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Fitch Places Hengdeli on Watch Negative after Proposed Disposal
January 6, 2017 / 10:07 AM / 10 months ago

Fitch Places Hengdeli on Watch Negative after Proposed Disposal

(The following statement was released by the rating agency) HONG KONG, January 06 (Fitch) Fitch Ratings has placed China-based watch retailer Hengdeli Holdings Limited's (Hengdeli) Long-Term Issuer Default Rating (IDR) of 'B+' on Rating Watch Negative (RWN). The senior unsecured rating of 'B+' with Recovery Rating of 'RR4' has also been placed on RWN. The rating actions follow Hengdeli's proposal to dispose its core operations to its founder and chairman. The company plans to use most of the proceeds from the disposal to repay nearly all of the remaining businesses' debt. The operations that remain should the disposal be completed will not warrant a 'B+' rating. KEY RATING DRIVERS Substantial Disposal Proposed: Hengdeli on 30 December 2016 announced it has agreed to sell wholly owned subsidiary Xinyu Group and its 75.54%-owned equity interest in Harvest Max to the company's founder and chairman Mr. Zhang Yuping. Xinyu Group represents the company's retail and wholesale operations in China and Harvest Max is mainly engaged in selling jewellery and low- to mid-end watches in Hong Kong. The two subsidiaries accounted for 80% of Hengdeli's revenue in 2015. Bonds to be Redeemed: Hengdeli expects to receive a net cash inflow of CNY5.8bn should the sale be completed. The company plans to use approximately 55% of the proceeds to repay the CNY3.2bn of outstanding debt of the remaining businesses, and the remainder for special dividend payouts, general working capital and business development of the retail business in Hong Kong and Taiwan, and potential expansion in overseas markets. The company is expecting to be almost debt-free after the disposal is completed. Scale of Operations Diminished: If the proposed transaction is completed, Hengdeli will be left with the Hong Kong and Taiwan watch retail business and the China watch accessories manufacturing operation, together accounted for just 20% of 2015 revenue. The disposal will greatly reduce Hengdeli's interest expense, but the operating scale will be much smaller. In addition, Hengdeli's market share in Swiss watch retailing in Hong Kong and Taiwan is smaller than that in China (over 35%). KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Lower gross margins for different business segments in 2016-2019 compared with 2015 levels - EBITDA margin of 5.3%-6.7% in 2016-2019 - Annual capex plus acquisition budget of about CNY150m RATING SENSITIVITIES Fitch is likely to take negative rating action if the proposed disposal of Xinyu Group and Harvest Max receives approval from shareholders at an extraordinary general meeting and is completed. If the disposal is not completed, Fitch will review the rating after determining management's intentions for the company's holding structure. LIQUIDITY Adequate Liquidity: Hengdeli maintains sufficient cash of CNY2.1bn and unutilised bank facilities of over CNY4bn to cover its current borrowings of CNY2.2bn at end-June 2016. 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 Yi Zhang Analyst +86 21 5097 3390 Committee Chairperson Kalai Pillay Senior Director +65 6796 7221 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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