worth. I've sent you a link on this in CNA forum, not sure if you have received it.

Before the report, Eratat tells of how great they are by allowing distributors longer credit terms so as to grow the brand. Was there any returns? How long has it been since they were doing this. It isn't anything recent, and no returns have been seen except growing trade receivables.

The latest report by Eratat tells of them even needing to subsidize their retailers? Aren't the Classic retailers making money at all to even do some small amount of renovation after so many quarters of sales? If so, and the margins for Premium aren't very much higher than that of Classic, can we expect the new retailers to achieve phenomenal sales as well?

Or perhaps the management knows that trade receivables are "growing" so huge that investors would start to query and question? Hence, the decision to cut trade receivables writing it off as subisidies for renovation. And hey presto! Trade receivables will start to decrease! Magic!

I see little reason why you would say give it more time to the effect of 2-4 more quarters. Early investors have already given more than 10 quarters.

Why not take case studies that have already present to you before hand?

China Printing & Dyeing was a case of increasing trade receivables. Granted, they had increasing debts as well. But well, we see Eratat having placements instead of debts?

Beauty China was another case of increasing trade receivables who mentioned it was relaxing credit terms to help its distributors who were hit by the financial crisis.

What happened to these two companies now?
[Case studies not done by me]

Wishing you best of luck with Eratat.

Signing off,
momoeagle

Hi Newbiestock, its nice of you to share the info re Q3 result briefing. Initially I was disappointed with the low 1H2012 trade fair orders but felt better after some quick calculations. The Rmb 285m apparel orders is 4% higher than the actual 1H2011 apparel sales. The drop in orders is due to the lower margin footwear. The Rmb141 m Eratat Premium orders vs Rmb40 m sales in 1H2011 sales is also encouraging.

I think CEO Lin and his team did a great job transforming Eratat's business from low margin sports shoes to casual/fashion wear in such a short time. In 2008, the apparel sales was Rmb156 m ( 35% of sales ) but this will increase 4 times to Rmb627 m ( 59% of sales ) end this yr. This will increase further to 75% in 2012, meaning Eratat is still evolving.

Hi Greenrookie,

As you know like you I have sold all my shareholdings in Eratat. Thankfully I was able to get out at over 13 cents, hopefully you were able to as well.

From my understanding the reason why their gross profit margins haven’t gone up for apparel despite higher ASPs is because apparel manufacturing is outsourced to suppliers, and the amounts they charge for producing higher quality or ‘premium’ apparel is higher.

Interesting that gross profit margins for apparel actually fell (albeit marginally) as well over the last year despite the introduction of the Premium label.

Thank you newbiestock, ethan999, Tactician and Observer2 for your amazingly passionate views and sharp analysis, from which I have learnt a lot about investing. I have no idea how Eratat's biz and stock price will turn out in the next few months but I wish you all the best. Perhaps the Eratat believers will actually make a capital gain and ethan999 will also make a gain by investing in another counter.  

Dear all forummers,

There is something puzzling about the margins of Eratat apparels, maybe one of you can enlightnened me.

For 2011, June-Sept period, they sold 0.96 million pieces and at ASP 200.9

For 2010, June-Spet period, they sold 1.23 million and at ASP 113.4

Yet margin drops from 39.1% to 38%

How come?

Less pieces but higher raw materials costs, thats possible, but with ASP improving by almost 90%, surely it enough to offset the raw materials.

It there is more prenium designing involved, the costs should be factored in Admin expenses, not cost of sales.

If the cost of sales is increasing depsite lesser pieces and higher ASP to the extent that it is eating into margins, I wondered what competitive advantage they have in producing the prenium series?

(I know i mentioned before that my previous post will be my last for Eratat, but this equation keeps bugging me, maybe newbiestock or ethan999 or anyone can explain)

Eratat is a young company so hurdles are inevitable and u can't expect perfect numbers in everything.

there may be no sharebuyback. But there isn't any insider selling as well since 2009 (excluding the parent-in-law selling that u talk about). i am not worried about the parents-in-law since his parents-in-law are non-executive members in the company. But i'll be worried if CEO Lin, CFO Ken or Ye sanzhi sell any portion of their share.

I do think it is perfectly ok if his parents-in-law made that return. After all, they vested many years back when it wasn't listed. The illiquidity and the high risks of vesting in an early stage company shld give them a proper return.

In the Venture capitalist and angel investment world, the return can be easily 10x to 100x for them when the companies exited via IPO or get acquired because they take on a very high risks. so, from 2.5 cents to 12.5 cents, i think it's a fair return for them.

i have been monitoring its financials very closely and every quarter briefing, i will be shooting questions at Ken. The ability to grow its cash balances will be my primary concern and it will take a few quarters to observe that to happen. If there comes a time that I really need to sell, I will not hesitate to sell, even at a huge loss. For now, I feel the full potential still haven't reached yet. if Eratat needs a break, before it can show another explosive growth again, so be it. I'll wait until that day comes.

cheers

Newbiestock,

This is Lin Jiancheng’s own wife’s parent’s we’re talking about, the proceeds and huge profits they netted from selling 212,000,000 million shares would have been more than enough for them to use some of the profits to transfer some shares to Lin Jiancheng’s Sunny Joy without him having to come up with a single cent.

Don’t even mention the IPO price of 30 cents, the fact of the matter is that even at a mere 12.5 cents the majority shareholders of Eratat decided to cash in. And these are the people who know exactly what's going on inside the company, the primary shareholders!

Don’t be mistaken I’m not angry at the management,over time I have simply become more confused and suspicious of their actions. Many things don’t add up, not least the placement which diluted shareholder value by 15% to add 60 million in cash despite the fact that even without the placement they would still have had over 100 million in cash. Over 100 million in cash, that is, even after deducting all new receivables involved with fulfilling the order book for 2h2011.

Also don’t forget that the value of a stock hinges far more on the sum of all expected future cash-flows rather than trailing P/E. No matter how low Eratat’s trailing P/E is, the murkier and more uncertain their prospects, the more hurdles they seem to be facing, as is the case now, the lower the market will measure their expected future cash-flows to be.

As I said it’s very easy to give excuses in business, there’s always a way to twist things around see the glass as half full rather than half empty, as you have been doing. But in this case all the excuses and rationalizations are sure adding up and there comes a point where one must realize it’s one excuse too many and there are many other companies out there with much better prospects.  Denial can be a very dangerous thing for an investor.

While Eratat is stagnating or moving backwards, there are many others taking big strides forward, and then you must ask yourself what are the opportunity costs?

I’m not saying that it’s impossible that Eratat’s management is honest and will eventually succeed, but the facts known to us  right now suggest to me that the probabilities are they will not, and that there are far more prudent investments to make out there, as is the case with many of the other stocks in my portfolio. Well I’ve said all I needed to say about Eratat for now in my last 3 posts, I wish you all the best Newbiestock

hi, ethan999. it's a common knowledge that IPO is an exit move for early stage investors and private investors. maybe, lin jiancheng's parents-in-law invested in his company and take this IPO opportunity to exit. But don't forget that their parents-in-law invested long before it even gets listed and they carry a much higher risks than any of retail investors. It's a norm that IPO price tends to be overpriced and that's why I don't buy IPO stocks. The current free floating shares and total share base is just at a right balance. If Lin Jiancheng bought too much, then retail investors may complain that there is too little liquidity. Buying half of it back from his parents-in-law is already a prove of his committment to Eratat.

if they don't care about shareholders, they wouldn't have to spend so much efforts organising quarter briefing and be at the investfair. Unfortunately, asking them to do sharebuyback or seek a dual listing is out of the option for them as it does not align with their long term business goals.

31-12-2010  31-03-2010   31-03-2009  31-03-2008   31-03-2007

111.381        96.642          125.924         70.154        40.619  (NPAT)

if u look through the past five years, for the FY ended 31st Mar, there is a dip in net profit to 96.642 RMB million. And, if u look through the history, Eratat was undergoing transformation from sportswear to casual. It seems like after every two years of big expansion, it will have one slower growth to consolidate its business and reposition its branding and strategy. Will 2012 be a repeat history of the FY ended 31032010? I dunno, but a fast grow next yr may not be good for Eratat as well. If they can achieve 10% to 15% growth next year, I'll be contended. With PREMIUM on track now, they probably need to do another restructuring of their CLASSIC products to put everything on the right branding track, so that both products can further complement each other.

ethan999, i know u angry and disappointed abt the book orders. relax. I was also surprised that u sold all yr Eratat stocks. But things are not really that bad as u think. if not, the bull camp would not have come back to push it back from 12.3 cents to above 13.6 cents before an eventual closing at 12.5 cents. Though i agree there are more bears than bulls on friday... but overall, things are not that bad as some thinks. It will hv to take a while for the value to be unlock.

Hi Newbiestock,

It’s easy to find an excuse for almost every disappointment in business but there comes a point where you must ask yourself if it’s one excuse too many and time to move on to investing in companies with better prospects. While Eratat is stagnating or moving backwards, there are many others taking big strides forward, and then you must ask yourself what are the opportunity costs?

1.       If you include Premium orders, 1h2011’s order book was 517 million while 2h2011’s order book was 550 million. The difference was only about 6% despite the seasonal differences. Next year the order book drops 31% to 380 million so now it’s convenient to bring back the excuse of seasonal differences again?

2.       Distributors dropped from 17 to 12 and of course Eratat will say that they are not performing and not sharing the same interests.  Did it occur to you that from the distributors’ perspectives, they may not be making money selling Eratat products and that’s why they decided to discontinue? Eratat’s revenue comes from sales to distributors and so there is no immediate indication on how well the Eratat products are selling to the public except from the distributors’ performances.

3.       Renovation carried out in phases in order to avoid disruption? Well from Eratat’s perspective there surely has been a huge sales disruption, with revenue for 1h2012 now projected to fall 27% from 1h2011.

4.       Before Eratat Premium came into the picture, the reason management gave for high and growing receivables was that the Eratat Classic stores were undergoing makeovers and renovations. This had been going on for 1-2 years and receivables continued to grow, with no sign or news of the makeovers nearing completion.

Now they changed their minds again and want to give the stores another makeover with no indication of whether the previous project was finished.   If the previous makeover project had been completed, why did the receivables not go down? The introduction of Premium stores cannot be an excuse because that only consists of about 20% of stores.

Or can it be that the previous makeover project has not been completed after so long but now they want to redesign them again? Or can it be that the receivables extension offered to distributors prior to the introduction of Eratat Premium was not really to upgrade and renovate their stores (as they claimed) but because the distributors were simply not making enough sales from Eratat products to survive and accumulate enough capital in order to pay Eratat promptly instead of having to depend on such long credit terms at the expense of Eratat’s cash flow? Perhaps that’s why the 5 distributors left, they were not breaking even?  

5.       The point I’m trying to make about protecting shareholders’ interests is the management seems totally indifferent about their shareholders’ diminishing value.  At a time where so many companies over the last 3 months have either done share buybacks or the management has purchased from the open market, they have not bought a single share despite a supposed PE of 1.5.

Yes there is no share buyback mandate but look at Hu An Cable for instance, they’re calling a shareholder meeting (long before the AGM) specifically to ask shareholders for a buyback mandate because they firmly believe their shares are undervalued.  

Yes the major shareholders can only purchases within certain window periods but that period has come and gone now many times without any reaction from them.   When your P/E is below 2 and your management is not interested in buying in any form, whether through the company or through themselves, when they are not putting their money where their mouths are, that for me is a big red flag.  

6.       Not only has Eratat management not purchased a single share, if you look at the final point in my previous post, Lin Jiancheng’s extended family (if you consider Hero Win Group which is owned by his parents-in law) has actually DECREASED their shareholdings in Eratat over the last few years.

From owning over 50% of the shares (212 million shares) under ‘Hero Win Group’ which they sold entirely in May 2009, the family now only owns 29% of the shares under Lin Jiancheng’s ‘Sunny Joy’ group.   The family as a whole has net exited Eratat by a huge amount since the IPO and made huge profits even at 12.5 cents because their cost pre-IPO was only 2.2 cents.

Their holdings went down from 212 million shares to about 120 million shares. If they believed so much in Eratat’s prospects would they have sold so many shares? Or were they more preoccupied with ensuring that they cashed in after the IPO? 

As a result of this Eratat’s free floating shares increased significantly from about 48% to 62.9% in 2009, and this has the opposite effect of management buybacks, leaving Eratat more vulnerable to being sold down by institutional and retail investors.  

Friday’s selldown to 12.5 cents on relatively high volume was not a good omen. I really think that if they are not careful, Eratat could go the way of China Sports. For your sake I hope I’m wrong but for now I think there are better opportunities elsewhere. 

hmm.. cannot compare 2H2011 premium order with 1H2012 premium order as well.

since 2H order is usually higher, due to more expensive materials being used for the autumn and winter.

by comparison, i would think that the quantity of orders received for 2H2011 and 1H2012 is roughly about the same.

they expand quickly in 2011, so for 2012, naturally, would hv to slow down and wait for the shop to breakeven.

Eratat's business model is very different from other apparel company. For other apparel company, the MORE the distributors it is, the better, regardless of the quality. But Eratat takes on a different approach, by focusing on the quality of distributors. Don't forget in 2H2011, they discontinued some distributors, which dropped from 17 to 12. Naturally, the book order in 1H2012 will be affected and will be lower than 1H 2011, due to lesser distributors and some of the classic shops being renovated.

Do note the renovation will be carried out in phases, in order to minimise sales disruption.

ethan999, u concern on the classic renovation is a valid one. But as the product mix changes and branding evolves, i think it's reasonable to accept that some facelift of the shop would be needed. The renovation is not a complete tear down of the shop and then do a 180 degree makeover. i don't expect renovation of a single shop to take months, at most a few weeks to finish.

And, besides that, for greenrockie, the margin u calculated for apparel did not include third party orders. who knows, there may extra orders coming in to add to the 1h 2012 confirmed order last minute.

as for sharebuyback, i think the management has said be4. They didn't pursue a share buyback mandate for this year. If insiders want to buy, there will be rules which have to be followed. regarding improving the valuation, the answer is the same. Ken will ask what is the objective of doing dual listing? although Eratat qualifies for HK listing, planning for a dual listing would take up a considerable resources from the management. That time might be better spent in enhancing the branding and focusing on improving the operations. Ken says there isn't a need to follow other companies to do TDR or dual listing, which leads to speculation. They believe as long as they focus on doing their business well, when the bull resumes and sentiment improves, they hope that Eratat would be one stock that would generate interest and be those that will fly.

Anyway, these are points I have gathered from the briefing. Ken did explain well about the rationale of their business and why they are doing this and all the numbers so far seems to be align with what they say. so, i guess it's up to individuals whether they are comfortable with Eratat. My suggestion is wait for a few more quarters to see. I do share the same concern about whether next year, it can continue to grow. If it can grow abt 10% to 15% and a decrease in receivables, i'll be happy.

I'll still continue to hold. I agree the growth next year will be a concern. I'll point that out again in Q4 briefing or during the AGM when I see Ken again.

if u do some maths:

its net cash at 170+ million rmb is around 8.4 cents cash per share.

If every year, it achieves a conservative 8 cents EPS and factoring in all receivables are collectable, we should see its cash balances grow (unless it uses cash for some other new product expansion)

so, by end of 2012, i am expecting its cash balances to have around 14-16 cents SGD per share.

For this Q3 result, i'll give the management the benefit of doubt.

For Q4, they have to give trade deposits for next yr book order.

so, by Q1 2012, there will be no excuses if its cash balances do not increase.

i'll give Eratat another two more quarters... !!!

Hi all, I'm new to posting in the forums, but I've actually been following the threads historically. I'd like to add my own insights to eratat lifestyle.

Firstly, there's been a lot of talk about focusing on the fundamentals of the company, and then the analysis goes to compare between how this year's results compared to last year, especially the order book numbers.

I find that quite strange because erata is still by 9% plus quarter on quarter and 53% or so for the 9 months comparison.

In addition, all of the fundamentals are still good actually... in terms of NTA, price to book value ratio, cash holdings, etc. Yes, receivables is rather high, but from what I've seen and know of, the community have been able to track the physical development of their stores, etc... so we know that receivables (and cash for this matter - since the communicty have been able to track the cash holdings too) is based on real orders from new store opening from their distributors, etc.

Please don't be so alarmed about the order books. Remember that when eratat moved to their premium range, all of their distributors would have started with 0 inventory. As such, the first order will normally be much bigger than subsequent orders (at least until the distributors scale up).

As such, I'm not surprised that the total order for everything is less than the year before (although premium orders is up). This would imply that footwear and classic orders would be lower.

Wasn't that somewhat expected? Eratat had switched from classic to premium and have decided to move up the value chain... giving up sales from more traditional sources. It's quite unreasonable to NOT expect a hit while this happens.

Strategy takes time to manifest and cannot be observed over 1 or 2 quarters only.... I would dare say that if such observations can be observed so fast, I'd worry more - in cases of fraud, etc.

Anyway, I think that those vested should be patient because the fundamentals are still very solid, and cash, receivables, etc can all be tracked. In addition, they have managed to collect back all receivables above 120 days (as mentioned in their Q3 financial statements).

I've followed a couple of other stocks before, with turnaround stories (including Asia Dekor - with a turnaround strategy, and Zobee - with a moving up the value chain story). They had been undervalued for a long time, but eventually moved to provide with very good returns.

While Eratat's story is not a turnaround story like Asia Dekor, eratat's story does exhibit certain similarities because it's a strategic move too. Follow the ratios - like the product mix ratio, the margin ratios, the account receivables, etc. It does make sense. It might not all be great - but that's exactly how a change in strategy should look like - some parts will falter while the change of focus from classic to premium is made.

The same occured with Zobee - when they moved from OEM to ODM to retail. Their stock price moved in excess of 1000% - from a low of about 2 cents to 20 odd cents... and eratat has far been fundamentals and governance/transparency. Either way, I believe that the stock still has very strong fundamentals (good liquidity ratios (also use acid test ratios as a more stringent liquidity ratio), good NTA, PTB, margins, etc... effectively, all the fundamentals are in the right direction).

As such, we next have to look at the governance/transparency aspects. So far, the story told by management, and from the analyst and store vists, including tracking of capital and actually seeing it being translated into their fashion shows and shop openings, etc... does indicate that there's no funky business occuring).

Expected EPS at 8 cents for the year end is just crazy. It really doesn't matter if growth is slowed while they switch strategy.

Hold it for a bit and it's almost a certainty that the market will notice it. After all, it's a market of fear at the moment, with all of the bad news and the uninformed investor will most likely stay away until things look better.

Going in later will likely just mean that one will be too late because it's not easy for the retail investor to time the market. Small caps also don't really move until a sudden interest peaks and elements of greed take over the fear rationale. Just be patient, and adopt a wait and see (with monitoring) approach. That's my 2 cents. Cheers

Newbiestock I wish you all the best with Eratat but here are a few points you should consider. I was beginning to have doubts and the recent results and announcements solidified my fears.

1h2012’s order book of 380 million rmb represents a 26% drop from 1h2011’s order book of 517 million rmb (including Eratat  Premium Orders) Okay let’s take footwear out of the equation since they are gradually phasing that out.  Here are the stats for apparel orders and for Premium orders.

(in millions of rmb)        

         1h2011 2h2011 1h2012

Apparel 253.33 357.5 285

Premium 40 132 105.45  

Apparel orders are down significantly from 2h2011 and up only marginally from 1h2011. Part of it may be due to the stores undergoing renovation, I’ll give them that.

However, Eratat Premium stores from last season will certainly not be under renovation this season since it’s the ‘classic stores’ that they want to upgrade. Despite this, Eratat Premium orders have also fallen by more than 20% from 2h2011. Granted the 2 seasons are different but where is the growth? Also recall that 1h2011’s orders for Erarat Premium only came towards the end of 1h2011 and were only meant for a summer trial of sorts in May or/and June and therefore don’t really count towards a full season.

In a growing PRC consumption market, Eratat doesn’t seem to be growing and keeping up with the competition. The likes of China Lilang has its order book growing at 30% and a whopping 135% for its L2 brand while Eratat’s orders are decreasing. In a market where the barriers to entry are low, more and more top foreign brands are coming into tier 2 and 3 cities and competing directly with Eratat for market share, can Eratat keep up?

More troublingly, recall that even for 1-2 years before Eratat Premium came into the picture and there was ONLY Eratat classic, the management had been using the rhetoric that receivables were growing because they wanted to encourage distributors to upgrade their stores,  improve frontage, presentation and branding, directly own their stores etc. So okay was that done and completed with all the Eratat classic stores?

Then now after going through all that they want to tear everything down and change all the Eratat classic stores to look like Eratat Premium stores? Was all that money and extension of receivables over the previous 2 years before Eratat Premium wasted? Down the drain? And so now they got to start all over again to extend receivables again and additionally even offer subsidies?   Surely the store owners will be perplexed at frustrated at having to build and construct only have to tear down and reconstruct again so soon after? Something is just not adding up here. Either we’re not getting the whole truth or their strategizing is all over the place. This management also doesn’t seem to be concerned with shareholder value.

Was the placement really necessary? Even without the placement they would have had over 100 million in cash after fulfilling the order book, surely 100 million is enough of a buffer not to have to resort to dilution of shareholder value?

And then now that their shares are trading at a P/E of 1.5 and 0.4 times of book value, incredibly low valuations, there is no sign of interest from any major shareholder including Lin Jiancheng himself to purchase any more shares. Nor is there any sign of interest in initiating a share buyback.

Yes there is no mandate for a buyback but Hu An Cable for instance is about to initiate a shareholder meeting specially to obtain approval for a share buyback even though their AGM is far away, their management is even trying to allow Singapore-based shareholders to sell their shares in Taiwan where their shares are trading at almost a 100% premium!

Is the Eratat management concerned with protecting shareholder interest? They need to put their money where their mouths are.

Working capital requirements are so high and so much of their money has to be committed to suppliers and distributors in order to fulfill the order book, and there is no sign of distributors making enough money from Eratat products after all this time for receivables to go down. If things continue like that, will they ever be able to grow their order book without raising cash through share dilutions?

Finally, one more point to consider is that prior to May 2009, the largest shareholders in Eratat were actually not Lin Jiancheng himself, but his parents-in-law under the company Hero-Win, who had 212,000,000 or more than 51% of the shares while Lin Jiancheng only had a very small share. On 22 May 2009, Eratat announced that Hero Win was selling ALL its shares in Eratat for 12.5 cents, of which only just over half or about 120,325,000 shares were to be ‘bought’ by Lin Jiancheng, 7.8% to Ye Sanzhi, and the rest to the open market. 

As a result of this, the ‘free floating shares’ in the company increased significantly to 62.9%.  This is always worded nicely as being meant to ‘increase the liquidity of the shares’ but this is essentially a euphemism for major shareholders disguising the fact that they are actually cashing in on their shares after the IPO, which is especially so because Hero Win’s cost price for the shares was only 2.2 cents. 12.5 cents therefore represented more than 500% profit for them!

If this was such a promising enterprise, why were they selling their entire stake! These were the controlling majority shareholders we’re talking about. No doubt some of the shares went to Lin Jiancheng but that’s all within the family and the family as a whole doubtlessly netted huge profits from the sales of the rest of the shares. Make of it what you will but I’m out of this stock for now. I wish all of you Eratat shareholders the best of luck.