SEOUL/HONG KONG, May 05 (Fitch) Fitch Ratings has published China - based
department store operator Golden Eagle Retail Group Limited's (Golden Eagle)
Long-Term Issuer Default Rating (IDR) and senior unsecured debt rating of
'BBB-'. The Outlook is Stable.
Fitch has also assigned Golden Eagle's proposed USD notes an expected senior
unsecured rating of 'BBB-(EXP)'. The final rating is contingent upon the receipt
of final documents conforming to information already received.
The notes are rated at the same level as Golden Eagle's senior unsecured rating
of 'BBB-' as they will represent direct, unconditional, unsecured and
unsubordinated obligations of the company.
Key Rating Drivers
Strong market presence in Jiangsu: Golden Eagle is the leading department store
operator in the Jiangsu province, which has the highest GDP per capita and
retail sales per capita growth among the Chinese provinces. Its dominance in
Jiangsu and strong focus on tier 2 and below cities have enabled the company to
post high growth and store productivity. As a result, the company has the
highest concessionaire rate and profit margins among rated industry peers.
Self-owned property strategy: Nearly 60% of total gross floor area of its stores
is self- owned. The high proportion of self-owned stores enables the company to
post higher profitability than similarly rated peers due to lower rental
expenses, and mitigates the risk of rising rental expenses. It also enables the
company to have stronger credit metrics than similarly rated peers with a lower
self-owned store ratio.
Low leverage: With a prudent historical expansion track record, the company has
maintained a strong balance sheet and net cash position. Fitch expects the net
cash position to narrow and net rental adjusted debt to turn positive over the
next two to three years with aggressive expansion plans. However, Fitch expects
the rental adjusted net leverage ratio to be close to zero in the coming years.
The company's strong cash position can also be attributed to its concessionaire
business model and the reliance on prepaid card (gift voucher sales) which
generates negative working capital. Adjusting for payables (trade payables plus
customer deposits), Fitch expect the company's net leverage to exceed 2x from
2013 onwards but to stabilise at around 2x thereafter.
High but flexible capex: Golden Eagle is in an expansionary phase and plans to
open on average five stores a year from 2014-2016. As a result, Fitch expects
capex to double to CNY2bn in 2013 and remain above this level until 2016. The
company also expects to post negative free cash flow until 2014. However, the
company has flexibility to its capex according to the market environment.
High geographical & store concentration risks: The rating is constrained by its
high reliance on the flagship store and on the Jiangsu province. The flagship
store accounted for 23% of gross sales proceeds (GSP) and its top five stores
represented nearly 60% of GSP in 2012. Furthermore, the company derives nearly
80% of its GSP and nearly 90% of operating profit from the Jiangsu province.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include
- Payables (trade payables plus customer deposits) adjusted net debt/EBITDAR
being sustained above 2.5x
- EBITDA margin being sustained below 40% (2012: 48.5%)
Positive: Positive rating action is not envisaged in the short to medium term,
unless it is able to reduce dependence on its flagship store and on the Jiangsu
Jeong Min Pak
Fitch Ratings Limited, Korea Branch
9F Kyobo Securities Building
26-4 Youido-Dong, Youngdeungpo-Gu
Media Relations: Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email:
Additional information is available on www.fitchratings.com
Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are
available on www.fitchratings.com.
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Corporate Rating Methodology
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