Eratat Lifestyle

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.

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.

greenerockie, gd point on the margin. But my guess is 1.2% difference is a very small margin difference. Furthermore, as the initial orders of the PREMIUM is small, until the order builts up, it will take a while for the PREMIUM to be able to show significant margin increase over the Classic order. If u vested in eratat, pls give it a bit more time... at least 2-4 more quarters.

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, momoeagle, my reply below:
[hr]
[momoeagle 09-11-2011]:

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).
 
My reply: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.
 
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.
 
My reply: Yes. i hv seen the link u sent. no businesses like trade receivables but the reality of the business doesn't allow u not to hv that. In china, credit loans are tight. The distributors need cashflow, so do Eratat as well. As Eratat is a small company, resources are limited, so I will be worried if all numbers turn out to be perfect.
 
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.
 
My reply: 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.
 
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?
 
My reply: The same 12 distributors did make money from the classic shop but besides owning the classic shop, they are also forking out their own money last year to launch their PREMIUM shop. Money earned from classic already goes to opening PREMIUM shop. Each PREMIUM shop can cost at least a million RMB or more. So, imagine each distributors opening ten or more shops at one go. Their cashflow will be very tight. As i mention, biz got to be win win. They got to provide incentives for the distributors. if not, the distributors won't be willing to commit to the brand and the shop.
 
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!
My reply: The credit terms will be capped at 120 days. The subsidy is only one time, only for the classic renovation, only for this special case. Their strategy of giving credit terms to their distributors for the goods will remain unchanged.
 
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.
 
My reply: 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.
 
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.
  My reply: haven't studied these two case studies. so can't comment. For me, I'll assess the management deeply and observe what the management says and how well they know their stuffs. that's why I try to attend the quarterly briefing. thanks for highlighting, momoeagle. I understand ppl don't like the receivables, don't like the drop in book order or don't like the renovation subsidy. But put yrself in the management shoes. if u are the ones running the company with the executive powers, how would u do it differently? can u make those numbers that don't look nice to the investors to go away? Does the reality of the business work so perfect in real life, esp for a young company? Are the numbers given logical with respect to the reasons given?
What happened to these two companies now?
[Case studies not done by me]
 

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.