Thursday, February 13, 2014

Investing Lessons to be gleamed from Eratat -- Avoiding a potential value trap

*This is a blog post written with hindsight, but I'm pretty sure it would have been dissed off and thrown aside had it been written earlier.*

Recently, just before Chinese New Year holidays, Eratat requested for a trading halt and subsequently suspension. It was a company I have been suspicious about since March 2011. Much of my analysis (with some calculations probably off) can be found here.
China Eratat

Note that this isn't an exercise or pure blog post done specially to ride on a S-chip suspension bandwagon, but to consolidate the lessons and what has been posted before since 2011.

The question is, is it possible to detect such fraud before it happens? Apparently, there were lots of clues to this, and this was posted in a few forums. Apart from that, from my recent read ups of marketing materials, I realise there are more things to investing in a business from a fundamental analysis viewpoint that is not often discussed about.

I might well be wrong, and everything turns out fine eventually. But I highly doubt so.

Let us first recap the pretty obvious red flags that were brought up over the course of time in different forums.

1) High percentage of receivables as part of assets.
2) The receivables would have been even higher had some of it not be written off as sales incentive and renovation subsidies.
3) Despite high cash levels, Eratat had "no choice" but to borrow at an effective interest rate of 32%.
4) As Greenrookie has pointed out in NextInsight forum, Eratat's subsidiary did not appear in the tax reports of top 100 corporate tax payers, which means it paid less than 3 mil RMB in taxes. The maths does not work out.
5) The director sold all his shares at a "deep discount" in Aug 2013 due to personal reasons that were never revealed. Now we know his "personal reasons".

I have also pointed out earlier that the NAV after netting off receivables looks constant after 2 years of being listed.

Tuesday, January 14, 2014

Business Lessons picked up (Part 3)

I think I am addicted to writing this, so shall add a part 3

It's never easy
No one ever says starting a business or running one is easy.

Which is why when I felt like giving up, I don't. I look for alternatives and look for better systems to achieve the targets and goals.

If needed, I will pay for external help. If there's anything I learned, there's no necessity to do everything myself.  Hire help. Outsource. As long as the costs are managed, spending to increase productivity is the way to go.

Which brings me to the next point....

Learn to delegate
Delegation is something that is easier said than done.

In the past, when I was still working as an engineer, I had to delegate some stuff to the engineering assistants to carry out. My first time doing it was a mess; the assistants were totally lost on what to do. Basically, I gave the final result I wanted, and not the steps to doing it.

So, I learned to list everything in steps, before sending my instructions on what to do.

I also once asked my sister to help me convert my handwritten physics notes into MS Word format.
The result was horrendous. Graphics weren't done well, nor was there proper formatting and font usage. I had to redo almost 90% of the stuff.

On hindsight, it was my fault. I learned over time that I should have done the following:
1) Provide a template
2) Include examples
3) Do up a metrics of performance
4) Detail out what needs to be done

Delegation is best done if the steps and systems are well laid out. Not many people know what you want, because most do not possess the unique skill of mind-reading.

Thursday, January 2, 2014

More business lessons I picked up over 2013, first hand

As I plod on, I realised there are few more business lessons I have learned and personally experienced. Thought I should be writing on them to help consolidate my thoughts as well as share on the public domain, although these are pretty cliche.

A team of different skills is needed
While most of the time, there are many things I can do alone, I realised the time and effort that are spent may not be worth it. The the speed of execution is important.

In additional, I recognize that I lack a number of skills to make a business succeed.

This is where a team comes in. Not a team of people, but a team of skills. Lots of people I see form teams just for the sake of forming teams. Or from what they learned from schools, formed teams because the teacher says so and so will make a team.

I remember the time I was in NUS, where we had to do this project called EE2001 at the second year. Right from the first year as a uni student, I was already opening my eyes and judging fellow students as potential team mates for this project. Needless to say, I chose the best I know, and they know too I will contribute the best I can. Eventually our project clinched A. Sounds great! Until I know another team that clinched A+. That team was not as good as us individually I believe, but as a team they worked great! Each of them has different skillsets that were crucial to the success of the project, and together, they did it better than us!

The true meaning of teamwork lies in forming a team where people with different skillsets can come to work in synergy.

A great team helps to bring a project forward. While deep pockets can pay for teams, small pockets like mine could also go into partnerships with people who have these skills to bring things forward. But the ultimate goal is the same, to bring projects one step further ahead.

Think and live and breathe the business
A business cannot be handled as a "by the way" thing, even though it may be a sideline. No one ever starts a business by chance. No one wakes up one day and says "Hey I have a business!". No one.

By thinking about the business, living and breathing it, I mean to say that one must think as a business owner, to constant think and improve and innovate to first match, then reach above competition.
==> Sometimes, I really wonder about small retail investors who claimed that they buy the business are hence a business owner, when they aren't even involved in the process of thinking, improving and innovating for it.

There is no point having a business that is the exact duplicate of the one next door. What makes a bubble tea shop better than the other one down the road? What makes this tuition centre better than the other one just beside? 

In essence, one must be always thinking on how to improve the business, make it better, and more helpful, more value, to customers. This distinguishes the business in the long run.

Initially, the constant thinking portion may be tough, but persist in thinking and over time, human brains will adapt, and eventually be constantly thinking about the business. Right now as I'm typing out, I'm still thinking how to bring my projects forward and make my tuition more effective and be able to reach out and help more students. It has been conditioned this way for over a year, and it is now second nature.

Instead of investing in a business with a economic moat, why not create a business and create your own economic moat? 

Friday, December 27, 2013

Review of Year 2013 & Some business lessons

In a few days time, it will be the last day of 2013, and it marks the first full year since I went self-employed. It has been a long way since I graduated from NUS in the mid of 2008.

I still remember the time where I just started work; I was full of optimism. I also gave tuition as a sideline then. In the "safe haven" of employment, it was so comfortable and the future looks bright. The company would try it best for us, or so it appeared.

But some events woke me up.
First event: Retrenchments
I see this company taking a loan from the government so that it could stay afloat and keep the jobs intact. A few months later, retrenchment came, and 10% have to be retrenched. Yet within a few months, hirings resume, for the positions that were retrenched. Jobs are never safe.

Second event: What I saw on my manager's desk
I remember there was once in the office, I saw a stack of printed powerpoint slides that titled: "How to motivate your employees without monetary means". There was a pay freeze at that juncture, and I was still at the pay of a fresh grad after working for 2 years. While I know this MNC isn't doing well in the crisis, and is logical from the business side, this event still left a deep impression on me.

Thus the tough decision to step out in 2012, and attempt to make a living by myself. The first few months were tough, my discipline was sorely lacking, and I was running around like a headless chicken. Fortunately for me, I have an experienced partner in the business, who manages the admin stuff well.

Which brings me to the first lesson I learned: Having an experienced partner or mentor helps greatly in the initial stages of doing business.

That is common knowledge, but I truly appreciate the wisdom in it. I could see the mistakes that I would have made, in terms of finance, HR (choosing tutors) and branding. I wondered if I would have learned these if I had just "do-it-myself". Fortunately for me, my previous dabbling in FAs of companies left me with some basic skills to manage and understand some aspects of SME finance.