Accounts receivable remain high, and net profit is beginning to be eroded. These data indicate that the spring of the construction machinery industry has not yet arrived.

　　Receivables Remain High, Net Profit Declines Rapidly

　　At present, the global construction machinery industry is still in an adjustment phase, with shrinking market demand and increasingly fierce industry competition.

　　Financial reports show that Sany Heavy Industry (600031) had accounts receivable of 22.5 billion yuan in the third quarter of this year, an increase of 1.8 billion yuan year-on-year and a decrease of about 800 million yuan quarter-on-quarter; XCMG (000425) had accounts receivable of 19.8 billion yuan, down 3% quarter-on-quarter and up 11% year-on-year. Xiagong Holdings (600815) also saw its accounts receivable in the third quarter increase to 5.6 billion yuan, up 1.8% quarter-on-quarter and 5.6% year-on-year. Previously, the market expected accounts receivable to decline significantly compared with the mid-year report of this year. Obviously, this expectation cannot be verified by the data.

　　While accounts receivable remain high, the operating revenue of many companies in the industry has declined. XCMG and Sany Heavy Industry reported third-quarter total operating revenue of 18.6 billion yuan and 29.9 billion yuan, respectively, both down 25%-26% year-on-year. Xiagong Holdings' third-quarter total operating revenue was 5.4 billion yuan, down 14% year-on-year, and the company incurred a loss. In addition, Changlin Company (600710) and Tianye Tonglian (002459) both suffered losses in the third quarter.

　　The persistently high accounts receivable of construction machinery companies have reduced the quality of industry net profit, causing some enterprises to face difficulties in capital turnover and increased interest expenses. Among them, XCMG's financial expenses increased by 157% compared with last year. Sany Heavy Industry's comprehensive gross profit margin in the third quarter was 28.56%, down 4.85 percentage points year-on-year.

　　Analysts pointed out that the year-on-year increase in accounts receivable may lead to a decline in net cash flow for some enterprises in the industry. According to Wind data, as of the end of the third quarter, Sany Heavy Industry's occupation of downstream funds increased, with accounts payable and notes payable increasing by 2.399 billion yuan, an increase of 34%. However, because accounts receivable remained high and cash received from sales of products and provision of services decreased, the company's cash flow came under certain pressure.

　　In addition, represented by the industry's leading enterprises, demand for the industry's main products has slowed, and the overall operation of the industry in the fourth quarter remains unoptimistic.Market Adjustment Will Continue

　　Taking industry leader Zoomlion (000157) as an example, its total operating revenue in the third quarter of this year was 28.9 billion yuan, down 26% year-on-year.

　　Since the beginning of this year, as Zoomlion's leading product, concrete pump trucks have undergone significant adjustment. In the first half of the year, pump truck sales fell by more than 50%, and the decline narrowed somewhat in the third quarter. However, the machinery industry experienced an overall relaxation of sales terms last year that overdrew future demand. At present, the existing equipment is relatively excessive and still requires a long digestion process.

　　Judging from the financial reports, the decline in operating revenue in the machinery industry precisely verifies earlier market concerns about the relaxation of sales credit terms in the machinery industry. Construction machinery products have high unit prices, and manufacturers generally adopt credit sales models such as installment payments, mortgage loans, or financial leasing. The down payment ratio is generally controlled between 20% and 50% depending on customer qualifications.

　　In recent years, in order to seize market share, several leading companies in the industry, represented by Sany Heavy Industry and Zoomlion, began to adopt some irrational promotional measures, including aggressive sales strategies such as "no bottom price," "zero down payment," and "low down payment" for product purchases. Other manufacturers in the industry, in order to prevent their market share from being eroded, also had to relax their credit sales policies.

　　Under such circumstances, the risk of bad debts arising from accounts receivable has become increasingly evident.

　　Time Still Needed for Reform Dividends to Emerge

　　In fact, the construction machinery industry as a whole has been undergoing continuous adjustment since 2011, with negative year-on-year growth for three consecutive years. So far, demand from downstream industries of construction machinery, such as real estate, railways, highways, and other infrastructure, has not changed significantly, and the overall factors driving market demand for construction machinery have not changed much.

　　From Zoomlion's financial report, it can be seen that in terms of overdue rates, the overdue rate of financial leasing rose slightly in the third quarter, but mortgage overdue rates began to improve. In terms of sales models, the company has also consciously controlled credit risk. Full-payment sales accounted for 30%, up 5 percentage points from 2012; mortgages accounted for 26%, up 5 percentage points from 2012; and financial leasing accounted for 21%, down 10 percentage points from last year.

　　With the stable implementation of the decisions of the Third Plenary Session, the promotion of expanded domestic demand will gradually release market demand. China's urbanization process determines that by 2025, more infrastructure such as highways and airports will still need to be built. Therefore, the inventory pressure currently faced by the mechanical engineering industry is expected to be released in the coming years, thereby pushing the industry out of its bottoming-out state.

　　Industry analysts believe that the decline in revenue in the machinery industry may narrow in 2014, and the market may accelerate the pace of inventory digestion in the next two years, with a recovery growth expected.