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Fitch Affirms China's Golden Eagle at 'BBB-'; Outlook Stable
September 4, 2014 / 6:37 AM / 3 years ago

Fitch Affirms China's Golden Eagle at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, September 04 (Fitch) Fitch Ratings has affirmed China-based department store operator Golden Eagle Retail Group's (Golden Eagle) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at BBB-. The Outlook is Stable. KEY RATING DRIVERS Capital Management Drives Deleveraging: Golden Eagle's adjusted funds from operations (FFO) net leverage (adjusted for lease, payables, and customer deposits) rose to 3.2x for the last twelve months ended June 2014 (2013: 2.3x) due to substantial share buybacks for the past 18 months and weaker performance. However, the company's concessionaire sales model, gradual improvement among its young stores and contribution from its newly renovated Nanjing-based Xinjiekou store support steady operating cash flow generation. Share buybacks going forward will likely be minimal as the company is nearing its minimum public float requirement. As a result, deleveraging will depend on its capex and dividend distribution policies, both of which are highly flexible. Fitch estimates that the company's FFO adjusted net leverage will remain just below 3x if it maintains neutral free cash flow post-dividends, which it has achieved in the past. Weak Environment, Renovation Affects 1H14: Golden Eagle's gross sales proceeds (GSP) for 1H14 contracted by 7.9% y-o-y to CNY7.9bn (2013: 3.1%) while same-store sales contracted by 6.7% for 1H14 (2013: 2.9%). Sales were affected by the renovation of its Xinjiekou store and higher base impact from a surge in demand for gold and jewellery last year. Excluding these factors, Golden Eagle's GSP and same-store sales were stable. For 2H14, Golden Eagle's sales may benefit from the reopening of its flagship store as well as a gradual sales increase among its newer stores. However, Fitch does not expect a strong recovery due to the on-going anti-corruption campaign in China, slower economic growth, and stiff competition. Margins Retraced, but Still Resilient: Golden Eagle's EBITDA margin narrowed slightly to 45.5% in 1H14 (1H13: 47.5%) given higher staff costs, as well as continued low productivity among its newer stores. Fitch expects Golden Eagle's EBITDA margin to stay stable above 43%, a level that is still higher than peers, after factoring lower margins from newer stores. The majority of the company's stores which opened after 2011 and are mainly located outside Nanjing, have yet to contribute meaningfully to its EBITDA. Fitch notes these stores mostly operate on a leased basis based on turnover rent. This has allowed Golden Eagle's to maintain lower operational leverage despite weaker performance. Leading Position in Jiangsu: Golden Eagle has maintained its position as the leading department store in Jiangsu. The company has increased lifestyle elements and has entered into exclusive arrangements in Nanjing with selected brands to improve its offerings. Fitch views such efforts positively as the company strengthens its positioning by providing retail experiences that cannot be fulfilled via e-commerce. Results of these initiatives, however, can only be translated into earnings improvement over the longer-term. Strong Financial Flexibility: The company's unrestricted cash and cash equivalents stayed robust at CNY4.9bn end-1H14 (end-2013: CNY5.9bn), sufficient to cover its short-term debt of CNY2.7bn (2013: nil) as well as near-term capex requirements. Golden Eagle's strategy of having full ownership of a majority of its store properties (60% of total stores) enables the company to control the progress of its new store openings, particularly during down cycles. Sales Concentrated in Jiangsu: Golden Eagle derived the majority of its earnings from Nanjing and the Jiangsu province. Its flagship store (Nanjing Xinjiekou) accounted for 21% of GSPs while its top five department stores contributed to about 60% of its GSP in 2013. Its single store concentration is likely to increase further following the expansion of Nanjing Xinjiekou Phase 2 earlier this year. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include - Adjusted FFO net leverage (adjusted for lease, payables, and customer deposits) being sustained above 3x - EBITDA margin being sustained below 40% - Sustained negative free cash flow Positive: Positive rating action is not envisaged in the short- to medium-term as the industry environment remains challenging. Contact: Primary Analyst Michelle Leong Associate Director +852 2263 9929 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Secondary Analyst Vicki Shen Associate Director +852 2263 9918 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: Additional information is available on Applicable criteria, "Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage", dated 28 May 2014 are available at Related Research: "2014 Outlook: Chinese Department Stores", dated 9 December 2013 Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here 2014 Outlook: Chinese Department Stores 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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