April 6, 2017 / 2:34 AM / 4 months ago

Fitch Affirms Golden Eagle at 'BB-'; Outlook Negative

14 Min Read

(The following statement was released by the rating agency) HONG KONG, April 05 (Fitch) Fitch Ratings has affirmed China-based department store operator Golden Eagle Retail Group Limited's (Golden Eagle) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB-'. The Outlook on the IDR is Negative. The ratings reflect the company's efforts to diversify its revenues and a high proportion of self-owned stores. This has helped to stabilise EBITDA, but the ratings remain constrained by the company's leverage and a challenging retail landscape. The Negative Outlook reflects the uncertainty over when leverage can be reduced. The Outlook could stabilise if the negative triggers are not breached within the next 12 months. KEY RATING DRIVERS Slight Improvement in Revenue. The operating environment for Golden Eagle has been challenging since 2014 due to changing consumer preferences for shopping channels and a lack of differentiation among department stores, but there are initial indications of a possible recovery in consumer spending. Gross sales proceeds (GSP) from concessionaire sales were flat yoy in 2H16 compared with a decline of 8% in 1H16, and full-year 2016 same-store sales (SSS) declined by only 4% compared with -9% in 1H16. Shifting Business Model: Weakness in concessionaire sales has been offset by boosting other revenue sources such as direct sales, rental income and auto services. The contribution from concessionaire sales as a percentage of GSP (not including sale of properties) fell to 84% in 2016 from 91% in 2013. Revenue diversification along with a lower proportion of rental properties has allowed Golden Eagle's EBITDA to remain relatively stable at over CNY1.5bn for the past three years. Fitch expects the change in sales mix will result in operating revenues outperforming GSP and contribute to stable or slightly growing EBITDA over the next few years. Leverage a Key Constraint: Fitch expects leverage to remain high until Golden Eagle is able to generate cash from residential property sales or sees a turnaround in the core business. Payables-adjusted net leverage had jumped to 5.9x by end-2015 (2014: 3.3x) after the acquisition of Global Era Group, which included a large office and residential property project in Wuhu, located in China's Anhui province. If cash flows from property sales related to Global Era are booked, then Fitch expects leverage may decrease along with any improvement in the core concessionaire business. Property Value Supports Rating: Golden Eagle owns more than 60% of the floor space it operates, and Fitch believes these assets may be used as collateral to secure additional debt funding, if needed. The carrying value of unencumbered fixed assets, land and investment properties was over CNY11 billion at end-2016, and Fitch estimates the market value to be substantially higher. The company already has the right to issue onshore medium-term bonds and company notes, which - combined - should be more than sufficient to refinance the CNY5.2 billion syndicated loan maturing in 2018, but the property value further provides confidence in the company's access to funding. DERIVATION SUMMARY Golden Eagle has a decent scale of operations and profitability compared with global peers, but relatively higher leverage and negative FCF may cause its financial profile to weaken if the retail environment remains unfavourable. Within the China retail environment, Golden Eagle faces structural challenges like weaker consumer spending and competition from other retail formats, such as e-commerce and shopping malls. Thanks to diversification in its revenue base and a higher proportion of self-owned stores, the company's business profile and financial metrics have been relatively resilient compared with local peers like Parkson Retail Group Limited (B-/Negative). No Country Ceiling, parent/subsidiary or operating environment aspects have an impact on the rating. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Low-single-digit growth in gross sales proceeds, with mild growth in concessionaire sales complemented by growth in direct sales, rental and service income (2016: -2% excluding sales of properties) - Low- to mid-single-digit revenue growth (2016: 5% excluding sale of properties) - EBITDA margin relative to operating revenue of 40%-41% (2016: 41%) - Capex of CNY1.2 billion-1.5 billion per year (2016: CNY448 million) - 45% dividend payout rate (2016: 130% including special dividends). RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - The Outlook will be revised to Stable if the Negative triggers are not breached in the next 12 months Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Payables adjusted net leverage (adjusted for lease, payables and customer deposits) being sustained above 6.0x (2015: 5.9x) - Further decline in operating revenues and gross sales proceeds - Failure to generate planned cash flows from property sale. LIQUIDITY Sufficient Liquidity: Golden Eagle had over CNY5 billion of cash and short-term investments and only CNY171 million of current bank loans as of end-December 2016. Short-term liquidity should not be an issue, while the company will still need to repay or refinance its CNY5.2 billion syndicated loan maturing in 2018. Fitch expects Golden Eagle to have sufficient funding in order to potentially repay this loan, as the company issued CNY1.5 billion in medium-term notes in September 2016 and has available credit facilities over CNY5 billion as well as a high value of property assets which could be used as collateral to secure additional debt funding. Contact: Primary Analyst Cathy Chao Associate Director +852 2263 9967 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Yee Man Chin Director +852 2263 9696 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Summary of Financial Statement Adjustments - Leases: Fitch has adjusted the debt by adding 8x annual fixed operating lease expenses (2015: fixed rental expense of CNY32 million) - Payables Adjusted Net Leverage: Fitch subtracts customer prepayments and 85% of trade payables from readily available cash. This metric applies mainly to Chinese department stores operating under the concessionaire model. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1021739 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT <a href="https://www.fitchratings.com">WWW.FITCHRATINGS.COM.. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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