A stockbroker I know was touting SBB at 11c, and the sp's now at 6.5c. With a "targeted" div payout ratio of 25%+ and a cash pile exceeding market cap, I thought it worthwhile doing some digging on it.
After two hours of research I just can't get my mind off the issues like those neatly summarised by Motley Fool. Ergo, I won't be investing.
This is from August:
Chinese retailer Sunbridge Group Ltd(ASX: SBB) recently rolled out its June quarterly cash flow statement and again we have more questions than answers.
If you haven’t read our previous articles, you can find them here, here and here.
I won’t go over those issues in detail again, but in summary we have noted the following: –
Insiders (who would theoretically have more information than buyers) began heavily selling their shares, virtually as soon as their shares came out of the six month escrow period. Many of those insiders are companies registered in a notorious tax haven, the British Virgin islands.
Unusually high profit margins and return on assets. Given Sunbridge’s model of outsourcing both the retailing and the production of its goods, you have to wonder what sort of margins its distributors and suppliers are earning, especially in China’s highly competitive fashion industry.
Loan guarantees to unrelated companies that are held off balance sheet. Sunbridge says this is common business practice in China.
The construction of an 8-storey head office. We can’t see the point of this, and we also note that capital expenditure in the company’s cash flow statements over the past two and a half years does not reflect a heavy spend on this building, nor any other property, plant and equipment the company says it is spending money on. (We also note that the artist’s impression of the building appears to show 11 levels).
The resignation of the CFO the day after our first article appeared. We also note that the CFO was previously employed by Grant Thornton, which also happens to be Sunbridge’s auditor.
The ASX only reviewing the business structure and objectives of one out of three emerging markets companies listed on the ASX according to ASIC.
Finally, coming to the latest cash flow statement.
The company says it received $1,000 in interest during the quarter, on an average cash balance of over $30 million. That equates to an interest rate of 0.006%. Looking at the Bank of China’s website, and using the lowest interest rate that bank pays on deposits as an example, (which was 0.35%), Sunbridge should have received roughly $27,000 in interest income – at a minimum.
Either questions need to be asked of the company’s management as to why they are receiving such low rates on their substantial cash balance, or it is questionable whether the company actually has $30 million in the bank.
We have put some of these issues to the Sunbridge board, as well as the company’s auditor Grant Thorton, but are yet to receive a reply.
aaaaand this one from July:
Recently listed Sunbridge Group Ltd(ASX: SBB) has seen its shares fall by more than 50% from its IPO price, although shares spiked up more than 20% earlier this week.
Still, shares have sunk a long way below its IPO price of 20 cents, and are currently trading at 8.5 cents.
At that price, the company has a market cap of around $40 million, not far off its cash holding of $31 million, despite Sunbridge posting revenues of $37 million in just five months to end of May 2014. It’s also below the company’s last reported net assets of $43 million at the end of December 2013.
Factor in the retailer’s strong growth in revenues and net profit – putting the company on a trailing P/E ratio of 2.9x – and Sunbridge looks to be the bargain of the century.
That is, until you dig a little deeper. Sunbridge is involved in retailing mens clothing and accessories in China. Sunbridge owns a Hong Kong company, Mega Rich International Limited, which in turn owns 100% of two Chinese companies. Those two companies are involved in designing, procuring and then selling their product to 17 distributors, who then on-sell the product to more than 400 retail stores. Not exactly what you would call a clean structure.
The company also has 24 of its own retail stores, and plans to expand its own footprint – a sensible move – which cuts out the distributors and allows Sunbridge to retain control from design to selling the product to retail customers, increasing profit margins and lower costs.
The majority of the shares in Sunbridge are owned by the CEO (55%), with shares held in escrow for 24 months. But other larger shareholders who held 40% of the shares in the IPO (190 million shares) are selling out almost as soon as their 6-month escrow period ended at the end of May – hence the recent share price falls. Interestingly, many if not all of these shareholders appear to be shelf companies setup by Chinese citizens in a notorious tax haven, the British Virgin Islands.
According to the Guardian newspaper, “In China, it is said that you have not succeeded until you have your own subsidiary in the British Virgin Islands”.
There are several other red flags, including unusually large net profit margins and high returns on assets. So high in fact, that Sunbridge’s return on assets beats every stock on the ASX except for REA Group Limited(ASX: REA), Carsales.Com Ltd(ASX: CRZ), 3 fund managers – who have little in the way of assets anyway – and biotech stock Acrux Limited(ASX: ACR). Another concern for investors is a common practice in China – according to the company – of providing loan guarantees to unrelated companies. At the end of 2013, Sunbridge had $2.8 million of contingent liabilities, but where it will be in future is anybody’s guess. Those liabilities are not held on the balance sheet either.
Investors may also be concerned about the company’s plan to build an 8-storey head office, given it says it has just 7 senior executives, and the in-house design teams are situated close to apparel manufacturing hubs.
Anyone with a 'buy' sentiment want to comment?
SBB Price at posting:
6.5¢ Sentiment: Sell Disclosure: Not Held
