Hi viviene,

let's just say I like counters like SPH and Starhub because they operate in an industry with extreme high barriers to entry.

I still remember the days when analysts were proclaiming how bad Starhub was after it lost its BPL bid. Furthermore, Starhub has high amount of debts. Was it safe? To most analysts, no. Some were even claiming $1.20 for Starhub (that's a 40% expected decline at that time), and that their dividends was not sustainable. Yours truly bought at this time.

If one took a closer look, Starhub has high FCF, and proved them wrong by raising its quarterly dividends (still less than FCF). This was done while debts are being paid down. And operating in a tightly controlled market, their revenue was more or less assured. Consequently, a ~50% rise for a defensive counter.. Furthermore, we get to see and experience Starhub business first-hand. It is extremely easy to understand this business without getting too detailed.

For our own academic purposes based on my personal selection of counters, I shall compare apples with oranges for Starhub and Eratat. FCF was negative in 2010, and positive in 2011. But sales incentive made 2011 negative again. Dividends are still paid, but on the back of negative FCF. There are no debts, but their market is highly competitive with extreme low barriers to entry. We do not see the business first-hand as well, and to me, it would have been self-delusionary if I says I know and understand Eratat's business very well based merely on their financial numbers and presentations. So naturally, I  could be wrong in my earlier analysis of Eratat. As mentioned earlier, it was my personal conclusion based on publicly available information, and of course, YMMV.

It is always interesting to read reports of different companies in my free time and learn how they conduct businesses. :)  Whether one is right or wrong in one's analysis, something can always be learned from the reports.

And of course, one can always profit from price movements without FA; that's afterall the basis of TA. Good luck to you and wish you huat huat!

momo, Your portfolio is the 'safe & sound' type, or 'steady steady' type, right? Wish you all the best.

Hallo viviene,

yes I do have.

Offhand, I remember having the following...
I realised that if I want a "high risk high gain" investment, I'm better off putting that money into a real business, and hence you would see my portfolio gearing towards the defensives.

Mistakes bought during early investing days:
CitySpring
Aztech
Berlian Laju
Cosco
Hor Kew

Ok counters:
Saizen
Starhill
KGT
Silverlake
CMA (both stock and retail bond)
GLP
Capitaland

My better counters:
SPH
Starhub
Singtel
CCT
ST Engg
AIMSAMPIREIT
First REIT
SGX

Thank you momoeagle for yr interesting thoughts on Eratat. May I know if you are currently invested in any other stock aside from Silverlake Axis (which you mentioned in a post below)? I got curious cos Silverlake is a very different type of stock from Eratat .

The current negative perception arises from the way Eratat conducts its business and runs its cashflow.

Certainly, if a distributor is a good seller and advertiser for Eratat (and distributing solely Eratat products), I fail to see how such good advertising would not trickle down to help other "ailing" distributors within the same country to perform better, especially when you have 12 good distributors (the remaining ones).

Additionally, nothing was mentioned in the previous report of a sales incentive, which struck me as a rather hasty decision (of 3 months or less) for the sum of 51mil RMB. I'm a partner in an SME, and if my other partner does similar things without even informing me, I will be very pissed. I wouldn't know how shareholders of Eratat would feel, but I don't see how transparent or shareholder friendly they are by informing only after the sales incentive ($$) was given.

Going forward, what do I expect for Eratat? Yes, the receivables will drop. 
But how? Renovation subsidies. Cool way to write off receivables.

On Eratat's reply to SGX, the subsidy "is not expected to be more than 5% of the projected revenue in FY2012." 

Let's assume a conservative 3% and a consistent 1 bil RMB in revenue for FY2012, and that would mean another 30mil RMB to be given out. Compare this with the FCF of 15mil RMB in FY2011 (FY2010 was negative).

Allowing new $$ to go into receivables is a taxable event. It is still considered as profit by Eratat, so it is taxed. But the money is still not in Eratat's hands! The amount is substantial enough already that if it were all collected back, Eratat could delist itself at 18 cts.

To Momoeagle

The point I was trying to make was that Eratat’s share price would also have fallen like any other penny stock because of the bearish market in 2011. The negative perception of the stock had obviously caused its share price to drop more severely. Sorry, I did not spell it out so as to avoid unnecessary arguments.

As all of us have different objectives and perceptions, I have no interest to engage in arguing over definitions or any other matters. What matter most for every investor at the end of the day, regardless of your investment strategies, is – your own final bottom line.

To Observer2,

your question was "Which penny stock did not have a big fall in share price since March 2011?"

My critical start time was March 2011, and I would take the end time as now, March 2012. I see no point to consider the absolute high and absolute low of a stock price within this one year period because I do not aim to buy at the lowest or sell at the highest. I have however no comments if you prefer to define a sell down as the difference between the absolute high and the absolute low, without further regards any price increases before or after that. I am not well versed at all in the area of price fluctuations and definitions of such.

As far as I'm concerned, I'm a much longer term investor, and any investor who put money into Eratat in March 2011 would definitely not been much better off in March 2012 than any investor who put money into any of the penny stocks I have listed earlier.

And as I have mentioned, HongXing was a mistake purchase even though I made lots from it. A great trading buy does not mean it is a great FA buy. It is great that your friends made great money buying at near the absolute low and selling near the absolute high. I do not have the skill to do that.

Finally, if it was indeed what you had mentioned earlier

“understand well the business that one invested in”
"Ultimately, it is for each individual to decide whether he/she wants to invest in Eratat (or any other company) after knowing the full facts of the company."
"Oceanus had insured against the risk factors 1, 2, & 3 for up to 50% of the market value of its abalones."

it would be contradicting to label them as  “High Risk, High Reward” in my opinion, unless the risks you are talking about refers to the state of being an S-chip. If the major risks was the integrity of the financial report and the management, then it would strike as extreme contradictory that one understands the risks from merely attending briefing sessions and understanding the business from its reports. Yet if the integrity was unquestionable, why should it even be labelled as "High Risk" in the first place?

And if expansion programmes, ability to deliver (your pts 4 and 5) are considered as major risk factors, it would be insane to label companies like Silverlake and Kingsmen and not high risk since it would appy to them as well.

And lastly, as I have mentioned, if one is aiming to talk about profitting from the price fluctuations, and not the business operations and management, I would not be interested, nor would I be able to comment on it.

The data I have presented earlier on Eratat is based on public information released by the company, the conclusions from the figures are mine. Of course, YMMV.

Dear Momoeagle,

Based on the historical closing price data of Yahoo, the stocks cited by you, except for Kingsmen Creatives, still did not escape a sell down.

Silverlake  - High – 43.5 cts (3/6/11); Low – 26.5 cts (28/11/11)

Kingsmen Creatives – Relatively inactive stock fluctuating within a narrow range of 54 to 59 cts throughout 2011

MTQ – High – 92 cts (29/7/11); Low – 66 cts (23/12/11)

GRP – High – 22 cts (11/4/11); Low – 0.161 cts (5/12/11)

Guthrie – High – 52 (8/4/11); Low – 41.5 cts (4/10/11)

All the stocks above are not the “High Risk, High Reward” type comparable to Eratat and Oceanus.

As for those who bought into Oceanus, many of them were my friends who bought within the range of 10 to 15 cts after studying the risks vs the rewards profile of the stock. As with any high- risk stock, it was wise of them to sell out (especially when the prospective PE had reached a high of 10x) and look for another stock offering lower downside risk and higher potential capital gain.

To Observer2

"Which penny stock did not have a big fall in share price since March 2011?"

I have a vested interest in Silverlake Axis. MusicWhiz has a vested interest in Kingsmen Creative, MTQ. Both MW and me have once had vested interest in GRP.

I totally missed the boat on Guthrie, but my dad didn't.

Hope that answer your question somewhat :)

As for your comments on Oceanus, d.o.g. of valuebuddies forum has a very insightful post (more than a year ago).

"The fundamental problem with abalone farming and indeed any long-lived agricultural business like timber, cattle or tobacco leaf production is that at any given time, there is a huge amount of capital at risk, while only a small part of the total value can be realized at any one time."

"The financial statements use fair value accounting which books estimated changes in market value as revenue. While this may comply with accounting rules, it is total nonsense from a cash flow perspective because none of the so-called fair value profits can actually be converted into cash. Only when the actual goods are sold and cash received will the company know what their real profits are."

As for "A number of people, who did their homework and had bought heavily into the stock earlier at the low end, had the last laugh.",

you are essentially assuming these people bought at rock bottom and sold at top.

AND if the business was good, why would it make sense to sell? And if it wasn't sold, would the buyers still be laughing now?

You may like to know, Yeh, that when Oceanus was fluctuating between 10 – 15 cts (at rock bottom end) in early 2009, there were also those who liked the stock and those who were very critical of it. Some critics went as far as to claim that Oceanus was an extremely risky stock as the yearly typhoon hitting the China coastline would wash away all the abalones in Oceanus farm. Oceanus was actually considered a higher than average growth stock with also a higher than average risk factors.

The major risk factors of Oceanus were:

1. Natural disasters (mitigated somewhat by its farms being located along the Fujian coastline shielded by Taiwan island)
2. Diseases (can be reduced by good disease control measures & dispersing farms over a wider area)
3. Theft (can be reduced by good security control measures)
4. Expansion programmes [include increasing the number of abalone tanks from 20,000 to 40,000 by Dec 2009] not being on track (DBS Research had considered the execution of expansion plans as its main downside risk.)
5. The ability of the Management to deliver results expected. (Applicable to all stocks especially S-chips).
6. The ability of the company to sell sizeable quantity of abalones after the farm expansion programme is completed. (Oceanus had 137.9 million units of caged abalones as at 31 March 2009. The number of abalones sold in 1Q 09 was very small compared to the stock available. The number of caged abalone population was expected to increase by about 150 million units by Dec 09.)

Oceanus had insured against the risk factors 1, 2, & 3 for up to 50% of the market value of its abalones.

When the bull market came along and Oceanus had a secondary listing in Taiwan in December 2009, the share price of Oceanus hit its previous record high of 47 cts. Oceanus forward EPS was only about 4 cts. A number of people, who did their homework and had bought heavily into the stock earlier at the low end, had the last laugh. This is not an implication that Eratat would also turn out in like manner. The lesson here is that penny stocks generally have high risks but also can come with rather high rewards. In order not to miss out on opportunities when they come, one must do one’s homework and understand fully the business of the company before taking the calculated risk.

Well said, observer2. I, however, recognise that there are valid concerns regarding Eratat's business evolution. Add on the general distrust that S-chips have earned, and we find that Eratat has become a target to whip to death.

Only time can tell if Eratat is run honestly & can overcome the burdens of long receivables, poor cashflow and a competitive industry.  The risks are factored into the stock price (11.5 cents). There is a bit more downside if the results for 1Q and 2Q are on a downtrend, which I fear would be the case.

On the other hand, I have caught the hint from Ken Ho about Eratat being "ready to expand its distributor network." My guess is in the best case scenario, it could sign on new distributors who are big-time and  can boost its revenue substantially. 

The time for that may be at hand -- as their next trade fair is this month (March).

One of the valuable tips for investors is to really “understand well the business that one invested in”.  Some of the comments made in this forum clearly reflect a lack of understanding of Eratat’s business. To understand Eratat better, those interested in Eratat may like to ask themselves the following questions:

1. What is Eratat’s business model? Is Eratat’s management on the right track to transform Eratat from a Sportswear business to a “Casual Lifestyle Wear” business? [Also see JP Morgan’s comments on PRC Sportswear - http://www.nextinsight.net/index.php/story-archive-mainmenu-60/917-2012-chinahk-companies/4959-jp-morgan-reiterates-negative-view-on-prc-sportswear ]
2. Assuming you are now the owner of Eratat, how would you make a success of Eratat’s current business?
3. High receivable is a risk factor. What has Eratat done to deal with this risk? How is this risk compared to the risks of accounting fraud, insider’s mismanagement, poor business or business downturn, etc.?
4. Eratat has rewarded its distributors for their good performance. [In FY 2011, revenue of RMB 1,041 million was raked up by 12 distributors as against RMB 968 million by 17 distributors in FY 2010]. Is it necessary to give such reward? Would you do it if you run such a business?
5. Eratat intended to subsidise distributors to renovate their premises to give it a classy, high-end look. Is this necessary? Would you do likewise if you were the boss of Eratat?
6. Is Eratat likely to succeed in transforming itself into a seller of high-end casual lifestyle wear in one or two years’ time?

Ken Ho and Kelly Tan of Eratat had dealt with all the issues above in detail at their briefing sessions to investors, and those interested to know more of the company should find it useful to attend one of these sessions. Ultimately, it is for each individual to decide whether he/she wants to invest in Eratat (or any other company) after knowing the full facts of the company. If Eratat can succeed in sprucing up its image as a high-end casual lifestyle wear supplier, shareholders taking a stake at current price level could well reap a whopping windfall; otherwise, its share price could just languish in depression like any other poor S-chips, depending on market condition.

As for the fall in Eratat’s share price since March 2011 which would likely have caused depression to many Eratat’s shareholders, I only have one simple question to raise – Which penny stock did not have a big fall in share price since March 2011?

Window Chan,

I'm pretty sure most of us here are not short term traders and don't seek to predict or explain the short term price movements of stocks. During a high volume market, penny stocks in particular are able to move very considerably in short periods of time and often not due to factors intrinsic to the company itself, although in the long run, fundamentals shine through. 

The reason why there has been a flurry of commentary on Eratat lately is not because the price has fallen dramatically but because it recently announced its results, which revealed new developments, some of which so egregious that they were certainly worth pointing out for the purpose of discussion. Topics like its continuingly poor cash flow, alarming levels of sales incentives and upcoming renovation subsidies would be very salient points of discussion even if Eratat's price had risen after its results were reported. 

Back in November I did suggest that the renovation subsidies could come up to tens of millions (RMB) on the basis of a very reasonable estimate of a subsidy of roughly 250k(rmb) per store (there are about 700-1000 stores but not every store will be renovated)  and it was scoffed by Eratat supporters as fear mongering and baseless speculation. Now not only has Eratat's recent response to SGX's query confirmed that this would likely be in the tens of millions, it was also revealed that they they spent over 50 million on sales incentives last quarter. As Momoeagle has pointed out, the total amount disbursed to distributors will likely exceed the 60+ million they raised during the dilutive placement last year, what generous suppliers they are!

I can also vouch for the fact that Momoeagle has been advising investors to avoid Eratat since March 2011, it would certainly be unfair to say that he is suddenly raising negative views on Eratat only because the price has fallen since it announced its results. 

Hi Window Chan,

you have totally missed the point.

1) I have been saying that Eratat is not a stock worth buying since March 2011 at 23 cts. I'm sharing what I have learned from Hongxing, one of my first few counters.

Incidentally, I made money from HongXing, but I still considered it a mistake purchase in terms of fundamentals. I made small money in Fuxing, but it's still a wrong purchase. I lost money in China Sky but I managed to cut it fast fortunately. Eratat, Hongxing, Fuxing and China Sky are in the same industry, and it makes perfect sense to study all, and understand my past mistakes.

So I have already sounded my warning in March 2011.

2) Looking at the fundamentals, I do not and will not bother about whether the share price is sustainable. I do not aim to speculate on sudden price rise and price drops, but look more objectively at the numbers presented. And yes, I will be still saying the same thing. My postings and analysis comes after their report, and I do not and will not speculate on the share price, be it rising or falling.

Share price is a reflection of what the market values, and not what I value it.

3) When you know what are the factors to look at, you do not need hours to crunch numbers. The cash flow statement tells everything you need to know, and you do not need to "analyse Eratat to death" at all.

Finally, as I have already mentioned, I would presume you are vested into this company, and you do not analyse any company which you aren't vested at all. Am I right to say that?

I welcome all views and I think coverup missed the point. when the share price goes down, they (like momoeagle who is not even vested but take so much effort to study the financials of eratat) can come out with all sorts of reasons , albeit the same old ones , to justify why the share price is going down. but when the share price shot up 50% in 2 weeks, nobody knows why. seems like the expert only know why the share price goes down, but not when the share price goes up.

how come those who analysed eratat to death did not come out to sound the same warning, that the share price rise might not be sustainable because of the reasons that they are citing now? funny don't you think ?

is the sell off really due to the reasons cited here by forumers ???  really ??? would they be saying the same thing if there is no sell off ??

many s chips got sold down today. anyone wants to make a guess why ?

I guess comments, regardless negative or positive,  are good because NextInsight is afterall a hub for serious investors is not it not? Otherwise, a forum with wholly positive or wholly negative comments will only encourage groupthink, which is something successful investors should avoid.

That said, it is not true that this Eratat thread is active with negative comments. When the stock goes up, there will be forummers shouting "chiong, chiong, chiong", or there will be highlighting its strong orderbook etc.

If you go through the history of this stock, you will realise that those with the deepest critical analysis are those who bought the stock and lost quite a fair bit of money.

True, for those currently vested, they would want such negative and insightful analysis hidden. But I guess to the intention of the forummers providing insightful analysis is to alert people of the possible challenges to the company. Just read through the blog links posted here and you can see for yourself, these were the same people who had faith in the company. Share price wise, those who bought at IPO have lost 60% while those who bought  a month ago at 15 cents are sitting on 20% loss.

1) Comments and analysis are made on financial reports without due regards to share price movements at all. The same analysis and opinion will still be there even if the share price rose 200%. In fact, the share price is still at a 20% gain from its lowest point.

Commenting on share price before results are out could only be due to technical analysis reasons or speculations.

In fact, SGX had similar concerns and had queries for Eratat. They are doing their part in helping shareholders and potential shareholders to ask Eratat to address these common concerns. And it is up to us to interpret the data and response.

2) Not being vested does not mean one should never analyse a report. It is totally illogical to claim that one should not analyse a report or company because one is not vested. Analysis of different companies in the same sector helps an investor understand how companies in similar industries fare. Continuous analysis of different companies and trends help to identify trends within the sector.

It is detrimental to disregard reading and analysing key components of such a financial report even though you are not vested; there could always exist lessons to be learned and ideas to be picked up from a financial report.

I would presume you are vested into this company, and you do not analyse any company which you aren't vested at all. Good luck and may you prosper.

There's 1001 reasons why a stock price goes up/down in short term, which very often it even has nothing to do with the company. Why this track attract many comments, it's because there is something interesting to comment about.

when the share price goes up 50% , no one knows why. but when the share price goes down, so many people came out with their 2c worth.....the usual receivables, etc etc.... i wonder if the share price continues to go up, what do they have to say.... probably none.

for those not vested, should simply move on and pick on other stocks to Analyse. is eratat such an intersting stock that people who are not vested have to keep analysing it ???