Hi ethan999,

I fear Singapore stock market has closed its eyes on S-chips.

And it is likely to last for 1-2 years.

I don't understand SGX intention to appoint an ang mo as a CEO when the entire world is running to China. Even Hong Kong appointed a mainland China CEO.

If SGX appointed a mainland Chinese CEO, I believe this CEO will have the network to pull some good Chinese IPOs to Singapore.

What can this CEO bring to Singapore? His first gamble has already failed.... I wait to see what is up his sleeves..

Eratat's PE is actually 2.7 now, compared to Lilang's PE of 26.    

Also, Lilang is trading at 6 times net asset value, compared to Eratat's <0.6 times.  

However Lilang’s current net asset value is only about 2.45 times that of Eratat’s.  

Furthermore, they aren't even that different in market size. Lilang's annual revenue of 2 billion rmb makes it only almost double that of Eratat's.  

And even then, Lilang was already trading at around this price range a year ago when its revenue was about 1.5 billion rmb.  

Eratat is currently valued at 85 million sgd while Lilang is at about the equivalent of 2.057 billion sgd, or about 24.2 times that of Eratat.  

No doubt Lilang is currently worth more than Eratat, but 24.2 times?                  

Perhaps Eratat really needs to seek a dual listing in HK.

Joshua87: i believe eratat is nvr about the cash they have or not since it is only a small proportion compared to the current share price...

it's about whether they can grow their biz or not and if their transformation from a sports shoe company to a casual wear and probably premium wear is successful or not... they have only embarked on it last year and hence, investors will need a few more years to gain that extra confidence...

their latest order book seems to be below expectation and the 2 placements have caused the share price to overhang... but the cheap valuation of ard 2-3x PE is worth investing for the longer term...

if u are looking for cash company, Changtian is the one that u should look out for with cash per share of around 20cents and yet the share price is trading at ard 7cents+... this kind of company u shld really worry if the cash is really there or not...

Hi Dele,

I need to make a slight correction to that post as it is not the 'celebrity' series but the 'travel' series within Eratat Classic which has been discontinued. The Celebrity series was doing well according to CFO Ken Ho and they decided to build on that with a whole new Premium series which has a more 'euro-chic' style. You can find the information regarding this on page 3 of the following report by SIAS.

http://www.eratatgroup.com/v2/files/releases/20110405_sias.pdf

Nevertheless I was hoping that their order book will  grow more this 2nd half of the year than it has. However it looks like they are focusing more on branding, pricing and increase margins rather than increasing volume right now. 

Projections for 2h 2011

Actual sales typically turn out to be 5% higher than order book.

Estimated revenue for 2h 2011: 550 million + (5% of 550) = 578 million.

Composition: 65% Apparel, 35% Footwear.

Gross Margins for Apparel: 40%  Gross Margins for Footwear: 25%

Estimated revenue from apparel = (65% of 578 million) = 375.7 million.

Estimated revenue from footwear = (35% of 578 million) = 202.3 million.

Estimated gross profit from apparel = (40% of 375.7 million) = 150.28 million

Estimated gross profit from footwear = (25% of 202.3 million) = 50.575 million

Total estimated gross profit for 2h 2011 = 150.28 million + 50.575 million = 200.86 million.

Looks very promising from a bottomline perspective but I hope they focus more on growing the topline as well in the months to come.

ethan999 says: Let's not forget that Eratat Premium is not exactly a complete breakaway from Eratat Classic.

One of the components within Eratat Classic used to be the Eratat 'Celebrity Series'. Given the popularity of that series, Eratat has decided to enhance its image using that series but marked in a more chic, up-market style in the form of Eratat Premium and if I'm not mistaken, the celebrity series has been removed from the Classic series as a result.

Therefore I think Eratat Classic orders could have decreased also partially due to a conversion of the celebrity series to Eratat Premium.

Anyway I think their Premium clothing look a lot better. I would buy them if they were selling in Singapore.


-------------------------------------------------
ethan999, are u sure they converted the Celebrity series to Premium? What was the Celeb series contributing  in terms of % revenue?

It is important to watch if Eratat Premium is doing well because Eratat is moving in that direction. in April -June quarter, they announced RMB40m of Premium sales. This is small but it is a good start. This time, for July to Dec delivery, the order is RMB132m. The momentum seems to be there.

Eratat has just announced:

> 2011 Autumn/Winter Season held in March 2011 -- confirmed sales order amounting to RMB550 million, of which about 24% are for ERATAT Premium products.

Sales is an increase of about 5% over 2010 autumn/winter season.

> The 2011 Season sales contribution by footwear and apparel will be about 35% and 65% respectively (2010 Season: 48% and 52% respectively).

This is expected to contribute positively to the overall gross profit and gross profit margin.


What do you guys think? Seems a bit low increase in sales. Cos of the fall in the no. of distributors. Will the remaining dozen distributors have the foundation to stay on>? The positive side is that the gross margin will definitely rise --- a. cos of the Premium products and b. cos of the change in prodt mix towards apparel.

I think it will only soar when SIAS keep their big mouth shut.

It's tough for this stock to move. 21 is super glue. What's missing is a bulldozer in the form of a fund manager who will zap this stock

The other thing that caught my attention was the cash balance -- nice one at 9.9 SG cents a share, which is higher than the 7.4 cents a share at end 2010.

9.9 cents versus stock price of 21 cents. .....

The bottomline is rosy, but the accounts receivables are getting bigger. Eratat is saying it's ok, they are collectible. Does anyone have any inkling on when this sort of thing can stabilise?

I mean Eratat is stretching out credit terms to its distributors so they can open new shops. Isnt there some point when the whole thing starts to stabilise or slow down and the receivables start getting paid back faster?

Eratat has reported a nett profit of RMB 37.4M for 1Q11 [Jan-Mar 2011], an increase of 90% over Jan-Mar 2010 period. Its EPS for the Quarter is 9 cts(RMB) [pre-earnings dilution] or 7.8 cts(RMB) following the recent placement issue of 60 million shares at 20.2 cts. See SGX’s Announcement in –

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_6B0535B9917AF536482578880016973D/$file/NR_1Q11_FINAL.pdf?openelement

Eratat’s latest results show that it has been rather successful in its strategy to reposition itself as a casual lifestyle brand. Despite the challenging and competitive consumer market, Eratat was able to raise the ASP of its branded footwear and apparel to maintain or improve its profit margin.

Eratat’s 2Q11 results due in August 2011, are expected to be significantly better than the current one for 2 reasons.

1.       1Q11 Profits entail the delivery of only about 44% of the orders received for the 2011 Spring/Summer Season (i.e. Jan-Jun 2011) amounting to RMB 477M. The balance of the orders (56%) would be delivered in 2Q11 (Apr-Jun 2011).

2.       New confirmed orders of RMB 40M from “Eratat Premium” Summer Series for delivery in 2Q11, would also contribute to profits in 2Q11.

.

Hi Observer2,

Thanks for your comments and once again I fully agree with what you say. Patience is key.Indeed 'one should not be easily distracted by “noises” or negative comments, if one has done one’s homework diligently' - it is precisely because the sector is out of favour that there is so much noise and negative comments, just like how everyone was predicting doomsday and the demise of capitalism as we know it in March 2009.

Most of the time I try to avoid engaging in debates as they get very tiresome after a while. This time round I just felt a need to point out why a placement was in fact the most feasible and viable fund-raising method they have.

But yeah if you've done your homework, then it's just better to let the stock price do the talking in the long run.The way Eratat and Qingmei are growing, if their prices remain the same in the near term I won't be surprised to see their P/Es sink to as low as 2.

 Always good to hear from you. 

Ethan999,

Eratat is currently one of my core holdings notwithstanding the many negative points regarding the stock. Like you, I had also attended one of Eratat’s briefing sessions in order to have a better understanding of its business risks and outlook. Penny stocks, especially S-chips, are high risk and high gain stocks and are unsuitable for holding over lengthy period. One needs to have a positive mindset to evolve a strategy to capitalize on the high possible gains; and more importantly, to take measures to reduce the risk element to a minimum. Below are 2 major factors that prompted me to take a stake in Eratat.

1. Bad Market Sentiment For S-Chips: Just ask the people around you now; the chances are that 9 out of 10 would tell you to stay away from S-chips. History has shown that stock prices are generally at or near their bottom end when sentiment is very bad. As not all S-chips are rotten, this is a good time for those who are willing to take calculated risks to look out for rewarding opportunities. Eratat, to me, is one of the few better S-chips that are worth taking a calculated risk at this point of time.
2. Margin Of Safety: At an entry price of 21-22 cts, there is very limited downside risk as the stock has a very low PE of 3.5x and selling at a discount from its IPO price (April 2008) of 30 cts and its current NAV of RMB1.50. The recent Middle-East crisis followed by the high oil prices and Japanese Tsunami & nuclear crisis has brought the stock to a low of 19 cts only. With its earnings visibility for the first and second quarter in 2011, it is reasonable to expect it to be re-rated upwards, when the STI gets re-rated to a higher level and rotational interest into second liners and penny stocks take place once again.

One should not be easily distracted by “noises” or negative comments, if one has done one’s homework diligently. When I accumulated a stake in Oceanus in 2009 at under 15 cts and under somewhat similar situation as Eratat now, someone cautioned me against doing it, as Oceanus is an S-chips with above average risks (which is true). This person said that he would not touch it even with a 10-foot pole. Investment entails taking calculated (but not foolhardy) risks. Nothing ventured, nothing gained.

Hi Jinraidx,

Thanks for your opinions, you bring up some relevant points that are worth thinking about. 

Being a relatively small growth-oriented company with a market cap of barely 100 million, Eratat has not really established itself as a stable stalwart in the Singaporean market - it's no SIA, Hyflux or any of the 3 big banks which can confidently issue corporate bonds and expect a good response. This is a situation that is not unique to Eratat but characteristic of small cap companies in general. 

Smaller cap growth companies are in a earlier stage of the business cycle and tend to come under the 'higher risk higher returns' volatile category of stocks which are not suitable for issuing corporate bonds. I mean if you're gonna subscribe to bonds for relatively higher risk companies you probably might as well buy the stock right? If you think it can successfully pay you the 8-10% annual interest returns on the corporate bonds consistently for a few years then as a growth stock it's profits are probably growing at much faster than 8-10% a year and you would prefer to invest in the stock. On the other hand if you're risk averse, you'll invest in an SIA bonds or DBS NCPS for the stable returns from stable established companies. For this reason, issuing debts in the form of corporate bonds is not really viable for smaller companies - how often do you see companies with market caps under 100 million issuing bonds right?

Regarding rights issues, Considering that the chairman owns 30% of the company, a rights issue would require him to come up with a significant amount of cash. His shares are worth about 30 million, so if say a one for five rights issue were to be done, the CEO would have to personally raise cash of about 6 million dollars SGD in order to subscribe to the shares, very difficult to do. Besides, correct me if I'm wrong I also don't remember the last time a company with market cap under 100 million doing a rights issue, unless the chairman doesn't own a significant portion of the shares, which is usually not the case. 

As for getting a bank loan in the PRC, this is what their Singaporean CFO Ken Ho said in a recent conference: 

Mr Ho: We have considered that. Offshore loans – that depends on the structure and therestrictions placed on usage outside of Singapore. Taking a bank loan in China in the towns andprovinces – if we apply for a loan, it’s not just collaterals the bankers are interested in but also apersonal guarantee from the business owner and a guarantee from an unrelated party. It iscommon practice, as some of you know.Yes, we can obtain that but one day, the unrelated party will want a guarantee from you – and thisplaces our company at risk.In addition, the cost of a loan is not that cheap – about 10-12% per annum.And they can give you, say, a 3-year loan but they require you to repay everything at the end of theyear before it’s renewed. What happens if the central bank has a tightening policy and we cannotget a renewal? We have considered all these factors, which is why we are doing what we are doing.And we now have a business expansion plan which we believe we can control and will take us toanother level in the market. When a strategic partner like CMIA comes along and it can add value toour management and the market’s perception of our stock – can we wait until our valuation goes to7X before we consider any fund raising option?

A full copy of this can be found here:

http://www.eratatgroup.com/v2/files/releases/20110301_nextinsights.pdf

Thanks for your insights  jinraidx and I think that as is the case wiith most stocks in the world each company will always have its own fair share of bulls and bears - after all that is how the market attains its current equilibirum. Rarely do the bulls and bears switch sides and there are so many facets to investment analysis that the debates can go on forever and get very tiring - that is why I wish to avoid that sort of thing and so I'll try to avoid continuing the debate from this point. Appreciate you taking the time to read my thoughts above, and good luck with your own investments. Let's just let the stock prices do the talking in the long run :)

Continuously going to the market to raise fund on a piece and bit basis don't look good or professional to me. There are definitely many other better option than what they are doing which is literally destroying shareholders value in the company.

If Eratat have to pay 80-90% deposit upfront as compare to the so called high-end international brands, then what is the competitive advantage that we are looking at?

1. They have to pay a higher price than their competitor.

2. They are literally financing the working capital of their OEM manufacturers who give credit term to the international brand indirectly funding their competitor.

3.The need for capital and funding will be endless since they started the new Premium brand which they will be supporting their distributors through stock and longer credit term.

4. I have also read in "The Edge" interview that part of the need for fund raising is because of the need for cash to pay dividend. Right pocket to Left pocket? When is it going to be cashflow positive?

What i will define as a really undervalued shares will be Saizen Trust.

a) It is trading at more than 60% discount to NTA. Today price is S$0.15 vs NTA of S$0.36 

b) Insiders continuously using their own money to buy. They vote with their cash, Not just talk.

c) The defaulting loan is going to be resolved by May 2011. Today they have make another payment and the final loan amount has been reduced significantly to only S$10mil. This defaulting loan is subject to penalty with annual interest rate of 7%. The new loan is around 3.5%

d) It should be re-rated soon once the default loan issue has been resolved.

e) It is paying out dividend from operational cashflow NOT by issuing new shares.

Ethan:

Well her answer may not have provided any clue to the discussion, I understand where you are coming from especially when the IR reply is rather reasonable. 

Then I think we should ask ourselves the following:

1) Why the repeated cash calls instead of one single large one?

2) Why not a rights issue to all shareholders rather than oppressing current shareholders and giving large funds a chance to fleece the minority and often retail guys? The reason of partnering a fund capable of strengthening their business operations does not hold true since the latest fund raise is with a mutual fund.

3) Why not raise debt instead since interest rates are so low now?

4) A common way for businesses to get short term funds for operations, especially in procurement and trading is to get LCs or Bank guarantees. I dont see the firm doing that.

5) From what I know in the industry, a deposit of 80-90% is really unheard of. Typically is 20% and I would suppose a priority deposit would mean a maximum of 50%? 80-90% just implies that you book a production and whatever happens, like QC risks and operational disruptions will be full borned by Eratat since the OEM guys already has close to full amount of cash, which means trouble!

I do not have incentive to dig further but preliminary thoughts would show that something is not quite right here. I guess next you could do is find out their raw materials cost and deduct from COGS to estimate their deposits to check if they tally.

160 rmb million in net cash, although amounting to 1/3 of its current market cap (due to low valuation) isn't that large for a company targeting >1 billion in revenue over the next financial year. At least it's striving to use that cash to expand, this may mean higher receivables and more payables, but this is how Eratat has chosen to invest its cash for expansion. It'a use of cash. Better than leaving the cash idle right?