1) Yep, I made an error in ROA calculations. I failed to add in the massive retained earnings. My bad. The error lies in taking merely share capital into calculations and not retained earnings.
Thanks for pointing out.
Incidentally, I noticed that the receivables account for 88% of retained earnings.
but
2) Your data is definitely not based on 2012 AR if it is updated 31/12/2012
Nevertheless, with the bond issue, the ROE will go up while the ROA will go down.
I would like to talk about Eratat from a purely qualitative point of view.
Eratat is becoming more and more of a design company. It outsource the manufacturing of the accessories and apparels and depend on distributors to sell its products.
Eratat has mentioned the manufacturer is also the manufacturer of renowned fashion brands, hence quality is ensured, but the bargaining power favour the Eratat's supplier.
IF ERATAT does managed to get more distributors and give more orders, it might increase its bargaining power, but so far, the bargaining power is status quo for years.
Eratat has a core 12 distributors, and has been generous in terms of credit length and renovation subsidy. It might be a valid reason to gave those since the industry is highly competitive, but it does point again to the fact the bargining power favors the distributors.
Eratat need to pay cash out front to supplier and takes a long time to convert receivables to cash, and at the same time is expanding at Shanghai and building "brand"
It is little wonder they need cash. Assume no monkey business, it does point to the weak position of Eratat. Given capex should be minimum since they outsource the biggest revenue contributor to third party, Eratat should have no problem having FCF, but again due to its weak bargaining power, it FCF is volatile.
Assuming more distributors do come onboard, I agree with moeagle it will still be years before the fruits are ripe for picking.
You might think the price is low enough to offset the current weaknesses of the business, and their business direction is correct, then perhaps you got yourself a deal. But Eratat swimming against odds now: high capex, high interest costs, demanding supplier and customers(suppliers) yet to be confirmed.
Greenrookie, appreciate ur fair n unbiased points to both sides.
Momoeagle, noted the revised calculation.
Actually, be it eratat or distributors, it's nt so much abt who has more bargaining power. Both depend on one another to grow n their fate are tied together. The distributors depend on Eratat to build the brand n constantly stay ahead by innovating the latest fashion design. Similarly, if the distributors do well, so will Eratat. Similarly, if there is a poorly performed distributor, eratat can always discontinue them n pick another one.
I am ok with their 120 days credit, although the ideal credit should be about 90 days. Any credit days below 60 days may nt be recommended because it may also hamper the growth of the distributors as the distributors themselves also need cashflow. Do note that some time is also needed to clear the stock n when goods are delivered to the distributors' warehouse, the distributors need to plan a scheduling to deliver the goods to every outlets of their shop. Those in the supply chain industry will know.
One impt point to note is that the distributors are using their own money to open their own shops so if u give them longer credit, the distributors hv better cashflow n can open new shops bit by bit at a time, which will also help improve subsequent orders. Imagine if eratat cuts credit days to very low until it affects the distributors cashflow. Yes, Eratat now gets the cash earlier but the distributors now hv a tighter cashflow n thus are nt willing to open new shops. Then what will happen to the growth next quarter?
Although eratat can adopt an asset light distribution, eratat strategy is to hv a gradual moderate growth. U grow too slow, others overtake u. U grow too fast n supply exceeds demand n u end up hv cashflow problems n inventories piling up, which was what happened to the sportswear sector, when they just keep opening new shops. The quality of the distributors are more impt than the quantity of the distributors.
Momoeagle, u hv been criticising abt the trade receivables. In ur opinion, what do u think is the ideal credit days should give to the distributors?
Eratat has been gg through transformation for the past two years to a men casualwear. It is taking the right steps so forget abt the past years. The good years for eratat are coming as they hv position themselves strong to undertake their next major expansion. Give eratat time, the receivables issue will slowly be taken care of, as i understand the management would also prefer to issue shorter credit days. What is imptly is profits n cash are growing so we can ecpect dividends in the coming year to multiply.
Every 365 + 120 = 485 days, their cash balances will add over RMB 100 mil+ (net profit - dividends). There is nothing to complain abt.
"I am ok with their 120 days credit, although the ideal credit should be about 90 days. "
We have to be clear here. It is not whether you are ok a not. You have no choice.
Even if they tell you tomorrow that their credit days will be 240 days, you have no choice and no control at all.
"Momoeagle, u hv been criticising abt the trade receivables. In ur opinion, what do u think is the ideal credit days should give to the distributors?"
We need to be clear here too that my main criticism is not the credit days, but the relative size of the receivables, which is why I mention it in percentages.
Simply put, credit days for receivables can be easily reduced by rolling over the credit. E.g. I pay off $100 of receivables that are 150 days old, and buy $120 new products at credit, so that my receivables start at 0 days again. Hey credit days are reduced!
Look at this, this is a company that tells you it has so much assets (RMB 1 bil), but 57% of it is in receivables! Like wow!
"Eratat has been gg through transformation for the past two years to a men casualwear. It is taking the right steps so forget abt the past years. The good years for eratat are coming as they hv position themselves strong to undertake their next major expansion."
Find me a listed company that won't tell you
1) we are operating in a challenging environment,
2) we are well positioned to _____[Insert optimistic goals]___, and
3) we will emerge stronger in the long run.
At worst, it is about profit warnings [Note the words, not losses], but every one is always confident in the long run.
Yes, in the long run.
And in the long run, we are all dead.
And operating in a highly competitive industry, and in a country called China rampant with cheap clothing manufacturers that could be of high quality as well...? What are the odds of a premium Made-In-China clothing manufacturer succeeding? In my opinion which is of course extremely subjective, I say extremely low.
"Give eratat time, the receivables issue will slowly be taken care of, as i understand the management would also prefer to issue shorter credit days. What is imptly is profits n cash are growing so we can ecpect dividends to multiply."
Given time, they had successfully reduced some receivables by a generous renovation subsidy and sales incentive. And actually convinced many about it. What an excellent track record!
Given such cheap funds available worldwide due to low interest rates environment, this is a company that had no choice (in the CFO's words) but to borrow at such exorbitant rates.
Furthermore, given 9 cts share price vs 23 cts net cash per share (saw it somewhere in the forum), the company could actually privatize itself at 11.5 cents, and earn an instant 100% gain. What is stopping them from doing that? Does anyone really think they care so much for the investors that they won't do that so that they can expand the company for you? Yes, I'm being very skeptical here.
NextInsight
a hub for serious investors
