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China Eratat chairman Lin Jiancheng (left) fielding questions from fund managers from Singapore, HK, China and S. Korea in his company's showroom. Photo by Leong ChanTeik
CHINA ERATAT Fashion, whose China operations I visited with six fund managers last Thurs & Friday at the company’s invitation, is an S-chip unlike many of its peers.
It has no bank borrowings, has not made any cash calls since its IPO in April 2008, and didn't issue any convertible bonds. It has not been smeared with any corporate governance lapses or accounting issue.
China Eratat CFO Ken Ho (right) with Justin Park, a general manager of a South Korean stock broker. Photo by Leong Chan Teik
On the positive side, it pays a decent dividend (6.7% yield currently), and has had the same Singaporean for a CFO since its IPO.
In April this year, it was ranked No.2 among the 200 or so S-chips on the Governance and Transparency Index (GTI) published by The Business Times.
China Eratat’s overall GTI score was ranked No. 40 out of a total of 681 SGX-ST listed companies that were assessed.
An example of its transparency is the four-page press release and 16-page financial statement for FY10, which are chock-full of details of every key aspect of the business that a serious investor would like to know.
Reading those 20 pages on my four-hour flight from Singapore to Xiamen last week enabled me to have a clear idea of the business.
Such features are what distinguish China Eratat from many S-chips.
Valuation-wise, it is not different, though: Its stock trades at a relatively low PE of 3X, or 15 cents a share. It has net cash of S$36 million compared to a market cap of S$62 million.
With a 29% stake, Lin Jiancheng is the single largest shareholder of China Eratat. Photo by Leong Chan Teik
Visiting China Eratat’s sales showroom, & meeting face to face with the boss
On arriving in Xiamen airport, we were driven to Jinjiang city an hour away, where China Eratat operates a sales office and showroom for its casual apparel and footwear.
There, we met the chairman and CEO, Lin Jiancheng, 44, who was casually dressed in an Eratat T-shirt. He busied himself with making endless pots of tea for his guests while answering questions.
So this was the man who, in April this year, won the “China Top 10 Outstanding CEO with Growth Potential.”
Certainly, Mr Lin has come a long way, and so has China Eratat which has a string of accolades such as the 2006 “China Top 100 Footwear Producing Enterprises.”
Mr Lin started working life at 16 as an apprentice in his father’s shoe factory. His father was a pioneer in the business in Jinjiang, and there are photos in a commemorative book showing him with top politicians of the day.
The younger Lin rose through the ranks and in 1998 became general manager of Fujian Eratat, which was funded by by his mother-in-law, Mdm Chong Shuk Ching, and brother-in-law, Mr Ho Wing Fai.
Last May, the duo sold all their shares at 12.5 cents apiece. The buyers:
* Mr Lin (120 million shares, 29% of the issued share capital);
* Ye Sanzhi, executive director (32 million shares, 7.8%); and
* Institutional investors and sophisticated investors (12 million shares, 14.5%).
Though he is wealthy, Mr Lin and his family continue to live in quarters at the top of one of China Eratat’s two factories. This is not entirely uncommon among S-chip CEOs as I have encountered a few similar cases.
Likely, they are just being practical. The factory is usually located far from the city centre, so it is just more convenient for the boss to live within the factory.
What China Eratat used to focus on, and what it does now
At its IPO, the company was into the design, manufacture and distribution of sports footwear, and the design and distribution of sports apparel, which are mainly marketed under its proprietary brand, ERATAT.
Over the subsequent years, however, the company shifted towards casual sportswear and casual apparel, as it deemed the sports category to be too competitive and it had to contend with foreign brands such as Nike and Adidas.
Though casual apparel and casual footwear are competitive businesses too, China Eratat appears to have benefited from its transformation, as its sales and profit have grown strongly.
Notably, the growth has resulted from the growth of same store sales – rather than from a wide expansion in retail points.
For unlike many of its competitors, China Eratat has chosen the strategy of expanding its retail chain (which are all owned by its 30 exclusive distributors) at a measured and careful pace.
That's why Its retail outlets currently number 1,680, not significantly higher than the 1,590 as at end-Sept 2008. The company instead incentivises its distributors to upgrade their shop frontage, close non-performing outlets and relocate to new sites with larger floor areas.
China Eratat offers longer credit terms (90-120 days) for its sales to selected distributors, and has yet to suffer any debt impairment.
Part 2 on Wednesday: CHINA ERATAT: Fund managers visit factory producing 5m pairs of shoes a year
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