Hengdeli's Proposed Acquisition Does Not Affect Ratings

Fri Dec 13, 2013 3:23am EST

(The following statement was released by the rating agency) HONG KONG, December 13 (Fitch) Fitch Ratings says Hengdeli Holdings Limited's (BB+/Negative) proposed CNY469m acquisition of a company with eight retail stores in Nanchang has no immediate impact on Hengdeli's ratings. Of the total purchase consideration, Hengdeli paid CNY338.16m in 2012 and needs to pay only CNY131.32m more to complete the acquisition. Fitch expects Hengdeli to have sufficient liquidity to satisfy the remaining acquisition costs via internal funds. Hengdeli's Negative Outlook reflects the weaker operating environment for watch retailing in mainland China and the challenges the company will likely face in its strategy to expand in the mid-market segment. The proposed acquisition is in line with the company's strategy to expand in high-growth lower-tier cities, in this instance, Nanchang city. The acquisition of Shenzhen Feierpusi Electronics Company Limited also entails the purchase of some commercial properties in downtown Nanchang that the retailer uses for its operations. Hengdeli's management has confirmed that Shenzhen Feierpusi has no other material business activities aside from the abovementioned and has minimal outstanding borrowings as at end-September 2013. Hengdeli has CNY2.53bn in cash, CNY738.31m of short-term principal protected investments and over CNY2bn of unutilised bank facilities as at end-1H 2013. The company used CNY2.1bn for the early redemption of outstanding convertible bonds in October 2013. Hengdeli's performance for 1H 2013 was affected by overall weak consumer sentiment in mainland China, as shown in the 7.5% yoy contraction in same-store-sales in mainland China. Slower sales, higher inventory and increased investments in Harvest Max, a watch and jewellery subsidiary in Hong Kong, raised Hengdeli's FFO adjusted net leverage to 3x in 1H13 (2012: 2.5x). Fitch expects a mild recovery in the operating environment in 2014. Although Hengdeli has flexibility in capex its deleveraging will be driven primarily by inventory reduction and sustained sales recovery, the timing for which remains uncertain. Further deterioration in the operating environment or setbacks in its repositioning strategy may undermine or delay the recovery of the company's credit metrics. Future developments that may, individually or collectively, lead to negative rating action include: - Average inventory days sustained over 210 days (1H13: 225 days) - FFO net adjusted leverage sustained above 2.75x (1H13: 3x) - Continued decline in same-store sales in China (1H13: -7.5%) - EBITDA margin sustained below 10% (H113: 9.7%) The Outlook may be revised back to Stable if Hengdeli is able improve the metrics set out above. Contact: Michelle Leong Associate Director +852 2263 9929 Fitch (Hong Kong) Limited 28th Floor, Two Lippo Centre 89 Queensway, Hong Kong Vicki Shen Associate Director +852 2263 9918 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available at www.fitchratings.com. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.