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ERATAT LIFESTYLE: 108% net profit growth in 2Q, best quarter ever
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Written by Leong Chan Teik
Tuesday, 02 November 2010 21:22

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Eratat CFO Ken Ho and Vice-President for investor relations Kellyn Tan at this afternoon's investor meeting at M Hotel in Anson Road. Photo: Leong Chan Teik


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At 20 cents, Eratat shares now trade at a PE of just 2.97X, assuming an annualised EPS of 6.74 cents.
ERATAT Lifestyle has had its best-ever quarter with revenue in 2Q ended Sept growing 20.3% year on year and its distribution expenses falling (yes, falling) by 28.5%.

The decrease in the expenses was due to lower product development costs (which were higher in 2Q09 to fund new designs for Eratat apparel) - and lower advertising costs this year.

As a result, while gross profit in 2Q this year grew 33.1%, net profit leapt a higher 108% to RMB44.1 million.

The sharp profit increase means that adding the 1Q and 2Q earnings per share and annualizing them would yield S$0.674.

With that, the current stock price of 20 cents translates into a PE of just 2.97, making Eratat one of the most attractively priced S-chips.

Eratat have other attributes including being debt-free, and it has not made any rights issue or issued new shares since its IPO in April 2008.

Neither has it suffered any corporate governance issue or accounting issue.

In fact, in April this year, it was ranked No.2 among the 200 or so S-chips on the Governance and Transparency Index (GTI) published by The Business Times.

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In Jinjiang: Eratat has a factory manufacturing footwear. Its apparel production is completely outsourced. Photo: Leong Chan Teik
Does it have any negative?

Analysts often point to its accounts receivables. The figure has grown from RMB269 million as at end-March this year to RMB348 million six months later.

Eratat CFO Ken Ho stressed at this afternoon’s meeting with investors that the receivables are collectible and the company has had no bad debt for more than five years.

The accounts receivables have been growing as the company extended credit terms to selected distributors to help them directly own more specialty shops, so they don’t sell Eratat products to third-party retailers operating their own shops.

As more of its distributors own more shops, Eratat will be better able to work with them to enhance the brand image, such as through improved outlet frontage, and choice locations for retail points of sale.

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Eratat chairman and CEO Lin Jiancheng (second from right) celebrating with models after the recent trade fair where Eratat clinched an order book of RMB477 m for delivery next Jan-June. That's a 23% year on year increase. Photo: Leong Chan Teik
More growth in the near term

The outlook for the near-term looks assured: Eratat has an orderbook of RMB500 million for the current autumn/winter season, or 12% higher than last year’s corresponding period.

Then there is a RMB477 million orderbook to be delivered between January and June next year – which represents the spring/summer season whose apparel and footwear have lower average selling prices than winter products.

The RMB477 million is a 23% increase year on year.

These orderbooks are determined at two trade fairs held each year by Eratat.

Orders collected from its distributors during these fairs account for practically all of the company’s annual revenue. In addition, there are also third party footwear sales, which normally account for 5-10% of total revenue. By the way, orders made at the fairs cannot be cancelled by the distributors.

Going forward, Mr Ho said Eratat will look to raise its average selling prices. In fact, it is currently developing high-end premium product range to penetrate Tier-1 cities or malls, unlike the current Tier-2 and 3 city emphasis.

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While gross margin for footwear has stayed stable, that for apparel has soared with new designs for casual wear and as Eratat exited from low-margin sportswear.


Some other highlights of 2Q

* Gross profit margin jumped from 26.5% to 32.2% chiefly because the average selling prices of Eratat apparel for the autumn/winter season of 2010 soared, from RMB83.5 in Jul-Dec 09 to RMB113.4 in 2Q this year

* Selling and distribution expenses plunged 28.5% to RMB 20.4 million for reasons described above.

* Return on equity (annualized) rose from 18.1% to 24.3%.


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