Friday, November 8, 2013

Investing in Eratat?

I realised that recently, there are more people my age group into investing. This wasn't the case back in 2008 and 2009 when I first graduated. An interesting event.

Over the years, I realised investing in equities does not merely mean digging through the financial reports. It also mean doing the necessary homework on competition, as well as potential business growth.

In addition to all the pure FA data, I looked too at charts for confirmation at times.

In investing, objectivity is of utmost importance. Of course, this is easier said than done, and I do not profess to be able to do that 100% of the time. And this is made worse when we own shares in the company too; typically there is a tendency to be more optimistic about the shares we own, because we bought it, and we don't want to be wrong in our judgment! Who want to buy shares to lose money?

Recently I had some spare time since tuition winds down during the end of year, I took another look in a company I once studied a little again to see if it has improved in any sense, and why certain forumers are still very bullish about it. The company is Eratat.

Over a number of forum exchanges, it is in my opinion in worse shape than 2011 when I first mentioned about it. Of course, different people, especially those with vested interests, still disagree strongly with me. I might be wrong in my opinions, but I'm not vested, and ultimately it is their money. :x So I decided to cease all future forum exchanges on this counter, and this will also be my final post on this counter until its fortunes has reversed substantially. "Never offer an advice or opinion to someone who won't take it or appreciate it." ==> I subscribed to this philosophy nowadays. I may not be Christian, but this certainly applies:
"Do not give what is holy to dogs, and do not throw pearls before swine, lest they trample them under their feet, and turn and tear you to pieces." (Matthew 7:6)"

The summary of the exchanges brought up some new data which I think would be nice to make a post here as a record for future study.

Critical Facts as summarized by someone
1) A director sold all of his stake at 13.8 cents, before the share price plummeted down.
2) Eratat issued bond/warrant at 32% per annum even though they have lots of cash and net margins are substantially lower than 32%
3) I mentioned about growing receivables before. Apparently someone compiled the data as well and showed that while revenue was growing at 34%, trade receivables was growing at 52.7%.
==> I would like to add that a chunk of the receivables were already written off and packaged to investors as renovation subisidies and sales incentives.

On the issue of bonds from SHK
"The company placed Rmb134m of 12.5% bonds with 82.5m warrants to SWAT Securitisation Fund, a SPV of Sun Hung Kai Financial. SWAT, in turn, offered a Rmb106.8m senior tranche of ABS to investors and a Rmb27.2m junior tranche to Sun Hung Kai Financial."

The effective $$ that went out to Eratat was about RMB 100.5m from SHK pocket.

By retaining a mere RMB 27.2m, SHK bears minimal risks as all risks have been offered out as ABS (Asset Backed Securities) to other investors. Smart.

The amount of net assets look really beautiful but is really made up mostly of receivables.
I would like to quote from the words of a fund manager's newsletter:
“One thing about accounting, you know the liabilities are always 100% good. It’s the assets you have to worry about.”  - Charlie Munger

Coming to the second part of Mr Munger’s quote, assets are often worth less than their carrying value. One obvious example is trade receivables. Trade receivables are counted as assets, on the basis that they will soon turn into cash, but they can also harbour unrecognized bad debt. Shareholders often find out the hard way that receivables seldom convert into cash at their full value.

Lastly, chart pattern. I saw someone mentioned that the chart looks bullish. I am not sure why, but clearly it doesn't look bullish to me. It has broke down a number of significant supports in my opinion.

Of course, after all the ranting compiling, I still hope the share price will recover for those souls who bought big into this company.


  1. I remember reading in a forum about Eratat borrowing large among of monies thru bond sales when they have lots of cash simply does not make sense.
    So you were quite right and vey diligent in your working.
    It was very tempting for anyone to invest into Eratat with cash per share higher than share price. And your sharing of findings , I am sure have helps many to relook in buying Eratat.
    The share was suspended for being not able to pay the interest of a bond.
    I too hope nothing will happen to the company as the guy who get hurts are ultimately the minority shareholder.
    I hope you will continue to share your opinion in the forum, you may never how many investors you have help silently.
    Great Work!


    1. Thank you Melvin. This is one situation I'm not happy I'm right :(


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