RPT-Fitch affirms Lifestyle at 'BBB-', outlook stable
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May 3 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Lifestyle International Holdings Limited's (Lifestyle) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'BBB-' with a Stable Outlook. The agency also affirmed Lifestyle's foreign currency senior unsecured rating at 'BBB-'.
Key Rating Drivers
Strong Hong Kong (HK) flagship asset: Causeway Bay (CWB) Sogo continues to be the key revenue source for Lifestyle, contributing over 70% of gross revenue or EBITDA in 2012. CWB Sogo is the largest department store in HK and the key beneficiary of HK's buoyant retail sales over the past few years. Although the retail sales growth at CWB Sogo declined from 23.2% in 2011 to 7.4% in 2012, it is in line with the HK retail sales growth in the same period (2011: +24.8%; 2012: +9.8%). HK's overall retail sales growth recently improved, up 13.9% yoy in 1Q13. We expect CWB Sogo to deliver full year sales growth in the high single-digit range in 2013. Fitch also forecasts CWB Sogo to contribute 70-80% of revenue & EBITDA to Lifestyle in the next three years.
Limited impact from TST Sogo closure: The lease at Tsim Sha Tsui (TST) Sogo will be terminated in Feb 2014. We believe the closure of TST Sogo will have limited downside risk to Lifestyle as TST Sogo only contributed to 5% of the firm's EBITDA in 2012.
Slow pace on revenue diversification: Although Lifestyle has entered China with department stores in Shanghai and second-tier cities, there is limited cash flow contribution to the company from these projects, except for Shanghai Jiuguang, which generated about 15% of the company's EBITDA. The company's limited diversification in revenue sources, a key rating constraint, is likely to continue in the near to medium term.
Strong liquidity: As of end-2012, Lifestyle had HK$8.3bn cash on hand and undrawn committed facilities of HK$2.1bn, compared to short term debt of only HK$1.2bn. Without significant capital expenditure plans and with strong cash flow from CWB Sogo, we expect FCF in the next three years to be positive. Adequate headroom on financial metrics: We expect Lifestyle to be able to maintain funds flow from operations (FFO) fixed charge coverage at 3.5-4.0x (2012: 4.9x) and FFO adjusted net leverage at around 1.5x (2012: 2.2x) in the next three years, leaving adequate headroom at the current rating level.
Negative: Future developments that may, individually or collectively, lead to negative rating action include-
-Accelerated or more aggressive expansion in China which is different from the management's plan
-Significant changes on its business model, e.g. moving away from the concession model
-FFO fixed-charge coverage is below 3x and FFO net leverage stays above 2.5x on a sustained basis.
Positive: Although no positive rating action is envisaged over the next 12-18 months, future developments that may, individually or collectively, lead to positive rating action include-
-Material diversification away from CWB Sogo without any loss in profitability
-FFO fixed-charge coverage above 5.5x and FFO net leverage stays below 1.0x on a sustained basis
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