Eratat Lifestyle - Forward PE 1.5X

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12 years 11 months ago #7587 by Tactician
Hi momo,
Glad that we got some traction with point 1. I'm actually not giving them concession. That should NEVER happen. Saying that, they are a small cap, so you need to analyze Eratat as a small cap. Otherwise, you're doing an analysis that is not relevant. NO CONCESSION, just doing a RELEVANT analysis to make it meaningful.
With respect to point 2. Well, your orignial point 2 is different from the point 2 you just brought up. I think I had addressed your original point 2 well enough.
Your new point 2 is pretty interesting. I agree with you that I did not like the placement when it happened (I had actually addressed this as a reply to Ethan), but understand why they did that (for more of what I feel about it, please read my earlier posts. Effectively, it was a dilution (which I did not like) at a price which I thought was too low. However, I can understand the POTENTIAL reasons for it. Not something I like, but something I can accept.) Eratat paying dividends while doing the placement is actually SOMETHING I LIKE very much. It's unconventional, but it does show a strong signal on how ERATAT deals with things... in a more predictable and cautious manner. I've seen a lot of their actions and they are very in sync with their stated strategy, and good corporate governance. As such, I like what they did very much. I've managed to sensemake to a level of confidence which was why I wanted to share my analysis and benefit the readers here.
I've benefited from the discussions on Eratat at this forum for some time already. I got vested because of what was said here, and from my own analysis. Both sides were very carefully looked at... especially the potential issues. Continued strategic tracking was and is being done on a regular basis. The overall story/picture/sensemaking for eratat is good... one of the better ones actually. Of course, I cannot analyze for fraud or any endogenous and exogenous events of large magnitude.
I've followed companies before, whose stories I've made sense of, and they typically being my best winners. Asia Dekor was one of them, where I had conceptualize the ability to diversify holding just 1 stock (Finance professors will tell you that's not possible, but that's only if you treat it from a static perspective. Adding a new dimension of time can yield different expectations over the short and long term, and create the same effect as diversification - from a financial perspective. Speaking to a friend of mine who is a finance professor, he actually validated my analysis. But that's a long story). Held Asia Dekor from both the short and long run to very good effect. The long run could have been better, but goodwill was effectively written off, and it was a huge amount (which is a good thing I practice the removal of all goodwill from the books when doing ANY ratios - as a sign of conservativeness). The other one with a strong story was Z-obee, which like Eratat was doing a move up the value chain. I thought there were some issues (more than Eratat to be honest), but they were also doing a lot of things well, despite their issues being greater than Eratat (in my opinion). In addition, their product can be considered Inferior to Eratat (I know they're different products, but a comparison of products across strategic groups and direct competitors enabled me to come to such a conclusion). Either way, Both turned out very well. Stories take time to materialize. If you don't have the time horizon, then it might be better to park your money somewhere else. The market situation is weak now and emall caps aren't going to benefit quite as much. The blue chips and middle liners of interest will likely move first. However, I've alwsys specialized in small caps because I know that's where I can make the best use of my abilities - which is the ability to smell a deal and structurally protect myself.
Eratat offers that to me. It might for some of you, it might not for others. A strong and proven asset base, an extremely strong revenue inflow and profit potential are good things to have. More importantly, it's DIRT cheap. S chips are scary, but the market has already discounted S chips like nobody's business. If you can find an S chip that does not have governance issues, you've already won half the battle because your company does not deserve that high discount. I believe Eratat has very good communications and governance for an S Chip and a small cap.(please read my first post for a brief summary of my analysis - note: it's not the full thing).
Eratat giving very reasonable dividends is another great thing. Management must continue with a constant dividend policy because creating legitimacy for a small cap S chip is extremely important... and I think they're doing a good job balancing that and growth/profits.
Remember that one should always invest in a company that one knows well enough. There is no such thing as the perfect industry. You cannot have everything. Even the darling of investors now (Apple Corp) had significant issues and almost ran out of cash before the Late Steve Jobs can back and took over its helm. Industry does matter (there's actually a research paper of the same name (and a follow up called - Industry does matter. really? - google it and you'll see the effect of industry on performance), but firm specific factors are at least as important. While we look at the industry where Eratat is in and realize that it is a competitive industry, also realize that there's still plenty of room in the industry, especially in China. In addition, some of the most successful players in the industry, like Versace, Louis Vitton, etc show that you can be highly successful if you know how. While Eratat is nowhere close to these players, they seem to be very successful in moving up the value chain. Most likely, they'll never be as successful as these players, but if they even achieve a fraction of what LV has achieved, you'll looking at GOLD.
Cheers
 
 
 

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12 years 11 months ago #7588 by relaxing
Hi Newbiestock - Yes, I am vested. I bought them in Feb 2009, hence I am still ahead. I attend AGM/briefings whenever I can partly to size up the CEO/CFO/Directors. I have my reasons for having faith in CEO Lin and his mgt team though I still have some minor grouses. I won't be too worried about the "selldown" last Fri, the day after the 3Q results. Only 3.3 m shares were done on that day hence only the small players were selling ( maybe even some forced margin selling? )bearing in mind that the free float is abt 70% or 330 m shares. CEO Lin and his Exec Dir Mr Ye own the balance 30%.

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12 years 11 months ago - 12 years 11 months ago #7589 by relaxing
Hi Tactician - Am glad you rebuked the sore losers who even implied accounting fraud etc. Don't think I like to argue with an academic with so much book theories . Bet you will win the arguement either way and hope you won't make a U-turn after you sell your shares one day hahah ? But one thing I must correct is that in the Q3 briefing ( also in the latest SIAS report in Eratat website ) everyone was told that there are 800 Classic stores/shop-in-mall of which 80% needs a facelift. This works out to be 640 stores and not the 1000 stores as repeatedly cited by certain posters. I'd take a stab on the one time facelift subsidy costs , 640 stores x Rmb80K x 50% subsidy = Rmb 25.6 m. This translates to a mere reduction of SGD1.1 cts in EPS, split between 4Q11 and 1Q12. I agree this is essential for the reasons already explained in Q3 results. Don't forget that the distributors have to foot the other Rmb25.6 m? But am glad we are on the same page re the eventual success of Eratat.
Last edit: 12 years 11 months ago by relaxing. Reason: wrong calculation

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12 years 11 months ago #7593 by Tactician
Hi Relaxing,
I agree that we should consider the impact of the subsidies. I just did not agree with the way it was calculated, which I felt were bad gussimates. When I was a consultant before, we treated our gussimates with great pride (to the extent that they were used for our interview process, and we had very stringent selection criteria - I heard it was an acceptance per 1000 resumes, but till today don't have any real proof to back up those numbers).
At least from your guessimate, I know that 1/3 of it is based on good information. That's the number of stores that are to be renovated. Saying that, there's still a factor missing. With the 640 stores, you're assuming that 100% of the classic stores will qualify for the subsidies. It might very well be possible that some constraint be placed on the classic stores which are eligible for the subsidies. Doing so would reduce the number of stores by whatever the multiplier of that variable is (with a maximum multiplier of 1 possible).
The other two components are ... well ... still up in the air. While the numbers are unknown, translating them the way you did made perfect sense, to see the impact to the financial statements, and the shareholders. Thanks for the inputs and methodlogy.
Lets wait till Eratat gives us more information on the details, and we'll be able to figure things out from there. My viewpoint doesn't change because of the subsidies. I can understand why they're doing it. It's just part of doing business in a responsible and team-oriented manner... something I actually wish more organizations would do (within reasonable costs). The reason being that organizations that focus purely on transactional means (i.e. trying to maximize each transaction) fail to build up important social capital and relationships that will help them win in the longer run.
Cheers

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12 years 11 months ago #7594 by momoeagle
Hi Tactician,
thanks for your wonderful reply without any subtle insinuations!
Again, I do not agree with your viewpoints on some of the ways Eratat conducts its business. Then again, this is bordering on subjectivity, i.e. you like certain actions which I don't.
 
Your sentence sums up very well.
"Remember that one should always invest in a company that one knows well enough."
I would like to bring it further by including one being comfortable with the business structure as well. Obviously, I'm not comfortable because of certain reasons, of which you had business experience in and are comfortable with. Thank you very much for sharing your knowledge and analysis.
 
That said, I'm still utterly unconvinced by Eratat, and would rather miss a gem than take a risk on something I'm uncomfortable with. I'm pretty sure you had done at least 10 times as much homework as me for this, so I would not say further.

Wishing you the very best of luck in your investments and may you huat tua tua!  :)

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12 years 11 months ago #7598 by Tactician
Hi momoeagle, Yes, I agree with you that one should not invest in a company one isn't comfortable with (unless one views it as speculation and not investment). That for me would be similar in spirit with my previous statement about "Remember that one should always invest in a company that one knows well enough." I guess I had assumed that one would have done sufficient due diligence and that discomfort and knowledge would be highly correlated. You mentioned that : "That said, I'm still utterly unconvinced by Eratat, and would rather miss a gem than take a risk on something I'm uncomfortable with. I'm pretty sure you had done at least 10 times as much homework as me for this, so I would not say further." I respect that decision. However, if you feel that you have not done enough research on the company, it might be a good idea not to blast the company so hard. It can lead other investors to make an uninformed decisions precisely because they might assume you had done a rigorous set of due diligence. Ultimately, all companies will have their own issues. Some just have more than others. On top of that, there's a lot of assymetrical information between insiders like management and outsiders like shareholders. This can easily lead to opinion differences, etc. We always have to be vigilant and we should always enter with our eyes open and be aware of potential issues (like what Green Rookie brought up). Saying that, you know my stance. I think Eratat is a gem with limited downside and risk. Cheers

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