Eratat invited some guests from SHK to the trade show. The
head of the team expressed positive findings about Eratat,
before all distributors and guests of Eratat, when interviewed by the event host on stage.
At the same interview, it was revealed that a team from SHK has been working with Eratat on this fund raising exercise for more than a year, during which extensive due diligence was conducted. The positive findings and the advanced stage of negotiations are votes of confidence in the company.
Page 3:
At the trade show, the event host interviewed Mr. Julian So, the managing director of Client Solutions, Sun Hung Kai Financial Limited, about his thoughts on Eratat. He
replied that he (and his team) has spent one and a half years working with Eratat and is impressed with the quality and professionalism of the management, staff, its
products and sales strategy. In a separate conversation with one of Mr. So’s staff, we gathered that they have been performing both financial and business due
diligence on Eratat, including visits to distributors’ outlets.
I checked with a portfolio manager (specializes in equities, and have some knowledge on fixed income). Based on her understanding of the eratat bond issue:
The 12.5% calculations and methods used by Eratat is the standard way of calculating Bond Interest Rate... so 12.5% is accurately depicted. Personally, I don't like it, but that's apparently Industry standard. At least it resolves an issue which I had.
She felt the bond was expensive, as did I (as mentioned earlier).
The effective annual rate should be the 15.45% using a compounding method of interest calculation. For the lay person's method of thinking of interest rates (I had mentioned earlier that the 12.5% is correctly represented and calculated according to bond calculations there is NO discrepancy apparently).
The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.
Some caveats which she did not like was the 3 day suspension issue which would force Eratat to redeem all the bonds. She felt that such a covenant can potentially be violated quite easily. Although, this would entail that Eratat would have to fork out 33.5m (the difference between 134, amd 100.5m) extra (principal less subscription).
Ultimately, It's up to each individual to determine if the risks and payment is worth (effectively 33.5m) is worth whatever they might be getting from SGK or whatever they might use the money, etc for for tactical or strategic purposes.
You know my take from my first post. There are always issues (as I had identified previously and here) but it's up to you to weigh the pros and cons. I'm pro-oriented because I take both a management and financial orientation. A purely financial orientation will more likely be less positive a perspective, because the field of finance deals with point estimates and whatever cannot be understood or interpreted is often ignored.
I just wanted to provide this latest information to help fellow investors to decide how to weigh in on your position and to provide additional information for decision making.
I wish you the best. Remember that discrepancy between investors is what creates the opportunity to make or lose.
Tactician wrote:
The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.
TQ a million for your post. Can you help me understand the excerpt above? U mean it's 12.5% interest on 100.5 million bond = 16.75 rmb m a year = 33.5 m in 2 years + 100.5 million = 134 m in total repayment?
If yes, it's odd that the 'Principal Amount of the Bonds' of 134 m includes the coupon repayments.
As an aside, the VB's d.o.g poster's calculation of effective 30% interest does raise serious doubts about the accuracy of the estimate. It's incomprehensible for any company to accept 30% interest charge, so that itself means that by commonsense it is a wrong calculation.
Hope it clarifies any misconception over eratat's bond issue. This is not my blog or I do not get advertising fees for people reading it
Also, there are some misconception around the definition of principal amount in bonds. Principal is defined as the face value of the bond which means the amount the issuer has to pay upon maturity and is separate from interest payments. Here is Investopdia definition.
www.investopedia.com/terms/p/principal.asp
Last edit: 11 years 5 months ago by 0913. Reason: Adding the definition of terms in bond
That is where the difference lies. The blog states a cash flow that includes BOTH coupon payments made quarterly and a full sum of the principle being paid to get the internal rate of return.
I believe it's a mistake and double counted. In accounting terms, it's a double entry issue. The blog writer seems to have counted interest twice, plainly speaking.
If anyone is going to meet with Eratat, this might be a good question to ask and finally settle the issue of the calculations. Obviously, an interest component that's 12.5% (based on typical bond calcs), 15.45% (using a layman approach towards interest)and 29.49% (based on the blog's calculations) can have very different judgement.
I still believe that the 12.5% and 15.45% figures are accurate given my talk with a portfolio manager (hence professional - albeit fixed income is not her area of specialty, although she does have access to such experts and does have knowledge of it), and my own understanding of the bonds.
Nevertheless, lets see if an exact picture can be obtained, rather than use information that might be inaccurate.
TQ to Skeptic for triggering discussion by pointing out the negatives despite not vested. Most times I don’t dare make negative comments if I am not vested. It’s great to have diff views in a forum so that we all learn something. Also TQ to posters who share their opinions, whether right or wrong. Eratat always attract strong views from both sides as it has great metrics but lousy share price. Anyway, here are my 2 cts worth.
I never bothered about S-Chips until 2008 subprime fiasco when my Blues/Mid-Caps crashed. China GDP was then still growing at 8%, which enticed me to buy my first S-Chip Eratat early 2009 at ave 8.5 cts. The price shot up to 28.5 cts in Oct 2009 for no reason, gaining more than 200% in less than a yr. I only sold some then as I thought it’s potential was not yet realised.
In Jan 2011, the price rebounded to 26.5 cts just because of the CMIA share placement ann., and again I sold some. I finally sold the remainder after they ann. the distributor sales incentives for YE2011 ( was disappointed with CEO Lin, though I made good money on this counter overall ). Didn’t own any S-Chips since then until their recent share buyback ann.
I am trying to illustrate that good stocks are also not immune to market crash and that S-Chips and their share prices can be unpredictable. In 2008, even super Blues like Citibank and AIG could have gone broke. Or recently, mighty Apple Inc dropped 44% within 7 mths from it’s Sept 2012 peak. Share investment is full of risks and there is no silver bullet. So I don’t just use FA to pick stocks but also look at the biz angle, risk/reward, mgt, short or long term etc, which luckily worked for me over the yrs. Every investor have diff risk profile, capital, discipline, experience etc.
When I picked Eratat early 2009, CEO Lin was a trailblazer, firstly transforming Eratat from sportswear ( after 2008 Olympic craze ) to casual wear and later from footwear to apparel. He made several good decisions, including building up the Eratat Classic brand starting in 2nd/3rd tier cities before going to 1st tier cities with higher end Eratat Premium, which turned out to be much tougher than expected. Now he wants Eratat to operate some flagship retail stores on their own, like most of it’s peers.
Coming back to the bonds, I am puzzled too, esp borrowing at high interest rates when they already have Rmb 545m cash. I try to look beyond the madness and hope CEO Lin has a plan LOL ? Instead I focused on risk/reward when I bought at 13.4 cts vs Eratat’s 23 cts cash/share , NTA 41 cts and PE 2.5. If this ann. was made early last yr, I won’t have bothered as there were many other good cheap stocks then. But now, it’s tough to even pick a stock which can gain 10% in next 12 mths, hence I am merely taking a calculated risk ( aka gambling ) as 1 ct gain is 7.5%. But don’t bet what you can’t afford to lose and keep your running shoes on.
As for SHK, it is listed in HKSE and is a large broker with extensive expertise and biz connection in HK/China. Don’t know why convertible bonds are not issued instead, maybe they hope warrants will be exercised before the 2 yr term ends ? On paper, the 25 cts warrant exercise price is cheap , hopefully a new savvy major shareholder will emerge. Though Eratat has disappointed many , I think it has potential as it has an established brand/distribution network in the huge fragmented China apparel market , hence IMHO , can attract many interested parties. Am vested, dyodd. Good luck.
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Page 1 of May 2013 SIAS Research report:
