I was reading a link provided by wildreams from VB
www.tradingfloor.com/posts/china-finance...g-resistant-17009177
It talks about where short sellers start, obviously, it is the financial reports, he mentioned clearly that companies that have all the red flags are not necessarily frauds, but mention that if companies does not show such flags, it might allow an investor to sleep better.
It wasn't really something very forensic, it was rather common sense, but I realised Eratat had quite a lot of ticks throughout the checklist (Again, this does not necessarily implied fraud,but maybe you should be losing some sleep,and use the time to dig deeper?)
1) Incredible Margins
Copied from Boon from valuebuddies:
Gross Profit Margin(GPM) FY2012 / FY2011
Lilanz = 40% / 39%
Zuoan =47% / 44%
Xiniya = 33% / 34%
Eratat = 31% / 33%
Net Profit Margin (NPM) FY2012 / FY2011
Lilanz = 22% / 23%
Zuoan =21% / 21%
Xiniya =13% / 21%
Eratat =14% / 14%
So Eratat pass this marker, no super margins.
2) Receivables growth
This has been deliberated many times, and forummers had point out that receivables are actually dropping, but I shall move on to the next point, and explain why I still think this is a issue.
3) Acquisitions
Eratat has not made any major acquistions, just organic expansion, but they gave renovation subsidies. And the renovation subsidies are offset by receivables, hence Q1 fall in receivables should not be something to cheer about.
4) Goodwill
PAssed!
5) Cash
Large horde of cash that is not spent over a long period of time, they are expanding into Shanghai agressively, why is it still not drawn down in a significant way? If they are already recruiting, it should means the shops are rent/bought, renovation going on...
6) Cash but increase loans
Well, lets not go into the SHK bonds again.
7)Insider dealings
If before the most recent sell-off by ye sanzhi, CEO has been reducing his stake too.
LAst but not least, I thought the only way to effective clear all doubts will be local knowledge, visiting the outlets, and check the renovation work done.
But as Boon from VB pointed out, there is no store locator in Eratat website,what we have seen all these while are just Shanghai outlets.From their wesite, they claim "Eratat products are sold in more than 1000 retail locations spanning across the PRC through our distributors and retailers." Anyone seen any Eratat outlets besides shanghai? I have been to Nanjing, Suzhou, Hangzhou, Beijing, but never seen those shops. I have seen xtep, and others thou....
I am not implying its a fraud.
But can Eratat stand a short selling attack? Minzhong has a major shareholder with deep pockets, a look at 2012 AR show chairman with the highest stake of 25%, the second largest stakeholder is Ye Sanzhi. He is gone too.
I am actually tempted to "trade" Eratat, but I think I will give the trading a miss too.
Just my 2 cents worth.