One of the valuable tips for investors is to really “understand well the business that one invested in”. Some of the comments made in this forum clearly reflect a lack of understanding of Eratat’s business. To understand Eratat better, those interested in Eratat may like to ask themselves the following questions:
What is Eratat’s business model? Is Eratat’s management on the right track to transform Eratat from a Sportswear business to a “Casual Lifestyle Wear” business? [Also see JP Morgan’s comments on PRC Sportswear - [url=http://www.nextinsight.net
/story-archive-mainmenu-60/917-2012-chinahk-companies/4959-jp-morgan-reiterates-negative-view-on-prc-sportswear]
www.nextinsight.net/index.php/story-arch...ew-on-prc-sportswear
[/url] ]
Assuming you are now the owner of Eratat, how would you make a success of Eratat’s current business?
High receivable is a risk factor. What has Eratat done to deal with this risk? How is this risk compared to the risks of accounting fraud, insider’s mismanagement, poor business or business downturn, etc.?
Eratat has rewarded its distributors for their good performance. [In FY 2011, revenue of RMB 1,041 million was raked up by 12 distributors as against RMB 968 million by 17 distributors in FY 2010]. Is it necessary to give such reward? Would you do it if you run such a business?
Eratat intended to subsidise distributors to renovate their premises to give it a classy, high-end look. Is this necessary? Would you do likewise if you were the boss of Eratat?
Is Eratat likely to succeed in transforming itself into a seller of high-end casual lifestyle wear in one or two years’ time?
Ken Ho and Kelly Tan of Eratat had dealt with all the issues above in detail at their briefing sessions to investors, and those interested to know more of the company should find it useful to attend one of these sessions. Ultimately, it is for each individual to decide whether he/she wants to invest in Eratat (or any other company) after knowing the full facts of the company. If Eratat can succeed in sprucing up its image as a high-end casual lifestyle wear supplier, shareholders taking a stake at current price level could well reap a whopping windfall; otherwise, its share price could just languish in depression like any other poor S-chips, depending on market condition.
As for the fall in Eratat’s share price since March 2011 which would likely have caused depression to many Eratat’s shareholders, I only have one simple question to raise – Which penny stock did not have a big fall in share price since March 2011?
Well said, observer2. I, however, recognise that there are valid concerns regarding Eratat's business evolution. Add on the general distrust that S-chips have earned, and we find that Eratat has become a target to whip to death.
Only time can tell if Eratat is run honestly & can overcome the burdens of long receivables, poor cashflow and a competitive industry. The risks are factored into the stock price (11.5 cents). There is a bit more downside if the results for 1Q and 2Q are on a downtrend, which I fear would be the case.
On the other hand, I have caught the hint from Ken Ho about Eratat being "ready to expand its distributor network." My guess is in the best case scenario, it could sign on new distributors who are big-time and can boost its revenue substantially.
The time for that may be at hand -- as their next trade fair is this month (March).
You may like to know, Yeh, that when Oceanus was fluctuating between 10 – 15 cts (at rock bottom end) in early 2009, there were also those who liked the stock and those who were very critical of it. Some critics went as far as to claim that Oceanus was an extremely risky stock as the yearly typhoon hitting the China coastline would wash away all the abalones in Oceanus farm. Oceanus was actually considered a higher than average growth stock with also a higher than average risk factors.
The major risk factors of Oceanus were:
Natural disasters (mitigated somewhat by its farms being located along the Fujian coastline shielded by Taiwan island)
Diseases (can be reduced by good disease control measures & dispersing farms over a wider area)
Theft (can be reduced by good security control measures)
Expansion programmes [include increasing the number of abalone tanks from 20,000 to 40,000 by Dec 2009] not being on track (DBS Research had considered the execution of expansion plans as its main downside risk.)
The ability of the Management to deliver results expected. (Applicable to all stocks especially S-chips).
The ability of the company to sell sizeable quantity of abalones after the farm expansion programme is completed. (Oceanus had 137.9 million units of caged abalones as at 31 March 2009. The number of abalones sold in 1Q 09 was very small compared to the stock available. The number of caged abalone population was expected to increase by about 150 million units by Dec 09.)
Oceanus had insured against the risk factors 1, 2, & 3 for up to 50% of the market value of its abalones.
When the bull market came along and Oceanus had a secondary listing in Taiwan in December 2009, the share price of Oceanus hit its previous record high of 47 cts. Oceanus forward EPS was only about 4 cts. A number of people, who did their homework and had bought heavily into the stock earlier at the low end, had the last laugh. This is not an implication that Eratat would also turn out in like manner. The lesson here is that penny stocks generally have high risks but also can come with rather high rewards. In order not to miss out on opportunities when they come, one must do one’s homework and understand fully the business of the company before taking the calculated risk.
"Which penny stock did not have a big fall in share price since March 2011?"
I have a vested interest in Silverlake Axis. MusicWhiz has a vested interest in Kingsmen Creative, MTQ. Both MW and me have once had vested interest in GRP.
I totally missed the boat on Guthrie, but my dad didn't.
Hope that answer your question somewhat
As for your comments on Oceanus, d.o.g. of valuebuddies forum has a very insightful post (more than a year ago).
"The fundamental problem with abalone farming and indeed any long-lived agricultural business like timber, cattle or tobacco leaf production is that at any given time, there is a huge amount of capital at risk, while only a small part of the total value can be realized at any one time."
"The financial statements use fair value accounting which books estimated changes in market value as revenue. While this may comply with accounting rules, it is total nonsense from a cash flow perspective because none of the so-called fair value profits can actually be converted into cash. Only when the actual goods are sold and cash received will the company know what their real profits are."
As for "A number of people, who did their homework and had bought heavily into the stock earlier at the low end, had the last laugh.",
you are essentially assuming these people bought at rock bottom and sold at top.
AND if the business was good, why would it make sense to sell? And if it wasn't sold, would the buyers still be laughing now?
Dear Momoeagle,
Based on the historical closing price data of Yahoo, the stocks cited by you, except for Kingsmen Creatives, still did not escape a sell down.
Silverlake - High – 43.5 cts (3/6/11); Low – 26.5 cts (28/11/11)
Kingsmen Creatives – Relatively inactive stock fluctuating within a narrow range of 54 to 59 cts throughout 2011
MTQ – High – 92 cts (29/7/11); Low – 66 cts (23/12/11)
GRP – High – 22 cts (11/4/11); Low – 0.161 cts (5/12/11)
Guthrie – High – 52 (8/4/11); Low – 41.5 cts (4/10/11)
All the stocks above are not the “High Risk, High Reward” type comparable to Eratat and Oceanus.
As for those who bought into Oceanus, many of them were my friends who bought within the range of 10 to 15 cts after studying the risks vs the rewards profile of the stock. As with any high- risk stock, it was wise of them to sell out (especially when the prospective PE had reached a high of 10x) and look for another stock offering lower downside risk and higher potential capital gain.
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