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Fitch: Hengdeli Rating Still Hinges on Disposal Despite Better Sales
April 6, 2017 / 11:42 PM / 6 months ago

Fitch: Hengdeli Rating Still Hinges on Disposal Despite Better Sales

(The following statement was released by the rating agency) HONG KONG, April 06 (Fitch) Hengdeli Holdings Limited's 'B+' ratings, which are on Rating Watch Negative, will still depend on whether it gains the approval of independent shareholders to dispose of its core operations, even though the company reported an improvement in retail sales in 2H16, Fitch Ratings says. The company said as it released its 2016 financial results that it has scheduled an extraordinary general meeting (EGM) on 25 April and if the plan is approved, the transaction is likely to be completed before 30 June. Fitch will resolve the Rating Watch Negative on Hengdeli's ratings on the outcome of the EGM. Fitch placed Hengdeli on Rating Watch Negative in January 2017 following Hengdeli's proposal to dispose a large portion of its core operations, Xinyu Group and Harvest Max, to its founder and chairman Mr. Zhang Yuping. Should the disposal be approved and completed, it would inject abundant liquidity that Hengdeli is expected to use to repay nearly all of the remaining business's debt, but at the cost of the loss of its position as the market leader in the retailing of Swiss watches in China and a severe shrinkage in operating scale. Fitch estimates the size of the remaining group would have been approximately CNY110m EBITDA in 2015 on a pro forma basis, representing less than 20% of the original consolidated group, which will not warrant a 'B+' rating. If the sale is not approved, the company will continue to actively search for buyers and expects to dispose of either the equity interest or assets of Harvest Max within 2017. Hengdeli said revenue from its continuing operations (excluding Harvest Max) rose 1% in 2H16 from the previous half-year, but declined 4% yoy. The improvement in luxury demand is consistent with observations from other retailers starting in 4Q16, driven by a wealth effect from higher property prices, narrower gaps between domestic and international prices and a curb on overseas purchases EBITDA margin for the continuing operations declined slightly in 2016 due to lower gross margin in Hong Kong from inventory clearance, but distribution costs and administrative expenses was maintained at a stable level of 18% relative to sales. With stringent efforts by the company to reduce inventory, inventory days has also decreased to 230 from a peak of 248 in 2015. Contact: Cathy Chao Associate Director +852 2263 9967 Fitch (Hong Kong) Limited 19F Man Yee Building 68 Des Voeux Road Central Hong Kong Yee Man Chin Director +852 2263 9696 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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