APAC Manufacturing Exhibiting Financial Stress, Identified by FRISK® Score

China’s factory activity has contracted for six consecutive months, according to Reuters. Certain manufacturers, particularly semiconductors, are showing signs of severe financial stress. In November 2019, CreditRiskMonitor observes that there are more than 1,100 public companies showing signs of elevated financial risk across China and Taiwan. These organizations are identified by our FRISK® score, which is formulated to predict bankruptcy within a 12-month horizon and is updated daily to help our clients mitigate risk exposure prior to financial distress and bankruptcy.

Public companies within the APAC region can abruptly default or slowly trend into corporate failure, so it’s critical to stay ahead of financial risk or it could lead to substantial losses for your company. 

Recent History

The FRISK® score is based on a “1” (most risky)-to-“10” (least risky) scale, with any score between “1” and “5” inside what we call the high-risk "red zone." Yingli Green Energy Holding Co. Ltd. is one of the aforementioned 1,100-plus companies in China and Taiwan who live in this dangerous crimson realm: their FRISK® score has trended between a “1” and a “2” for more than a year’s time. Red zone companies demand immediate attention, as their bankruptcy risk potential could soar up to 50 times that of the average public company.

As it became increasingly apparent that Yingli Green Energy was insolvent – again, doggedly identified by its daily low FRISK® scores – the company’s creditors and suppliers worked to make appropriate collections in 2016 and 2017. However, these parties only received a fraction of what they were owed and most claims appear to have been unresolved.

As of October 2019, Yingli Green Energy is attempting to work through a comprehensive debt restructuring – effectively putting elapsed time between attempted collections from present day out to approximately two years. The anticipation is that Yingli Green Energy will remain as an operating entity for now; going forward, it remains unclear as to which creditors will receive payment and what the expected recovery rates will be in the end.

Troubled Semiconductors

Within China and Taiwan are more than 1,100 public companies trending in the red zone. The four companies below carry significant risk as denoted by their high-risk FRISK® scores and Z’’-Scores, dated as of Nov. 7, 2019:

The FRISK® score, however, is more accurate than the Z’’-Score since it contains more comprehensive data, including stock market information, financial statement ratios and bond agency ratings (when available). The financial ratios within the FRISK® score have also been adjusted to identify variations in profitability, leverage and liquidity more reliably. For example, our calibration will determine that a decline in operating profitability is significantly less meaningful than if the given company were to outright swing from an operating profit to an operating loss. This is only one of many aspects that can provide an advantage versus traditional scoring methodologies.

Shunfeng International Clean Energy, a solar panel manufacturer, has about half of total sales generated internationally, including countries of India, Japan and Germany. The FRISK® score has been entrenched in the red zone category, signaled elevated failure risk:

• Pretax income has been negative for six consecutive semi-annual periods
• 1H 2019 total debt exceeded tangible net worth by 4x
• Working capital has been at a deficit for years and persistently widening

Tatung Company sells a variety of electronics and home appliances, with 84% of revenue from China and Taiwan and 16% coming from the U.S. and other countries:

• Free cash flow has been negative for more than four consecutive years
• Gross margins have been negative in each of the last four quarters
• Total debt exceeds tangible net worth by 2.7x
• Short-term debt increased to an alarming 87% of total debt
• Working capital widened to a record deficit

Coolpad Group Ltd sells smart phones and accessories, with about 15% of sales derived from China and the remaining 85% being international:

• Pre-tax income has been negative for four consecutive years
• 1H 2019 total debt exceeds tangible net worth by 1.8x
• Working capital has been negative for four consecutive quarters

OFILM Group Co Ltd is a supplier of touch display and sensor products:

• Free cash flow has been negative for more than five fiscal years
• Cumulative trailing 12-month net income was negative
• Q3 2019 total debt exceeded tangible net worth by 2.1x
• Working capital has been negative for four consecutive quarters

Bottom Line

If your company is selling into APAC manufacturers or buying products from them, it is important to stay ahead of financial risk. These above are but four examples. Financial distress can eventually lead to devastating situations, including the inability to collect payment or having a disrupted supply chain. Instead of ignoring the issue, your company should identify financially healthy and more reliable alternatives before trouble erupts. The 96%-accurate FRISK® score provides subscribers, who are risk professionals just like you, with the objective and timely assessment of financial risk for public companies.