SBB - Sunbridge Group

Muliple choice

A) The CFO is competent and has resigned because he sees something rotten that he can’t fix and so his only option to save his reputation is resign.
B) The CFO is incompetent which wasn’t picked up during the hurried recruitment of many staff to get the company listed but is now being dealt with.
C) The CFO has resigned for personal reasons.


A) The pre float investors know something that the buyers don’t and are selling at any cost?
B) The pre float investors are likely also major investors in Erartat given the similarity of industry and location. They are spooked by the similarities and mitigating risk, in light of their now likely locked in outcomes to Erartat.
C) The pre float investors are really alternative identities for Mr Xu and this is a major fraud where Xu is shooting himself in the foot in regards to his 2 Year escrowed holding.

A) All Chinese companies are fraudulent; they must seek listings on new exchanges to find new suckers.
B) Because some Chinese companies are fraudulent, other legit companies will seek listing on international exchanges with tighter governance practices to try and build legitimacy.
C) The ASX has woeful governance practices

A) This is a fraud – the investment will be worth nothing, and nothing will be recovered from the auditors or their insurance despite them having to be totally negligent or fraudulent for this outcome to occur.
B) This is a potentially O.K company priced accordingly with the currently known/feared risks.
C) This is an awesome company priced ridiculously cheaply and everybody buying is going to be fabulously rich tomorrow.

No question, SBB is a stock with plenty of risks associated with it. I think these risks have been described very well by others, skc in particular, so I won’t dwell on them further.

Those risks, in my mind, are very real, and those that are not prepared for a very real chance of total loss on this investment should read no further. For those like me, who are prepared to take lots of small bets on opportunities such as these, read on.

Are the warning signs so bad that one shouldn’t invest in SBB at any price? Is it completely worthless to a rational investor? Clearly not, there’s no evidence of outright fraud, not yet anyway. So, I’ve tried to work out what the valuation should be for this company, and then decide whether the current price factors in the risks.

Current numbers:
Price/Earnings: 2
Price/Book: 0.66
Price/Sales: 0.36
ROC: 32%
Current Assets – Total Liabilities: $38m
Market cap: $28m

First thing that jumps out is that it’s a “net-net”, trading at a 26% discount to its cash backing. In theoretical case of liquidation $10m is a profit made by the investor and the 26% discount are the odds that you take that this is not a fraud. I never liked this approach, because in practice this never happens. At the same time, buying “net-nets” has always been a good investment strategy.

So, let’s now assume that things are as they are presented. A growing company, currently generating profits of $13.9m/year. I will disregard any growth here, not my thing. Being an average company with average prospects, I would suggest a PE of 12. But, and this is a big but, Chinese companies do not trade on the same multiples as Australian companies. They are always substantially discounted. This one might change the trend, but I wouldn’t count on it. So, I would assume a PE of 6, and that is assuming everything in the report is true, things are rosy, and the profit remains the same or grows.

The next big question for me, however, is how sustainable these numbers are. As skc and others have pointed out, they are very high. I don’t necessarily think they are suspiciously high – a) small private companies before listing generally have better performance. B) some retailers in Australia have/had similar margins. C) SBB is in a growing and less mature market.

But one must ask what if the numbers were only temporary, perhaps “adjusted” for the float. What if this is just another commodity business in a highly competitive industry? In that case, Price/Book would be the starting point of analysis to work out the replacement cost of capital. Which is usually a little higher for businesses such as these, because brand name, designs, contacts, etc. are not recorded on the balance sheet. Without doing much research, I will assume a valuation equal to Price/Book of 1.25.

So, here’s what we have:



To me, 26%-67% discount is substantially greater than what I think the odds of fraud are. As I mentioned, liquidation play is not something I seriously consider, so for me the discount is closer to 48%-67%.
The discount to valuation could be treated as substitute for odds of fraud, but it’s not that simple. There are other businesses also selling at a discount, without suspicions of fraud, so it must be compared to them. At the same time, looking at other businesses in the same price range, they are either making a loss, or have other serious issues with them.

All in all, I see an opportunity with a fair risk/reward ratio. I certainly do not see it as a once in a life time opportunity, but one that fits in well with my investment strategy. To me, it's similar to the psychological tests where you chose whether to flip a coin or not when heads gets you $100, tail loses you $90. As long as you don't bet large amounts, you want to make as many of these bets as possible.

Whatever the outcome, this one's been fun and I am sure it will provide lots of valuable lessons.


P.S. Minority sellers could be all one person, but not necessarily the CEO. It could be a single other person operating under different names. In which case, Xu doing anything suspicious, and there aren't multipe holders trying to get out at one time. Just another options to add to craft's excellent questionnaire.

Great post KTP.

That's about how I see it too; the investment would seem to be risky, but if I can find a lot of investments with decent risk/payout ratio then I should do okay overall.

I have a large proportion of my money in the boring stocks, but it's fun to have a few speculative ones too.

DYOR.

Cheers

KnowThePast said:

.....Whatever the outcome, this one's been fun and I am sure it will provide lots of valuable lessons.

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An interesting post outlining your thoughts on SBB, KTP.

For me the previously documented issues make it too likely that there is something fraudulent going on.

The other thing that tickles my inate intuition against this one is simply the old adage that "if its too good to be true, its likley too good to be true - the PE ratio, book value, net tangible assets, all add up to a picture that is truly too good to be true.

I too am happy to speculate with small positions occasionally, but I need to have some confidence in not losing all my stake, and I cant find that here.

KnowThePast said:

No question, SBB is a stock with plenty of risks associated with it. I think these risks have been described very well by others, skc in particular, so I won’t dwell on them further.

Those risks, in my mind, are very real, and those that are not prepared for a very real chance of total loss on this investment should read no further. For those like me, who are prepared to take lots of small bets on opportunities such as these, read on.

Are the warning signs so bad that one shouldn’t invest in SBB at any price? Is it completely worthless to a rational investor? Clearly not, there’s no evidence of outright fraud, not yet anyway.

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So having said all that, in the absence of evidence of outright fraud...you crunch the numbers anyway.

And this is why the fraudsters continue to do what they do...bait the hook and wait for the particular fish that is interested/susceptible in/to your bait to come along.

KnowThePast said:

But, and this is a big but, Chinese companies do not trade on the same multiples as Australian companies. They are always substantially discounted. This one might change the trend, but I wouldn’t count on it. So, I would assume a PE of 6, and that is assuming everything in the report is true, things are rosy, and the profit remains the same or grows.

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Take a look on the SGX. There is a group of shares known as S-chips which are essentially Chinese companies listed in Singapore. Collectively they do trade on pretty low single digit PE's (the attached link is a bit dated).

http://www.nextinsight.net/index.ph...-dividend-paying-stocks-at-book-value-or-less

Perhaps a good quantitative research there could help guide the % chance of fruad and longer term PE etc.

KnowThePast said:

All in all, I see an opportunity with a fair risk/reward ratio. I certainly do not see it as a once in a life time opportunity, but one that fits in well with my investment strategy. To me, it's similar to the psychological tests where you chose whether to flip a coin or not when heads gets you $100, tail loses you $90. As long as you don't bet large amounts, you want to make as many of these bets as possible.

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Good analogy (I was going to use it myself), albeit not a psychological test, but simply a logical/mathsmatics proposition.

KnowThePast said:

P.S. Minority sellers could be all one person, but not necessarily the CEO. It could be a single other person operating under different names. In which case, Xu doing anything suspicious, and there aren't multipe holders trying to get out at one time. Just another options to add to craft's excellent questionnaire.

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Yes. Entirely possible.

craft said:

Muliple choice

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The mulitple choices are not MECE (mutually exclusive and collectively exhaustive) so I don't know if it's particularly useful in aiding decision or assigning probability. The only MECE set one can derive is at the top level, as you had it earlier, that this is either a fraud or not a fraud.

It is however helpful to highlight the possible positive outcomes under the different headings.

Paavfc said:

And what wouold convince you that this is a legit business ??

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The reverse of what made me uncomfortable holding it. E.g.

- Several periods of consistent results / dividends.
- Escrow stops selling / major holders buying.
- Answers to questions like "What's the deal with the office tower / 2012 dividends / trade receivables etc?"

Paavfc said:

To me this is a Chinese Business transforming into an Australian business.

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It's not transforming anything. It's a Chinese business listed on the ASX. Nothing more than that. If some improved governence brushes off that'd be a major achievement.

So_Cynical said:

So having said all that, in the absence of evidence of outright fraud...you crunch the numbers anyway.

And this is why the fraudsters continue to do what they do...bait the hook and wait for the particular fish that is interested/susceptible in/to your bait to come along.

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Hi SC,

You bring up a good point - if this is a fraud, the numbers are useless.

But, if you think there's a chance that it's not, than surely there are odds that are worth betting on.

Clearly, you think the current price is too much. Would you buy the entire company for $1 though? If the answer is yes, than clearly the valuation would be between $1 and the current market price of $28m.

How much then do you think it's worth, and what method of valuation would you suggest in a case like this?


The thing is, I find myself in perfect agreement with yourself, skc, and all other skeptics. Psychologically, my gut feel tells me to stay away. But writing things down, and working through the numbers, it stacks up as a good bet in my eyes. And I've learnt to trust that more than my gut feel.

KnowThePast said:

and working through the numbers, it stacks up as a good bet in my eyes.

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The numbers are TOO good! Thats the biggest problem for mine - and what i reckon makes it a really bad bet!

I see your larger point though, you are risking capital you are prepared to lose, on the chance that its not a shonky and you can profit from the deal.

You have posted your reasons in good faith and a few of us have posted a contrary view, its a good learning opportunity for all and time will tell how it works out.

KnowThePast said:

Hi SC,

You bring up a good point - if this is a fraud, the numbers are useless.

But, if you think there's a chance that it's not, than surely there are odds that are worth betting on.

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For me the first decision to be made has to be 'is it a fraud or not'? just like pregnancy one cannot be half pregnant just as a company cannot be a half or sort of a fraud...it one or the other.

KnowThePast said:

I've learnt to trust that more than my gut feel.

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Fair enough, im a big believer in the gut.

So_Cynical said:

For me the first decision to be made has to be 'is it a fraud or not'? just like pregnancy one cannot be half pregnant just as a company cannot be a half or sort of a fraud...it one or the other.

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I actually think there is a real business there. It's not really in doubt that they are selling these products and they have stores/concessions. I just don't know if everything being presented is an accurate portrayal of that business.

galumay said:

The numbers are TOO good! Thats the biggest problem for mine - and what i reckon makes it a really bad bet!

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So_Cynical said:

For me the first decision to be made has to be 'is it a fraud or not'? just like pregnancy one cannot be half pregnant just as a company cannot be a half or sort of a fraud...it one or the other.

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So what you guys are telling me, is that you are 100% sure it is a fraud, and no price is low enough to compensate for that risk?

Yes, just like pregnancy, the fraud is either there or not. But as an outsider, at an early stage of the process, I am looking at a small bump and wonder whether saying congratulations may offend them.

KnowThePast said:

So what you guys are telling me, is that you are 100% sure it is a fraud, and no price is low enough to compensate for that risk?

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Where have i said that I am 100% sure its a fraud? Overall there are many clues that all is not above board with this company, taken as a whole I believe there is something fraudulent about the amazing figures that are published for this company.

Its not about how low the price is, price is actually irrelevant to me in considering gambling with a speccy, its about position size given that i am only prepared to spend as much money as I am prepared to lose, and normally that is $2K.

But I still need some confidence that I am not automatically going to lose the money, otherwise I may as well light a fire with the $2k - and I dont have that confidence in SBB. Secondly by its nature a speccy bet needs to entice me with the possibility of a pretty high pay out to make it worth even bothering with, probably potential to be a multi-bagger, with SBB I see it will either turn out to be a fraud, or it will turn out to be a successful clothing company - and I dont see multi-bagger potential there!

KnowThePast said:

All in all, I see an opportunity with a fair risk/reward ratio. I certainly do not see it as a once in a life time opportunity, but one that fits in well with my investment strategy. To me, it's similar to the psychological tests where you chose whether to flip a coin or not when heads gets you $100, tail loses you $90. As long as you don't bet large amounts, you want to make as many of these bets as possible.

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I reckon that is spot on. Very similar to how Howard Marks thought about and made good money from Junk Bonds.
A portfolio of these things is less risky then a one off play and if you are building a portfolio of these things then SBB belongs in it even if your gut tells you otherwise. Its not about being right on any one outcome, its about correctly pricing risk/reward and positioning for unknowable future outcomes.

skc said:

The mulitple choices are not MECE (mutually exclusive and collectively exhaustive) so I don't know if it's particularly useful in aiding decision or assigning probability. The only MECE set one can derive is at the top level, as you had it earlier, that this is either a fraud or not a fraud.

It is however helpful to highlight the possible positive outcomes under the different headings.

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Not meant to be a MECE exercise. the answer could just as easily be D,E,F - Z.

The point is that any 'conclusion' you reach with imperfect information could just as easily be explained by another plausible explanation. Facts you don't have to question, but opinions, which is what we form when evaluating imperfect or insufficient information need inverting. that's the purpose of the multiple choice exercise.

KnowThePast said:

Yes, just like pregnancy, the fraud is either there or not. But as an outsider, at an early stage of the process, I am looking at a small bump and wonder whether saying congratulations may offend them.

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That's funny.

galumay said:

The numbers are TOO good! Thats the biggest problem for mine - and what i reckon makes it a really bad bet!

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Too good to be true IS a great concept to protect yourself against possible scams and fraud.

But balance it with the famous efficient market analogy.

A finance professor and a student who come across a $100 bill lying on the ground. As the student stops to pick it up, the professor says, "Don't bother - it if were really a $100 bill, it wouldn't be there."

craft said:

Too good to be true IS a great concept to protect yourself against possible scams and fraud.

But balance it with the famous efficient market analogy.

A finance professor and a student who come across a $100 bill lying on the ground. As the student stops to pick it up, the professor says, "Don't bother - it if were really a $100 bill, it wouldn't be there."

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Its not a great analogy, with a share the risk is its a fraud or there is someother reason for the apparent massive mispricing, the CONSEQUENCE is potentially total capital loss.

With the $100 dollar bill the risk is its not real, the consequence is the effort of bending down!

Risk always needs to be considered with consequence.

KnowThePast said:

Yes, just like pregnancy, the fraud is either there or not. But as an outsider, at an early stage of the process, I am looking at a small bump and wonder whether saying congratulations may offend them.

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craft said:

That's funny.

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I loled

I haven't said its 100% fraud and that's because i don't know, but i do know that if there is any genuine doubt then one has to err on the side of caution, or be prepared to lose 100% straight up.

If SBB was too good to be true – it just got gooderer with the latest 4C.

OCF for the 6 months to date: $10.6 Million.
Investment in Non Current Assets (New stores): $1.7 Million
Net repayment of debt 3.8 Million
Dividends 290K
Net increase in cash of $4.8 Million before FX
Cash at end of quarter $30.5 Million.
The Australian chairman signed this quarterly.

Market Cap 38 Million (as at yesterdays close)

craft said:

If SBB was too good to be true – it just got gooderer with the latest 4C.

OCF for the 6 months to date: $10.6 Million.
Investment in Non Current Assets (New stores): $1.7 Million
Net repayment of debt 3.8 Million
Dividends 290K
Net increase in cash of $4.8 Million before FX
Cash at end of quarter $30.5 Million.
The Australian chairman signed this quarterly.

Market Cap 38 Million (as at yesterdays close)

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The 4c is largely consistent with the last two updates provided by the company. Now there should be a clean run between now and the actual report date. Let's see if the inside escrow holders would stand back and let the price rise for a change.