May 14, 2015 / 10:12 AM / 2 years ago

Fitch Affirms Lifestyle at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, May 14 (Fitch) Fitch Ratings has affirmed Lifestyle International Holdings Limited's (Lifestyle) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook. The agency has also affirmed Lifestyle's foreign currency senior unsecured rating, the ratings of its USD500m 5.25% senior notes due 2017 and USD300m 4.25% senior notes due 2022 at 'BBB-'. KEY RATING DRIVERS HK business remains resilient: Causeway Bay (CWB) SOGO currently contributes more than 70% and 80% of Lifestyle's sales and EBITDA. It registered same store sales growth (SSSG) of 3.4% compared with the industry's 1.4% in 2014. Management indicated a negative SSSG for CWB SOGO in 1Q15, caused by a continuous drop in tourist spending and weak local demand. We expect the store to keep outperforming the industry because of its prime location and widespread recognition; however, SSSG may suffer from a low single digit drop in 2015. Lifestyle's Tsim Sha Tsui SOGO store was closed in Feb 2014 and reopened in Nov 2014. It also recently opened its supermarket and catering business in May. We expect the store to fully ramp up in 2015-2016, compensating for the slow-down in CWB SOGO. Mainland Chinese stores bottoming out: Mainland China now accounts for 27% of Lifestyle's total sales proceeds, 21% of revenue and 16% of EBITDA. The four stores at Shanghai, Suzhou, Dalian and Shenyang were under pressure in 2014 due to fierce competition and soft consumption demand. But the management saw positive SSSG in Shanghai, Suzhou and Shenyang stores in 1Q15, which started to gather momentum from 2H14. Healthy credit, conservative capex: Lifestyle maintained funds from operations (FFO) fixed charge coverage and FFO adjusted net leverage ratios comfortably at 4.03x and 1.54x in 2014. The Company had HKD8.3bn available cash at hand as of Dec 2014, enough to cover HKD8bn debt due in the next three years. Capex in 2015 will mainly focus on its Shanghai Zhabei Project, reaching HKD1bn in total, still conservative considering over HKD2bn EBITDA from the Group. Bond rating unaffected by refinancing: Given Lifestyle's strong financial position, Fitch expects Lifestyle to be able to successfully refinance or repay its syndicated loan secured by CWB SOGO and East Point Center, which will mature in 2016. Fitch doesn't expect the senior unsecured bond rating to be notched down, given its senior secured debt/EBITDA ratio is 1.7x and the refinancing will not affect this ratio. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include- - Accelerated or more aggressive expansion in China which is different from the management's plan - Significant changes to its business model, e.g. moving away from the concession model - FFO fixed-charge coverage is below 3.0x and FFO net leverage stays above 2.5x on a sustained basis - Senior unsecured debt will be notched down if senior secured debt / EBITDA >2x and unsecured assets/ unsecured debt <2x Positive: Although no positive rating action is envisaged over the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include- - Material diversification away from CWB Sogo without any loss in profitability - FFO fixed-charge coverage above 5.5x and FFO net leverage stays below 1.0x on a sustained basis Contact: Primary Analyst Vicki Shen Associate Director +852 2263 9918 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Center 89 Queensway, Hong Kong Secondary Analyst Chloe He Associate Director +852 2263 9967 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, Corporate Rating Methodology, dated 28 May 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Additional Disclosure Solicitation Status 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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