Sunbridge Group Ltd soars 12%: Too good to be true?

Is this the bargain of the century?

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Chinese apparel retailer Sunbridge Group Ltd (ASX: SBB) has seen its shares soar by 12% by lunchtime, after the company announced upbeat half yearly expectations.

The company, which retails men’s fashionwear in China, says it expects revenues for the six months to June 2014 to come in at $43.8 million, on the back of solid sales of its two key brands. Sunbridge also reported that it was in a strong position with $30.5 million in cash and minimal debt.

Further progress on developing its own retail network was also announced, with the acquisition of another 35 retail outlets for an outlay of $3 million. Sunbridge will have 60 company-owned outlets post completion, after acquiring 19 stores earlier this year, to add to its existing 5 stores.

At its current market cap of just $34 million, Sunbridge is trading for virtually its cash balance alone, although it also had debts of $9.2 million at the end of December 2013.

However, we still have concerns as highlighted in previous articles here and here.

Today, the Australian Investments and Securities Commission (ASIC) released a report聽(PDF) into the operations of ASX Limited (ASX: ASX) and the Australian Securities Exchange. One of the concerns ASIC highlighted was the ASX’s procedures for considering listing applications from emerging market issuers. In point 114 in the report, ASIC found that the ASX had only reviewed the business structure and objectives of one out of the three companies that ASIC had looked at, which should concern investors.

ASX has a conflicted role here. As the company is listed on its own exchange, the more companies it can attract to list in Australia can positively impact its earnings, while it also needs to maintain strong governance of those same companies, rejecting those that are deemed to not meet the criteria.

Given the issues the US, Hong Kong and Singapore exchanges (SGX) have had with emerging markets listings, particularly with Chinese companies, the last thing the ASX would want is to fall into the same trap. As my colleague Ser Jing Chong wrote in this article, around 20% of the聽Chinese stocks on the SGX聽are trading at less than their net current asset value (NCAV) – an unusually high proportion.

According to globalsecuritieswatch.org聽(PDF),聽one of the reasons the ASX / SGX merger never went ahead was because of concerns over the quality of Chinese companies listed on the SGX. As always, buyer beware.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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