DONGGUAN/HONG KONG (Reuters) - If, as the adage has it, turnover is vanity, profit is sanity, but cash is reality, a Reuters analysis of working capital at 1,200 Chinese firms shows much of corporate China is hurtling towards a reality check.
As China's economy hits its slowest growth in 25 years, businesses are finding ever more cash tied up in unsold stock and unpaid invoices as industry shirks the pain of trimming capacity and struggling customers take longer to pay.
KPMG China partner Fergal Power, who specializes in distressed companies, says most Chinese companies prioritized market share and revenue growth in the boom years, with "less discipline in managing working capital in China than we have seen in other markets".
The Reuters analysis, which covered all companies on the Shanghai and Shenzhen bourses with a market value of more than $500 million, shows that on average they wait about 59 days to be paid by customers, compared with 37 days in 2011.
For some sectors the picture has deteriorated much more sharply; energy companies now wait 80 days, up from 24.
For industrials, which already waited 61 days to get paid in 2011, that has climbed to 94, while information technology companies are involuntarily funding their customers for 112 days, up from 76.
"The rate of growth of receivables has exceeded sales growth in the industrial sector for the past few years... The picture one gets from data is that this is a nagging problem," said Cliff Tan, Bank of Tokyo-Mitsubishi UFJ analyst.
"One sign that the problem is worsening is the emergence of funky shadow banking products, because of a lack of access to more traditional banking products," adds Tan.
At the sharp end is Danny Lau, boss of a construction panel factory in Dalang, a factory town in the southern province of Guangdong, which makes around a quarter of China's exports.
His construction firm clients have pressured him to take lower downpayments than the usual 20 percent, and to extend repayment times, tightening his cash flow and magnifying the risks to his business.
"One client said he'd write a three-month forward-dated cheque, but when I got it, it was for six months," he said, as fork lifts trundled by with stacks of freshly spray-painted red panels.
Lau has been forced in turn to delay paying some of his 50 or so downstream suppliers in the Pearl River Delta, dubbed the Factory of the World.
Two of Lau's rivals have already gone bust, he said, and his firm's cash reserves had now been almost exhausted, forcing him to borrow to buy raw materials and service fresh orders.
"If this continues, a lot more companies and factories will collapse," he added.
"Many of these companies are hugely leveraged and seeing a sharp slowdown in demand," said London-based Sanjiv Shah, Chief Investment Officer at Sun Global Investments. "So this means they'll be facing huge growth in inventories, plus what customers are left will be demanding better and longer credit terms so payments receivable will increase."
Inventories have gone up over the period, too, especially for industrials, where they rose to 26.5 percent of sales from 22.7 percent, and technology companies, where they grew to 23.7 percent from 20.9 percent.
When cash is tied up in assets, it has direct consequences on the shop floor.
Yang Jiafen, a labor broker in Dongguan, said firms have been increasingly unable to sustain wages for a large permanent workforce, so 80 percent of workers she now recruits for Pearl River Delta factories are on temporary contracts, up from around 70 percent a year ago.
Temps have fewer labor rights and benefits than permanent staff and are paid lower hourly rates.
Jong Hsu, the Taiwanese owner of Asink Corporation, a small factory in nearby Huangjiang making cooling panels for LCD televisions, said he wouldn't pay a year-end bonus to his 50 staff this year.
He said at least three factories along his street had gone out of business or moved in recent months, and the Lunar New Year holiday coming up on Feb. 8, when factories typically close for two weeks, could be the tipping point for a few more.
"I expect there to be a big unemployment wave after Chinese New Year," he said in his office. "Workers coming back might not be able to find work because a lot of the poorer quality factories won't survive."
Reporting by James Pomfret and Umesh Desai; Editing by Will Waterman