Eratat Lifestyle

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Boon,

Thanks for pointing out all the details. I noted that Eratat price for its design and franchise concept is considered mid-range to high, by middle class standard. So its likely that to move to Shanghai (they are already in Shanghai within high end fashion premise) and would mean they have to now be more astute in their design and pricing. The local branding will need to mimic the taste and trend Italian/French, they better not try anything out of the extra-ordinary.

Looks like Inditex this year is so out of whack that they might have got it wrong. Also noted Eratat doesnt sell fashion - its actually ordering those fabrication based on the eye of their franchisee of what they feel will sell. In that way, Eratat doesnt really decide on what is fashionable!

Its very much what the design crew of Eratat is able to come up with. Its a challenging business but the reward that they are able to sell more in line with what the report pointed out is above average growth for Eratat and the industry viz lady fashion! So its not wrong to focus on man fashion afterall!
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For those who are interested and can read Chinese, a lot more information on Eratat could be found on the Chinese search portal www.baidu.com by typing in “鳄莱特”, the Chinese name of Eratat

The following link shows the Group’s recent recruitment advertisements covering various positions in Shanghai, Anhui, Fujian, Guangdong and Shandong province.

http://opendata.baidu.com/zhaopin/?ie=gb...5%D0%C6%B8

Its Shanghai office is recruiting shop assistants for 9 of their Shanghai outlets of I don’t know how many – I have been told there are more than 10 outlets in Shanghai – I have seen 4 so far.

(Not Vested) – on watch list
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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For those who are interested, here are a few other Listed Men Apparel Companies with Similar Business Models as Eratat:

At first glance, the net margins of all companies for FY2012 were above 10% - for Lilanz, it was above 20% - WOW!

Would share more after closer look.

Lilanz/Lilang (HKEx)
http://www.lilanz.com/lilang/en_about.html

zuoan (NYSE)
http://zuoancn.investorroom.com/

xiniya (NYSE)
http://www.xiniya.com/

vlov (NYSE)
http://www.vlov.net/profiles/investor/fu...0&ID=12365

(Not Vested - on watch list)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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China is considered to have one of the largest and fastest-growing menswear markets in the world, driven primarily by rapidly growing economy and increasing disposable income of consumers.

The following two documents give a good overview on China’s apparel market

1) China’s apparel market, according to Li & Fung Research: http://www.funggroup.com/eng/knowledge/r...ries21.pdf
- Domestic apparel players dominate the mass market
- Department stores and specialty stores are the major distribution channels for branded apparel
- Climbing costs pose challenges to apparel enterprises
- Established domestic players spend more resources on brand-building
- Some well-established foreign apparel players accelerate expansion in China.
- Foreign brands still dominate the luxury apparel market in China
- High inventory remains a concern for many apparel enterprises
- Apparel enterprises are expanding into lower tier cities
- Existing adult-focused apparel retailers are flocking to the children’s wear market
- Online platform becomes an important sales channel for apparel players
- Increasing number of department store operators launch their own private apparel labels or proprietary brands
- Marketing and branding are gaining importance

2) Winning China’s Apparel Market, by AT Kearney: http://www.atkearney.com/documents/10192...a9d45abb2e
- Sportswear market is maturing: stiff competition, over-expansion, over stocks of obsolete inventories have troubled many leading local companies.
- Men’s formal wear is maturing: growth slowdown, intense competition, price wars, industry consolidation.
- Men’s casual wear is scaling : rapid growth, fragmented market, increased competition, new stores opening
- Baby wear is scaling
- There is no one-size- fit-all strategy for success in China’s apparel market. Its unprecedented recent growth over recent years is expected to double over the next decade, but of course that doesn’t guarantee that every player will succeed. Established and aspiring players that re-think their strategy, and perhaps reinvent their brand, will likely to win a share of China’s burgeoning apparel markets – finding the right fit will be vital. .

In short, the pie is growing, so is competition and challenges. Eratat not only has to compete with a growing number of international brands trying to expand their market share in China, but also various domestic brands with similar business models and target markets. In this industry, one has to compete with others principally on the basis of brand image, design and concept, product mix, quality, size and coverage of distribution network, and proximity to target customers.

International brands traditionally dominate the high-end market, but domestic brands are claiming to have advantages in price and distribution and are increasingly competitive in the mid-to high-end markets. How true are these claims? I really do not know. However, I guess, the best way to gauge the business prospect and competition is to look at revenue growth, profitability and profit margin of Eratat and its peers in the menswear market segment.

Revenue : FY2012/2011 (RMB Million)
Lilanz = 2,793 / 2,708
Zuoan = 1,427 / 1,230
Xiniya = 1,383 / 1,180
Eratat = 1,032 / 1,041

Gross Profit Margin(GPM) FY2012 / FY2011
Lilanz = 40% / 39%
Zuoan =47% / 44%
Xiniya = 33% / 34%
Eratat = 31% / 33%

Net Profit Margin (NPM) FY2012 / FY2011
Lilanz = 22% / 23%
Zuoan =21% / 21%
Xiniya =13% / 21%
Eratat =14% / 14%

Interestingly, net profit margins of Lilanz and Zuoan were much higher than that of Xiniya and Eratat. From 2011 to 2012, revenue stayed flat for Lilanz and Eratat but was still growing for Zuoan and Xiniya. Profit margins remained at double digits - reasonably attractive as compared to many other industries – not a bad industry to be in, I would say, if these figures reflect the true state of the market situation.

(Not vested - on watch list)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Thanks for the hard work, boon! very informative!

Assuming the figures can be trusted, Eratat's management is really prescient to change its business model from sportswear to the more lucrative casual wear market. The substantial resources dedicated to brand-building(eg. renovation subsidy et al) also makes more sense now in the context of the information you have provided, rather than just a way for management to siphon funds.

I note that other sportswear companies are now trying to enter the casual wear market as well (eg. China Sports from Q1 release). Intensifying competition, so let's hope that Eratat's brand-building for the past two years can maintain a competitive edge.
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Eratat seals Dim Sum ABS
IFR Asia 805 - July 20, 2013 | By Nethelie Wong

Eratat Lifestyle has completed a Rmb134m (US$22m) securitisation in the first private placement of asset-backed securities in the offshore renminbi market.

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 Singapore-listed apparel-maker is paying an annual coupon of 12.5% on the two-year bond, issued at 74.44. That translated to a hefty yield of over 30%, leaving plenty of room for a securitisation transaction.

However, the interest rates on both the senior and the junior ABS tranches were not disclosed. The exercise price is S$0.25 for each warrant , which represents an 85% premium to July 15’s share closing of S$0.135.

Proceeds will be for expansion. Eratat’s gross profit ratio was at around 18.4% for 2012.

Rival bankers saw the deal as a high-yield structured product rather than a proper ABS as the bankruptcy-remote and the relatively low interest rate features are not significant in this case.

The bond has a charge over 121,525,000 shares in the company directly and indirectly in the hands of Lin Jiancheng, the company’s CEO. The shares represent approximately 25.59% of the existing issued share capital of the company.

The transaction was the combined result of the sudden liquidity squeeze in the onshore market in late June/early July and a reverse enquiry from high-yield investors chasing yields.

The reason the warrants were bundled into the bonds was that the company’s share price had hovered at lows recently and it would have been very unfavourable to existing shareholders if convertible bonds had been issued instead.

As for the use of the ABS structure, it was to boost the confidence of investors in buying into the deal as Sun Hung Kai Financial is retaining around 20% of the transaction as a junior tranche. Sun Hung Kai Financial acted as arranger, as well as co-investor, on this transaction.

http://www.ifrasia.com/eratat-seals-dim-...40.article

(Not Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Thanks Boon for the article.

from the Eratat announcement, they did not mention below details on senior / junior tranche.. More important, who is the list of investors?

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.


(26-07-2013, 08:58 AM)Boon Wrote: Eratat seals Dim Sum ABS
IFR Asia 805 - July 20, 2013 | By Nethelie Wong

Eratat Lifestyle has completed a Rmb134m (US$22m) securitisation in the first private placement of asset-backed securities in the offshore renminbi market.

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 Singapore-listed apparel-maker is paying an annual coupon of 12.5% on the two-year bond, issued at 74.44. That translated to a hefty yield of over 30%, leaving plenty of room for a securitisation transaction.

However, the interest rates on both the senior and the junior ABS tranches were not disclosed. The exercise price is S$0.25 for each warrant , which represents an 85% premium to July 15’s share closing of S$0.135.

Proceeds will be for expansion. Eratat’s gross profit ratio was at around 18.4% for 2012.

Rival bankers saw the deal as a high-yield structured product rather than a proper ABS as the bankruptcy-remote and the relatively low interest rate features are not significant in this case.

The bond has a charge over 121,525,000 shares in the company directly and indirectly in the hands of Lin Jiancheng, the company’s CEO. The shares represent approximately 25.59% of the existing issued share capital of the company.

The transaction was the combined result of the sudden liquidity squeeze in the onshore market in late June/early July and a reverse enquiry from high-yield investors chasing yields.

The reason the warrants were bundled into the bonds was that the company’s share price had hovered at lows recently and it would have been very unfavourable to existing shareholders if convertible bonds had been issued instead.

As for the use of the ABS structure, it was to boost the confidence of investors in buying into the deal as Sun Hung Kai Financial is retaining around 20% of the transaction as a junior tranche. Sun Hung Kai Financial acted as arranger, as well as co-investor, on this transaction.

http://www.ifrasia.com/eratat-seals-dim-...40.article

(Not Vested)
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Eratat and other listed Apparel Players like Lilanz, Zuoan, and Xiniya all have adopted the “Asset light distribution model” aka “wholesale model”. The main advantage of this business model is – it is Highly Scalable. The model has allowed Apparel Players to build or have access to a large retail network throughout China without significant initial capital outlays and with less resource allocation. However, there exist other risks in this model.

Let’s take a closer look at this business model

Characteristics of “Asset light distributor model” aka “wholesale model
- Apparel Players (AP) like Eratat/Lilanz/Zuoan/Xiniya are responsible for design/product development/brand management/marketing
- Apparel Players outsource the manufacturing of its apparel products to third party contract manufacturers.
- AP sells its apparel products to its Distributors, who in turn distribute these products to end consumers through their self-managed retail outlets or through retail outlets owned and operated by third party retail operators / sub-distributors. All third party retail operators/sub-distributors are appointed by the Distributors.
- The Distributors are responsible for managing local networks of retail outlets which include specialty shops and shop-in-shops.
- AP does not own or operate any of these outlets (hence Asset light – highly scalable model), with the exception of flagship stores.
- AP does not enter into any contractual relationship with any third party retail outlet operators/sub-distributors appointed by its Distributors.
- All of the retail outlets operated by distributors and third party retail operators / sub-distributors are required to operate under the AP’s brands and are required to sell AP’s products exclusively
- Although AP does not have a direct contractual relationship with third party retail operators / sub-distributors, distributors are required to ensure that third party retail operators / sub-distributors comply with terms and conditions of the distributor agreements
- Distributors place advance purchase orders at AP's biannual sales fairs/trade shows. (some AP have 3 trade shows per year)
- AP normally offers a credit period of 90 to 120 days to Distributors. Some have been extending credit terms to its distributors for up to 150days.
- AP does not hold any material collateral from its Distributors for granting credit terms..
- If sales increase, the amount of accounts receivable to AP from its distributors may increase
- Distributors are normally responsible for absorbing unsold inventory
- AP have been awarding “incentives” in one form or another to their distributors – seems like a market practice.

Risks to Apparel Players with “Asset light distribution model” :
- Heavy reliance on distributors: Apparel Players rely too heavily on Distributors (customers) to drive sales and growth. There is no assurance that AP will be able to decrease its dependence on these major customers over time. The failure to renew distributorship agreements with the major distributors or a breach of such distributorship agreements by them may materially and adversely affect AP’s operations.
- If any of AP ’s Distributors fails to adhere to its contractual obligation to distribute its products on an exclusive basis, its brand image and sales could be materially adversely affected.
- AP is expose to high credit risks of not getting paid by Distributors – especially if and when the underlying businesses are not profitable or in distress – maximum exposure is amount of trade receivable

AP’s Distributors and incentives given:

Lilanz/Lilang (HKEx)
http://www.lilanz.com/lilang/en_about.html
Number of distributors = 64
Number of sub-distributors = 1,472
Total number of retail outlets = 3,327
Number of retail outlet operated by distributors = 1,069
Number of retail outlet operated by sub-distributors = 2,158
Number of flagship stores/Self-operated stores = ?

From AR of Lilanz
Quote:
“Advertising and promotional expenses and renovation subsidies amounted to RMB254.4 million for the year” – AR2012 of Lilanz

“Included in the selling and distribution expenses were advertising and promotional expenses and renovation subsidies totaling RMB221.5 million” – AR2011

“Included in selling and distribution expenses were advertising and promotional expenses and renovation subsidies totaling RMB181.2 million for the year” – AR2010
Unquote:

Xiniya (NYSE)
http://www.xiniya.com/
Number of distributors = 29
Number of sub-distributor = 1,378
Total number of retail outlets = 1,710
Number of retail outlet operated by distributors = 118
Number of retail outlet operated by sub-distributors = 1,590
Number of flagship stores/self-operated stores = 2

From AR2012 of Xiniya
Quote:
“In the years ended December 31, 2010, 2011 and 2012, we provided rebates to our distributors in an aggregate amount of RMB34.1 million, RMB51.5 million and RMB67.6 million, respectively”.
Unquote.

Zuoan (NYSE)
http://zuoancn.investorroom.com/
Number of distributors = 16
Number of sub-distributors = 325
Total number of retail outlets = 1,329
Number of retail outlet operated by distributors = 180
Number of retail outlet operated by sub-distributors = 1,142
Number of flagship stores/self-operated stores = 7

From AR2012 of Zuoan
Quote:
We rely on a small number of distributors for the sale of our products.
We sell a vast majority of our products in China through our distributors, who in turn sell our products to consumers through retail stores directly operated by them or by their sub-distributors............................................................ Our dependence on distributors increases their bargaining power with us and the need for us to maintain good relationships with them. To the extent that any distributor ceases to cooperate with us for any reason and we are not able to find a suitable replacement in a timely manner, we may lose significant business. To the extent that our large distributors significantly reduce their purchases from us due to the deterioration of their financial position or other reasons, our sales would be materially and adversely affected. In addition, we may have to offer volume-based discounts or more favorable credit terms to our distributors in the future, which may lower our operating profit. As we rely to a large extent on our distributors for the sale of our products, our future growth will also depend on the performance of our distributors and their ability to expand their business and sales networks. In addition, any consolidation, restructuring, reorganization or other ownership change in our distributors may have a material adverse effect on our sales. We generally enter into agreements with our distributors for a term of three years. There is no assurance that we will be able to renew our distribution agreements or renew such agreements on terms that are favorable to us. In addition, there is no assurance that one or more of our major distributors will not breach their distribution agreements or fail to comply with their obligations thereunder. In such event or events, our results of operations may be materially and adversely affected.

We are exposed to the credit risks of our distributors.
We generally provide credit terms of up to 90 days to our distributors. However, since the third quarter of 2012, we extended credit terms to up to 120 days for certain of our distributors who experienced difficulties in collecting from their sub-distributors due to the economic downturn since the second half of 2012 in China. As of December 31, 2012, we have not experienced any significant difficulty in collections or made any provision for bad or doubtful debts. However, our sales going forward may rely more heavily on credit, and we may be unable to collect these accounts receivable in full or at all. Failure by our distributors to pay us in a timely manner or at all could have a material adverse effect on our financial condition and results of operations

Brand Promotion Allowance . Prior to 2010, as an incentive to promote our brand in order to facilitate the expansion of our sales network and enhance sales, distributors were entitled to a brand promotion allowance equal to 3% of the total purchase orders from us. Such allowance was terminated beginning in 2010 as we adopted a strategy to increase our spending on centralized nationwide marketing activities while continuing to encourage our distributors to pursue their own marketing initiatives in line with our guidelines. Since the fourth quarter of 2011, as a result of warmer winter, we provided discretionary brand promotion allowance equal to 3% of the total purchase orders from us to our distributors for their marketing efforts to clear inventories for the 2011 winter collection. Since the third quarter of 2012, we provided higher discretionary brand promotion allowance equal to 6% of the total purchase orders from us to our distributors in light of the declined spending power caused by the economic downturn in China since the second half of 2012 . In the future we will determine whether such brand promotion allowance is needed based on market conditions and may enter into agreements on such brand promotion allowance
Unquote

Eratat:
Number of distributors = 12
Number of sub-distributor = Not disclosed ?
Total number of retail outlets = Not disclosed ?
Number of retail outlet operated by distributors = Not disclosed?
Number of retail outlet operated by sub-distributors = Not disclosed ?
Number of flagship stores/self-operated stores = 0 (coming soon in Shanghai)

2010 (29 distributors), no bad debt, no inventory obsolescence
2011 (12 distributors), no bad debt, no inventory obsolescence, provided sales incentive of RMB 51.7 million to Distributors
2012 (12 distributors), no bad debt, no inventory obsolescence, provided renovation subsidy of RMB 41.7 million to Distributor

Comments:
1) Lilanz has been providing “renovation subsidies” to its distributors.
2) Xiniya has been giving “rebates” to its distributors.
3) Zuoan has been giving “brand promotion allowances” to its distributors.
4) Eratat has been giving “renovation subsidies”, “sales incentives” and “longer credit terms” to its distributors.
5) Be it allowances, rebates, renovation subsidies, or extending longer credit terms etc – these are all incentives in one form or another which these listed Apparel Players (with asset light distribution model”) have been “awarding” to their distributors, for "whatever reasons" - seems like it is a market practice in this business model. Is this justifiable ? One has to make his/her own judgement !
6) Distributors seem to have stronger bargaining powers than AP in this “asset light distribution model” relationship – mainly due to the fact that AP are relying too heavily on Distributors for driving sales and growth. Afterall, it is much easier for a distributor/sub-distributor/retailer to "switch brand" than for a AP to "switch Distributor"
7) Beside exposure to high credit risks, AP are subject to higher business risks, as Apparel Players (brand owners) have weaker control (indirect) over the sub-distributors/third party retail operators. The greater the proportion of retail outlets owned by sub-distributors/third party retail operators, the greater the risks. Lilanz seems to have the highest proportion of retail outlets owned by its direct distributors, at around 32%. Hence, less risky.
8) For the sportswear sector, in recent years, this highly scalable “asset light distribution model” has resulted in channels overstocking / inventory problems – due to over expansion of retail outlets in excess of demand. Hence, certain investors may now take a more cautious view on apparel companies operating on similar business model - by demanding higher risk premium for exposure to such increased business risks. As reported by AT Kearney : "Unless lessons of recent past are absorbed, history is likely to repeat itself"

(not vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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Interestingly, Zuoan has been giving renovation subsidy to its distributors as well but not paying dividend to its shareholders.

Zuoan Fashion's CEO Discusses Q1 2013 Results - Earnings Call Transcript
Jun 6 2013


http://seekingalpha.com/article/1485031-...art=single

Question-and-Answer Session

John Sheehy - Private Investor
Okay, thank you. I would like to ask about the new stores that you have opened. When you open these stores, do you pay any of the costs or are all of the costs and all of the financial commitments paid by your distributors?
James Hong - Founder, Chairman of the Board and Chief Executive Officer
[FOREIGN LANGUAGE]
Wang Chaoshen - Chief Operating Officer
[FOREIGN LANGUAGE]
James Low
All right. John, I think that you are referring to the stores that our distributors are opening, right?
John Sheehy - Private Investor
Right.
James Low
In that case, we are still maintaining a policy of subsidized or paying for the renovation which is RMB1,500 per square meter as well as the furniture and fixtures,. The racks and stuff, another RMB1,500 per square meter. That makes a total RMB3,000 per square meter.
John Sheehy - Private Investor
And you record that as an expense on the income statement instead of a capital asset?
Chi Hon Tsang - Chief Financial Officer
No, this is expense in our income statement.
John Sheehy - Private Investor
Then like signing the lease and everything like that, that’s the responsibility of the distributor?
James Low
You mean the shop lease, right?
John Sheehy - Private Investor
Right.
James Low
That’s the distributor's responsibility.
John Sheehy - Private Investor
Okay, so they are taking those commitments to help build your business together. So that’s a good signal for you, right, that they are spending money to help expand your business…………………………..

.John Sheehy - Private Investor
Okay, thank you. Then the last point I would like to make is that many Chinese clothing companies listed in Hong Kong pay dividends. Your business is doing relatively well. So I encourage you to consider paying dividends as well. That’s all I have got. Thank you very much.

(not vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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On page 5 of 2Q2013 result statement,

Bond and Warrant Issue : “ On 20 June 2013, the Company entered into to a bond and warrant subscription agreement (the “Subscription Agreement”) with SHK Securities (Nominees) Limited (“SHKSN”),whereby the Company would issue to SHKSN (1) a redeemable 12.5% per annum nonconvertible bond with principal amount of RMB134.0 million (the “Bond”), and (2) 82.5 million warrants (the “Warrants”). The subscription price for the Bond and Warrants was RMB100.5 million (the “Subscription Price”). The Bond and Warrants were issued on 24 June 2013 and 8 July 2013 respectively (Please refer to the announcements made on 20 June, 6 July and 8 July 2013 for details).
As at 30 June 2013, the Subscription Price has been recognized as “Bond payable” in the Balance Sheet. In accordance with Financial Reporting Standards (“FRS”), the difference between the Bond principal amount and the Subscription Price of RMB33.5 million will be amortised over the 2-year Bond period. For the current quarter, RMB321,000 has been amortised in the profit and loss account.”


From the above statement, Eratat has treated the Subscription Price of Warrant as “zero” - which was in line with what d.o.g. had assumed.

Also, the difference between the Bond principal amount and the Subscription Price of RMB33.5 million will be amortised over the 2-year Bond period - which was consistent with what I had assumed.

Therefore, in so doing, Eratat has indirectly confirmed that “borrowing cost” for the issuance of “bond and warrant” equals to 32% gross (before tax deductibility) and around 24% (after tax deductibility), as worked out by d.o.g. and I in earlier postings.

Question remains : why ………………………………………………………..?

(Not Vested)
Research, research and research - Please do your own due diligence (DYODD) before you invest - Any reliance on my analysis is SOLELY at your own risk.
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