Eratat Lifestyle

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. 

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.

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

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

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)

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.