Fitch Affirms China's Parkson Retail at 'BBB-'; Outlook Stable

Wed Mar 27, 2013 11:46pm EDT

(The following statement was released by the rating agency) SEOUL, March 27 (Fitch) Fitch Ratings has affirmed China-based department store operator Parkson Retail Group (Parkson)'s Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook is Stable. Key Rating Drivers Weak 2012 performance: A weak macro environment and the company's mature store network, which leaves it more exposed to competition, have affected the company's 2012 performance. Parkson's business was further hurt by remodelling and subway construction work in key stores. As a result, the company's same store sales (SSS) growth was nearly flat at 0.4% in 2012 and is also estimated to be flat in Q113. But we expect Parkson's performance to improve from Q2, leading to modest mid-single digit SSS growth for 2013. Little rating headroom: With almost flat SSS growth, start-up costs for new stores and higher rental expenses which include one off increases, Parkson's EBITDA fell by nearly 20% to CNY1.4bn in 2012. As a result, FFO fixed charge coverage ratio deteriorated to 2.2x in 2012, and is expected to remain below Fitch's negative guideline of 2.5x for 2013 as well. We expect credit metrics to show improvement from 2014 with Y/Y sales picking up from Q213 but see little headroom at the current rating level. Well diversified nationwide network: However, Parkson's ratings are supported by its well established and geographically diversified presence in China across 34 cities. Its top 10 stores accounted for approximately 50% of total gross sales proceeds (GSP), compared with nearly 80% for key listed industry peers. In Fitch's view, the relatively low concentration risk offsets the lower growth that Parkson's older stores generate compared with its industry peers. The company's revenue is also less reliant on gift voucher sales compared with industry peers. Strong financial position: Parkson's ratings are also supported by the company's prudent financial policy, evidenced by its healthy balance sheet and cash position. As at December 2012, the company had cash and cash equivalent of CNY5.1bn, well exceeding its trade payables and customer deposits of CNY3.2bn. As of today the company's total debt is USD450m which matures mid to late 2013 and the company is working on refinancing plans. Fitch believes refinancing risk is not an issue and it is well mitigated by the company's strong financial position. Capex high but flexible: The company is still in an expansionary mode but it has scaled back its expansion plans from 2H13. Additional opportunistic acquisitions are likely to put pressure on the company's cash flow but as evidenced in 2012, it has the flexibility to adjust its capex by delaying store openings and we believe it will likely do so depending on the market environment. The risk is further mitigated by the company's strong cash position. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to negative rating action include - FFO fixed charge coverage lower than 2.5x on a sustained basis - Sustained negative free cash flow - Same store sales growth of less than 5% - Failure to refinance debt maturing in 2013 Positive: Future developments that may, individually or collectively, lead to positive rating action include - FFO fixed charge coverage greater than 4.0x on a sustained basis - Sustained positive free cash flow Contact: Primary Analyst Jeong Min Pak Senior Director +82-2-3278-8360 Fitch Ratings Limited, Korea Branch 9F Kyobo Securities Building 26-4 Youido-Dong, Youngdeungpo-Gu Seoul Secondary Analyst Michelle Leong Director +852- 2263-9229 Committee Chair 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 at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, are available on www.fitchratings.com. Applicable Criteria and Related Research Corporate Rating Methodology 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. 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