Eratat Lifestyle

From the above discussion it seems that the company still in good shape and not anything possibly related to accounting fraudulent issue that is a consolation.

The ONLY concerned for any S-chip is accounting fraudulent issue that force company to go burst.

As for other issues that discussed it is all speculating and whether the management can handle it or not no one actually know. In business which company do not face receivable issue ? do not face steep competition ? 31% gross margin is extremely HIGH as far as I see it. 120days debt is a bit high yet manageable with such high margin. after all if ALL three ( supplier, Eratat and Distributor ) all can make money the outcome will still be OK.

Maintaining current earning rate may be tough h/e it does not equal to hope-less.

Borrowing at high interest rate seems no choice in the PRC market and with the discount from bond issuer is a confident vote.

With the above I change the status from reduce to hold for the time being.

elbert wrote: From the above discussion it seems that the company still in good shape and not anything possibly related to accounting fraudulent issue that is a consolation.

The ONLY concerned for any S-chip is accounting fraudulent issue that force company to go burst.

As for other issues that discussed it is all speculating and whether the management can handle it or not no one actually know. In business which company do not face receivable issue ? do not face steep competition ? 31% gross margin is extremely HIGH as far as I see it. 120days debt is a bit high yet manageable with such high margin. after all if ALL three ( supplier, Eratat and Distributor ) all can make money the outcome will still be OK.

Maintaining current earning rate may be tough h/e it does not equal to hope-less.

Borrowing at high interest rate seems no choice in the PRC market and with the discount from bond issuer is a confident vote.

With the above I change the status from reduce to hold for the time being.

Let just say I stop short of talking about any fradulence. High receivables is already a potential red flag on it. And I have not even touch on the director selling all just before the price goes down.

"In business which company do not face receivable issue"
Find another business that has greater than 50% total assets in receivables.

"do not face steep competition"
SGX, in buying of local stocks.
Local telcos, in an oligopoly

"Borrowing at high interest rate seems no choice in the PRC market"
Yeah, Net Profit Margin of 13.72% but borrow at 16+% and effective annual interest of 32%. "No choice" but to borrow indeed.

Locally, if we borrow $$ to buy stocks, the riskiest of instruments, even if we use our cash as collateral, the loan percentage is 6% and the quantum is three times the amount we put up as collateral or two times the value of stocks put up as collateral. Eratat has >500mil RMB in cash, yet they have "no choice" but to borrow 100mil RMB at 32% interest. This "no choice" seems to make sense to some people, but it certainly does not make sense to me. Seems like something that doesn't make sense can actually be brushed off with a simple reason of "no choice".


Yep, I guess I am really damn stupid and missing a gem in this company.

Even if they tell you tomorrow that their credit days will be 240 days, you have no choice and no control at all.

Momoeagle, u hv been criticising abt the trade receivables. In ur opinion, what do u think is the ideal credit days should give to the distributors?"

Momoeagle, 240 days is a silly assumption that you make. Of course, Eratat will not agree to a 240 days credit, which is a 8 month period as Eratat knows they also need cashflow. In order to create a win win situation for stakeholders (eratat-distributors), u need a credit days that is just nice (that is not short or too long) so that both Eratat and the distributors can grow together.

We are talking about many millions pieces of apparel being shipped in batches with each batch having tens to hundred thousand pieces. On the average, it will take about 3 to 5 months(90-150 days) for such huge quantity of apparels to be cleared. And, like i say before, when distributors have better cashflow, they put in their own money to open new shop, which is also good for Eratat.

u obviously have no clue what is the optimum credit days to give. As long as i see book orders and no of shops gradually increase every season and all receivables collected punctually, I dun really see a problem. As mention before, 90 to 120 days are the optimum credit days. If can go to 60 days, that will be a bonus. Anything below 60 days will have detrimental effect on the long term growth of the distributors, hence affect future book orders. And, pls understand that the distributors are using their own money paying for the setting up of their own shops, NOT eratat (except for their own flagship stores). hence, the risks falls more on the distributors than Eratat. If a particular shop fail to perform due to locations or other reasons, it is the distributors taking up the risks and losing their initial setup capital, not Eratat. Eratat can still find other distributors who are better at selling and willing to use their own money to open the shop. Eratat has discontinue distributors before so, if one distributor doesn't perform, just transfer the apparels to the one that can perform.

For such millions of apparels, 3-5 months is a reasonable timeframe and that is why the credit days are set such a manner. More than 6 months of credit is not possible because after 6 months, the season changes and by then the apparels should have been sold by now and thus no reasons to give distributors more than 6 months credit. so to answer your quesstion, it is not Eratat or distributor no choice. The credit days are chosen that way because it optimises both the growth of Eratat and the distributors.

We need to be clear here too that my main criticism is not the credit days, but the relative size of the receivables, which is why I mention it in percentages.

Momoeagle, do read the financial report carefully. Since when did Eratat trade receivables form 50% of its total asset.

Q2 2013 Balance Sheet
Current Assets
Inventories 4,186
Trade receivables 473,394
Other receivables 101,517 (due to bond)
Prepaid land lease 16
Amounts due from subsidiaries -
Cash and bank balances 502,053
Total Assets 1,158,127

The trade receivables comprised:
As at 30.6.2013
Trade receivables 317.5
Trade deposits to suppliers 155.9
473.4

Take note that under balance sheet, they combined the trade receivables and trade deposit together, which adds up to RMB 473.4 mil. For trade deposit, they hv paid money but the suppliers have not delivered the goods to Eratat yet. i would assume the manufacturers/suppliers would deliver the goods on time with a trade deposit made.

If u omit the trade deposits out and only consider the receivables to the distributors (goods delivered to distributors but money not paid to Eratat), the receivables are RMB317.5, which includes 17% VAT.

Now, if u omit the 17% VAT, the receivables to the distributors are only RMB271.4 million and RMB271.4 million is about 27% of their total current assets of over RMB1,158,127 or slightly less than 60% of their total net cash.

so, where gt distributors' trade receivables forming 50% of total assets? u should omit the trade deposits to the suppliers and the VAT payment to the government, otherwise it is painting the wrong image.

In business which company do not face receivable issue". Find another business that has greater than 50% total assets in receivables.

hi, design company who outsource OEM manufacturing. These are the type of companies u will find high % of receivables. Go look at the high volume electronics sector. If they do manufacturing on their own instead of outsourcing manufacturing, the trade deposit is changed to inventory too. Go look at the TV industry. When the distributors in each region imports hundreds or thousands of TVs in bulk at one go, go ask the distributors how many credit days the TV manufacturer gives to them. When the TV is delivered from the warehouse to the outlet, go ask the retailers how many days are neeeded for a 1000-2000+ TV price tag to be displayed before eventually cleared and sold from the shop. If TV is not good example, go look at the furniture industry and ask them how many days it take on the average for a few thousand dollars sofa to put on the shop before it is being sold. Nevertheless, there's still a furniture tycoon like IKEA. so, apparel tycoon, why not? U may even need months for a single TV or furniture to get cleared from a shop lol.

I also working on my engineering projects too and I have to find overseas suppliers too. I hv to pay 100% in full, including shipping fees to the manufacturers first before they willing to fabricate the things I need. And, Eratat is paying only 30% to 50% trade deposit instead of the full amount. so I dun really see the need for any complaint. how I wish my supplier can just let me pay a fraction of the deposit. But too bad, I dun have the volume to negotiate for that.

I hope that answers your questions.

"Momoeagle, 240 days is a silly assumption that you make. Of course, Eratat will not agree to a 240 days credit, which is a 8 month period as Eratat knows they also need cashflow. In order to create a win win situation for stakeholders (eratat-distributors), u need a credit days that is just nice (that is not short or too long) so that both Eratat and the distributors can grow together."

The meaning isn't about 240 days, but about the fact that it is not within your control. Didn't think you would take it literally. My apologies.

But I think you still have to read properly that my problem is not with the credit days, as I have already mentioned how it could be played around with.

"Momoeagle, do read the financial report carefully. Since when did Eratat trade receivables form 50% of its total asset.

Q2 2013 Balance Sheet
Current Assets
Inventories 4,186
Trade receivables 473,394
Other receivables 101,517 (due to bond)
Prepaid land lease 16
Amounts due from subsidiaries -
Cash and bank balances 502,053
Total Assets 1,158,127

The trade receivables comprised:
As at 30.6.2013
Trade receivables 317.5
Trade deposits to suppliers 155.9
473.4"

Earlier, you take ratios from 2011 AR and then asked me about 2012 AR. Now you are talking about Q2 2013..... errr...... jumping all over the place.... Nevertheless, the receivables form a major percentage of total assets, as you say next...


"design company who outsource OEM manufacturing. These are the type of companies u will find high % of receivables. Go look at the high volume electronics sector."

You missed the point completely. Comparing rotten apples with bad eggs doesn't make any of it a better purchase. Comparison should be done within industries.

Key thing like I said, is the relative size of the receivables. If this is industry standards, then this industry is not worth investing at all.

Then again, if you are extremely comfortable with all these things I consider as a portion of the red flags, no problems. It is only a small portion of your personal assets as I believe you practice financial discipline, seeing all your posts so far.

I just feel I have to raise all these up for would be buyers to have a differing opinion on potential red flags instead of pure bullishness.


*Incidentally, I was from the electronics sector in an American MNC, and there was minimal trade receivables during the 4 years I was there. Its customers are primarily other listed MNCs, and it has the ability to borrow from Sg and USA at really low interest rates during the crisis to boost the cash profile to takeover distressed companies to expand production capacity.

momoeagle speaks with a lot of authority, but poke deeper and everything comes crumbling down...

i'm all for good solid analysis, and good solid viewpoints *hat tip to greenrookie*, but it's another thing altogether to spread misinformation around...

I believe the high receivables and high cash issue has been touched on sufficiently by Boon from valuebuddies in the past. Just to make sure, i went and extract data again, using the comparables that Boon has kindly provided.

Conclusion: Eratat's financials are in line with the industry norm and the business model, which is characterised by high trade receivables and high cash on hand.

Zuoan
30-Jun-13
Trade and other receivables 465569
Fixed deposits-pledged 19040
Cash and cash equivalents 1204508
Total assets 1747535
96.66%

Xiniya
30-Jun-13
Cash and cash equivalents 993356
Time deposits held at banks 120000
Trade receivables 232829
Prepayments to suppliers 177630
Other receivables and prepayments 55663
Total assets 1664105
94.91%

Lilanz
30-Jun-13
Trade and other receivables 737564
Pledged bank deposits 153939
Fixed deposits 100000
Cash and cash equivalents 1242788
Total assets 2514578
88.85%

Eratat
30-Jun-13
Trade receivables 473394
Other receivables 101517
Cash and bank balances 502053
Total assets 1158127
92.99%

To repeat, the high trade receivables and high cash is not an issue unique to Eratat. Other retailers with the same business model has this issue as well.

So, as always, the key question is more about whether Eratat is a fraud. If it's not a fraud, it's easily a multibagger. If it's a fraud, then gg (and this being an S-chip, I'm sure all investors who took a position in this stock has already sufficiently considered this factor..)

Qwerty, I would appreciate if you would read with more detail on my posts. I have said that it is not just about high receivables, but about the relative size of the receivables.

Key phrase: RELATIVE SIZE

Using the data you took out, it is obvious that by industry standards, Eratat has the highest relative size of receivables as compared to total assets.

Zuoan
30-Jun-13
Trade and other receivables 465569
Total assets 1747535
26.6% of total assets are receivables

Xiniya
30-Jun-13
Trade receivables 232829
Other receivables and prepayments 55663
Total assets 1664105
17.3% of total assets are receivables

Lilanz
30-Jun-13
Trade and other receivables 737564
Total assets 2514578
29.3% of total assets are receivables

Eratat
30-Jun-13
Trade receivables 473394
Other receivables 101517
Total assets 1158127
49.6% of total assets are receivables


Now, where is the misinformation?
I'm using your data, which has proven my point.