In this post, I will share some quick calculations on Eratat.
Also in this post, let's assume that the financial figures presented by them is correct and all cash is indeed there, else all calculations would be wrong anyway, which sorts of defeats the purpose.
Finally, I take all calculations rounded off, and an exchange rate of 1SGD to 5RMB for simplicity of calculations. Some of my calculations will be in SGD and charts are in RMB.
As of 31st Dec 2010, Eratat mentioned an NAV of about 0.30 (SGD). At a current price of 0.215 (SGD), this represents a discount to the NAV. It has cash of 0.077 (SGD) per share too. In fact, over the past 8 quarters, NAV has been steadily rising. Q1 ends 31st Mar 09, and Q8 ends 31st Dec 10. There was no change in the number of shares for these 8 quarters.
ERATAT's NAV in RMB (fen)
However, there is something that worries me here, that is, the trade and other receivables, which is included in NAV calculations. The total per share value of its trade and other receivables is a rather staggering 0.21 (SGD) in SGD. That's like 60% of its total assets, and 70% of its NAV!
The problem with trade and other receivables is that these are trade deposits placed with other companies. It is thus not easy to audit such receivables and verify it.
Essentially, if you are paying for "assets" that is not yet collected, that is at the mercy of other distributors, assuming what is reported is true. The reason why this assumption has to be made is because I know how certain individuals in China can create separate holding companies for such purposes of siphoning, but I shall not go into the details how this work.
The breakdown of the age of trade receivables are as follows. There was no quarterly breakdown given before 2009.
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 180 days | Total |
| Balance as at 31.03.2009 | 127.9 | 33.6 | 6.2 | 167.7 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 180 days | Total |
| Balance as at 30.06.2009 | 217.5 | 19.7 | - | 237.2 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 180 days | Total |
| Balance as at 30.09.2009 | 177.9 | 68.7 | - | 246.6 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 180 days | Total |
| Balance as at 31.12.2009 | 184.1 | 53.8 | - | 237.9 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 120 days | > 120 days | Total |
| Balance as at 31.03.2010 | 138.9 | 72.5 | 57.7 | - | 269.1 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 180 days | Total |
| Balance as at 30.06.2010 | 188.0 | 90.7 | 26.4 | 305.1 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 180 days | Total |
| Balance as at 30.09.2010 | 217.3 | 101.9 | 28.5 | 347.7 |
| (RMB ’mil) | 1 to 60 days | 61 to 90 days | 91 to 120 days | Total |
| Balance as at 31.12.2010 | 216.2 | 102.8 | 47.9 | 366.9 |
Putting in Chart Form will show it clearly.
Chart of Total Trade Receivables
Chart of Trade Receivables aged >60 days
In my opinion, Trade Receivables > 60 days (2 months) is a rather long time. What's more, it has been increasing over the last few quarters. Doesn't look very healthy to me at the moment...
I also computed a chart of NAV minus Trade Receivables per share for Eratat over these past 8 quarters.
Chart of NAV less Trade Receivables per share
As we can see, the net NAV remains moderately constant, which sort of tells me that most of the profits went into the trade receivables portion. Of course, there were some dividends given out, but I believe it won't affect the result too much as the payout wasn't really consistent in the beginning. It also tells me that the ratio of trade receivables to total assets or net assets have been growing over the past 8 quarters.
It is thus of utmost importance for any potential investors to monitor the growth of trade receivables. I know this post is only on 2 years (8 quarters) of Eratat's history, but all in all, I remain extremely skeptical of Eratat's growth story.
Interesting insights! Thanks! - like the graphs. Agree trade receivables can be hard to verify.
ReplyDeleteThe thing here is - if in doubts, dun put your hard-earned money there.
Maybe you should do some research on what stage of growth and what the company is actually doing at this point before you judge their trade receivables. Look through their financial reports.
ReplyDeleteThe company is setting up new Eratat Premium stores and compelling distributors to set up directly owned stores as opposed to stores-in-store. Having more directly owned stores allows Eratat to have greater control over the marketing, pricing and brand image. Therefore they are both increasing their stores + converting existing stores-within-stores to directly-owned stores.
There is no free lunch, if you wish to expand you need to invest. If you're gonna invest you need to risk your money. To raise money, some companies do right issues, some do placements, some take large loans from banks, some issue convertible bonds etc. In Eratat's case, instead of loaning their distributors money to set up these new stores, they have adopted the more prudent approach of lengthening credit terms to the most established distributors in which they have had long term relationships with in order to get the new stores up and running. This seems to me to be a very reasonable step in the expansion of the company.
You wanna grow, you have to take risks.
1) Both Q2 and Q3 had +ve net cash flow from operations
2) Greater net increase in cash in Q3 over Q2
2) Receivables in Q3 and Q2 are quite comparable
At end of Q2, the longest trade receivables aging of the group are 91-180 days but at end of Q3, the longest trade receivables are 91-120 days.
It's fashionable to debunk s-chips now because of what's going on with the Hongs. During the savings and loans crisis in the early 90s, investors in the US who even mentioned investing in banks were ridiculed and deplored for their foolish ways, just as investors now are being deplored for investing in s-chips. If they have too much cash they must be faking it. If they have too much receivables they must be faking it. If they have too much profits they must be faking it. If they have to do a placement to grow they must be faking their cash position. Noble Group does a placement at a large discount a few days later and no one says a word, no one dares to even suggest that Noble is in decline simply because it has done a placement. But if an s-chip does a placement, god forbid, the CEO is on the verge of running away with the money! Reminds me of the Singaporeans for whom the only China-born girls they ever met are the prostitutes in Singapore who are conniving and untrustworthy - from that they assume that every girl from China is only out to cheat your money. The sheer ignorance!
The tide will change one day and many of the honestly run Chinese companies listed here now which are being unfairly bogged down and vilified due to a few bag eggs will one day have justice done upon to them.
As the great Warren Buffet once said, in the short run, the stock market is a POPULARITY CONTEST. However, in the long run, it is a WEIGHING MACHINE, true value will eventually be realized. Just as markets as a whole go in and out of recession, sectors too (in this case s-chips) go in and out of favor, the important thing is to see the bigger picture and not be swept away by the tide of Popular Culture. That's the only way to beat the market.
Oh can't stomach people overcoming your points with well reasoned arguments huh? Haha. No wonder no 1 ever comments here.
ReplyDeleteMaybe you should do some research on what stage of growth and what the company is actually doing at this point before you judge their trade receivables. Look through their financial reports.
The company is setting up new Eratat Premium stores and compelling distributors to set up directly owned stores as opposed to stores-in-store. Having more directly owned stores allows Eratat to have greater control over the marketing, pricing and brand image. Therefore they are both increasing their stores + converting existing stores-within-stores to directly-owned stores.
There is no free lunch, if you wish to expand you need to invest. If you're gonna invest you need to risk your money. To raise money, some companies do right issues, some do placements, some take large loans from banks, some issue convertible bonds etc. In Eratat's case, instead of loaning their distributors money to set up these new stores, they have adopted the more prudent approach of lengthening credit terms to the most established distributors in which they have had long term relationships with in order to get the new stores up and running. This seems to me to be a very reasonable step in the expansion of the company.
You wanna grow, you have to take risks.
1) Both Q2 and Q3 had +ve net cash flow from operations
2) Greater net increase in cash in Q3 over Q2
2) Receivables in Q3 and Q2 are quite comparable
At end of Q2, the longest trade receivables aging of the group are 91-180 days but at end of Q3, the longest trade receivables are 91-120 days.
It's fashionable to debunk s-chips now because of what's going on with the Hongs. During the savings and loans crisis in the early 90s, investors in the US who even mentioned investing in banks were ridiculed and deplored for their foolish ways, just as investors now are being deplored for investing in s-chips. If they have too much cash they must be faking it. If they have too much receivables they must be faking it. If they have too much profits they must be faking it. If they have to do a placement to grow they must be faking their cash position. Noble Group does a placement at a large discount a few days later and no one says a word, no one dares to even suggest that Noble is in decline simply because it has done a placement. But if an s-chip does a placement, god forbid, the CEO is on the verge of running away with the money! Reminds me of the Singaporeans for whom the only China-born girls they ever met are the prostitutes in Singapore who are conniving and untrustworthy - from that they assume that every girl from China is only out to cheat your money. The sheer ignorance!
The tide will change one day and many of the honestly run Chinese companies listed here now which are being unfairly bogged down and vilified due to a few bag eggs will one day have justice done upon to them.
As the great Warren Buffet once said, in the short run, the stock market is a POPULARITY CONTEST. However, in the long run, it is a WEIGHING MACHINE, true value will eventually be realized. Just as markets as a whole go in and out of recession, sectors too (in this case s-chips) go in and out of favor, the important thing is to see the bigger picture and not be swept away by the tide of Popular Culture. That's the only way to beat the market.
Hi Anonymous, or TrillionairePauper with only 1 post in CNA forum,
ReplyDeleteThe reason I don't want to share in CNA forum is not because I can't stand anyone commenting on my points. I just feel like that isn't a forum for sharing anymore. It's people like you who would sign up a new account and hide behind a new nickname just to post in the forum that makes me sick to share there.
The thing is, all that you said are from the management's talk. How sure are you of it?
There's no point listing Warren Buffett because you forgot his most important lesson. That is, the integrity of the management. Are you able to come out and give an absolute guarantee / insurance of the integrity of the management? If you can't, none of your points stand.
There's also no point comparing Noble and Eratat, because that's comparing apples with oranges. You can think about why.
I can give you guarantee that stocks like SGX, Singtel, Starhub and SPH will not fail or falter or go bankrupt within the next 5~10 years. Are you able to give absolute guarantee on Eratat?
Hi JW,
ReplyDeleteI will give my comments, though they are simplistic ones as I do not understand the business in depth.
First off, I think probably using NAV and comparing it against receivables' NAV is not too accurate. Though there has been an increasing trend in NAV over the years, companies like Eratat are usually valued using price-earnings or DCF because they are assumed to be going concerns. NAV is more a measure of liquidation value and should not be used to justify a discount or margin of safety on purchase. You may disagree with this but I had told Market Uncle the same thing with Surface Mount some time back - NAV can be ephemeral and "tangible" assets can be written down due to obsolescence and impairment. Inventory often forms quite a bulk of NAV but if the inventory cannot be sold then it would require a write-down to market value, which can be much lower and hence cause NAV to plunge. Just one example of how NAV can sometimes be much less than what is stated on the Balance Sheet. Always remember that the Balance Sheet works on a historical cost basis for most of the assets, while the liabilities are much more current!
I think your Trade Receivables analysis might be more robust if you comparedt the % of overdue receivables as a proportion of total receivables. From my experience, usually >90 days would be considered serious and anything >180 days warrants a write-off, if not a provision. For a sports shoe company like Eratat, I would think customers (the retail stores) should pay fairly promptly, say 60 to 90 days? Anything more should be suspect and if what Anonymous says is true about extending longer credit terms, then it would mean a cash flow crunch on the Company as their cash conversion cycle would get squeezed.
Another point I'd like to make is possible channel stuffing issues - "selling" to retailers and booking revenues and receivables, then later writing them back again when the stores cannot sell the goods. Not accusing Eratat of doing this, but it's one point you may like to bring up as companies which sell consumer goods sometimes resort to this to bump up sales targets.
Cheers.
Hi MW!
ReplyDeleteI based my posts on what I have read around the net.
The main reason why I took the trade receivables per share into consideration is because a major bulk of their reported assets are from it.
In the case of Eratat, inventory does not form the bulk of NAV. Trade receivables does.
Actually to me, I would think trade receivables of > 60 days as dangerous for a sports shoe company, what's more growing it. Let's hope what Eratat says is correct, and it would eventually be reduced to a constant rate.
As they could possibly write off some of the trade receivables, as you said, this could cause a plunge in NAV too.
As for channel stuffing issues, etc, this is only skimming the surface of what can possibly happen. I didn't want to list any out in case of committing slander. Furthermore, the possible types of cases are just too many to think out and list. I based my considerations on what Eratat has reported in SGX.
Hi Ken,
ReplyDeleteafter going through more of the postings and the comments here, I'm rather convinced that Eratat isn't as good as some are making it up to be.
The amount of risks is not justifiable to me. It does seems as though most of the earnings go into trade receivables.
I won't put my hard earned money in of course :)
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ReplyDelete