Slowdown effect: Consumer firms burdened with piling inventory in China

Chinese auto dealer Dah Chong Hong Holdings amassed so much inventory this year that it would take 63 days to sell all of its Bentleys, Toyotas and Isuzus, up from the 42 days’ supply it carried in December.

For rice wine maker Shanghai Jinfeng Wine Co, a 14 percent inventory increase plus slowing demand means it would take 22 months to clear stockpiles at the current sales pace, compared with nine months at the end of last year, data showed.

As China’s economic growth cooled to a three-year low, inventories swelled at consumer firms such as auto dealers, food makers, liquor companies and department stores, according to an analysis of balance sheets from 350 Chinese companies.

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[caption id=“attachment_431607” align=“alignleft” width=“380”]  For rice wine maker Shanghai Jinfeng Wine Co, a 14 percent inventory increase plus slowing demand means it would take 22 months to clear stockpiles. Reuters[/caption]

The bloated inventory complicates Beijing’s efforts to shore up growth as it prepares for a once-a-decade government leadership transition later this year. If China pours in more stimulus money when demand is weak, it could just make the inventory overhang worse by encouraging companies to produce more goods than the market can digest.

About one in three consumer firms recorded inventory growth of at least 10 percent between December 2011 and June 2012. Dah Chong Hong’s $296.5 million inventory jump was the largest sum in the sample of companies examined.

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With demand slowing-China’s July retail sales growth eased to a 17-month low-it will take longer to clear out the goods.

“To resolve the inventory problems may have to take two to three years to see the results and it’s impossible to see a major effect within a couple of months,” Kim Jin Goon, executive vice chairman of sportswear company Li Ning, said last week, when his firm predicted a full-year loss because of heavy inventories and rising marketing costs.

PICKING UP THE SLACK

These consumer companies primarily feed China’s domestic economy, which must pick up some of the slack from sluggish exports to keep the country on track to meet its 2012 growth target of 7.5 percent. Second-quarter growth slowed to 7.6 percent, and early indicators of July and August point to a lacklustre third quarter.

A China manufacturing survey released on Thursday showed heavy inventories and a sharp decline in new export orders in August.

Chinese authorities told state-owned companies in July that they should focus on clearing inventories for the rest of the year. This is healthy for long-term growth, but in the short term it curbs demand throughout the economy as companies hold back on ordering new supplies.

It can also squeeze corporate profit margins when firms cut prices to dispose of excess inventory. Profits at non-financial state-owned enterprises fell 13.2 percent year-on-year through the first seven months of 2012, the Ministry of Finance said on August 15.

At Dah Chong Hong, inventory rose 38 percent to $1.07 billion between December and June, according to Thomson Reuters data. The company did not immediately respond to a phone call and email seeking comment. In its earnings statement on August 15, it acknowledged that margins were getting squeezed.

“Rising inventory levels and price competition have exerted pressure on profit margins and have led to consolidation in the market,” Chairman Hui Ying Bun said in the statement.

COTTON AND WINE

At Shanghai Jinfeng Wine, a unit of Bright Food Co, average inventory days soared to 678 as of June, up from 284 in December, Thomson Reuters data shows, illustrating just how long it would take to sell off the stockpiles.

An official in the chairman’s office who provided only his surname, Liu, said Jinfeng did not consider its inventory level high. Liu said such stockpiles were necessary to ensure adequate supplies for year-end banquets that are popular in China.

However, in June 2011, Jinfeng held 493 days worth of inventory. Its current tally of 678 days is the highest in Thomson Reuters data going back to September 2007.

The net value of inventory on the books of all 350 companies sampled rose 2.3 percent between December 2011 and June 2012. It was up six percent among companies listed on the Shenzhen stock exchange, but down about four percent for Hong Kong-listed firms.

The better performance for Hong Kong-traded stocks was primarily due to a $472 million inventory drop at one company: Weiqiao Textile, China’s largest cotton textile firm. It curbed production of yarn, fabric and denim “to lower the output with a view to reduce inventory levels”, Weiqiao said in its earnings statement.

China’s textile exports rose just 1.3 percent in the first half of 2012, a steep drop-off from the 28.8 percent jump it recorded in the same period of 2011, Weiqiao said.

Reuters