Fact: the warrant with 89% premium to current share price is of practically no value now.
Fact: there are better ways to raise capital if Eratat is truly starved for cash (eg. issuing a convertible bond will have a lower interest rate, issuing a bond with a bigger discount instead of the quarterly payments, etc.)
Many are just focusing on the headline interest rate of 30%, while ignoring the other terms of the bond. It’s clear that regarding this bond issue, where you lean depends very much on how much you trust management. (In my opinion, I still think that SHK can offer some strategic value to Eratat, even if I don’t like the terms of the bond issue. eg. Without even taking into account the potential contacts and business opportunities from SHK’s network, as a major brokerage, SHK simply initiating coverage on Eratat or touting it to customers will raise Eratat’s profile considerably.)
Much of the opposite camp’s premise is that the reported figures are false, there’s no cash, and the company is on the brink of insolvency. Regardless of whether that is true, I would just like to point out that the market has already priced in a significant amount of this risk. To reiterate, Eratat only has a PE of 2 and a PB of 0.30, even with the reported figures showing strong growth in BOTH topline and bottomline.
If Eratat is an empty shell, boom, there goes your investment (although at current pricing, even in liquidation, it's possible shareholders may get a significant part of their capital back). However, if it turns out that these fears are unfounded, the stock is easily, EASILY a multi-bagger. Put it this way: imagine a coin-flipping game. If tails, you lose $1. If heads, you win $10. Would you play this game?
To be clear, I’m not recommending anyone to bet the house on this. But given the risk/reward trade-off, I find that a small position is still well within my risk appetite. To any potential new investors, my advice is to ask yourself what is your risk appetite, and how much do you trust the management.
We can speculate all day on what management intends to do with the cash from the bond issue. Could be a desperate gesture, could also be a win-win deal. Don't miss the forest for the trees.
Price has reached very attractive level for accumulation in my opinion.
Eratat was able to transform successfully into premium menswear and maintain the loyalty of its 12 distributors all these yrs. Good mgt decision and ability to motivate/reward partners/distributors shd be the key factors.
I am sure there is some positive purpose behind the current bond/warrant issue..
gangho wrote: Price has reached very attractive level for accumulation in my opinion.
Eratat was able to transform successfully into premium menswear and maintain the loyalty of its 12 distributors all these yrs. Good mgt decision and ability to motivate/reward partners/distributors shd be the key factors.
I am sure there is some positive purpose behind the current bond/warrant issue..
There are also discussions going on over at Shareinvestor forum about Eratat. Almost all are questioning about the ridiculous interest rate its paying SHK. Well... Gangho maybe right that there are some positive purpose behind the scene which was not known to most of us. S-chips usually render this kind of negative speculation. Confident investors just hang on...
a piece of good news for holders of Eratat, from Boon at valuebuddies...
I am currently based in Shanghai and would like to share the following.
Eratat had incorporated a wholly owned subsidiary in Shanghai last year and intend to use Shanghai as a platform to further expand its presence across China, particularly in reaching out to new distributors. The management believes that this strategic move will help strengthen the marketing of the ERATAT Brand - which would attract new distributors, improve its domestic visibility and ultimately, driving sales.
From what I have observed in Shanghai so far over the past few months, it seems to me that there have been “real activities” taking shape – they have been doing what they said they would do.
- I have seen Eratat Premium outlets popping up in Shanghai – Personally I have walked past two shops but did not go in. I do not know how many shops they have now in Shanghai.
- I have seen its recruitment advertisement for shop assistant/sales staffs etc. over the media for its various new outlets in Shanghai
- I have seen “retailer recruitment” advertisements over the media put up by its distributors
- They have move the trade show to Shanghai from Hangzhou.
In my opinion
- It seems like they do have strategy and plans in place for expansion to grow its business – and these are being carried out. How sucessful it would turn out - only time will tell.
- Eratat is not considered big compared to some of its local peers. If it intends to grow as big as some of them – it would need a lot more capital – its current cash reserve (assuming it is real) would not be enough – but these are future needs - if it could grow that big.
- However, for its immediate needs, it still makes no sense to me to commit to the bond/warrant issuance at such ridiculously lousy terms, considering that it still has so much cash.
- Renovation subsidy is not a concern to me – it is normal in China with this kind of business model.
- If its books are “real” and the cash is “real”, then it is a “real” undervalued stock.
(not vested)
If I can do such leg work on my own, maybe I can be more sure, but too bad, I cannot ... so i pass...
Maybe interested personel can ask him about sales traffic and pricing etc...
Eratat has earlier given out to its distributors abt RMB100m as sales incentive and renovation subsidy to buy their heart and loyalty, and therefore successful transformation and sustainable rev/profit.
In biz, money is the only thing that makes thing happen. And, I see that Eratat is giving out RMB67m to SHK to reach out to China/HK investment community and therefore bring the pe to more reasonable level of 6-8. If RMB67m can help to increase mkt value by RMB600-800m, what is the big deal of this money, which can also be paid thru warrant conversion?
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