XGMA (600815, SH) is truly facing one wave after another. Before the Shandong dealer case was resolved, yesterday (August 20), XGMA became involved in two more lawsuits filed by downstream dealers in Hebei.

　　In the past two years, as downstream growth slowed, the machinery industry nevertheless continued aggressive sales. Now dealers frequently default on payments, leaving companies no choice but to resort to the courts for resolution. The predicament XGMA currently faces is a microcosm of the aftereffects of the machinery industry's aggressive expansion.

　　Zhang Yueguang of Lianhe Credit Rating Co. believes that, from a settlement risk perspective, XGMA currently mainly adopts a dealer and distributor sales model. If the ultimate customer of a mortgage business fails to fulfill repayment obligations and the dealer fails to fulfill its guarantee obligations, or if the dealer fails to fulfill its obligation to pay the bank acceptance bill deposit in full on time, the company will bear the guarantee risk. Since adopting this sales model, the company's accounts receivable balance has increased significantly, posing certain risks.

　　Endless Wave of Dealer Lawsuits

　　XGMA announced yesterday that dealers Hebei Xiazhong Machinery Sales Co., Ltd. (hereinafter referred to as Hebei Xiazhong) and its debt guarantor, and Hebei Zhengxu XGMA Construction Machinery Sales Co., Ltd. (hereinafter referred to as Hebei Zhengxu) and its debt guarantor, had defaulted on payments owed to the company. After repeated unsuccessful demands for payment, the company filed civil lawsuits against Hebei Xiazhong and Hebei Zhengxu with the Xiamen Intermediate People's Court.

　　At present, the first-instance hearings for the above two lawsuits have not yet been held. According to the announcement, the total amount involved in the two cases is 36.31 million yuan, accounting for 0.77% of the company's audited net assets for 2012.

　　"The impact of these cases on the company's net profit depends on the court's judgment results," a person from XGMA's securities department told reporters. However, out of prudence, the company has already made a total of approximately 17 million yuan in bad debt provisions in accordance with its accounts receivable bad debt provision policy.

　　In fact, this is not the first time XGMA has been caught in the vortex of downstream dealer arrears. On May 24 this year, because dealer Shandong Linyi Wangli Construction Machinery Complete Equipment Co., Ltd. had overdue payments of 13.86 million yuan, XGMA also took it to court.

　　At present, the sales models in the construction machinery industry are mainly the distribution system and the agency system. The main feature of the agency system is that the agent does not buy out ownership of the products but merely sells products on behalf of the company, and after the products are sold, issues a transaction confirmation form to the company. The company then issues sales invoices based on this, recognizes sales revenue, and the customer first transfers the sales payment to the agent's account, after which the agent settles with the manufacturer.

　　This means that if the industry situation deteriorates and downstream customers face funding constraints, the dealers in the middle will encounter difficulties in collecting payments, which will ultimately be passed on to the company, and the company will also bear inventory risk.

　　According to the reporter's understanding, XGMA began gradually transitioning from the agency system to the distribution system in 2010, under which distributors must buy out product ownership within 1 to 3 months after the product shipment date and pay the company for the goods.

　　"Both the agency system and the distribution system now exist, but the agency system still accounts for more," said a person from XGMA's securities department. At present, the company is still in a transition period. In addition to resorting to the courts over downstream payment arrears, the company will also track its larger accounts receivable in greater detail to prevent new bad debts.