It used to be so simple. Buy construction machinery makers when China booms, and sell on the whiff of a slowdown. Few sectors have been so closely tied to government economic boosters because of Beijing’s dependence on infrastructure spending to deliver growth. Yet as the new leadership focuses on consumption as well as urbanisation, at the same time as steady rather than breakneck growth, the sector is harder to call. The allegation this week of accounting fraud at Zoomlion has shaken confidence.
The Hong-Kong listed machinery maker denies the allegation. Yet Zoomlion’s shares fell 6 per cent yesterday. Its bigger peer, Sany Heavy, lost 1 per cent in Shanghai. The two groups’ shares now trade on seven and nine times forward earnings respectively – a third below their three-year averages. Yet it is difficult to consider them cheap.
Fixed asset investment continues to slow. If it grows as much as 17 per cent this year, as Macquarie estimates, this is still a third below its recent run rate. The slowdown had already pulled down machinery sales by 2 per cent in the first three quarters of last year from the same period in 2011. And while sales at the bigger manufacturers have not plummeted, dependence on vendor financing has soared. Zoomlion’s sales were up 18 per cent in the first three quarters, for example. And China Confidential notes that vendor financing loans contributed almost half of Zoomlion’s sales in the first half. As a result, accounts receivable are mounting. So are inventory days – up a 10th and a third at Zoomlion and Sany respectively.