The persistent issue of delayed payments to private enterprises has increasingly drawn the attention of high-level authorities in ChinaOn February 18, the National Development and Reform Commission (NDRC) stated its intention to enhance efforts to resolve outstanding debts owed to private companiesThis urgency was echoed in discussions from a symposium on private enterprises held the previous day, which underscored the importance of addressing the delayed payment crisis in this sector.

Currently, private companies account for more than 60% of the total number of publicly traded firms in ChinaAccording to Wind statistics, there are a total of 5,395 listed companies on the A-share market, of which 3,426 are private enterprises, representing over 63%. This significant presence makes the challenges faced by these firms particularly influential to the overall market economy.

The scale and quality of receivables in listed private enterprises reveal insights into the realm of 'debt.' As of the third quarter of 2024, the total accounts receivable for private enterprises listed on the A-shares reached approximately 31.2 trillion yuan—an 8% increase from the prior year

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The sectors leading in outstanding receivables include power equipment, electronics, and biopharmaceuticalsMoreover, both the construction and environmental sectors exhibit significant account receivable figures.

According to an analysis by Chen Cong, an analyst at CITIC Securities, the construction industry has seen increased financing pressures on developers and local governments, adversely affecting their operational and profitability capabilitiesIn the public environmental protection sector, receivables largely stem from government accounts, leading to more pronounced debt issues compared to other industries as local governments continue to face fiscal pressures.

Tian Lihui, the director of the Financial Development Research Institute at Nankai University, pointed out that for publicly listed companies—especially private ones—accounts receivable serve as a critical indicator of a company's operational health.

“The issue of delayed payments owed to private enterprises not only disrupts normal operations and growth but can also precipitate a series of cascading repercussions such as cash flow breaks and debt defaults,” Tian noted

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In the current economic climate, especially given the rising global uncertainties, the government aims to alleviate the pressures on private enterprises by strengthening policy support and enforcement, thereby nourishing their healthy developmentAddressing the issue of overdue payments also constitutes a pivotal move towards optimizing the business environment and enhancing market confidence.

Data reveals that nearly 400 listed private enterprises have receivables surpassing their revenue figures at the end of the third quarter of last yearA wide-ranging perspective over time indicates that from 2021 to 2023, the number of listed private firms where the ratio of receivables to revenue has been climbing each year has exceeded 1,100. Moreover, numerous listed private enterprises have outstanding receivables that have been on their books for over three years and, in some cases, up to five years.

The Accumulation of Accounts Receivable

At present, there are a total of 3,426 private enterprises listed on the A-share market, with nearly half (1,651 companies) listed on the main board, while over 30% (1,108 companies) are on the ChiNext, with the STAR Market and Beijing Stock Exchange seeing 439 and 228 listed private firms, respectively.

Accounts receivable are considered a crucial indicator of asset quality and operational capabilities among private enterprises

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Wind data indicates that as of the end of September last year, the total accounts receivable for 3,426 listed private firms stood at 31.2 trillion yuan, reflecting an increase of approximately 237.9 billion yuan, or 8.25% compared to the same period in 2023.

At the company level, over 30 firms recorded receivables exceeding 10 billion yuan, predominantly industry leadersDuring the observed period, companies such as BYD, CATL, and Luxshare Precision reported receivables of 79.44 billion yuan, 66.70 billion yuan, and 38.36 billion yuan, respectivelySector-wise, industries, including power equipment, electronics, and biopharmaceuticals, exhibited total receivable figures exceeding 100 billion yuanWithin the power equipment industry, 290 listed private enterprises recorded a total receivable scale of 605.1 billion yuan.

“The characteristics of certain industries determine that they may carry relatively high levels of accounts receivable,” noted Tian LihuiFor instance, in the construction industry, long project cycles and milestone payments can lead to extended receivable turnover periods.

He further mentioned that industries such as environmental protection and construction machinery face similar challenges, especially when clients are government departments or large enterprises, where payment processes may be complicated, and approvals are strict, extending collection periods.

"While high receivables may be due to industry characteristics, this does not mean that the risks associated with such situations can be ignored," emphasized Tian Lihui

Reasonable control of accounts receivable levels and timely collection of outstanding debts is vital for maintaining the robust growth of enterprises.

The ratio of accounts receivable to revenue is an important metric for assessing financial health, particularly in terms of collection efficiency and cash flow dynamicsAs observed in the third quarter of last year, nearly 400 listed private companies reported receivables that exceeded their revenue figures.

Statistically, as of the end of September last year, 396 listed private enterprises had a ratio of receivables to revenue exceeding 100%, accounting for 11.56% of all listed private firms during that periodCompanies involved include Changyao Holdings, ST Yuancheng, and Mingde Biotechnology.

Among them, Changyao Holdings, a publicly traded pharmaceutical company, reported revenue of 101 million yuan in the first three quarters of 2024, reflecting a staggering year-on-year decline of over 90%, while its accounts receivable stood at a staggering 1.52 billion yuan

The company faced pressures in its operational cash flow, with a net cash flow of -32.74 million yuan during the reporting period, down 202.52% year-on-year.

What industries are associated with these companies that possess high ratios of accounts receivable relative to revenue? A review indicates that among these 396 enterprises, computer, machinery, defense industry, and construction companies are prominently represented.

Revenue Declines and Increased Receivables: A “Double Blow”

Looking at a broader timeline, which listed private companies have seen their accounts receivable as a percentage of revenue continuously increase?

Statistics reveal that over the past three full accounting years (2021-2023), more than 1,100 A-share private enterprises have witnessed an annual increase in the ratio of accounts receivable to revenue, affecting firms such as *ST Navigation, *ST Nongshang, and Daqian Ecology.

From 2021 to 2023, *ST Navigation's revenue declined yearly, reporting figures of 318 million yuan, 205 million yuan, and only 22 million yuan, respectively, while accounts receivable during the same periods were 170 million yuan, 269 million yuan, and 176 million yuan, accounting for about 53%, 131%, and a staggering 809% of revenue.

As of the end of the third quarter last year, *ST Navigation had accounts receivable of 185 million yuan, and its net cash flow from operating activities stood at -87.14 million yuan.

The accounts receivable situation of *ST Navigation has drawn investor attention as well

Last November, the company indicated in an interactive platform that its receivables primarily stemmed from Client A, affiliated with the China North Industries Group Corporation, with whom the company has enjoyed a long-term cooperative relationship characterized by solid performance and strong creditworthiness for repayment.

*ST Navigation also emphasized its commitment to effectively managing accounts receivable and risk control, asserting that as of November 11, 2024, the receivable collection status was satisfactory.

From an industry standpoint, analysis reveals that from 2021 to 2023, A-share private enterprises experiencing continuous increases in accounts receivable ratios are largely clustered in sectors such as construction decoration, defense industry, and biopharmaceuticals.

Excessively long accounts receivable aging, remaining uncollected for extended periods, can also lead to cash flow difficulties for companies.

Currently, how are the accounts receivable patterns among listed private enterprises faring?

Wind statistics show that as of the end of the last third quarter, several A-share private enterprises reported accounts receivable aged over three years, affecting companies such as Boke Testing, Yalian Machinery, Huitong Technology, and Haibo Creative—most from the machinery equipment sector.

Boke Testing, which went public on ChiNext last December, disclosed that by the end of the previous September, their accounts receivable totaled 67.38 million yuan, with debts aging over five years amounting to 10.89 million yuan.

When Boke Testing applied for its IPO, the Shenzhen Stock Exchange highlighted concerns regarding the fact that in the years 2020 to 2022, its receivables aged over two years comprised 1%, 17.60%, and 18.63% of total receivables, respectively, reflecting a troubling upward trend.

Boke Testing responded by noting that its accounts receivable derive primarily from the provision of equipment and system solutions externally

Some receivables are over two years old, mainly due to clients facing financial difficulties affecting their payment schedulesThe company has thus made specific provisions for bad debts based on each client's actual operating conditions.

Additionally, as of last September's third quarter, private enterprises with accounts receivable mostly aged under one year included Junwei Electronics, Fuling Shares, and Boyuan Shares.

Caution Against Reliance on Receivables to Support Performance

Since last year, the issue of resolving overdue payments owed to enterprises has consistently received high-level attention.

The recent symposium on private enterprises emphasized the need to tackle the issue of unpaid debts to private companies

The National Development and Reform Commission also stated its commitment to ramping up initiatives to resolve these payment delays and accelerate the development of the private economy.

Zhang Jun, chief economist at Galaxy Securities, forecasts that in the near future, the stance toward private enterprises will favor “encouragement” over “regulation,” with expectations for a boost in the management of non-tax revenues at the local level by 2025, which may facilitate solutions to outstanding debts owed to these enterprises.

Tian Lihui noted that the recent emphasis by the private enterprise symposium and NDRC on resolving overdue payments indicates the government's commitment and support for the private economy.

“Accounts receivable are like a 'double-edged sword.' While moderate receivables reflect business expansion, excessive amounts may obscure income quality, creating inflated revenue through methods such as credit sales,” stated Tian Lihui.

To assess the asset quality of listed private enterprises more effectively, investors should consider the ratio of accounts receivable, cash flow conditions, and other key items on the balance sheet (such as current ratio and quick ratio) for a comprehensive evaluation.

“Investors must be wary of 'paper profits.' If a company's net profit grows while its operating cash flow remains in the negative, this may indicate a reliance on accounts receivable to sustain performance, necessitating further scrutiny of client credit and contract terms,” cautioned Tian Lihui.

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