Sale incentive ......sound to me like a nice way to put it for receivable writeoff.....

During the current quarter under review, the Group gave the distributors sales incentive award of RMB51.7 million as a reward for their sterling sales performance during FY2011. Had the sales incentive award not been incurred, the net profit after tax would have been a record of RMB197.9 million, representing an increase of about 51%.


??? What is this sales incentive award???

Sounds like some new-fangled way of subsidising their distributors? Or is this ' renovation subsidy ' by a different name?

Good volume while price continue to move up slowly. Guess BBs are still collecting......

See above, screen capture of my purchase at 11.1 cents of 100K shares.
I feel lucky that there is a S-chip small-cap rally. But I wonder what the 4Q results will bring. Life has a lot of uncertainty, man!

Can Eratat rebound back to 20c level?

Hi Reck - I don’t think this is luck as everyone knows they are going to report EPS of abt 8 cts for YE2011 later this mth.  I couldn’t understand why retail investors were selling at 12 cts or PE of 1.5 but yet it went further down to 10 cts.  Why? Only those who sold at such low prices can answer this.

It is true that blue chips will lead a market recovery and rotational play later will push up penny stocks. You will note that many speculative S-Chips recovered first but with their poor fundamentals , it is very risky to hold them. By the way, the ST China index now is only 262 and still  below last yr’s peak of abt 310 ( from memory )

Everyone just got lucky as Eratat hit 15 cents.
Lucky -- cos of Penny Stock Rally, the mother of all rallies for the past 12 months. On top of that, the hot sector is S-chips, quite unbelievable but true. S-chips are all rallying after being the Bad Boy of the year.
Such is investing.

.

hi, momoeagle,

there are reasons why i throw back the questions back to u. Criticise them is easy but to actually offer a viable, practical solution that fits reality is not easy. if the distributors need to invest few millions to open several shops, u do need that long term credits in order to make that happen.

hongxing is still in sportswear and being a big company (including XStep as well), it can't evolve and adjust as fast as Eratat. Eratat is heading the right direction, expand fast in a year, consolidate its position in the following year and then expanding fast again in the following year.

seriously, which manufacturer will be in the right mind to cut down the number of distributors? isn't it the "more the distributors, the merrier"? think abt why Eratat is doing the reverse way by focusing on Quality distributor instead of Quantity distributor. The larger the number of distributors, the less responsive it is to respond to market changes.

If u ask me how long to wait, i don't know. In the short term, I can't predict when the share price will move. But in the long term, within three years, Eratat should be able to grow to a much much bigger size than what it is now.

For young and growing company, one needs to be patient. If u want to maximise capital returns, three years will be a good investment horizon. if u buy at a good price, just hold for three years. Anything that happen in between, just try not to bother with it. so long as u meet the management, can trust them to execute their strategy, then the returns will come. if can't wait three years, then go for mature company, but the capital return will be smaller.

as u know, momoeagle, i once worked in a tech startup company (from a program i told u before.) The mindsets of VC and angel investing are also very different from the mindset of a retailer investor in a stock market. although i am not qualified or hv the capital to invest like a VC and angels... There are super wealthy ppl that don't invest in stock markets. They buy unlisted company when is young and wait for it to grow and exit when the company gets acquired or enters IPO.

tat's why when ethan999 mentioned about lin jiancheng's parent-in-law making huge profits from the sale, i am not surprised at all. but of course, investing in a growth company has a lot of inherent risks. if u want a safer return, then go for value investing in a mature company lol.

As for eratat, if the risk appetide doesn't suit u, then don't buy. I am not doing recommendation on Eratat as well but I will still to continue to hold because i still see value, until subsequent quarters prove me wrong.

Hi newbiestock,

you are basically throwing all questions and problems that a CEO should solve to me, and taking upon yourself to answer questions that the management should be answering.

The fact that "If they don't extend credit beyond 90 days, how to get distributors to work with them to open shops?" tells that no one wants to sell their products unless being given huge incentives.

As for trade receivables, anything above 60 days is a very long time, and beyond 90 days? To me, this is a red herring.

And if
"so, 1), 2), 3) - either way also wrong and got investors worry here and worry there."
the question becomes, why bother to invest if all possible ways are wrong?

I don't see their strategy as being good at all. From the way I see it, the management has no idea how to solve their problems, and having such a huge trade receivables made them puppets of their distributors; their distributors can just walk out on them without any blow to their personal assets if Eratat does not agree to their terms.

I have also posted before why I view their placement very negatively, given their acceptance of a lower placement price when the earlier failed. Was it even necessary to accept it so hastily when the market was down? Wasn't it them who said earlier that they had no necessity for it, and would prefer to wait for a better price, when CMIA first expressed interest?

With the latest report by them, by using subsidies to offset trade receivables, this is to me a 2nd red herring. Of course, I do hope I'm catastrophically wrong and Eratat will rise back to 30cts for investors around, but objectively based on my understandings, this company is done. Ask to give more time, and more time, and more time? I agree, that time will tell if this company is indeed what it claims to be. For me, I'm not going to risk my hard earned money like this.

*In case you are wondering why I have interest in all these textile companies, I had once studied the textile industry, and was once vested in Hongxing and China Sky. Fortunately, I have managed to escape with nett profit before things get blown up. Precisely because I recognized that it is a market that is already crowded due to a low entry barrier.*

hope this will be the last pt i made for the receivable.

"Curbing revenue growth doesn't sound all that great. Margins don't increase substantially."

- Think:

1) If they don't extend credit beyond 90 days, how to get distributors to work with them to open shops?

2) if raise revenue and book order, so long as credit remains above 90 days, receivables will continue to increase every quarter release. And, when receivables rise, investors also complain.

3) if set a cap on revenue but focus more on margin, it will reduce receivables over time. But investors also complain and worry about growth.

so, 1), 2), 3) - either way also wrong and got investors worry here and worry there. U tell me how u can reduce receivables, yet increase revenue and margins, yet the distributors are willing to put cash in to open new shops? momoeagle, if u are the CEO, tell me how u can achieve all the three things? what strategy can u implement? The distributors only have limited cash. They also need to pay labour and salary, so do Eratat as well. if u got good suggestions, pls suggest it to the management. And, in china, it's hard to borrow money due to high interest rates.

it's like our famous Cheaper, Better and Faster rally call from our labour union. Tell me how one can achieve all three things at one go.

Premium just newly launched and individual apparel piece of orders are not large. Naturally, the higher cost will offset the higher price. Wait a while. as no of apparel shops increase, orders increase, as it scales up, average costs will drop. actually, for 38% to 42% of gross margin for an apparel is already very good. Outside international brands, also gt around that gross margin. u can't expect 60% to 80% gross margin for apparel bah. while footwear drop, overall gross margin will increase. that's the most impt.

There's always uncertainty in every business or investments. just wait for them to finalise the discussion lah. I trust they will do their best to negotiate a good subsidy for the interests of the long term business. 

ever since Eratat got IPO, they only do placement once lol.

I don't like telco industry. it's just service provider and margins are not good, though it's a stable stalwart. both starhub and singtel this quarter gt profit drop.

check this:

http://www.nextinsight.net/index.php/story-archive-mainmenu-60/914-2011-chinahk-companies/4550-vodone-target-hiked-75-qinfa-surges-28-in-2-days-on-maa

“We believe the fact that the mass market is crowded due to a low entry barrier among the sportswear segments prompts us to believe Xtep is more vulnerable to the current deteriorating industry environment.”

- come to think of it. Lin jiancheng is a visionary CEO. Eratat has been evolving and fast responding well to the industry changes. if nt, they would hv followed the footsteps of XStep. The CEO already foresees this few years back and hv been making quick adjustments to their strategy.

Hi newbiestock,

there are a few questions I would like to point out on your conclusions:

"I already expected trade receivables to increase. My opinion is Eratat is deliberately trying to curb revenue growth and trying to increase its margin by offering a higher apparel product mix, so that its receivables can be capped at a certain level for next yr."

The important consideration isn't your opinion, but whether if that is the management's plans and directives. No point second guessing on uncertainties as you aren't a controlling shareholder at all.

Curbing revenue growth doesn't sound all that great. Margins don't increase substantially.
Furthermore, they are planning to offset some trade receivables with subisidies on renovations?

How many shops are they going to upgrade? How much are they going to subsidize?

Let's do a rough estimate:
Num of shops to upgrade: 1000 (as per AR2010, more than 1000 retail shops. 2011 was supposed to have growth isn't it? So 1000 is a good estimate.)
Cost of renovation: Est 0.5mil RMB  (Abt $100k SGD, which is quite cheap for a big floor space. But this is China, so I gave some discount.)

Total cost of renovation: 500mil RMB
A subsidy of 10% will give around 50mil RMB, and hey presto! 50mil RMB taken off trade receivables!

An even higher subisidy to give HUGE support and a BIGGER encouragement to the retailers would be nicer of Eratat right? What's the advantage? Even larger reduction in trade receivables! That would make it the best of both worlds!

What's the cost? A reduction in reported NAV! How? Simple, explain it off again that these subsidies are needed for future growth! And more growth! And more growth! The question is, till when? 

There are just too many questions and uncertainties that I seriously believe the risks are not worth the rewards. And I see no point in explaining for the management; they should be the one addressing, not you or me. :x

"It takes time for execution to show. When u launch a new product, expect at least a year or slightly more to see result. btw, all stocks are down due to the poor macro sentiment. Not just eratat."

Not all. Telcos aren't really down much.
Anyway, this isn't any reason not to consider the possibility of major shareholders exiting on the quiet because of internal events.

"Why not? Young company needs time to grow and for the execution to show result. It can't happen overnight. PREMIUM is just newly launched. Eratat needs to rest and consolidate as well after an explosive growth in 2011. After enough resting, it will grow explosively another time again. When the explosion comes again, that will be the time that Eratat shows another big jump in share price."

I don't see Eratat as having grown at all in 2011. Most of the asset growth comes from substantial increase in trade receivables, which should be treated with due caution.

BTW, for others, I'm not vested.

Hi, momoeagle, my reply below:

Hi newbiestock,

this is momoeagle from CNA forums.

I believe I'm actually repeating this, but I just have to point out again (it's almost the same for the past many quarters) that trade receiveables is up yet again.

We can see from the latest balance sheet that Eratat has once again raised its total assets substantially, via the substantial increase in trade receivables (again).

As mentioned before, the problem with trade and other receivables is that these are trade deposits placed with other companies. It is thus not easy to audit such receivables and verify it. Essentially, if you are paying for "assets" that is not yet collected, that is at the mercy of other distributors.

Trade receivables are hence usually valued at a much lower valuation than they are worth. I've sent you a link on this in CNA forum, not sure if you have received it.

Before the report, Eratat tells of how great they are by allowing distributors longer credit terms so as to grow the brand. Was there any returns? How long has it been since they were doing this. It isn't anything recent, and no returns have been seen except growing trade receivables.

The latest report by Eratat tells of them even needing to subsidize their retailers? Aren't the Classic retailers making money at all to even do some small amount of renovation after so many quarters of sales? If so, and the margins for Premium aren't very much higher than that of Classic, can we expect the new retailers to achieve phenomenal sales as well?

Or perhaps the management knows that trade receivables are "growing" so huge that investors would start to query and question? Hence, the decision to cut trade receivables writing it off as subisidies for renovation. And hey presto! Trade receivables will start to decrease! Magic!

I see little reason why you would say give it more time to the effect of 2-4 more quarters. Early investors have already given more than 10 quarters.

Why not take case studies that have already present to you before hand?

China Printing & Dyeing was a case of increasing trade receivables. Granted, they had increasing debts as well. But well, we see Eratat having placements instead of debts?

Beauty China was another case of increasing trade receivables who mentioned it was relaxing credit terms to help its distributors who were hit by the financial crisis.

What happened to these two companies now?
[Case studies not done by me]

Wishing you best of luck with Eratat.

Signing off,
momoeagle

Hi Newbiestock, its nice of you to share the info re Q3 result briefing. Initially I was disappointed with the low 1H2012 trade fair orders but felt better after some quick calculations. The Rmb 285m apparel orders is 4% higher than the actual 1H2011 apparel sales. The drop in orders is due to the lower margin footwear. The Rmb141 m Eratat Premium orders vs Rmb40 m sales in 1H2011 sales is also encouraging.

I think CEO Lin and his team did a great job transforming Eratat's business from low margin sports shoes to casual/fashion wear in such a short time. In 2008, the apparel sales was Rmb156 m ( 35% of sales ) but this will increase 4 times to Rmb627 m ( 59% of sales ) end this yr. This will increase further to 75% in 2012, meaning Eratat is still evolving.

Hi Greenrookie,

As you know like you I have sold all my shareholdings in Eratat. Thankfully I was able to get out at over 13 cents, hopefully you were able to as well.

From my understanding the reason why their gross profit margins haven’t gone up for apparel despite higher ASPs is because apparel manufacturing is outsourced to suppliers, and the amounts they charge for producing higher quality or ‘premium’ apparel is higher.

Interesting that gross profit margins for apparel actually fell (albeit marginally) as well over the last year despite the introduction of the Premium label.

Thank you newbiestock, ethan999, Tactician and Observer2 for your amazingly passionate views and sharp analysis, from which I have learnt a lot about investing. I have no idea how Eratat's biz and stock price will turn out in the next few months but I wish you all the best. Perhaps the Eratat believers will actually make a capital gain and ethan999 will also make a gain by investing in another counter.  

Dear all forummers,

There is something puzzling about the margins of Eratat apparels, maybe one of you can enlightnened me.

For 2011, June-Sept period, they sold 0.96 million pieces and at ASP 200.9

For 2010, June-Spet period, they sold 1.23 million and at ASP 113.4

Yet margin drops from 39.1% to 38%

How come?

Less pieces but higher raw materials costs, thats possible, but with ASP improving by almost 90%, surely it enough to offset the raw materials.

It there is more prenium designing involved, the costs should be factored in Admin expenses, not cost of sales.

If the cost of sales is increasing depsite lesser pieces and higher ASP to the extent that it is eating into margins, I wondered what competitive advantage they have in producing the prenium series?

(I know i mentioned before that my previous post will be my last for Eratat, but this equation keeps bugging me, maybe newbiestock or ethan999 or anyone can explain)