Eratat Lifestyle

greenrookie，

I do like your inquisitive questions and approach, u do know what u r looking for, don’t u?

I will address your questions after the release of 3rd quarter results, it will be more meaningful to use the latest figures. In the meantime, it allows me more time to finish off reading through Boon’s work on valuebuddies.com. excellent work by boon, I must say. I wish he can be part of this discussion. I sent him a private message, hope he or she will reply.

greenrookie,

how do u look at this three page report

english.caixin.com/2012-12-26/100476983.html?p1

Hi UB40,

I am nt sure what would u like me to see or the point u are trying to make? Maybe some help on specific. This article just reinforce the fact that the culture of doing business is different.

The article seem to suggest that at least the tax authorities are stringent, where they are stringent in collecting money but not sure about their documentation. As China minzhong and other s-chips in the past have shown, SAFE, SAT and SAIC, which all deal with tax in one way or another are caught sleeping or poor documentation.

Hence, I said, s-chips need to prove beyond reasonable doubts before we invest. Btw Eratat only has a factory for shoes which is contributing less than 25% or revenue, the rest are outsourced, so they are not perpetrators of overcapacity ... Eratat need not worry about people copying their design ... I would buy the stock if imitation of Eratat is out in the market.

yes, if u see immitation of eratat, time to buy the stk.

Greenrookie,

From the article, three critical issue relevant to Eratat
1) Tight bank credit condition
2) Poor corporate governance
3) tax

- may be, there is some truth that eratat cannot get bank loan in jinjiang due to tight credit condition.
- corporate governance is a big issue, agree
- on tax, boon was absolutely right, if corporate tax paid can be verified with tax authority to be consistent to what was reported by the company, then reported profit must be real. In the case lilanz, it looks ok, that’s why I am invested.

tax paid by lilanz
www.jjjjb.com.cn/html/2013-03/25/content_371993.htm
click on pdf to down load

for eratat on tax paid, I have only part of the jigsaw puzzle.

UB40 wrote: Greenrookie,

From the article, three critical issue relevant to Eratat
1) Tight bank credit condition
2) Poor corporate governance
3) tax

- may be, there is some truth that eratat cannot get bank loan in jinjiang due to tight credit condition.
- corporate governance is a big issue, agree
- on tax, boon was absolutely right, if corporate tax paid can be verified with tax authority to be consistent to what was reported by the company, then reported profit must be real. In the case lilanz, it looks ok, that’s why I am invested.

tax paid by lilanz
www.jjjjb.com.cn/html/2013-03/25/content_371993.htm
click on pdf to down load

for eratat on tax paid, I have only part of the jigsaw puzzle.

UB40,

NOt sure if you had read my reply to boon regarding the fact that dividends paid need to remit through SAFE means the accounts are good.

That is a myth, or rather, not a good assurance.

this is what i wrote:
I try to see if those china firms that got into accounting troubles and were suspended gave dividends.

I found that sinopipe gave dividends in 2010, but in its special audit:
Its subsidary over report its Net profit in2010.

Sinopipe like Eratat, is also incoporated in SIngapore.

As for CHina HongXing, they declared a dividend in 14 sept 2010 but was suspended in feburary 2011. CHina HOngxing is incoporated in Bermuda

China Milk special audit mention about SAFE too, so i guess it does not matter which country the company is incoporated in, as long as money need to remit out of china, it goes thro SAFE.

In conclusion, I think SAFE might not be as robust in its certification or auditing processes, since there are already predecent cases of companies falling through the cracks. I guess as long as there is enough money in the accounts to clear the dividend amount, SAFE will just clear it.

(Given that trade figures of CHINa at national level can be inflated, I doubt SAFE can be an effective guard against monkey business)

What do you think?

---

And Boon reply:

Hi Greenrookie,

After checking with my accountant friends, the correct Procedure for Repatriation of Profits from China is best illustrated by the following link:

china-trade-research.hktdc.com/bu...002LMN.htm

The following document by Deloitte on taxation and tax filling is excellent : Taxation and Investment in China 2013 – Deloitte
www.deloitte.com/assets/Dcom-Glob..._China.pdf

In short,
1) SAFE is no longer that hands-on
2) In theory, an overseas holding parent company could draw on one year’s profit from its China WFOE subsidiary to fund few years’ dividend payments overseas.
3) That said, a good auditor should be able to rely on the amount of tax paid by a WFOE to deduce at the amount of profit it had made – by verifying the authenticity of the tax payment certificates with SAT (State Administration of Taxation). – Profit must be tallied with amount of tax paid. – IMO, this is a reliable and effective way of checking against potential accounting fraud of inflating profits.
4) Withholding tax on dividend is 10%, unless there is concession or tax treaty.

---

Everytime a auditor clear the acc for Annual report, I view it as a 1 year free of nasty surprises. In the past, when I owned s-chips, I used to sell the counter a few days after they announced the full year results and buy back when the books get audited, because that window period is the busiest for monkey business.

Personally, I might be too strigent, but I think Boon concede the point that dividends is no assurance, he mention SAT instead of SAFE, as a source where auditor checks. (I might misunderstood Boon, if he read this, he can correct it if I misuderstood you)

Also, given the amount of work put in by Boon, he is still not vested. That bothers me too.

I am aware of the tight credit condition, YZJ subloans(mircofiance) to companies, they claim all companies that loan to are big companies and mostly SSOEs, and the interest rate can be as high as 18%, so what more about Eratat.

But take a step backwards, why is PRC clamping down on shadow banking? Do you not think 18% is going to be crippling to the business and unsustainable. That everyone is mad in a mental institute doesn't make any patient more sane.

Anyway, I know many does not like my "bashing" of Eratat, I write more because I thought you are open enough to hear what I have to say. Like what you say, end of the day, is your conviction and your money.

I would most probably only invested when I see:
-More distributors confirmed.
-Auditor clear their report.
-Better receviables, etc.
-Spare cash...

NO la, I still will not buy... I still scared... 2 years to payment of SHK bonds, nowhere to hide or kicking of can down the road, a default will be game over.

Others will better risk appetite or trading prowess please go ahead.

I will look at it with money only they redeemed the SHK bonds.