I had attended the Q2 eratat briefing, so i just share some quick points.
Don't worry too much about the negative cashflow and piling receivables as of now.
The key thing is for a sustainable business, there needs to be a win win situation, involving not just Eratat as well as their distributors. What Eratat wants is to allow its key distributors to generate good cashflow, so that these distributors can use their own money to open up more Eratat shop. As distributors open more shops, sales increase over time. Business is also about trust.
Imagine if for the sake of pleasing shareholders' concern, Eratat stops extending the credit loan and demands their distributors to pay up within a shorter timeframe, what would happen? The distributor may just go away and Eratat's growth will be affected.
And, what's the probability of distributors not paying on time and having a bad debt?
So long as sales of the new products are good, we shouldn't worry too much on that. The track record of no bad debt speaks for itself.
Do note that distributors have committed to the Eratat brand and use their own money to commit to open the shop. Imagine if distributor has the money but deliberately default the payment? Eratat may just kick the distributor out. The thing is if that happens, the money that the distributor has invested in to setup the shop would have gone to a waste. so, which distributor would be so silly to break the relationship? (unless the sales aren't good). What we shld be concern now is to see good sales coming from the PREMIUM product rather than worrying abt the receivables.
Do take note that the setup costs for each Eratat PREMIUM shop can range from RMB 2 million to RMB 5 million. For a shop to breakeven from its sales, it probably takes around two to three years.
Anyway, revenue is generated when goods are delivered. so long as their distributors pay consistently on time and Eratat can show growth consistently, i don't mind Eratat collects the payment two to three months later. Don't forget the distributors also need around two to three months to clear their stocks in their shop too.
In short, create a win situation for the distributor, so that it will be a win situation for Eratat in the long run.
Give Eratat a few more quarters to grow. Gradually, their cash balances will slowly build up, so do their number of distributor shop outlets, as well as their revenue and net profits.
Wait for its distributors to grow bigger to a stage whereby they can be self-sustaining. When that happens, receivables will go down and Eratat by then shld have lots of cash to give a good dividend payout.
Who knows. It may turn out to be a $1 stock in a few years, the sgx-listed version of Lilanz in HK. And, when u look back at the price that u are currently buying now and comparing the dividends u may be getting few years back, u probably be laughing to the bank.
Newbiestock and ethan999, I have some questions. Do Eratat export their products, or it it still 100% domestic PRC market? How come they have a higher margin for apparels when their manufacturing capability is on shoes? Doesn't that mean they have low competitive edge when production is concerned? Wouldn't it be better if they outsource that too and focus on brand building? Dun get me wrong, I would rather they focus on the PRC market since the euro crisis might cause protectionism to rear it's ugly head and affect exports if they restart anti-dumping taxes. I am not that concern about long cash cycles as long as they continue to have positive cash flow in every half of year (which they do after checking the last 2 years of record), but I dun think that will change anytime soon since they are still expanding and their new "premium" products hasn't pass the test of time with consumers. Eratat does seems like a steal at current prices, and might get cheaper with the bloodbath going on and on. and after some simple fact finding, I like what I saw. Definitely on my radar screen. Thanks for sharing
Hi Greenrookie,
Eratat products are currently only sold in China although I remember once in an interview, CEO Lin Jiancheng mentioned that ultimately they hope to build up Eratat into an international brand one day. If I'm not mistaken, so far Li Ning is the only Chinese fashion brand to have ventured overseas, and is of course currently a multi-billion dollar company.
According to Eratat, apparel commands a higher profit margin in China than sport shoes due to the latter being a very competitive industry. This is also why Eratat has evolved more and more into a general fashion brand as a whole over the last few years rather than to be specifically focused on sports shoes. In fact in its latest order book for the second half of this year, they reported that 65% of the orders were for apparel and only 35% for shoes - this is all well and good since apparel commands a much higher profit margin. I would also think that with apparel, there is much more room for innovation, flair and creating your own style to achieve brand identity tas compared to sports shoes.
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