Eratat Lifestyle - Forward PE 1.5X

Hi Newbiestock, The concept of e-shopping can be a risky one, especially for a player who's trying to build up a strong brand name. I'd known of Eratat since a long time ago (before they were listed) when they were selling sport shoes only, and always thought that they've had a pretty good eye to detail. Now that they've moved to apparel, and have focused on moving up the value chain, the addition of e-shopping might actually be something that can detract management from their focus. The competancies of developing competencies to support an internet platform successfully is very different and many fail to realize its implications. Most treat the use of the internet as just another form of distribution, but the implications are actually much larger than that. For example, e-shopping is normally related to a cost-leadership strategy (if the full suite of options of e-shopping is utilized) - note that e-shopping is very different from using the internet to reach out to customers, etc. There is very strong implications with respect to brand dilution, etc. Personally, I'd rather not bring up the idea to Eratat precisely because many tend to get caught up with the lure of e-shopping or the use of the internet as a channels for revenue (with a very low cost base if done correctly) without fully understanding its implications, which is why so many internet related ventures fail. Maybe you can ask Eratat to send a signal to the market that it has everything under control by doing a special dividend? Since the concerns of investors tend to be with respect to its receivables, etc?

hi, tactician, i do share and agree with the possible implications u raised about e-shopping. if i got attend the next briefing, i'll check with the management about their views on e-shopping privately during the Q&A session. I think the management needs to be mentally prepared, in case disruptive technologies come and phased out traditional biz ideas. Even in Korea rite now, u can do grocery shopping via photo taking in the subway without gg to the supermarket itself and they will deliver the goods to yr home. another example is online video and p2p video streaming phasing out the need for a retail VCD/DVD shop. I don't know how shops like poh khim in sg can make money these days with online video penetration.

Check this virtual shopping. I do know of researchers in A STAR trying out and developing such similar technologies.
 
With a higher projected EPS of 8 cents this year, they shld give a higher dividend theoretically. With a conservative payout ratio of 15%-20%, the dividend can work out to be around 1.5 cents to 2 cents (> 10%), if u have been buying Eratat between 11-20 cents. Lilanz has nearly 50% payout ratio last yr with 17 cents RMB EPS. so, imagine Eratat next time has 50% payout ratio and assuming it can maintain 8 cents SGD EPS every year, u will be getting around 3-4 cents sgd dividend per year for a yield exceeding 20%, if u hold Eratat over long term. But for now, don't think 50% payout ratio is possible for Eratat as they are still expanding. Maybe, wait until Eratat grows double to the size of Lilanz bah.
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[Tactician 03-12-2011]:
Hi Newbiestock, The concept of e-shopping can be a risky one, especially for a player who's trying to build up a strong brand name. I'd known of Eratat since a long time ago (before they were listed) when they were selling sport shoes only, and always thought that they've had a pretty good eye to detail. Now that they've moved to apparel, and have focused on moving up the value chain, the addition of e-shopping might actually be something that can detract management from their focus. The competancies of developing competencies to support an internet platform successfully is very different and many fail to realize its implications. Most treat the use of the internet as just another form of distribution, but the implications are actually much larger than that. For example, e-shopping is normally related to a cost-leadership strategy (if the full suite of options of e-shopping is utilized) - note that e-shopping is very different from using the internet to reach out to customers, etc. There is very strong implications with respect to brand dilution, etc. Personally, I'd rather not bring up the idea to Eratat precisely because many tend to get caught up with the lure of e-shopping or the use of the internet as a channels for revenue (with a very low cost base if done correctly) without fully understanding its implications, which is why so many internet related ventures fail. Maybe you can ask Eratat to send a signal to the market that it has everything under control by doing a special dividend? Since the concerns of investors tend to be with respect to its receivables, etc?

Hi Newbiestock,
Very nice video from CISCO. Purely conceptual at the moment though, although it might be possible in the not so distant future, if cost goes down (the technology should be able to cope with such a concept soon, but to make it reality, economies of scale really need to kick in, and that will normally take a while). It's just like Intel having built a successful 32 core chip about 6 years back now, and they had a white paper about the world of the 100 core chip. However, we onlt see quad cores in the market still, 6 years after a working model of the 32 core has been built (housed separately in a cold room cause it generated too much heat - with heat and pathing issues being the main issues then). Either way, concepts do take time to filter into the market.
Even if it does, this will not be a disruptive technology, because the paradigm of shopping has not changed, and until it becomes so cheap that individuals will have such systems in their own homes, it will not be disruptive, as it still uses the retail channel for distribution. Once it becomes cheap enough, then it will be disruptive... but that's something that will not happen so soon. There's a lot of other implications, such as bandwidth issues, etc (and that's moving into a regulated industry).
I agree with you, that Eratat should not be distributing 50% of dividends at the moment, and they probably will not, because it doesn't make sense. However, I'm thinking in terms of absolute amounts. Even if they jump their dividend to 1 cent (which would be but 12.5% of expected 8 cents EPS), I think that would be a good signal already.
I am aware of your example of e-shopping in Korea. It's an initiative by TESCO, and they have billboards with products at subway stations. Effectively, they're using the mobile phone to take pictures of a product code (one of those square shaped codes) and you can get product information, etc. They can then deliver it directly or have it picked up. Not fantastically sure about the details, but I have quite a bit of information about their business model. To be honest, there are some major benefits and issues to such a model. Will have to see if it works out... but my guess is that it's not going to generate as much profits as optimists might hope for. The devil is in the details for this example.
Even online video streaming has issues, because it uses a channel which isn't controlled by the product/service providers. ISPs and Telcos are effectively changing the way data is charged over its channels. It's moving away from unlimited usage to chunks. This can threathen the business viability of providers of products/services which stream large chunks of data. The classic example is Netflix which take up the bulk of bandwidth now... and they're going to get hit hard. Having control over your sources of competitive advantage is very important, and the internet is an area where it can be very risky if one doesn't know how to navigate it.
Cheers
 
 
 
 
 

Yup. U are right, tactician. Economies of scale nt there yet, though the technologies are quite mature right now. The whole setup can be quite expensive. In A STAR, there are such research carried out. Virtual reality can be quite interesting and fun. I know abt it because i used to work in A STAR.
anyway, such technologies will be a long way to go and u are rite that there isn't a need to worry abt it. But it will be interesting in the future, if such technologies can help improve sales and maybe improve inventory planning...
As for dividend, i'll be happy if they can distribute somewhere btw 1.5 cents to 2 cents SGD dividend for next yr.
 
 
[hr]
[Tactician 03-12-2011]:

Hi Newbiestock,
Very nice video from CISCO. Purely conceptual at the moment though, although it might be possible in the not so distant future, if cost goes down (the technology should be able to cope with such a concept soon, but to make it reality, economies of scale really need to kick in, and that will normally take a while). It's just like Intel having built a successful 32 core chip about 6 years back now, and they had a white paper about the world of the 100 core chip. However, we onlt see quad cores in the market still, 6 years after a working model of the 32 core has been built (housed separately in a cold room cause it generated too much heat - with heat and pathing issues being the main issues then). Either way, concepts do take time to filter into the market.
Even if it does, this will not be a disruptive technology, because the paradigm of shopping has not changed, and until it becomes so cheap that individuals will have such systems in their own homes, it will not be disruptive, as it still uses the retail channel for distribution. Once it becomes cheap enough, then it will be disruptive... but that's something that will not happen so soon. There's a lot of other implications, such as bandwidth issues, etc (and that's moving into a regulated industry).
I agree with you, that Eratat should not be distributing 50% of dividends at the moment, and they probably will not, because it doesn't make sense. However, I'm thinking in terms of absolute amounts. Even if they jump their dividend to 1 cent (which would be but 12.5% of expected 8 cents EPS), I think that would be a good signal already.
I am aware of your example of e-shopping in Korea. It's an initiative by TESCO, and they have billboards with products at subway stations. Effectively, they're using the mobile phone to take pictures of a product code (one of those square shaped codes) and you can get product information, etc. They can then deliver it directly or have it picked up. Not fantastically sure about the details, but I have quite a bit of information about their business model. To be honest, there are some major benefits and issues to such a model. Will have to see if it works out... but my guess is that it's not going to generate as much profits as optimists might hope for. The devil is in the details for this example.
Even online video streaming has issues, because it uses a channel which isn't controlled by the product/service providers. ISPs and Telcos are effectively changing the way data is charged over its channels. It's moving away from unlimited usage to chunks. This can threathen the business viability of providers of products/services which stream large chunks of data. The classic example is Netflix which take up the bulk of bandwidth now... and they're going to get hit hard. Having control over your sources of competitive advantage is very important, and the internet is an area where it can be very risky if one doesn't know how to navigate it.
Cheers
 
 
 
 
 

Newbiestock -Agree that it was good strategy for them to establish their sales network initially in 2nd and 3rd tier cities before they move to the 1st tier cities where top global brands are based. Another good move was to change their low margin sports shoe biz to casual wear after the 2008 Olympics . They even started a school to train retail staff of present and new distributors. Their track record and cautious/methodical approach reflect their deep understanding of this biz in the China market.
Tactician – Don’t know the motives of those who don’t own this stock but regularly come to this forum to run it done with the same old arguments. Anyway, whatever negative concerns should be already factored into present low price, esp when there is minimum orders on hand until mid-2012.

Well, I don't see why "un-vested" individuals cannot come in to comment on a stock.
Do you mean to say that you study only the counter/company you want to buy, and not others in similar industries or economy for a fair and just comparison on a company's advantages and profit margins?
Does no interest in buying a counter equates to no interest in reading annual reports? Maybe to you it equates, but to me, there's absolutely no link at all.
Hence, I find your comment and post extremely strange, given that you mentioned you have done lots of homework before buying into a counter. I would have expected you to have compared with all other competition, even if you have no interest in buying into competitors.
 
Good stock or bad stock, it makes perfect sense for an investor to study on why it is good or bad.
 
 
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[Tactician 02-12-2011]:
I wonder if anyone finds it strange that Eratat gets a lot of "un-vested" individuals who regularly come in to comment on the many possible issues with the stock (which I had addressed before). If the stock is such a bad stock, then shouldn't investors who have no interest in the stock (since they don't really look deeply into the stock, and feel that they don't quite understand or buy the story), then shouldn't it make more sense for one to focus on stocks they believe they can make money from? I know I don't find it strange, because it's a choice (endogeneous) variable and the ability to make comes from two sides of an equation (your typical cost versus revenue argument). Buy low and/or sell high will help to ensure profits. Either way, I'm very happy that the stock is being beaten down cause it provides with opportunity. From a tactical point of view, it all fits. Perhaps a small insight for "next insight"