Overview of payment practices
Weak household consumption is making economic recovery uneven and, mainly driven by export growth, the use of trade credit in B2B trade relationships is expected to increase. Cash flow issues and loss of revenue stemming from the pandemic downturn, has caused concern over the protection of financial flexibility
and has led to greater outsourcing of credit risk management than is seen on average in Asia. Against this backdrop, businesses in the industry tell us they plan to focus on customer credit risk management over the coming months and anticipate improvement in their business performance.
More than half of all consumer durables credit sales are overdue
55% of the total value the industry’s credit sales is overdue. This is significantly higher than the 43% average in Asia. Therefore, it may be not come as a surprise that businesses in the Hong Kong consumer durables industry spent more time, costs and resources than their peers in Asia to chase overdue invoices over the past year (reported by 61% of businesses in Hong Kong compared to 50% in Asia).
However, a comparison between credit management approaches, shows that Hong Kong focuses more on reducing credit risk concentrations (cited by 68% of respondents in Hong Kong compared to 59% in Asia) and by adjusting payment terms according to credit risk profiles (69% in Hong Kong compared to 60% in Asia).
In addition, their industry peers in Asia appear to favour tools aimed at
accelerating cash inflows to avoid liquidity shortages, such as trade debt securitisation (50% of businesses in Hong Kong compared to 63% in Asia).
This different approach to credit management is also reflected in the lower percentage of write-offs reported by the industry in Hong Kong (just 1% of the total value of receivables compared to the 4% average in Asia). This wide difference may reflect the fact that more businesses in Hong Kong (60%) than in Asia (55%) outsourced the collection of longer-term outstanding invoices (more than 90 days overdue).
This may also explain why DSO in the consumer durables industry in Hong Kong averages 81 days, which is far shorter than the average 110 days for the same industry in Asia.
Confidence is low among Hong Kong’s consumer durables businesses
Amid concerns over weak household consumption, 27% of businesses in the industry are pessimistic about an improvement in business performance. This is much higher than their industry peers in Asia (16%). In the instances where businesses did predict improvement, 67% told us they believed this would come from a rebound of the domestic economy. Most respondents in Hong Kong (37%, far higher than the 24% average for the industry in Asia) do not expect to see changes in their business performance over the coming months.
20% of the industry is concerned about maintaining adequate cash flow levels over the coming months (equal to peers in Asia). However, Hong Kong
businesses are more worried than the Asian average about potential bank lending restrictions that could hamper their ability to access cash to weather market fluctuations and contain credit management costs in the coming months. When it comes to the outlook for the use of trade credit over the coming months, 30% of the industry in the Hong Kong believes that it will become more widespread over the coming months (regional average: 20%). In addition, the majority (47%) report this will primarily be aimed at supporting customers by allowing them more time to pay (regional average: 27%).
Business performance and customer credit risk in the Hong Kong textiles/clothing industry remain poor. Hong Kong serves as a middleman between mainland China factories and overseas end-buyers. In the domestic market, wholesalers and retailers are facing lower demand due to social distancing measures and decreased footfall, although online sales have increased. However, even though the industry experienced a
harder impact than peers in Asia, it did well in managing write-offs and DSO fluctuations.
Concern over liquidity levels and containment of credit management costs do remain, but business confidence seems to be positive, particularly in anticipating an improvement in sales and profits stemming chiefly from healthier export flows over the coming months.
Late payments hit Hong Kong harder than peers in Asia
Businesses in Hong Kong’s textiles/clothing industry appear to be the most negatively impacted by late payments of all of the industries we surveyed in the territory over the past 12 months. Apart from write-offs, which they were relatively good at containing, local businesses also appear to have fared worse than the industry in Asia. 61% of the total value of all B2B sales on credit was reported overdue. This is higher than the 50% average for the industry in Asia and despite that fact that Hong Kong businesses reported requesting payment in cash more often than their peers in the same industry in Asia (56% in Hong Kong, 49% in Asia). This can largely be explained by different approaches to credit management. The exception is the use of letters of credit, which was reported by a similar percentage in both geographies (64% in Hong Kong and 63% in Asia). 62% of clothing/textiles business in Hong Kong reported resorting to self-insurance, fewer than the regional average of 78%. However, within the self-insurance frame, 56% of businesses polled in Hong Kong reported offering discounts for early payment of invoices over the past 12 months (fewer than the regional average of 66%).
Moreover, significantly fewer businesses polled in textiles/clothing in Hong Kong (49%) than in Asia (63%) reported they adjusted payment terms to reflect the credit risk profile of their
customers, choosing most often set payment terms in accordance with their company standards. given the above scenario, it may not come as a surprise to find that the Hong Kong textiles/clothing industry has to work harder than their peers in Asia to chase overdue invoices. Indeed, more businesses polled in Hong Kong (40%) than in Asia (36%) reported spending more time, money and resources on resolving unpaid invoices over the past 12 months. This led to positive results in terms of minimising the impact of customer credit risk on the business. For example Hong Kong’s textiles/clothing industry wrote off 4% of the total value of B2B receivables. This is much lower than the 7% average for the same industry at regional level.
DSO in Hong Kong is far shorter than the industry average for Asia, averaging 49 days, compared to 81 days for the region. This pattern was also evident in the percentages of businesses reporting average DSo in the 60-90 day and more bracket (44% in Asia compared to just 11% in Hong Kong). 59% of the industry in Hong Kong reported no change in DSo over the past 12 months (regional average: 42%). Correspondingly, far fewer businesses in Hong Kong (26%) than in Asia (48%) reported increased DSO over the past 12 months; and 5% in Hong Kong (3% Asia) reported shorter DSO than one year ago.
Cash flow worries more businesses in Hong Kong than in Asia
Far more industry respondents in Hong Kong (31%) than in Asia (18%) told us they are concerned about maintaining adequate cash flow over the coming months. 21% (higher than 16% in Asia) are concerned about containing credit management costs over the same time frame. Amid concerns over the potential continuation of disruptions to global supply chains, rising pandemic risk due to an unexpected resurgence of cases, and a potential ramping up of geopolitical tensions over the coming months, far more industry respondents in Hong Kong (62%) than in Asia (36%) anticipate no change in their business performance over the coming months. For those local
businesses anticipating improvement, the majority (62%, compared to 21% in Asia) believes that this will chiefly stem from improved export flows. 22% anticipate improvement will come from a combination of a rebound of the domestic economy and increased export trade flows (regional average: 32%), while just 11% in Hong Kong compared to 47% in Asia expect improved business performance to come from improved conditions of the domestic economy. 15% of industry respondents believe trade credit will be used as a sales tool more often over the coming months, significantly fewer than the industry average of 44%.
The Hong Kong ICT/electronics industry plays a major role in this well-connected and open economy, acting both as a key ICT services provider as well as a re-export hub for electronic components sold to/by Chinese factories. After disruptions in H1 of 2020, the industry supply chains resumed normal practice in the second half of last year. However, the industry has endured many challenges over the past two years, due in particular to the fallout of the ongoing US-China trade war and the pandemic.
This may explain why the industry has favoured a strategic approach to
credit management, more frequently favouring outsourcing over in-house retention and management. Looking ahead, Hong Kong ICT/electronics businesses appear more confident than their Asian peers about anticipating improvement in business performance and largely predict this will come from a combination of increased exports and improved conditions of their domestic economy. However, they agree with their peers in Asia that B2B credit trade will increase over the coming months, in particular as a short-term financing tool for customers.
Half of Hong Kong’s ICT/electronics invoices are overdue
An average of 50% of the total value of Hong Kong’s B2B ICT/electronics credit sales are overdue. This compares to a 47% average for the same industry in Asia. Write-offs in both Hong Kong and Asia amount to an average of 4% of the total value of B2B receivables.
When it comes to managing customer credit risk, 40% of respondents in both Hong Kong and Asia alike told us they had strengthened their credit management processes over the past year, spending more time, costs and resources on resolving overdue invoices. A strong focus was applied to avoiding customer credit risk concentrations.
This was seen more often among businesses in Hong Kong (68%) than in Asia (59%), where industry consolidation has increased strongly over the past few years often resulting in a single customer representing a high proportion of the credit sales. So businesses that are able to set sufficient bad-debt reserves to cover a
payment default told us that they do so within the frame of self-insurance (reported by 66% in the Hong Kong industry, compared to 69% in Asia). A significant percentage of respondents employ trade credit insurance, helping to reduce the risk of trade debt concentration (63% of respondents in both Hong Kong and Asia).
In addition, the survey respondents reported a fairly widespread use of factoring (53% in Hong Kong, 61% in Asia) and trade debt securitisation (50% in Hong Kong, 58% in Asia).
When it comes to the collection of long-term overdue invoices (more than 90 days overdue), more industry respondents in Hong Kong (60%) than in Asia (54%) told us that they outsourced debt collection to external agencies as a complement to their own internal trade debt collection processes. This helped many to reduce DSO, resulting in a 90-day average for Hong Kong, which is shorter than the 110-day for the same industry in Asia.
Business confidence weak in face of uneven rebound of domestic economy
Hong Kong’s ICT/electronics industry told us that when looking ahead its primary concerns are protecting liquidity levels and the likely introduction of restrictions to bank lending. Although local demand for electronic products has increased largely due to increased remote working, business confidence in the industry appears to be dented by an ongoing weakness of private consumption on the domestic market which appear to be a holding-back factor for economic growth. This may explain why far more businesses in Hong Kong (62%) than in the industry in Asia (53%) express pessimism about improvement in business
performance over the coming months.
Businesses that appear to be more confident about the future expect business growth to come from a combination of increased exports and improved conditions of their domestic economy. There are fewer survey respondents citing a rebound in the domestic economy as the sole driver of business improvement than on average in Asia. Conversely, there is agreement between the industry in Hong Kong and Asia (with an average of 43% of respondents) that trading on credit will be increasingly used as a short-term financing tool for customers.