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April 1 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings says investments by Intime Retail (Group) Company Limited’s (Intime, BB/Negative) new strategic shareholder and bondholder, Alibaba Group Holding Limited (Alibaba), strengthen Intime’s capability to expand its online-to-offline (O2O) business while providing long-term funding source for the company’s on-going expansion needs.
Intime’s outlook remains negative, reflecting the company’s high leverage following a period of high capex. The timing of Intime’s deleveraging remains uncertain amid a still weak operating environment and an above-than-peers capital expenditure plan (CNY1.5-2bn per annum) to expand its store network over the next 12-18 months.
The partnership with Alibaba allows Intime to tap into the former’s technical capabilities to expand its O2O business). Fitch believes such collaboration would benefit its operations over the longer term as the partnership is still at initiation stage. The immediate cash proceeds of CNY5.37bn from the proposed share issuance (CNY1.66bn) and convertible bonds (CNY3.71bn) to Alibaba enhance Intime’s liquidity position and provide long-term funding for the company’s expansion.
Operationally, Intime faced slower growth in 2013 amid weak buying sentiment and stiff competition from e-commerce and other shopping malls. Its same store sales growth (SSSG) was 8% (2012: 9.1%) while total gross sales grew 12.6% (2012: 19.8%) to CNY15.69bn. Such growth rate is still more favourable than most of its rated-peers due to its younger store network as well as leading position in the Zhejiang province. The operating environment for 2014 is still weak, which may dampen the company’s efforts to increase its sales and lengthen the payback period for its new investments.
Intime generated negative free cash flow for 2013, with estimated payables adjusted FFO-net leverage still high at 5.61x (H113: 5.57x) mainly due to CNY2.6bn capex spending on land acquisitions and outlet expansion. Intime’s ongoing effort to divest non-core assets, growing EBITDA and slowing capex would be key factors driving its deleveraging. The company has substantial non-core assets of CNY1.39bn at end-2013, though the timing of the divestments is still subjected to market conditions and the targeted investment return sought by Intime.
Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted net leverage rising above 4.5x on a sustained basis
- generating negative FCF on a sustained basis
As the current Rating is on Negative Outlook, Fitch’s sensitivities do not currently anticipate developments, individually or collectively, with a material likelihood of leading to a rating upgrade. The Outlook will be revised to Stable if:
- FFO adjusted net leverage trends lower towards 4.5x in 2014; and
-neutral FCF is being generated on a sustained basis