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.
