ValueBuddies.com : Value Investing Forum - Singapore, Hong Kong, U.S.

Hi Greenrookie,

I started my leg work yesterday by making a visit to an Eratat outlet which is situated at 3rd Floor of Oriental Shopping Center in Xujiahui - one of the more popular shopping areas in Shanghai. This shopping center is situated opposite Metro City - which belongs to Metro holdings, Singapore.

Chinese web page of the shopping center for those who could read Chinese:
http://www.bldfqj.com/

Level 3 is designated for selling men apparels from mid to high end category - some of the brands include

Hugo Boss
Cerruti 1881
Tommy Hilfiger
D’urban
Worsley
DAKS
Bean & Pole
Plus other less expensive local brands

Pricing of Eratat products:
Only Summer Collections are being sold at the moment – Short-sleeves shirt including T-shirts, short-pants, long pants, belts and suits.
Cheapest item = RMB 279 for a T-shirt
Not many items are priced below RMB 400
Most items are priced in the range of RMB 500, 600, 700, and 800..
There were less than 10 pairs of suits on display, priced at more than RMB1000 but less than RMB 2000
The most expensive item I spotted is a bag priced at RMB 2780
(Please note; generally summer wears are relatively less expensive compared to spring/autumn/winter wears)

I spent about 30 minutes in the shop and during this period there were about 6 to 7 shoppers went through the shop – a few were just browsing without making any enquiry, the others did ask the shop assistant questions. Only one shopper ended up making a purchase.

I was a bit amused by the shop assistant when she told me that Eratat was a UK brand. But when I looked at the tag/label attached to its merchandise, to my surprise, the tag has the following printed on it:

Eratat Int'l Co., Ltd
30 Ironmongers Place, London, E14 9YD (printed in English)

Distributor: Eratat Shanghai…………….

Subsequently, I did a google search on “Eratat Int’l Co Ltd” and found the following link

http://www.trademarkuk.info/tm/2559271/eratat

Questions:
1) It seems like there is a brand identity issue here.
2) Is Eratat “faking” its “brand nationality”?
3) What exactly is “brand nationality”? – the perceived national of the brand.
4) Eratat was a Chinese owned company and therefore considered a Chinese brand prior to listing. After listing, technically，one could argue that, in the eyes of the Chinese laws, Eratat is a Singapore company – since all of its subsidiaries in China are WFOEs – Wholly Foreign Owned Enterprises- owned by its Singapore parent company. Should it still be considered a local Chinese brand?
5) Having successfully registered its trademark in the UK, can Eratat then legitimately market itself as a UK brand to the Chinese consumers? If the answer is yes, it would mean good news. If the answer is no, it would mean troubles.

Overall, here are my takes on Eratat Premium: (my view could be subjective as each of us has different taste and consumer behavior)

1) From its pricing positioning alone I would not rank it as high end – high end luxury products are normally priced in the thousands - RMB.
2) Quality wise – it looks and feels good - not the finest
3) Design and cutting – looks very trendy
4) Color – lots of black, grey and white – there are other colors but few.
5) Putting price, “brand nationality” aside, I think the products would appeal to certain consumer groups in the market. Taking all into consideration including – brand, price, quality, design etc – what fraction of those who like the products would buy - I really don’t know - at least I have seen one purchase made. If the sales figures of the Premium Series as reported in the financial reports were “real”, one should be pleased about the achievements – after all, we are talking about new products. .
6) IMO, legal risks exist on the “UK Brand nationality” issue.

You have raised some good points on the SAFE issue. I would seek further clarifications from some accountant friends and would comment later.

(not vested)

Any sign of dishonesty is a major red flag on my list.

Not vested.

(23-06-2013, 01:21 PM)d.o.g. Wrote: [ -> ]

(23-06-2013, 11:15 AM)Greenrookie Wrote: [ -> ]Hi d.o.g and guys,

Tactician from Nextinsight has post:

The 12.5% calculations and methods used by Eratat is the standard way of calculating Bond Interest Rate... so 12.5% is accurately depicted. Personally, I don't like it, but that's apparently Industry standard. At least it resolves an issue which I had.

She felt the bond was expensive, as did I (as mentioned earlier).

The effective annual rate should be the 15.45% using a compounding method of interest calculation. For the lay person's method of thinking of interest rates (I had mentioned earlier that the 12.5% is correctly represented and calculated according to bond calculations there is NO discrepancy apparently).

The quarterly coupons paid should be part of the final amounts, which will add up to 134m after 2 years. Hence, previous calculations brought over by value buddies had effectively double counted, which was the issue I was concerned with. The Effective rate is hence not 30% or so.

Please read the terms and conditions again. Interest payment is SEPARATE from principal accrual. There is both cash interest (12.5% per year, paid quarterly in 8 installments, total 25%) and imputed interest (deferred until maturity, 25% lump sum). Maybe there is confusion because the total amount of interest paid amounts to 25% on each side.

Page 2 of the announcement on SGX clearly states:

Principal = RMB 134m
Subscription Price of Bonds+Warrants = RMB 100.5m
Interest Rate = 12.5% based on principal, payable quarterly in arrears
Maturity = 2 years from issue

Again, to make things clear:

Issue proceeds = RMB 100.5m
Amount due at maturity = RMB 134m

Imputed interest rate from discount at issue = (134/100.5)^(1/2) = 15.47%

The imputed interest is what you earn from capital gains by buying at RMB 100.5m and redeeming at RMB 134m, without collecting a cent in interest coupons. So capital gains are 15.5% per year on a compounded basis.

Interest rate = 12.5% of RMB 134m
Annual payment = RMB 16.75m

Actual interest rate = 16.75 / 100.5 = 16.67%

The actual interest rate is your effective yield based on your cost. You pay RMB 100.5m and collect RMB 16.75m in interest, so your yield is 16.7%.

Effective interest rate = 15.5% + 16.7% = ~32% p.a.

This is BEFORE we take into account the cost of the warrants (which are out of the money but not worthless). Remember Olam's rights issue of bonds + warrants? The warrants had value so the cost of the bonds was higher than the reported coupon rate.

In Olam's case the bonds were also issued at a discount (95% of par) so the effective yield was over 7% despite the coupon rate being 6.75%. There was an extra 5% at maturity in 5 years' time, effectively 1% per year in principal accrual, which increased the bondholder's return to 8%.

In the case of Eratat perhaps the confusion arises because the returns to the bondholders appear so large. But the analysis is the same. And the conclusion is the same - if Olam was in fact in trouble and needed money, that goes double (or triple) for Eratat.

(08-07-2013, 12:39 AM)Boon Wrote: [ -> ]Hi Greenrookie,

I started my leg work yesterday by making a visit to an Eratat outlet which is situated at 3rd Floor of Oriental Shopping Center in Xujiahui - one of the more popular shopping areas in Shanghai. This shopping center is situated opposite Metro City - which belongs to Metro holdings, Singapore.

Chinese web page of the shopping center for those who could read Chinese:
http://www.bldfqj.com/

Level 3 is designated for selling men apparels from mid to high end category - some of the brands include

Hugo Boss
Cerruti 1881
Tommy Hilfiger
D’urban
Worsley
DAKS
Bean & Pole
Plus other less expensive local brands

Pricing of Eratat products:
Only Summer Collections are being sold at the moment – Short-sleeves shirt including T-shirts, short-pants, long pants, belts and suits.
Cheapest item = RMB 279 for a T-shirt
Not many items are priced below RMB 400
Most items are priced in the range of RMB 500, 600, 700, and 800..
There were less than 10 pairs of suits on display, priced at more than RMB1000 but less than RMB 2000
The most expensive item I spotted is a bag priced at RMB 2780
(Please note; generally summer wears are relatively less expensive compared to spring/autumn/winter wears)

I spent about 30 minutes in the shop and during this period there were about 6 to 7 shoppers went through the shop – a few were just browsing without making any enquiry, the others did ask the shop assistant questions. Only one shopper ended up making a purchase.

I was a bit amused by the shop assistant when she told me that Eratat was a UK brand. But when I looked at the tag/label attached to its merchandise, to my surprise, the tag has the following printed on it:

Eratat Int'l Co., Ltd
30 Ironmongers Place, London, E14 9YD (printed in English)

Distributor: Eratat Shanghai…………….

Subsequently, I did a google search on “Eratat Int’l Co Ltd” and found the following link

http://www.trademarkuk.info/tm/2559271/eratat

Questions:
1) It seems like there is a brand identity issue here.
2) Is Eratat “faking” its “brand nationality”?
3) What exactly is “brand nationality”? – the perceived national of the brand.
4) Eratat was a Chinese owned company and therefore considered a Chinese brand prior to listing. After listing, technically，one could argue that, in the eyes of the Chinese laws, Eratat is a Singapore company – since all of its subsidiaries in China are WFOEs – Wholly Foreign Owned Enterprises- owned by its Singapore parent company. Should it still be considered a local Chinese brand?
5) Having successfully registered its trademark in the UK, can Eratat then legitimately market itself as a UK brand to the Chinese consumers? If the answer is yes, it would mean good news. If the answer is no, it would mean troubles.

Overall, here are my takes on Eratat Premium: (my view could be subjective as each of us has different taste and consumer behavior)

1) From its pricing positioning alone I would not rank it as high end – high end luxury products are normally priced in the thousands - RMB.
2) Quality wise – it looks and feels good - not the finest
3) Design and cutting – looks very trendy
4) Color – lots of black, grey and white – there are other colors but few.
5) Putting price, “brand nationality” aside, I think the products would appeal to certain consumer groups in the market. Taking all into consideration including – brand, price, quality, design etc – what fraction of those who like the products would buy - I really don’t know - at least I have seen one purchase made. If the sales figures of the Premium Series as reported in the financial reports were “real”, one should be pleased about the achievements – after all, we are talking about new products. .
6) IMO, legal risks exist on the “UK Brand nationality” issue.

You have raised some good points on the SAFE issue. I would seek further clarifications from some accountant friends and would comment later.

(not vested)

Thank you lots lots boon, for your leg work and sharing .

(07-07-2013, 10:12 PM)Greenrookie Wrote: [ -> ]

(07-07-2013, 07:17 PM)specuvestor Wrote: [ -> ]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.

Yes, in the reporting there is always group and company column. The entity we are buying is actually the company, and the assets therein. Don't worry about not accounting trained, frankly most analyst don't even understand the difference as they are always trained to look at group or consolidated basis.

When dividends are paid they are paid from the company. So the subsi below has to pay upwards in order for the company to replenish its cash.

So in your example you are right then the maths will show they can sustain 10 years which is irrelevant to us impatient investors but we see how it will EVENTUALLY blow up for Satyam, Pamalat or even Madoff. Of course I agree "eventually" is not within our scope so we should narrow down to those that have maybe less than 2 years of dividend cashflow and see if they are able to replenish their cash.

For Eratat their cash holding on the company level been going down through the years but net net they have been moving money upwards to pay dividends. The company receivable from the subsidiary has been increasing nonetheless ie likely upward cash due but not paid in cash, to about RMB250m but dvd payment is only about RMB12m while cash is less than RMB1m. What that means basically is that if any year they can't repatriate the money out from China for whatever reasons, the shareholders will know in February, even if they have hoard of cash on the consolidated basis So this is not something that can be dragged which comes back to the issue of why they need cash now at such high price.

This is also the reason why you see a lot of cash rich stock not paying much dividends because the cash is not in the holding company. With the internationalisation of RMB, it will be interesting to see what the "cash-rich" S-chips will say next.

(07-07-2013, 10:20 PM)Nick Wrote: [ -> ]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)

Not sure about withholding tax but IMHO it is very difficult to deduce dividend flowing out from tax payable as tax accounting and accruals are very different from actual cashflow.

http://www.china-briefing.com/news/2010/...china.html

(07-07-2013, 10:20 PM)Nick Wrote: [ -> ]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 ?

This might work in general but there're exceptions.

Dutech's dividend payment was made via borrowing SGD from OCBC Singapore, while depositing the equivalent amount in OCBC China. It bypassed the withholding tax in this way.

I think Apple did something similar, by issuing US bonds to pay dividend without repatriating foreign earnings back and incurring huge taxes.

So, the tax payable need not necessarily correspond to the dividend paid.

A few points about whether Mr Lin is a idiot or a shrewd businessman:-

1) Educated up to middle school - might be the right material, most businessman found their calling early.
2) Branch out of sport shoes business 2yrs ahead before Beijing Olympic, so you can see the difference betw China SPort and HongXing - both dead.
3) Make the transition from sport to casual wear, step by step. And now moving into tier 1 city.
4) Model of business is actually franchising to shop and taking order from shop owner. It does not sell fashion in reality, it is targeting retailer's marketability.
5) Cash conversion cycle still a concern but improving. The Co. need to explain this very carefully and address this as its fund raising at such a high interest rate also need explanation and make comparative on why this is the right move!!

Mr Lin is over confident? or is he a fool, Sporean can watch, this S chip as a model. Surprisingly, SGX or all those analyst report are now silent - meaning they too are doubtful.

Eratat - what a name also - sounds like (errata). If that is not what Mr Lynch made famous of name - the stranger it sounds, the more it resonate in the mind of the consumer!!

(09-07-2013, 10:41 AM)ValueBeliever Wrote: [ -> ]A few points about whether Mr Lin is a idiot or a shrewd businessman:-

1) Educated up to middle school - might be the right material, most businessman found their calling early.
2) Branch out of sport shoes business 2yrs ahead before Beijing Olympic, so you can see the difference betw China SPort and HongXing - both dead.
3) Make the transition from sport to casual wear, step by step. And now moving into tier 1 city.
4) Model of business is actually franchising to shop and taking order from shop owner. It does not sell fashion in reality, it is targeting retailer's marketability.
5) Cash conversion cycle still a concern but improving. The Co. need to explain this very carefully and address this as its fund raising at such a high interest rate also need explanation and make comparative on why this is the right move!!

It is always EASIER to determine whether a statement is valid or not, by trying to prove that it is wrong, rather than trying to prove that it right. In scientific hypothesis testing, we always try to prove that the null hypothesis Ho is wrong - if we can't, then we accept Ho's argument.

In other words, if we want to validate the statement 'all swans are white', we just need to find 1 black swan to get our answer, rather than waste the time searching for thousands of white ones. Similarly, d.o.g does not need to find tons of reasons to prove whether Mr Lin is a shrewd businessman, he just needs to find the ONE reason to show that he is NOT.

Being once a FMaths student, I know what weijian is talking about but I beg to differ. The test is binary, and actions are usually along a continuum and not a binary right or wrong. And Buffett had been wrong many times does not mean net net he is more right than wrong. If one is right 2/3 times with proper discipline, one would have been way above average, including professionals.

I'm giving no representation about Mr Lin. My contention is that the logic is flawed. In general I would approach the issue multi-facet including historic track to establish Mr Lin's credibility.

(09-07-2013, 10:12 PM)specuvestor Wrote: [ -> ]Being once a FMaths student, I know what weijian is talking about but I beg to differ. The test is binary, and actions are usually along a continuum and not a binary right or wrong. And Buffett had been wrong many times does not mean net net he is more right than wrong. If one is right 2/3 times with proper discipline, one would have been way above average, including professionals.

I'm giving no representation about Mr Lin. My contention is that the logic is flawed. In general I would approach the issue multi-facet including historic track to establish Mr Lin's credibility.

hi specuvestor,
Thanks for your reply. I do agree investing in the REAL world is a continuum. There is no way one can be successful in contrarian investing if he/she shuts out to any opportunity. There is a need to do continuous hypothesis testing and understand the risk/rewards of every opportunity at every time quantum - that is why i have great delight in seeing forumers making the effort on both sides of the argument.

BUT then again, sometimes more (information) could be less (worst decision). A simpler brain like mine could be better served to get 2/3 decisions right, by focusing on what i need to know.

Hi Greenrookie,

After checking with my accountant friends, the correct Procedure for Repatriation of Profits from China is best illustrated by the following link:

http://china-trade-research.hktdc.com/bu...002LMN.htm

The following document by Deloitte on taxation and tax filling is excellent : Taxation and Investment in China 2013 – Deloitte
http://www.deloitte.com/assets/Dcom-Glob..._China.pdf

In short,
1) SAFE is no longer that hands-on
2) In theory, an overseas holding parent company could draw on one year’s profit from its China WFOE subsidiary to fund few years’ dividend payments overseas.
3) That said, a good auditor should be able to rely on the amount of tax paid by a WFOE to deduce at the amount of profit it had made – by verifying the authenticity of the tax payment certificates with SAT (State Administration of Taxation). – Profit must be tallied with amount of tax paid. – IMO, this is a reliable and effective way of checking against potential accounting fraud of inflating profits.
4) Withholding tax on dividend is 10%, unless there is concession or tax treaty.


On a different note, here is a report called : Fashion in China Mapping

http://movingcities.org/wordpress/wp-con...apping.pdf

This report, commissioned by Dutch Design Fashion Architecture, presents an analysis of the fashion design field in China. Researched and written in 2011 by MovingCities, and updated throughout 2012, it highlights the people and processes that will influence future fashion design agendas in China and throughout the world. It is based on 13 interviews held in 2011 with acclaimed Chinese designers and scholars, as well as on additional desk research.

If you are not into Chinese Fashion Design/Designers, you may not enjoy reading this report. But the following pages (page 39 to 45, page 57 & 58) might be of interests to you. It shows

1) How small Eratat is compared to some of the local big boys like Youngor
2) The importance of Shanghai as a fashion hub.- ( Do you think Eratat has made the right move by moving into Shanghai?)
3) Men’s wear – the potential of the market – (Do you think Lin has made the right move by diversifying away from sports shoe/apparel and into men’s apparel ?)

On page 39 to 45
- Fashion and Apparel – Market Landscape and Entries
- Market Entries for foreign brands
- Fashion Hubs : Textile City, Shanghai Fashion Hub and Fashion Silicon Valley

On page 57 & 58
- Trending Topics - Luxury, Adaptation and Exposure.
- Can “Made in China” Be Luxury and Chic?
- The stigma of locally made luxury products is explained


Men’s Wear
Sales of men’s wear soar on the back of China’s huge population, fast economic development, and rising personal incomes. A recent report by Frost & Sullivan, a US consulting firm, states that the development of China’s garment manufacturing industry is already quite mature but is still maintaining a high growth rate.10 In 2008, the market value of the men’s garment sector in China amounted to approximately 260 billion yuan ($40.87billion); in 2010 this figure jumped to 348 billion yuan, and it is expected to maintain a 16.9% annual growth rate. The report also points out that the market value might exceed 700 billion yuan in 2015

(Not Vested)