RPT-Fitch affirms China's Intime at 'BB'; outlook stable

Fri May 3, 2013 3:53am EDT

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May 3 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed China-based department stores operator Intime Department Stores (Group) Limited's (Intime) Long-Term Foreign- and Local Currency Issuer Default Ratings (IDR) at 'BB' respectively. The Outlook is Stable. The agency has also affirmed Intime's local currency senior unsecured rating at 'BB' and its offshore CNY senior unsecured notes at 'BB'.

Key Rating Drivers

Strong presence in Zhejiang: Intime achieved same-store-sales growth of 9% despite an industry-wide difficult year of 2012. This was higher than most other listed peers', due to its young store network and dominance in Zhejiang province, especially in Hangzhou. It is the largest department store operator in the province with 19 stores, with a further 11 stores in other parts of China. The rating is, however, held back by Intime's weaker financials compared with its 'BBB' category peers and by concentration in Zhejiang province.

Low-risk concessionaire model: More than 90% of Intime's gross sales proceeds are derived from concessionaire sales. The concessionaire model lowers both inventory risks and working-capital requirements; it enables the company to receive upfront cash payment compared with a direct sales model. The risk of losing strong concessionaires is mitigated by Intime's strong bargaining power, in light of its strong presence in the Zhejiang regional market.

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.

Weaker liquidity: Intime's trade payables to concessionaires and customer advances at end- 2012 of CNY3.1bn exceeded its unrestricted cash balance of CNY2.5bn. In addition, the company faces an upcoming maturing CNY1.6bn convertible bond in October 2013. Moreover, Fitch expects the company to generate negative free cash flow in 2013 due to its high capex plans. Mitigants include an expected inflow of CNY500m from asset disposals and the company's strong access to domestic bank funding.

Capex weakens credit metrics: Intime targets to open about seven new stores per annum in 2013 and 2014. This will likely weaken Intime's funds from operations (FFO) fixed-charge coverage (2012: 3.0x) and FFO adjusted net leverage (2012: 4.6x), which are already weaker than that of most listed peers. These metrics are likely to improve when new stores start contributing meaningfully to profits or when the company slows its expansion. To its credit, the company has demonstrated flexibility in deferring capex in 2012 when industry conditions dampened.

In calculating net leverage metrics, Fitch nets off payables to concessionaires and advances from customers from cash, consistent with the approach taken with other industry peers. In addition, Fitch estimates that only 70% of the company's reported lease payments are fixed in nature, which has been adjusted for in Fitch's calculation of lease capitalisation.

Rating Sensitivities

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

-Loss of dominant market position in Zhejiang or deviation from existing concessionaire model

-FFO fixed charge coverage falling below 2.5x on a sustained basis

-FFO adjusted net leverage rising above 5x on a sustained basis

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- FFO fixed charge coverage rising above 3.5x on a sustained basis

- FFO adjusted net leverage falling below 3.5x on a sustained basis

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