More questions for Sunbridge Group Ltd

Another warning for investors

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 4, 2014 10:46 am AEST

If you've been following our series of articles on Sunbridge Group Ltd (ASX: SBB), then you'll know that we have concerns for its Australian retail shareholders.

With 1 in 5 Chinese companies listed on US exchanges since 2007 being delisted for fraudulent activities and 1 in 10 on the Singapore Stock Exchange, it would be naïve of us to assume it could 'never happen in Australia'. With that track record, a detailed investigation into the company's business structure, strategy and reported financials for any company (Chinese or other) listing on the ASX is warranted.

So far we have raised several issues, which may turn out to be nothing more than poor management, undue attention to corporate governance or a lack of communication from the company. Our concern is that these issues are none of those.

Here are another couple of early warning signs that investors should be wary of when looking at Sunbridge.

Payment of a dividend is not a conclusive sign that there are no issues. Eratat Lifestyle, a men's apparel retailer in China, paid dividends every year until it was suspended in 2013, after the company was found to have fabricated some of its bank statements. Grant Thornton, who were appointed as internal auditors, did not appear to pick this up in November 2012 when they examined Eratat's subsidiaries' bank balances.

Sunbridge's statement that it intends to pay out just 25% of net profit in dividends once a year, appears at odds with having such a large cash balance, negligible capital spend and rapidly growing revenues and profits.

Receivables as a high percentage of total assets. Eratat's accounts receivable in 2013 represented 42% of its total assets. Sunbridge's accounts receivable stood at 32% of total assets in 2013.

Overdue accounts receivable. Sunbridge had 50% of its receivables overdue at the end of 2013, $9.3 million of the company's payments to be received from its distributors out of a total of $18.7 million.

With so many potential issues, we again warn investors that until the facts are clearer, they may want to avoid investing in Sunbridge shares.

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