NetPosa, which bills itself as the PRC's largest VMS provider, is in a crisis. The firm is pursuing huge unpaid bills from clients, and its chairman is being sued for over $220 million of unauthorized loans, resulting in banks freezing NetPosa cash and shares. This all comes as the PRC government recently became NetPosa's controlling shareholder.
Inside this note, we examine the crisis at NetPosa, including:
Accounts Receivable Explode Amid Government Debt Crackdown
Due to the high level of local government debt and the decline in local financial payment capacity, the growth rate of the company's business needs will slow down, the construction period of the project will be extended, and the period of corporate capital withdrawal will be lengthened. This may result in an increase in the period of accounts receivable and an increase in the amount of bad debts. [emphasis added]
I am curious to see how this evolves. PRC government spending on surveillance has been a huge boon for PRC manufacturers. If this changes, it could seriously impact those companies and their overall plans.
As long as Netposa's contracts were won legally, the Chinese government is good to pay and they will pay in the end, they don't have a shortage of money and can always print more. For companies relying on government money, the problem is always the working capital, it can take years to collect the account receivables and i guess this is the major reason netposa took out the loans. the government ownership is also probably a way to keep the company afloat (on a side note, i recall a few years ago the Korean government gave out a lot of tenders to upgrade and install new city surveillance projects in Korea to assist local manufacturers).
The major risk for Netposa is if there is some under the table money in any of their projects. it is not uncommon for a local government official to grant you a project and expect some money back from you. if There are cases like this, the government will not pay but instead start an anti graft investigation which will land you in jail and bring the company down.
I agree that the government customers should eventually pay but there are still 2 longer-term risks:
(1) If the government customers come back and say "Hey we have not paid you for the other projects but want to do more", what does Netposa do? Risk even a greater liquidity crisis with even longer and more uncertain terms about when to be repaid?
(2) If the government customers are having difficulty paying for what they already bought, what if they stop buying new projects from Netposa? Even if Netposa gets paid for previous projects they face a risk of having problems to find new ones / revenue, yes/no?
Related, revenue was down 12% year over year in H1 for their continued operations which point to the risk of declining customers / sales, see the 3 red circles below:
UPDATE: a Beijing court has ordered the freeze of 17,000 square feet (1,588 square meters) of NetPosa office space in Beijing, according to the latest NetPosa announcement. The freeze is active for three years (until September 2022). The office space is not the same address as NetPosa's Beijing headquarters (although nearby).
This doesn't mean the offices have been physically sealed off. What this means is that the plaintiffs suing Liu Guang and NetPosa successfully got the court to hold the office space for the time being, in case Liu and NetPosa can't pay back their loans. If that happens, the plaintiffs can then seize the offices and liquidate (i.e. sell) them to cover their debts.
One Beijing real estate brokerage puts the price per square meter of the building where the NetPosa office is located at about $10,000 per square meter, so this property could be worth $15,880,000.