Chinese retailer Sunbridge Group Ltd (ASX: SBB) has posted an operational update to the ASX today, which unfortunately for shareholders is virtually meaningless.
The company manufactures, distributes and sells men's fashion wear in China, but had a tough year last financial year. Net profit fell to just $2 million, despite buying a large number of franchises to operate itself from distributors. Company-owned stores should theoretically generate much higher margins without the middleman, and therefore profit should increase.
Sunbridge blamed the weak retail environment in China, higher operating expenses (from those company stores) and amortisation of funds invested in franchise store renovations.
But the big question on shareholders' lips is what is the company going to do with its supposed $30 million in cash it is holding. Sunbridge says it needs these funds for financial flexibility, potential acquisitions and investing in future growth. So far, holding $30 million in cash has seen profits sink – so it doesn't seem to be a strategy that's working all that well.
Since listing at 20 cents a share two years ago, Sunbridge's share price has crashed to just 3.7 cents, despite holding around 6.3 cents a share in cash. It's clear that Australian investors either don't believe the company has $30 million in cash – or if it does, whether they will see any of it.
And, despite the prospectus statement, "The company is targeting a dividend pay-out ratio of at least 25% of the group's net profit after tax," shareholders haven't seen a cent in dividends from earnings since March 2013 and appear unlikely to ever see a cent in future.
Sunbridge CEO Mr Xu Jia Yin also said in today's update, "Board and management are working very hard at an operational level to ensure that our share price will be more reflective of Sunbridge's true value and potential."
Forget all the operational guff – investors want action, not words. Here are two very simple things management can do to get the share price back to 20 cents or above.
- Pay a dividend. Until Sunbridge pays a dividend, very few Australian investors will believe that the company has $30 million in cash in the bank. Simply paying a dividend would fix that problem and give shareholders back their faith in management and the financial statements. Even a 25% of earnings dividend would still leave Sunbridge with 75% of earnings to reinvest back into growth. Holding out a promise of possible future dividends is as worthless as the words in the prospectus.
- A share buyback. If the company does actually have $30 million cash in the bank (worth ~6.3 cents a share), buying back shares would not only be prudent financial management, but it too would restore shareholders' faith.
Unfortunately, investors are unlikely to see either. Sunbridge has reneged on its promises in the prospectus and given the issues we have highlighted with Chinese listed companies around the world, shareholders are likely to see the company's share price fall even further.
Buyer beware.
