Mudslinging in China’s Heavy-Machinery Sector
May 28, 2013 Leave a comment
May 27, 2013, 9:21 a.m. ET
Mudslinging in China’s Heavy-Machinery Sector
By DUNCAN MAVIN
Digging for dirt on China’s machinery sector can be productive, especially when the economy’s stuck in the mud. Several companies that supply excavators, loaders and other construction equipment ran into trouble in 2012 and in the first few months of this year. The main problem was slowing economic growth, though oversupply of equipment was a big factor too. That led to slumping sales, rising inventory levels and a sharp uptick in accounts receivable as hard-up customers took longer to pay.All that was supposed to end with an uptick in the economy in 2013. Instead, growth still looks uncertain—with little cheer to be found in recent data on factory activity and industrial profits, for example. Sun Hung Kai Financial analyst Vik Chopra noted that sales data for some equipment has turned positive recently. But that’s off a low base, and prospects for a rebound are unclear, he said.
With green shoots of recovery hard to come by, the sector makes fertile ground for naysayers.
Take Zoomlion Heavy Industry Science & Technology Co., the second-largest company in the sector by market capitalization, at $8.9 billion. Zoomlion suspended trading in its Hong Kong- and mainland China-listed shares Monday after a Chinese news website alleged the company’s sales data included false numbers. It declined to comment and said a statement is pending, though none was available at the time of writing.
Investors will be concerned. Zoomlion has already had to defend itself once this year, after an anonymous letter to the media and regulators in January accused it of exaggerating sales. The company declared then that its accounts are accurate.
For now, Zoomlion’s recent performance doesn’t give much cause for optimism. Its first-quarter profit was down by almost three quarters from a year earlier, and the slump may be deepening. Early-May demand for the company’s excavators in one key market was down by 50% from the previous month, according to Barclays BARC.LN -1.38% .
The company’s shares have already lost a third of their value this year. Management must deliver a convincing response to the latest allegations. Otherwise, the shares will likely fall further when trading resumes.
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