Chinese engineering machinery firms suffer mounting bad debt

Chinese engineering machinery firms suffer mounting bad debt

Staff Reporter

2013-11-09

As a harbinger of the economic climate, leading engineering machinery firms in China, including Sany, Zoomlion, XCMG, are feeling the pinch of a possible economic downturn. In order to boost its sales, Sany Heavy Industry is now accepting a range of orders, instead of only processing orders from major clients. The company is now expecting a marked increase in bad debt. According to their financial statements, in the first nine months this year the revenue of Sany, Zoomlion and XCMG tumbled 26.5%, 26.1% and 25% year-on-year, respectively, with their net profits scoring even sharper declines of 49.3%, 45.48% and 46.3%. Meanwhile, as of the end of September, their accounts receivable totaled 68 billion yuan (US$11.5 billion): 22.55 billion yuan (US$3.7 billion) for Sany, 25.6 billion yuan (US$4.2 billion) for Zoomlion and 19.8 billion yuan (US$3.2 billion) for XCMG, up 50.6%, 35.6% and 11.5% respectively over the amounts at the beginning of the year.Revenue decline, mounting accounts receivable and prolonged repayment period are proof of the industry’s downturn, remarked an analyst at a securities firm. The average debt repayment period at Sany has been extended to 7.52 months now, compared with 4.7 months in the third quarter last year.

Industry insiders have predicted that the engineering machinery business will remain in the doldrums for quite a while, citing a murky economic outlook, the absence of stimulus policy and a slowdown in the implementation of infrastructural projects, according to the Guangzhou-based 21st Century Business Herald.

Accounts receivables are increasing at unbridled pace, despite strenuous efforts of leading enterprises in the line to check the increase of bad debts and cut credit risk, said Duan Jiaxuan, machinery-industry analyst at China Investment Consulting.

The huge levels of bad debt are attributed partially to the reliance of leading engineering machinery firms on credit extension to stimulate sales. Another major culprit is the macro-control policy of the Chinese government, including the control and adjustment of the realty market, suspension of mining operations, and slowdown in high-speed rail construction.

Some improvement might be achieved in the third quarter, when Sany saw its revenue rise to 29.9 billion yuan (US$4.9 billion) and accounts receivable slip to 22.25 billion yuan (US$3.7 billion). Insiders remarked that the overall situation remains grave, however.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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