Eratat Lifestyle

[dzwm87]

Actually if you do a search for Eratat under youtube, you can get a few decent videos which are largely uploads from NextInsight.

[ValueBeliever]

A lot of prudence had given way to doubt. CFO and MR Lin both probably still looking at the market reaction to such a hefty interest rate. At the very least they should come out to the website Nextinsight to explain their stand on this issue.

Otherwise, more people will think this is another S chip that had gone wary on bond financing debacle that plagued many S chip before they collapse in operational problem. They have been 7 years in this business and just wonder why would they do anything to harm their reputation?

The fact that they have been asking for money and the revenue have truly increased in tandem demonstrates there is real money at work but as to why they need to expend in Shanghai and not focus in 2-3rd tier cities also give rise to question?

Can the CFO be trusted? Why isnt the ID questioning the issue? Is there a need for SGX to question the issue? Eg. SGX why not ask a re-varification of an independent judgement on as to the current state of account in bank/trust/receivable? Are there real issue of this fund raising that sends alarms like "as if" the Co. is going under?

[Gaudente]

strategic reasons aside, is the company in so desperate need of money?

it has 23 cents of cash ??? Are these cash real?

obviously not

Who's the moron that while having loads of cash in bank at 0% interest issues bonds at 32% interest rate ?

Clearly someone who plots to run away with the money paid by the bond subscribers

[Boon]

A lot of prudence had given way to doubt. CFO and MR Lin both probably still looking at the market reaction to such a hefty interest rate. At the very least they should come out to the website Nextinsight to explain their stand on this issue.

Otherwise, more people will think this is another S chip that had gone wary on bond financing debacle that plagued many S chip before they collapse in operational problem. They have been 7 years in this business and just wonder why would they do anything to harm their reputation?

The fact that they have been asking for money and the revenue have truly increased in tandem demonstrates there is real money at work but as to why they need to expend in Shanghai and not focus in 2-3rd tier cities also give rise to question?

Can the CFO be trusted? Why isnt the ID questioning the issue? Is there a need for SGX to question the issue? Eg. SGX why not ask a re-varification of an independent judgement on as to the current state of account in bank/trust/receivable? Are there real issue of this fund raising that sends alarms like "as if" the Co. is going under?

Relative speaking, I think Eratat’s current presence in China is wider and denser in the southern part of the country, but is still sparse in the northern half, they are moving into Shanghai and would use Shanghai as a strategic platform from which to further expand its presence ACROSS China, including 2nd and 3rd tier cities. IMO, once a brand has established its popularity in a 1st tier city like Shanghai, it would then be more readily and easily accepted in other parts of the country. I don’t see any problem with this – I think it is a good move.

Competition is keen in China but the market is huge – for well capitalized companies with good strategic plans and good execution capabilities, there are still opportunities to be seized.

Here is the rationale of the bond/warrant issue as given in the announcement

Quote “
4. RATIONALE OF THE PROPOSED BOND AND WARRANT ISSUE AND USE OF
PROCEEDS
The Board is of the view that the Proposed Bond and Warrant Issue is beneficial to the Group as it will allow the Group to strengthen its cash position to grow its business and its access to new contacts and opportunities through the Subscriber’s network, thereby increasing exposure of the Company’s shares to new investor communities, funds and financial institutions in Hong Kong and the PRC…………………………………………

The Board is of the opinion that:
(i) after taking into consideration the Group’s present banking facilities, the working capital available to the Group is sufficient to meet its present requirements. Nevertheless, the Company is undertaking the Proposed Bond and Warrant Issue to strengthen its financial position; and…………………………………………………………….” Unquote

In short,
A) This has been the decision of the Board, independent directors included. The CFO is not a Board member.
B) The Board is saying: we have the capital resources to meet present requirements without taking on the bond/warrants issue, but we are doing it as the Board is of the view that it is beneficial to the Group as it will …………………………………………………………………………………

There are 5 members on the board – 2 executive directors and 3 IDs. If I am not wrong, all 3 IDs + the CFO are Singaporeans – all have been with the company since 2007 or 2008 – and IMO, all have reasonably good qualifications and experiences for the roles they are playing now.

In the eyes of the Board – this was a right business decision to make as the Board viewed it as beneficial to the group.

In the eyes of some investors/shareholders/non-vested critics – the interest cost is abnormally high and the terms of the deal is too lousy to the Issuer.

In the eyes of the law - has there been any breach of rules and regulations that warrants an enforcement action or interference from regulators? Honestly I do not know but I don’t think so.

Warrant for questioning by SGX ? – I would hope so – but how useful or effective would these be ? Still, it is better than nothing.

I would prefer that a rule be put in place, if there isn’t one yet - for governing maximum interest rate at which a company could borrow – example, at not more than 10% or 20% above certain market bench mark for X amount of borrowing etc. – beyond which 75% or 90% shareholder approval would be needed.- a controversy suggestion I would guess.

Your point on re-verification on the state of accounts etc. by another independent party/body is a good one, if it could be carried out. I do not know if SGX or relevant regulatory agency currently has the authority to call for such an investigation under current circumstances?

Well, I remember reading an article which says - a well-functioning capital market is built on trust:
- Trust that companies and its executives would follow the rules,
- Trust that auditors are independent and alert, and would do a good auditing job
- Trust that enforcement agencies/regulatory bodies do their jobs.

But sometimes, trustworthy auditors and trustworthy enforcement agencies could also be “fooled” by untrustworthy companies..

To me, at the end of the day, it is trustworthiness of a company that matter the most - if one does not trust the management of a company, I guess it is best not to invest in it.

(not vested) – on watch list

[Greenrookie]

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)

Hi Boon,

Cool, would very much want to do some legwork on my own if I can afford it. I am wondering if you shed some lights to some of thoughts. (Not vested, used to be until rennovation subsidy)

1) What is the av. selling price at their shops in shanghai, I would guess it should be higher than what they declare in their reports since Shanghai rents is higher.

2) What is the most expensive piece and cheapest? What are some of the popular western labels in the mall, and how does its pricing compare to products of Eratat?

3) Did you see aggressive advertising? e.g. TV commercials, popular ppl as spokemen, sponsor higg viewership programme e.g. CCTV channels etc, mall events, promotional events?

Why my questions?
(Just a normal gut feel with no research backup), to compete in the luxury/prenium segment, quality and brand recognition is more important than price. But to gain brand recognition from scratch, you need aggressive branding exercise, assuming quality is already not a issue.

Chinese are willing to spend and not bid a eyelid if the brand makes them look good, from what i understand, many choose after continental cars and few choose local cars unless it is for the reason of price, so if Eratat wants to compete at brand level, they must have a fighting plan.

I am not a fashion follower, but I think I can still tell when I look at 2 piece of clothes with similar price, touch the 2 piece, wear the 2 pieces, I should have a rough verdict if they are on par on another is really subpar.

Maybe you can share futher your scuttlebutt experince.

Thank you

[Boon]

Hi Greenrookie,

I could certainly do the leg work but for a cost of course.

Ha-ha ! Just kidding.

I will see what I can do for our buddies

I have been going through the IPO prospectus and would like to share the following

1) On page 42 of the IPO prospectus: one of the risk factor as stated is

Quote
“As our operating Subsidiaries are incorporated under the laws of the PRC and our business operations, assets, our Executive Chairman and certain of our Non-Executive Directors are located outside Singapore, there may be difficulty for Shareholders to commence any legal action against our Subsidiaries or certain of our Directors :
Our operating Subsidiaries are incorporated under the laws of the PRC and our business operations, assets, our Executive Chairman and certain of our Non-Executive Directors are located outside Singapore. The Companies Act may provide shareholders of Singapore incorporated companies with certain rights and protection, of which there may be no corresponding or similar provisions under the laws of the PRC. As such, our Company, as the sole shareholder of our Subsidiaries, may or may not be accorded the same level of shareholder rights and protection that would be accorded under the Companies Act to a shareholder of a Singapore-incorporated company. In addition, our Executive Chairman, Lin Jiancheng, and certain of our Non-Executive Directors, namely, Ho Wing Fai and Ye Sanzhi, are not resident in Singapore and their assets are located outside Singapore. As such, there may be difficulty for Shareholders to commence any legal action against our Subsidiaries, our Executive Chairman or certain of our Non-Executive Directors, as service of process will have to be effected outside Singapore, or to enforce a judgment obtained in Singapore against our Subsidiaries, our Executive Chairman or certain of our Non-Executive Directors.”
Unquote

This prospectus was printed in 2008, I guess nothing has changed since, am I right? Like other S-Chips bosses who ran away with tens of millions, if Lin were to do the same, nothing much can be done. ( I am not implying he is going to do so)

2) Excluding its recently formed subsidiary in Shanghai, Eratat has only 4 other subsidiaries - all in the Fujian province, namely
- Fujian Eratat
- Haimingwei
- Wanshida
- Quangang Hongli

According to the IPO prospectus, all the four subsidiaries had been turned into Wholly Foreign Owned Enterprise (WFOEs) in the PRC prior to listing.

Eratat has been paying dividend every year since its listing in 2008. Cumulative amount of dividend paid to date = RMB 61.8 million according to my calculation.

To my knowledge, SAFE regulates the conversion of the RMB into foreign currencies. Therefore, SAFE approval is required for Eratat to remit after tax profit in RMB from its PRC WFOEs into SGD to Singapore for distribution as dividend to its shareholders. The company must generally provide tax payment certificates, an audited financial report, a board resolution approving the distribution of profits, the foreign exchange registration certificate, and a capital verification report in order to obtain clearance for an overseas profit payment. SAFE may also request additional documents

Since Eratat has been paying dividends every year, it must have gone through this process every year. It is impossible to get through this process with fake documents IMO. – especially on the tax payment certificates – therefore, credit must be given for this. If the amount of tax paid is “real”, the profits as reported are likely to be “real”.

Comments are welcomed.

(not vested) – on watch list

[Greenrookie]

Hi Greenrookie,

I could certainly do the leg work but for a cost of course.

Ha-ha ! Just kidding.

I will see what I can do for our buddies

I have been going through the IPO prospectus and would like to share the following

1) On page 42 of the IPO prospectus: one of the risk factor as stated is

Quote
“As our operating Subsidiaries are incorporated under the laws of the PRC and our business operations, assets, our Executive Chairman and certain of our Non-Executive Directors are located outside Singapore, there may be difficulty for Shareholders to commence any legal action against our Subsidiaries or certain of our Directors :
Our operating Subsidiaries are incorporated under the laws of the PRC and our business operations, assets, our Executive Chairman and certain of our Non-Executive Directors are located outside Singapore. The Companies Act may provide shareholders of Singapore incorporated companies with certain rights and protection, of which there may be no corresponding or similar provisions under the laws of the PRC. As such, our Company, as the sole shareholder of our Subsidiaries, may or may not be accorded the same level of shareholder rights and protection that would be accorded under the Companies Act to a shareholder of a Singapore-incorporated company. In addition, our Executive Chairman, Lin Jiancheng, and certain of our Non-Executive Directors, namely, Ho Wing Fai and Ye Sanzhi, are not resident in Singapore and their assets are located outside Singapore. As such, there may be difficulty for Shareholders to commence any legal action against our Subsidiaries, our Executive Chairman or certain of our Non-Executive Directors, as service of process will have to be effected outside Singapore, or to enforce a judgment obtained in Singapore against our Subsidiaries, our Executive Chairman or certain of our Non-Executive Directors.”
Unquote

This prospectus was printed in 2008, I guess nothing has changed since, am I right? Like other S-Chips bosses who ran away with tens of millions, if Lin were to do the same, nothing much can be done. ( I am not implying he is going to do so)

2) Excluding its recently formed subsidiary in Shanghai, Eratat has only 4 other subsidiaries - all in the Fujian province, namely
- Fujian Eratat
- Haimingwei
- Wanshida
- Quangang Hongli

According to the IPO prospectus, all the four subsidiaries had been turned into Wholly Foreign Owned Enterprise (WFOEs) in the PRC prior to listing.

Eratat has been paying dividend every year since its listing in 2008. Cumulative amount of dividend paid to date = RMB 61.8 million according to my calculation.

To my knowledge, SAFE regulates the conversion of the RMB into foreign currencies. Therefore, SAFE approval is required for Eratat to remit after tax profit in RMB from its PRC WFOEs into SGD to Singapore for distribution as dividend to its shareholders. The company must generally provide tax payment certificates, an audited financial report, a board resolution approving the distribution of profits, the foreign exchange registration certificate, and a capital verification report in order to obtain clearance for an overseas profit payment. SAFE may also request additional documents

Since Eratat has been paying dividends every year, it must have gone through this process every year. It is impossible to get through this process with fake documents IMO. – especially on the tax payment certificates – therefore, credit must be given for this. If the amount of tax paid is “real”, the profits as reported are likely to be “real”.

Comments are welcomed.

(not vested) – on watch list

Boon,

I try to see if those china firms that got into accounting troubles and were suspended gave dividends.

I found that sinopipe gave dividends in 2010, but in its special audit:
Its subsidary over report its Net profit in2010.

Sinopipe like Eratat, is also incoporated in SIngapore.

As for CHina HongXing, they declared a dividend in 14 sept 2010 but was suspended in feburary 2011. CHina HOngxing is incoporated in Bermuda

China Milk special audit mention about SAFE too, so i guess it does not matter which country the company is incoporated in, as long as money need to remit out of china, it goes thro SAFE.

In conclusion, I think SAFE might not be as robust in its certification or auditing processes, since there are already predecent cases of companies falling through the cracks. I guess as long as there is enough money in the accounts to clear the dividend amount, SAFE will just clear it.

(Given that trade figures of CHINa at national level can be inflated, I doubt SAFE can be an effective guard against monkey business)

What do you think?

[specuvestor]

If you are trying to figure out if dividends are a facade for fraud, check out their cash on the company level basis, and calculate at this rate of dividend paying, how long it takes before they get busted as the fake subsidiary profits cannot be paid upwards to the holding company.

[Greenrookie]

If you are trying to figure out if dividends are a facade for fraud, check out their cash on the company level basis, and calculate at this rate of dividend paying, how long it takes before they get busted as the fake subsidiary profits cannot be paid upwards to the holding company.

Hi specuvestor,

PArdon me, I am not accounting trained and dun quite understand. At company level, and holding company, do you mean the "group" and "company" in the quarter reports? OR do you have to dig into the subsidiary cash level? But subsidiary's cash info is not easily available.

If you are talking about company and group, assume company A has $10000 cash and have been paying $1000 dividend annually. So the cash will be dry in 10 years time, how does this help me know if the cash is real??

Thank you for sharing your knowledge.

[Nick]

Can I clarify with buddies here that when profits are remitted out of China subsidiaries to the Singapore/Bermuda/HK (etc) incorporated holding entities (ie dividends), a 5% withholding tax is payable to the PRC govt ? If so, we could ensure that the tax payable matches with the dividend flowing out. If there is no tax being paid, then obviously, nothing is flowing upwards. Is this accurate ?

(Not Vested in Eratat)