China’s heavy equipment makers: cracks in the concrete

June 6, 2012 8:59 am

by Paul J Davies

Hong Kong’s market for new stock listings has taken a sickly turn as concerns about the eurozone and a sharper than expected slowdown in China have rattled nerves. IPOs for Graff of London and several Chinese companies including car dealers China Yongda have been pulled in the past few days.

One sector seems especially unlikely to achieve its hoped-for HK listings: the construction machinery business.

Sany Heavy Industry and XCMG Construction Machinery have long had deals in the pipeline, with the former hoping to raise about $2bn and the latter more than $1bn, according to bankers and Thomson Reuters data.

The problem is that both companies are right in the front line of China’s readjustment from an economy based on heavy investment in fixed assets such as property, factories and infrastructure, to one based on consumption and domestic commerce.

There are concerns that some parts of the industry are keeping sales going only by using overly aggressive financing and hefty incentives for sales forces, and that concrete machines in particular – where Sany and its Hong Kong and Shenzhen listed rival Zoomlion compete fiercely – are being used by buyers as collateral for further financing, because they themselves are having to sell mixed concrete on tick to property developers.

Such fears have turned Zoomlion’s HK listed equities into the most shorted stocks in the market.

As China slows, its construction equipment makers have been accelerating production – based on the simple idea that long-term survival can be ensured by getting big, fast. The amount of gear produced by the industry increased by almost 80 per cent between 2008 and last year, when 484,316 units were made, according to data from Bloomberg. This was 13,256 more units than the industry could sell – in spite of a near doubling in exports to more than 40,000 units.

Even worse, also according to Bloomberg: demand for such equipment in China dropped 56 per cent in the year to April.

Matthew Forney and Stella Zhou, writing in Draganomics’ China Economic Quarterly for June, look at Sany and its rivals. They note that industry executives are talking of a “collapse” and are looking to export their way out of trouble.

Product quality is a big problem. A Sany crane, for example, needs 10 to 30 hours of work to make it safe for use in the US, they say. They suggest the company should develop more of its own components to add more value to its products itself.

They also highlight Sany’s financing issues.

Sany’s reputation for aggressive sales has many observers wondering about the company’s financial health… It is possible that Sany records all or part of a sale when it delivers its products to distributors, many of which are partly owned by Sany. This creates opportunities for channel stuffing – boosting short-term revenues.

They also note that Sany got $149m in state subsidies last year, more than 10 times what Zoomlion received. This may partly explain a slanging match between the companies on Weibo in April.

The closer you look, the more the industry looks like an economic and political microcosm of China’s wider story.