Eratat Lifestyle

I sometimes remind myself that any set of 'facts' can be interpreted in various ways by investors. There's subjectivity always. That's why while there are skeptics, there are buyers at any price level.

In the first place, so-called facts may be wrong for reasons such as hasty research. Good luck every body.

There always risk involed in any investment (big or small). My personal opinion only, eratat may not be a big name now and we never know if it going to be successful or not till time tells but all new companies with their new brands or products or services need to start from somewhere. Be it sino grandness, cordlife or fj benjamin (raoul). The start is always the hardest.

IMHO it’s ok for experienced investors to take calculated risks, provided they don’t bet too heavily to affect their lifestyle if bet crashes. I reckon only 10% of S-Chips are well run, but I dunno which ones ? Some appeared promising few yrs ago, but have now crashed. Some may still be ok but nobody is interested as they are so indifferent to minority shareholders ie PR, dividends, untimely info etc.

Generally, I have my doubts re S-Chip reports, so my approach is look at the risks vs rewards as don’t think there is anyway to verify their sales , GM , etc. If you believe their reports or that the SHK notes will be positive, then this stock is cheap. But better for newbies to stay out. My views only. Dyodd.

Eratat has been consistently giving out div of 3.3%, despite it was going through the transformation over last 3 yrs. That is respectable since less than 10% s-chips can match that!

actually, Eratat transformation to menswear casual in 2012 is yielding tangible results but may not be obvious unless you go deeply into numbers.

if one goes and study the breakdown of its sales figures, one should have seen that the ASP for Eratat brand apparel has risen from RMB 143 in 2011 to RMB 202 in 2012. That ASP and gross margin is comparable to one of the top menswear leaders, Lilanz in China. However, the gross margin for third party footwear is usually low and mostly for exports purpose. With increase orders of its third party footwear from RMB62.6 mil in 2011 to RMB 158.9 mil in 2012, the overall gross margin was pulled down quite a fair bit in 2012 from 2011. Another thing to note is that in middle of 2012, several Eratat shops were undergoing renovation in phases and naturally, order volume will be affected during the renovation disruption.

It has to be noted that 2012 was a very challenging year for almost all industries in China. Many apparels companies, esp Sportswear are slashing prices. Even Western top brands like Adidas and Nike faced price cuts too.

Given the slowdown in China, it makes sense for Eratat not to expand aggressively in 2012-early 2013. But I believe Eratat is preparing its next expansion phase for 2014.

If one do a check, there is this menswear casual apparel company called Xiniya. To deal with the slowdown, they are slashing their ASP, extending credit terms, hoping this can increase the volume orders.

U can check Xiniya Q1 2013 result in the link below. This company is listed in NYSE.

www.mzcan.com/us/XNY/financial/10/EN/Xin...ean_akbYnJI6jJcb.pdf

But Eratat, on one hand, did the opposite to deal with this China slowdown environment. Increase ASP, but maintain/reduce total volume order. It's a "Sell Less pieces but higher price" approach to maintain total value. Note that its Eratat apparel brand gross margin is raised from 36% (2012 Q1) to 37% (2013 Q1). After all, quality sales is always better than quantity sales. You do not want to overproduce, end up cutting prices and inventories months down the road like some other brands. As long as Eratat apparel brand gross margin is maintained or did not drop much (which can fluctuate 0.5-1.5% due to raw material and production costs) and its ASP are on the rise on a q-to-q basis, I see it as good sign to infer that Eratat brand products, which is the core business, are still selling well. The lower margin due to third party footwear is not a big concern to me as it is a supplementary business.

Xiniya's net profit after tax in 2013 Q1 was RMB 33.2 million while Eratat's net profit after tax in 2013 Q1 was RMB36,1 million. Xiniya has 1676 retail shops but Eratat only has 800+ retail shop. Can you imagine the growth potential of Eratat when China economy bottoms out with growth restored and when Eratat starts increasing its retail shop numbers?

The market is facing a correction now and its share price will inevitably face some weakness. And it is not surprising that people who are skeptics about it will come out and start criticizing it at this time.

But nothing is going to change the fact that 2013 will be a record profit year for Eratat. Eratat should be able to surpass its RMB 146.1 mil record net profit in 2011 and hit a target somewhere RMB 155-RMB 180 mil easily on a conservative estimate. Note that if Eratat did not give a renovation subsidy of RMB41.8 million, its net profit in 2012 will be RMB 183.4 million instead of RMB 146.1 million.

Is there any tangible results from the transformation?

Yes. The consistent numbers will not lie. Those who say Eratat has no growth obviously have not studied the numbers deep enough.

Is management competent enough?

Yes.

The Proof: Eratat looks like they are going to overtake Xiniya this year, considering that Xiniya used to be much bigger than Eratat at its peak year lol.

The usual strategy for apparel companies is to spent many millions to find a celebrity spokesperson. Like Lilanz has Chen Daoming and Xiniya has Jacky chueng, the singer. The endorsement contract with Wang Li Hom has already ended and Eratat has no plans to get any celebrities endorsement. If it can sell the product without any celebrity endorsement, why not? It can help save the company many millions and is good for shareholders.

Do note that in 2012, Eratat started this personalised image consulting sales services. Sales consultant can go out and find customers. It looks like direct sales to me. when Eratat does image consulting to their customers, they provide full set of matching apparel and accessories design from head to toe to suit the occasion and i believe this new personalised sales approach will be able to help Eratat retain existing customers. You can't compare it to those pasa malam T-shirt selling and made a judging remark that textile industry has low barrier to entry. Eratat has a differentiation in brand and design as well. Try setup a big clothing shop at Orchard and go do a calculation on the rental and renovation. Not cheap lol.

China slowdown will eventually end and growth will pick up. And, when China growth picks up, Eratat should be well positioned enough to ride the wave. For 2012 and 2013, Eratat strategy is focusing on quality and less on quantity sales (that should be what a transformation is about- to proof that the brand can sell a higher ASP product, before expanding the volume). But when come to 2014, the focus will be on both quality and quantity sales after new distributors come in.

cheers. hope my analysis helps