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Financial Dangers Lurk in the Shadows of China’s Burgeoning LED Industry

Apr 14th 2015 at 12:08 AM

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Escalating market competition in China's LED industry has spurred vendors to acquire orders by offering customers generous loan terms, but when buyers delay payment, it adversely affects manufacturers' liquidity. If delayed accounts receivable become bad debts or uncollectible accounts then the consequences can be dire. Recently, the chief executive officer of Dongyuan Winghing Electronic and Science Technology , who owed suppliers RMB 8 million (US $1.30 million) for product payments and more than RMB 20 million in bank loans is missing, and believed to be in hiding.

This example reflects risks inherent in accounts receivable. A butterfly effect can be triggered when a series of companies are indebted to each other and none has the means to pay back the money it has borrowed. LEDinside has monitored 16 Chinese LED manufacturers and found while 80 percent of businesses are finally showing growth in both profit and revenue, it is imperative to look closely at the increase of accounts receivable, which reveals the firms' ostensible success is in fact an illusion. Manufacturers with high level of accounts receivable Financial reports for the first half of 2014 showed accounts receivable soared for 14 out of 15 listed Chinese manufacturers, according to data compiled by LEDinside.

Eleven companies reported a 20 percent hike in accounts receivable, with LianTronics having increased the most. The company's accounts receivable increased 50.42 percent from RMB 246 million earlier this year to RMB 371 million in September 2014. Four manufacturers' accounts receivable even exceeded 20 percent of their assets, with the highest being Leyard Optoelectronics at 30.05 percent, followed by Jufei Electronics, Refond and LianTronics. It is notable that several manufacturers' accumulated accounts receivable exceeded their revenues for the first half of 2014.

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