Eratat has been giving out div of 0.5cts [about 3% based on current yield] consistently since listing. There is no need for it to show such a huge cash hoard if it is not real since it can avoid all the queries/irk of shareholders and also avoid paying div.
Some sell down by contra players are expected and hey, there could be punters shorting these few days as well...
Let's do a quick analysis if Eratat need to keep RMB545m cash for biz growth:
1) Eratat is experimenting a new consultative selling approach (probably image consultancy). For current rev of RMB220m per qtr and avg selling price to distributor of RMB208 per unit, each shop [800+ shops] is selling an average of 14 units per day. Based on 3 sales pax per shop, one sales person is probably selling 3 units per day. Doubling or tripling the number is highly possible if each sales person becomes more effective by mastering the skill. Assuming it doubles, Eratat will need extra cash of RMB150m for pre-payment to supplier and 19% tax just for this same store growth.
2) Eratat's collection from 12 existing distributors is improving to max 120 days, showing its distributors are achieving better sell through. It is likely that these distributors may start to open new shops after 3 yrs of freeze. Assuming 10% growth [add rev of RMB22m] for new shops, it will need roungly RMB88m [120 AR day] to support new store expansion.
3) Eratat intends to expand into Shanghai. It has done a recruitment drive in May 2012. It has recruited 16 new distributors during the first round [note: read its chinese website]. Ken mentioned about some impact on revenue from 2H13 and I assume it should be at least 10% of current revenue, i.e. RMB22m. Assuming 90 AR day, it will need around RMB66m to support this growth.
The potential biz growth will need at least RMB300m and the rest is needed to support current biz. It seems to me that it is reasonable for Eratat to maintain the current cash, even though it looks high.
I give an example why I do see potential value in Eratat.
As everyone knows, the former IR, kellyn Tan has left Eratat.
During the AGM meeting on late April, I was shocked to see Kellyn there, helping out.
she is likely not paid to do so but she did it willingly to help out in the AGM event of her former company. Who would be in the right mind to do tat?
what does it tell u? Excellent management and good bosses !
And, from the SIAS report, it seems like Eratat has been in discussion with SHK for more than a year. Tat i think is already a recognition of the company.
CEO Lin Jiancheng hv very good foresight when he realised the saturated competiton of sportswear. China sports is still in the process of transforming into casual wear whereas Eratat has already done that a few years ago and is moving ahead of others.
Before the PREMIUM came along, the Classic shop do sell mens and female wear. But during the AGM, i realised that Eratat has now reposition itself into fully menswear apparel company. They don't sell anymore female wear. Thus, it makes sense that in 2012, they have to give the renovation subsidy to change the image of the shop. There's no more distinction between Eratat classic or Eratat shop. Every shop now uses the new ERATAT english logo instead of the old Eratat chinese word logo found in the former classic shop.
Having said enough, it's the strong management and their wonderful execution that convinced me to vest in this company. give eratat some time. it will turn out to be the next Lilan in HSX.
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