Credit Insurance case study - Sunta Chemical LTD.

 

 

Backed by trade credit insurance, this Hong Kong firm has accessed a host of new buyers and outperformed peers.

 

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For many of those engaged in plastics trading, continuous business success has proven less durable than the material itself.  Hong Kong-based Sunta Chemical Ltd. has bucked the trend of compressing margins and grown its business by 40% after the financial crisis.  Credit insurance coverage has been key to the strong performance, executives at Sunta stress, as it allowed the company to enlarge the working capital that is necessary to deal with larger clients.

Sunta sources raw materials from Southeast Asia and supplies them to mainland Chinese factories whose clients are mostly US and European brands. Because of the wide application of plastics in a variety of both industrial and retail products, the overall size of the market is enormous, but the average margins across the industry are less — at just 1%. 

Growing the client base to increase profit is thus a constant matter of attention for Sunta. Due to the huge working capital, Sunta mainly trade with buyers who pay cash or within a shorter payment period. This in turn barred the company from working with larger corporates that subject their suppliers to much longer payment cycles. 

Without the ability to tap this pool of potential buyers, though, Sunta faced a vicious circle.  Financial institutions were unwilling to extend working capital facilities.  This exacerbated the strain on the company’s cash conversion cycle further.

Sunta Executive Director Terry Tam explains: “Our business is tough. If there is a bad debt on one container of plastic products, we have to churn 100 containers to make up for the loss.”

Trade credit insurance provided the solution all along.  Giving banks greater confidence in the business, insurance led to larger credit facilities and thus the ability to handle longer payment terms.  “We can now accept up to 30 to 90 days of payment schedule because the banks are willing to finance us now that we are backed by credit insurance,” Terry explains. “We can also go for bigger ticket and higher-volume orders.”

Terry also highlights that Euler Hermes is able to provide data on client’s financial situation. “Sunta may know just one side of the story, but Euler Hermes can shed light on the full situation,” she says. Since the recent global economic downturn, and in particular the contraction in consumer demand in Europe and the US, this complete picture of buyers has proven invaluable to the company.

In the last two years, Sunta has experienced delays and defaults in client payments.

A 30-year-old manufacturing firm was forced to shut its doors after one of its major customers, a large Japanese electronics firm, suffered a decline in business and cut its orders. “One would expect companies like my client to have a stable stream of orders. Little did we know that it had been running in the red and not being able to pay the bills,” managing director Edmond Tam notes.

In another case, an operator specialising in high-end products used by airlines was wound down because of strained cash flows. This lead to a significant delay of a sizable payment to Sunta. “It was totally unexpected and there was no warning at all.” Edmond recalls.

Fortunately, Sunta had purchased a Euler Hermes trade credit insurance policy and was able to protect themselves from the non payment or insolvency of their trading partners.  In the end Sunta was able to reclaim the invoice amount through Euler Hermes.

“We want no surprise in business. We want reliable services and flexible attitude and this is what Euler Hermes can offer,” Edmond says.

With a goal to facilitate further expansion, Sunta plans to increase credit insurance coverage. It is also enlisting the help of Euler Hermes’s database to assess new clients in low-cost manufacturing markets including Vietnam, Bangladesh and Cambodia.

“We are willing to invest more in risk control because it can boost our credit worthiness as well,” Terry adds. “We can now do business with the bigger brands and avoid price wars. We aim at the higher-quality market rather than going for the chase-to-the-bottom-game and buying from low-quality producers.” 

“Euler Hermes’ services have made us stronger. When the next financial crisis comes, the weaker players will be filtered out and Sunta can stay on,” she sums up.