Interview Questions:
1. Can you provide an overview of DL's core focus and business operations in the
power industry?
2. How would you describe DL's relationship with Group B, the large state-owned
enterprise? What role does DL play as a supplier to Group B?
3. According to the provided data, Group B has been making significant
procurement investments in the grid. How does DL's supply services to Group B
impact DL's financial situation, specifically in terms of accounts receivable?
4. Could you explain the payment model used in Group B's sales contracts with DL?
How does this payment model impact DL's cash flow and funds tied up?
5. The rising prices of raw materials have led to higher production costs for DL.
How are these increased costs affecting DL's financial situation and selling prices
of its products?
6. What challenges does DL face in terms of its capital chain and financing costs?
How does DL plan to address these challenges and ensure financial stability?
7. DL mentioned the risk of winning orders larger than its actual production capacity.
How does this risk impact DL's performance and the quality of its goods? How
does DL manage this pressure effectively?
8. DL mentioned the risk of winning orders larger than its actual production capacity.
How does this risk impact DL's performance and the quality of its goods? How
does DL manage this pressure effectively?
9. How does DL plan to mitigate the pressure of concentrated payment from
construction companies defaulting on labour wages? What measures or
safeguards does DL have in place to handle such situations?
10. Considering DL's position in the power industry and its relationship with Group
B, what steps is DL taking to ensure long-term financial stability and sustainable
growth?
Answer
1. DL's core focus lies in the production of transformers, cables, and wires, as well
as the development and production of transmission and transformer equipment.
We excel in transmission and transformer system integration and have ventured
into new energy power plants and power and heat supply services. Our
wide-ranging capabilities and extensive business coverage have positioned DL as
a crucial supplier in China's power industry.
2. DL holds a prominent position in the power industry and has established itself as
a crucial supplier to Group B, a large state-owned enterprise operating across
more than 20 provinces in China. We work closely with Group B to meet their
growing demand for electricity, transmission and distribution efficiency, and
security upgrades. Our products and services play a vital role in supporting Group
B's operations and ensuring reliable power supply across their network.
3. As an upstream supplier in the industry chain, DL completes supply services for
Group B according to the terms agreed upon in the purchase and sales contract.
However, due to the payment terms, it may take a longer time for DL to obtain
the full refund, resulting in a large amount of accounts receivable. We understand
that Group B's sales contracts typically adopt a "4:3:2:1" or "1:4:4:1" payment
model, where a significant portion of the payment is made after DL has delivered
and accepted the goods. This delay in payment affects our cash flow and ties up a
substantial amount of our funds.
4. The payment model used in Group B's sales contracts with DL impacts our cash
flow and financial situation. Usually, 50% (30% + 20%) or 80% (40% + 40%) of
the payment is made after DL has delivered and accepted the goods. In addition
to these percentages, quality guarantees of 10% for service contracts and 5% for
material contracts are charged. As power equipment has a long lifespan, warranty
payments for certain equipment and technical services are paid much later after
delivery and acceptance. These payment terms pose challenges in managing our
funds effectively.
5. DL is currently facing higher financing costs due to the rising prices of raw
materials. The main raw materials for our transmission and transformation
products, such as silicon orientation, steel, copper, aluminium, and transformer
oil, account for about 90% of our production costs. The fluctuating purchase
prices of these raw materials have been on an upward trend in recent years. To
compensate for the increased production costs, DL has been forced to raise the
selling prices of its products, transferring the financial pressure to Group B.
6. DL acknowledges the challenges posed by a tight capital chain and higher
financing costs. To address these issues and ensure financial stability, we are
actively seeking appropriate finance solutions. We are exploring options such as
securing additional funding sources, negotiating favorable financing terms with
our partners and financial institutions, and optimizing our internal financial
management practices.
7. The risk of winning orders larger than our actual production capacity can lead to
performance risks, such as late delivery or lower quality goods due to excessive
production pressure. DL understands the importance of managing this risk
effectively. We are continuously working to improve our production planning and
capacity management processes. By enhancing our operational efficiency and
closely monitoring demand forecasts, we aim to fulfill orders within the agreed
timelines without compromising on quality.
8. To resolve our financial stress situation, DL is considering various strategies and
finance solutions. These include exploring partnerships or collaborations with
financial institutions to access additional funding, leveraging our strong
relationship with Group B to negotiate more favorable payment terms, and
optimizing our procurement processes to mitigate the impact of rising raw
material prices. Additionally, we are actively diversifying our customer base and
exploring new business opportunities to ensure a stable revenue stream.
9. DL acknowledges the pressure of concentrated payment from construction
companies defaulting on labor wages. To mitigate this risk, we have established
robust risk management procedures and thorough due diligence processes when
selecting construction partners. We closely monitor the financial health and track
record of our partners to minimize the likelihood of default. In case of any default,
DL has contingency plans in place to handle the situation and mitigate the impact
on our financial stability.
10. DL is committed to ensuring long-term financial stability and sustainable growth.
We are implementing comprehensive financial planning and risk management
strategies to address the challenges we face. Additionally, we are focused on
enhancing our operational efficiency, diversifying our product portfolio, and
exploring new markets to reduce dependency on Group B. By maintaining strong
relationships with our customers, continuously improving our processes, and
staying adaptable to market changes, we are confident in DL's ability to achieve
long-term success in the power industry.
1.
Can you explain the supply chain finance implemented by Group B and how
it addresses DL's financial challenges?
Answer: Group B has implemented supply chain finance to address DL's financial
challenges. Group B's trust company, with a deep understanding of the power grid
industry, facilitates flexible financing and flow arrangements among different
enterprises in the supply chain. This reduces DL's financing costs, expedites accounts
receivable realization, and accelerates the flow of capital in the supply chain. By
minimizing financial costs, the entire supply chain benefits. This financing solution
broadens financing channels for suppliers, reduces operating costs, improves DL's
leverage level, and optimizes the financial structure of the industrial chain. It ensures
the quality and efficiency of DL's shipments, supports the normal operation of power
grid construction, and promotes stable development in the power industry.
2. How does the supply chain finance model implemented by Group B
specifically support DL's capital pressure and debt structure optimization?
Answer: The power industry in China, including DL, faces significant capital pressure
due to its capital-intensive nature and long investment terms. Group B's supply chain
finance alleviates DL's capital pressure and optimizes the debt structure between the
two companies. It facilitates the safe and sound development of DL's production by
realizing the synergy effect of production and financing. This approach improves the
core competitiveness and value creation capacity of the industrial chain, laying a
foundation for stable industry development. By using DL's receivables from Group B
as an asset to be financed, the capital pressure is effectively relieved.
3. What are the unique characteristics of the power industry that make supply
chain finance a suitable solution for DL?
Answer: The power industry in China has specific characteristics, including high
capital intensity and long investment terms. These characteristics create substantial
capital pressure for small and medium-sized enterprises like DL. Supply chain finance,
as implemented by Group B, addresses this pressure by optimizing the debt structure
and providing timely financing. This financing model helps DL cope with the
challenges of slow cash flow returns during power grid project construction, rising
raw material prices, and payment pressure from construction companies. It effectively
relieves DL's capital pressure and supports the company's stability and growth.
4. How does the adoption of accounts receivable mode supply chain finance
benefit DL and position it for financial success?
Answer: The adoption of accounts receivable mode supply chain finance overcomes
the limitations of traditional financing models and creates opportunities for financial
success. By improving cash flow and reducing reliance on traditional financing, DL
can streamline approval processes and mitigate credit risks. This innovative financing
solution empowers DL to seize market opportunities, invest in research and
development, and expand its business operations in the dynamic power industry. By
embracing this approach, DL enhances its competitiveness and sustains long-term
growth.
5. How does supply chain finance contribute to DL's overall competitiveness
and value creation in the power industry?
Answer: Supply chain finance, through its efficient capital flow and optimization of
financing and debt structure, enhances DL's overall competitiveness in the power
industry. By relieving capital pressure and providing timely financing, DL can focus
on production and R&D activities, thereby improving its core capabilities. This, in
turn, enhances DL's value creation capacity within the industrial chain. By leveraging
innovative financing solutions, DL can stay ahead of the competition, seize market
opportunities, and foster sustainable growth in the power industry.
6.
Can you explain the supply chain finance process that DL Company
participates in?
Answer: The supply chain finance process at DL Company involves the following
steps. First, DL provides products or services to Group B, forming accounts
receivable. Then, DL submits a financing application to the trust company, and both
parties sign a financial services contract and open a trust supervision account. After
completing due diligence, the trust company provides information about DL's
accounts receivable to Group B and applies for confirmation of the relevant assets.
Group B cooperates with the trust company to verify the accounts receivable. DL
proposes to Group B to change the sole collection account to the trust supervision
account. The trust company raises funds from qualified investors through a public
offering of the supply chain finance trust plan. DL transfers the confirmed accounts
receivable to the trust company, and the trust company allocates the trust funds to
the upstream supplier as consideration for the accounts payable. Finally, Group B
makes payments to the trust's custody account according to the payment schedule of
the accounts receivable, and the funds in the custody account are used to repay the
principal and interest of the trust scheme.
7. How does the supply chain finance trust scheme focus on DL's accounts
receivable characteristics?
Answer: The supply chain finance trust scheme primarily focuses on the
characteristics of DL's accounts receivable, which typically involve large amounts
and long payback periods. The trust scheme is designed to provide financing
solutions that align with these specific characteristics. By participating in the
scheme, DL can optimize its cash flow and reduce the financial strain caused by
extended payback periods. The scheme ensures that DL's accounts receivable are
efficiently monetized, allowing the company to unlock the value tied up in these
assets and improve its overall financial position.
8. What is the role of the trust company in DL's supply chain finance process?
Answer: The trust company plays a crucial role in DL's supply chain finance
process. It serves as a financial intermediary that facilitates the financing and flow
of funds between DL, Group B, and qualified investors. The trust company
conducts due diligence on DL's accounts receivable, coordinates with Group B to
confirm the assets, and manages the trust funds raised through a public offering of
the supply chain finance trust plan. The trust company also handles the allocation of
funds to upstream suppliers as consideration for accounts payable. By leveraging
the expertise and services of the trust company, DL can efficiently access financing,
optimize its financial structure, and enhance the stability of its supply chain.
9. How does the change of account to the trust supervision account benefit DL
in the supply chain finance process?
Answer: The change of account to the trust supervision account brings several
benefits to DL in the supply chain finance process. By proposing this change to Group
B, DL ensures that payments for the purchase and sale contract are directed to the
trust supervision account. This arrangement enhances transparency, accountability,
and security in financial transactions. The trust supervision account serves as a
centralized and controlled platform where funds are managed and allocated according
to the payment schedule of accounts receivable. This streamlined payment process
helps DL receive payments promptly, reduces administrative complexities, and
enhances financial efficiency.
10. How does the supply chain finance trust scheme provide DL with financing
and repayment mechanisms?
Answer: The supply chain finance trust scheme provides DL with financing and
repayment mechanisms. The trust company raises funds through a public offering of
the supply chain finance trust plan, leveraging investments from qualified investors.
DL transfers its confirmed accounts receivable to the trust company, which then
allocates the trust funds to upstream suppliers as consideration for the accounts
payable. Group B makes payments to the trust's custody account based on the
payment schedule of the accounts receivable. The funds in the custody account are
utilized to repay the principal and interest of the trust scheme. This mechanism
ensures that DL receives timely financing, and the repayment process is aligned with
the payment schedule, reducing financial risks and enhancing cash flow management.
Interview for HC
1.
Can you provide an overview of Company HC and its main business
activities?
Answer: Company HC was established in 2007 in Henan Province, China. Its
main business is the wholesale sale of mobile phones, along with the sale of spare
parts and maintenance production of related electronic equipment. HC is a
contracted dealer of HUAWEI in Henan Province and primarily serves mobile
phone wholesalers and retailers.
2. How has HC's business developed over the years in terms of sales, revenue,
and assets?
Answer: HC has experienced significant growth in sales, revenue, and assets.
Since its establishment, HC's total assets have grown from over 20 million to
nearly 300 million by the end of 2017. Sales revenue has also increased from over
100 million to over 300 million during the same period. Although HC is
considered a small and medium-sized enterprise based on market share and
company size, it has shown strong growth in these areas.
3. What challenges has HC faced in its business operations, particularly in
terms of cash flow difficulties?
Answer: Despite its growth momentum, HC has encountered challenges related to
cash flow. The company heavily relies on upstream and downstream enterprises,
making it overly dependent in the supply chain. HC faces difficulties in managing
the flow of funds to support its operations. The company's balance sheet analysis
reveals higher prepayments and receivables due to weak authority with upstream
suppliers and lenient credit policies imposed by downstream companies. This
situation has led to a large amount of accounts receivable, weakening HC's capital
chain and posing risks to its financial stability.
4. How does the composition of HC's assets and income impact its financial
position?
Answer: HC's current assets consist mainly of inventory, accounts receivable, and
prepayments, rather than a significant amount of monetary capital. Although HC's
sales and profits appear to be growing, a closer examination reveals that the
quality of its income is not very high. Additionally, the cycle of research and
development of electronic equipment parts is shortening, requiring increased
investment in technology and sales teams. Outdated machinery and equipment
also need upgrading and renovation, which demands substantial capital. The
bottleneck in HC's development lies in the flow of capital due to these factors,
creating a sense of urgency to address the company's financial stress.
5. What are the potential risks and consequences HC faces if it doesn't resolve
its financial stress issue?
Answer: Failure to resolve the financial stress issue can have severe repercussions
for HC. Outdated production equipment may result in the inability to fulfill orders,
risking default on these orders and damaging HC's reputation. Insufficient funds
may hinder regular payments for inventory goods and raw materials, leading to a
decline in business and potential bankruptcy. The shortage of funds also hinders
the company's ability to invest in research and development and update
machinery and equipment. It is crucial for HC to find a suitable solution promptly
to avoid these risks and secure the company's future.
6.
What challenges did HC face when considering traditional financing options
such as issuing shares or bonds on the capital market?
Answer: HC's financial system was not yet sound, despite its expanding scale and
improving business performance. The requirements for listing in China were high,
making it difficult for HC to meet those requirements. Moreover, the long queue
of enterprises waiting to be listed made it challenging for HC to raise funds
through listing and issuing shares within a short period of time.
7. Why were the loan applications made by HC to multiple large banks
unsuccessful?
Answer: The banks' refusal to grant loans to HC was mainly due to the company's
inability to meet the loan requirements. HC's total assets were predominantly tied
up in inventory, accounts receivable, and prepayments, leaving little room for
suitable collateral. Additionally, most of HC's sales were reliant on accounts
receivable, which did not generate substantial cash flow and posed challenges for
loan repayment in the future. The bank conducted a credit rating of HC and
concluded that the company did not meet the minimum requirements for loan
approval.
8. How did Everbright Bank analyze HC's financial data and assess its collateral
for potential loan services?
Answer: Everbright Bank examined HC's financial data, which revealed that
accounts receivable, inventory, and prepayments accounted for a significant
portion of the company's total assets. Prepayments specifically accounted for the
largest percentage at 26.8%. While HC did not have many fixed assets suitable
for pledging, its strong partnership with upstream supplier HUAWEI, supported
by the Chinese government, provided a basis for supply chain finance.
HUAWEI's strong assets, large scale, and good credit met the requirements for
supply chain finance.
9. How did Everbright Bank propose a loan service that addressed HC's
financing difficulties through supply chain finance?
Answer: Everbright Bank formulated a loan service that utilized the prepayment
of accounts in supply chain financing. The model leveraged HUAWEI's scale,
assets, and credit to provide confirming warehouse services for HC's procurement
business. Under this model, HC paid a deposit to Everbright Bank, and the bank
issued a bank draft to HUAWEI for a specified amount. HUAWEI then handed
over the goods to third-party logistics and warehousing enterprises for
supervision. HC could access the goods up to the limit of the deposit paid, and if
HC failed to repay the funds to Everbright Bank by the due date, HUAWEI would
repurchase the goods. The third-party logistics company played a supervisory role
in the transaction process, trusted by Everbright Bank.
10. How does the supply chain finance model proposed by Everbright Bank
address HC's specific financing needs and alleviate its capital flow problem?
Answer: The supply chain finance model offered by Everbright Bank, based on
HC's relationship with HUAWEI, provides a solution to HC's financing
difficulties. By utilizing HUAWEI's strong assets and credit, the model allows
HC to access funds through confirming warehouse services. This approach
enables HC to secure goods based on a deposit, ensuring a stable supply chain
and alleviating its capital flow problem.