Article for posterity. Pierpoint was onto this 30 months ago...

Article for posterity. Pierpoint was onto this 30 months ago

Sunbridge Group investors are owed some dividends

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China-focused clothing group Sunbridge needs its tennis-loving chairman to serve up some dividends.

by James Thomson
Thanks to the boom in Chinese trade, Australia now bristles with China experts. But don't include Pierpont in that number, because your doddering correspondent doesn't even understand how Chinese companies do business.
They seem to have their own quaint ways, which are as mystical to Pierpont as Zen Buddhism. Take, as an example, Sunbridge Group (SBB), which listed on the ASX in November, 2013.
Sunbridge says it is a leading retailer of menswear in the People's Republic of China. It owns and operates the Pandist and Agueseadan brands of menswear, which are targeted at different age groups of well-groomed upper-middle-class men and are sold in more than 400 retail outlets across China.
Pierpont applauds this welcome entry of capitalism into the fashion business of China. For decades, everyone in China seemed to wear only those dreadful boiler suits made compulsory by Mao Tse-tung (or Zedong or whatever his name was).

The business was founded in Hong Kong in 1996 under the appealing name of Mega Rich International Creation Ltd by a chap called Jiayin Xu. To float Mega Rich publicly, Sunbridge was formed as a parent company to take over Mega Rich. Sunbridge was then floated in Australia.
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So the structure of the group is that Sunbridge sits at the top as parent and owns 100 per cent of Mega Rich, which in turn has two wholly owned subsidiaries called Bangdisidun (Fujian) Dress Development Co Ltd and Hengjiasi Dress Development Co Ltd.
Pierpont's confusion began with the prospectus illustrations. Sunbridge's operations are entirely in China and its Australian head office is in Melbourne. But the group's logo is the Sydney Harbour Bridge. Your correspondent was further confused by the fact that although the menswear is entirely produced and sold in China to Chinese customers, the male and female models in the prospectus photos look – to Pierpont's rheumy, old eyes anyway – like Westerners.
Nor was it immediately apparent why this entirely Chinese business should want to become an Australian public company.
The prospectus said that at the end of December, 2012 the group had total assets of $29.6 million, net assets of $19.6 million and cash of $8.6 million. If it was doing so well as a private company, why bother seeking a mere $10 million in Australia?

The minimum raising specified by the prospectus was $3 million, which hardly seemed worth the trouble. Xu would be almost giving away equity in return for a tiny capital injection. In the event, the float raised $4.347 million before expenses.
Yet another mystery was why red-blooded Australian investors should not have leapt at the offer to invest in a thriving Chinese business. In practice, the blood was supplied by a lass named Shan Shan Hong, who spent $2.8 million buying 14.226 million shares in the float. If Shan hadn't stepped up to the plate, the float would have flopped for lack of support.
Before floating, Sunbridge had 450 million shares on issue. Of those, 259.2 million were held by Xu and escrowed for two years. The other 190.8 million were held by other shareholders (apparently all Chinese) and were escrowed for six months. The public bought only a further 21.7 million in the float.
After listing, the shares held above issue price until May, even hitting 26¢ in March. But on May 27, the 190 million shares were released from escrow and the price dropped vertically to 6¢ as nearly all the Chinese holders stampeded for the exit. The price has never recovered since and is 6.3¢ as Pierpont quills this column.

At the end of 2013, the top 20 shareholders held 98.76 per cent of Sunbridge. That top 20 included only one nominee company, Citicorp, which held a mere 527,000 shares. So the 1.24 per cent of shares outside the top 20 must have been spread very thinly indeed to meet the ASX spread requirements.
Sunbridge is essentially a design house which acts as a middleman in the Chinese rag trade. Sunbridge sends its designs to different manufacturers, who make the clothing. The clothing is then dispatched to franchisees who run dedicated retail outlets. Sunbridge also runs five retail outlets of its own, which give the group first-hand feedback from customers.
That sounds a good business model, because Sunbridge is freed of the capital expense of building its own factories or retail outlets. All it has to do is sit in the middle, design clothes and collect profits.
The accounts are a picture of booming health. Revenue totalled $88 million in 2014, by which time Sunbridge was holding $29 million cash. We don't have the full December, 2014 accounts yet, but in the half year to June, 2014, NPAT jumped 11 per cent to $6.7 million.

Pierpont has so rarely seen such lovely numbers that for a while he sat staring at them, his mind perfectly blank. Then he started wondering – in his old-fashioned way – about Sunbridge's dividend policy.
That took a little tracking. Sunbridge balances on the calendar year. The accounts from 2010 to 2012 are expressed in renminbi but the annual report for 2013 was in Australian dollars with no conversion factor shown. Incidentally renminbi is the Chinese currency but the units are yuan – the same as sterling and the pound. As Mega Rich accounts are expressed in yuan, Pierpont will conform to Chinese custom.
From the start of 2010 to the end of 2012, Xu was the sole director and shareholder of the (then Mega Rich) group. In 2010, the group declared net profit of 44.8 million yuan ($9.2 million) and paid a dividend of 30 million yuan to Xu, which is just what Pierpont would have done in his position. By the end of 2010, Xu also owed the group 13.75 million yuan, so he wouldn't have needed to wonder where his next dim sim was coming from.
In 2011, the group declared NPAT of 76 million yuan and a dividend of 50 million yuan ($7.5 million at the time) to Xu. In addition, Xu had borrowed another 51 million yuan from the group, bringing his total indebtedness to Mega Rich to 65 million yuan ($9.7 at the time). The Mega Rich accounts also said a further 63 million yuan dividend would be paid in 2012.

Pierpont doesn't know for sure, but he imagines those numbers must have set the abacus clicking at a couple of Chinese banks. Because the 2011 cashflow statement shows 81 million yuan was drained from the group that year by Xu, leaving only 62 million yuan in the till on New Year's Day. That number was 20 million yuan down on the previous year and Xu was planning to take a further 63 million yuan dividend. None of the loans to Xu from the group had been on an arm's-length basis and no specific terms or conditions had been attached to them.
The group's four banks at that time were owed 34.7 million yuan of which 8.4 million yuan was secured on group properties and the remainder just on Xu's personal guarantee. Those banks might also have peeked at note one of the group accounts which said revenue from the sale of goods is recognised at the point of delivery to the wholesalers.
Presumably that would mean the trade receivables of 39.5 million yuan (clothing which had been delivered to distributors but not yet paid for) had already been credited to the group's 2011 revenue. As the cost of collecting those receivables should have been very small, that figure would (also presumably) have dropped straight to the profit line.
In other words, the stated NPAT of 76 million yuan could have included 39 million yuan which had not yet been paid. Worse, the amount of impaired inventory (clothing that couldn't be sold for a profit) was growing. In 2010, obsolete stock accounted for 6.8 million yuan out of a total 46.4 million yuan. (14.6 per cent). By the end of 2011, obsolete stock amounted to 9.4 million yuan out of 41.5 million yuan (23.5 per cent)
Calendar 2012 saw big changes.
The obsolete stock somehow disappeared from the balance sheet and Xu's 65.5 million yuan debt to the company was wiped out. The accounts record the receipt of 2.5 million yuan from Xu. The accounts do not record the payment of the proposed 63 million yuan dividend to Xu, so Pierpont presumes it was never paid but simply credited against his debt to extinguish it.
Xu was still the sole shareholder at December 31, 2012. Some time between then and the formation of Sunbridge on May 22, 2013, 190 million shares in Sunbridge were issued to 11 Chinese companies. As far as Pierpont can ascertain, no cash was ever paid for those shares, nor were any assets vended into the float for them. So your correspondent can only assume that granting them was an act of generous philanthropy by Xu.
These were the shareholders who, almost to a man, stampeded out of Sunbridge as soon as the escrow period expired in June.

Meanwhile the group's dividend policy has been shrinking even faster than the Australian dollar. The prospectus said Sunbridge intended to pay at least 25 per cent of NPAT in dividends each September. So far, only one dividend of a mere $182,521 was paid in April last year (admittedly for only the period between listing and the end of the year) and not a cent since.
The prospectus noted Sunbridge relies principally on dividends from its operating subsidiaries, Bangdisidun and Hengjiasi, for cash to pay dividends itself. Pity, but the accounts to date don't show the individual performance of those subsidiaries.
No dividend was paid last September and Sunbridge's latest statement (on January 30) boasted about the group's strong revenue but gave no indication of a dividend this year.
Pierpont is also puzzled by the lack of interest income. Sunbridge accounts show the company was holding $28 million cash at the end of 2013 and $29 million at the end of 2014. Yet, interest income in 2014 was a mere $18,000.
With so much cash, Sunbridge should have had no debt, but for some reason it owed $6.45 million to banks and another $2.7 million on notes at the end of 2013. Sunbridge appears to have repaid the bank debt during 2014 and also paid $736,000 interest, so they're paying interest at much higher rates on their debt than they collect on deposits.
Maybe that's why Sunbridge is capitalised at only $30 million, which is barely the amount of cash it claims to hold.
The board is entirely Chinese except for the non-executive chairman Wayne Reid, who has been a director on heaps of Australian boards and, more importantly, was a top tennis player in the days when Australia was the top tennis nation.
Reid even beat Rod Laver in the 1960 South Australian Open and made it into the Davis Cup squad that year. Let's hope he can serve an ace by delivering a dividend next September.