China Erata - Leading sportswear enterprise in Jinjiang City

China Eratat is a leading branded sportswear enterprise based in Jinjiang City, Fujian province in the PRC since 1983. They are principally engaged in the design, manufacture and distribution of sports footwear, and sports apparel, marketed under its proprietary brand ‘Eratat’. Currently, 67% of its revenue is derived from footwear. Its products are mainly sold through its 22 distributors across 1630 retail outlets.

The group has carved a niche in “great style at affordable prices”, capturing the hearts of consumers in the current downturn. It has an in-house product development team which seeks to introduce at least 250 new designs each year. The appeal for ‘Eratat’ products is further boosted by its internationally renowned ambassador ‘Wong Li Hom’.

The group’s new factory premise in Quangang which added 4 sports footwear new production lines in 1H09 could boost its existing production by 3-fold to 700k pairs of footwear per month. We are impressed by its new plant which has the entire production processes neatly integrated into a seamless single production line.

The group plans to add 5 production lines to manufacture footwear and 50 new production lines to manufacture sports apparels by 4Q09. It also aims to increase its distribution network to 2300 in FY09. However, to ensure earnings stability amid the economic downturn, the management is mindful to slow-down its expansion plans according to demand.

The group is currently trading at near its net cash (post CAPEX) of $0.08 and a low FY09 PER of 1.4x. Its upcoming 3Q09 earnings are likely to be positive considering a 42% yoy increase in order book (RMB500m for delivery from Jan – Jun 09) at its Sep 08 sales fair. It achieved a 4-year earnings CAGR of 69% and trades at a steep discount to the sector average of 8x PER.

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