A sharp drop of 1000%! The paint industry is facing a financial crisis!

Recently, several listed paint companies have released their financial reports for the first half of 2024. While there have been significant changes in revenue, net profit, and other data, the important indicator hidden behind making money - cash flow - has also received increasing attention. According to incomplete statistics, many paint listed companies (including those listed on the New Third Board) have negative net cash flow generated from operating activities in their financial reports, some even as low as -1.4 billion, and the year-on-year decline is even more worrying.
Cash flow decreased by 1000% year-on-year, and the paint industry is facing a "cash flow" crisis
According to the financial reports of listed companies, the cash flow of companies such as Dongfang Yuhong and Karen Co., Ltd. is as low as negative billions of yuan. However, the cash flow of listed companies such as Feilu Co., Ltd., Chongqing Sanxia, and Huierming, as well as New Third Board companies, is as low as negative 10000 yuan. This is a signal of poor financial condition for the enterprise, indicating that the actual operating cash flow of the enterprise is insufficient to cover the current accounts receivable, accounts payable, and other operating costs, indicating a tight cash flow situation.

                                   (The above data is sourced from listed companies or New Third Board announcements)
There are multiple hidden dangers behind this, such as insufficient operational efficiency of enterprises, cash inflows being less than outflows, etc., which will also affect the life cycle length of enterprises to a certain extent and are serious warning signals. Even more concerning is that the negative cash flow data of many companies still showed a downward trend compared to the same period last year.
The net cash flow of Feilu Stock decreased by 1017.76%, due to a decrease in payments received compared to the same period last year;
The net cash flow generated by Huierming's operating activities decreased by 408.68% compared to the previous period, mainly due to increased expenses for purchasing inventory and paying for goods;
The net cash flow of Karen Co., Ltd. decreased by 295.74%, mainly due to the increase in using houses to offset debts during the reporting period, resulting in a decrease in cash received from sales;
The net cash flow of Chongqing Three Gorges decreased by 271.58%, mainly due to the year-on-year decrease in cash received from the sale of goods during the reporting period.
It is not difficult to find that many companies attribute the decline in cash flow to an increase in payments to suppliers, a decrease in cash receipts, an increase in salary payments, and an increase in debt to equity swaps. These factors are a combination of multiple factors, revealing the current difficulties faced by paint companies.
Upstream and downstream pressure, midstream coating companies have become "laborers"
On the one hand, upstream raw material companies are experiencing a fierce upward trend. Upstream major chemical companies have always had the power to raise prices, and most of them receive and deliver goods in cash. Even if the supply of goods is scarce and cannot achieve "pay and deliver", paint companies still need to pay a large proportion of the payment to upstream raw material suppliers in order to qualify for queuing. Chemical raw materials with oligopolistic monopoly patterns such as titanium dioxide, resin, and MDI can easily raise prices together. Since the beginning of this year, the price increase cycle in the chemical market and the frequent occurrence of artificial sales control have greatly increased the cash payments made by coating companies, bringing about a crisis in the funding chain.
On the other hand, there is suppression in downstream fields such as real estate and automobiles. That is to say, the combination of excessively long payment terms and payment methods such as acceptance bills makes it difficult and time-consuming for paint companies to collect funds. Even so, in the cold downstream environment, paint companies have to accept these unequal treatments. In order to grab orders and even advance funds, or discount commercial bills to solve the urgent problem of the capital chain, it has become a hidden rule for men and women in the industry to do business with reverse payment.

For many years, paint companies have made a lot of efforts and sacrifices to maintain the balance between upstream and downstream, such as losing teeth and swallowing them. However, these seemingly stable trends have been completely disrupted within a few years of the pandemic. Under the dual pressure of endless parking and maintenance in the upstream, price increases due to stock shortages, and strong demands from downstream paint factories to lower prices, as well as funding for projects, paint companies have become profit seeking tools for upstream enterprises in the downstream market, turning into "laborers". What's even more terrifying is that they find it difficult to control pricing power, and even have no voice to complain, so they hastily go bankrupt and deregister, turning into an inconspicuous gravel in the long river of history.
Refusal to accept, layoffs and salary cuts! The road to resisting internal competition and self rescue is open!
Why is cash flow so important? Because its role in the survival of a business is like the role of blood in the human body. A healthy cash flow is the foundation of all businesses, but without a stable funding chain, it will be difficult for companies to carry out production and sales, technology research and development, expansion and development, and even face the risk of development setbacks and bankruptcy. Therefore, more and more companies have begun to realize the role of cash flow and have opened up a survival model of "cash is king".
In 2018, Vanke, a top student in the real estate industry, shouted the slogan of "survive". Later, during Vanke's 2023 performance exchange meeting, the chairman of the board, Yu Liang, once again mentioned "survive".
In 2022, Huawei founder Ren Zhengfei mentioned that survival should be the top priority, spreading the chill to everyone and ensuring that we can overcome the crisis of the next three years.
In fact, this is no longer an isolated case, and the paint industry is no exception. Yang Xianghong, Chief Economist and Consultant of Shunde Coatings Chamber of Commerce, stated that "living on" is the theme of the coatings industry in 2023; Chen Bing, Chairman of Zhanchen Group, stated that the important goal and primary task for most coating companies in Guangdong in 2023 and the coming years is to survive; Wang Zhipeng, a leading figure in the paint industry, also expressed his desire to "survive" in the first half.
But how to implement the slogan? How to achieve cost reduction, efficiency improvement, and cost saving? How to survive, develop and even go against the trend in the reduction market, many coating companies are constantly trial and error.
If the cost is too high, then optimize the structure and lay off employees, reduce labor costs, intermittent holidays and work stoppages, reduce overall costs, and develop and establish long-term strategic partnerships in the supply chain to reduce the cost of the supply chain and avoid the crisis of raw material price increases and stockouts.

If sales decline, then diversify and explore more areas, or identify non core areas to survive and avoid unnecessary expenses. We also need to increase market investment and incentive policies, and explore new customers with strong demand in the process of transformation and upgrading.
If it is difficult to collect payments, then strengthen the collection and management of accounts receivable, eliminate or reduce credit, and prevent situations where a large amount of funds are occupied. We also need to optimize the management and operation mechanism, reduce inventory and stock, strengthen the speed of capital flow, and increase operating capital.
Whether it's staying warm together or taking drastic measures, the multiple measures taken by paint companies are all aimed at "surviving". The most important way at present should also include resisting internal competition. Otherwise, the blade of internal competition will cut itself, and the side effects of internal friction will make the survival of the enterprise even more difficult. The competition in the post pandemic era has just begun. Only by breaking through internal competition and combating homogenization can we have hope, confidence, and the ability to develop.