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Feb 26 (The following statement was released by the rating agency)
Fitch Ratings has downgraded China-based department store operator Parkson Retail Group Limited's (Parkson) Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB' from 'BB+'. The Outlook is Negative.
The downgrade reflects the deterioration in Parkson's credit metrics for the medium-term arising from weaker sales growth and profitability amid a challenging operating environment. The Negative Outlook reflects the continued pressure over the next 12-24 months on Parkson's performance from the still-weak retail sentiment in China, stiff competition and start-up losses for its existing and upcoming new stores.
KEY RATING DRIVERS
Newer Stores Underperformed. Parkson's 2H13 earnings continued to be hurt by weak retail sentiment, the austerity drive by the Chinese government and stiff competition from peers as well as other retail formats. Out of the company's 57 stores, 21, which mainly opened after 2010, have yet to break even. Parkson's gross sales proceeds increased by just 4.3% to CNY17.48bn in 2013, hampered by renovation works at its flagship store in Shanghai, while same-store sales contracted by 1.8%. Higher staff costs and rental sent EBITDA down by 32% to CNY961m for 2013. Fitch expects weak retail sentiment to persist with the overall industry registering single-digit growth in sales for 2014.
Medium-Term Profitability Squeezed: Fitch expects Parkson's profitability to continue to come under pressure because it plans to open 11 more new stores, increasing its total gross floor area by 20% over the next 24 months. These new stores require at least three years to break even while merchandise gross margin for new stores are generally lower compared with that for mature stores. Any recovery in profitability would be driven by Parkson's ability to increase sales productivity across its stores, which is challenging under current environment.
Weak Performance, Capex Delay Deleveraging: Parkson's weak performance and higher rental obligations resulted in the sharp deterioration of its credit metrics for 2013, even though it had no significant new borrowings in 2H13. The company's payables adjusted FFO net leverage rose to 5.3x at end-2013 from 3.8x a year earlier and FFO fixed charge cover fell to 1.52x from 2x a year earlier. The start-up losses from the new stores, about CNY2bn of planned capex for the next two years and dividend distribution are likely to hinder rapid deleveraging. Fitch expects Parkson's adjusted FFO net leverage to hover at 5x in 2014 before recovering to around 4.5x in 2016.
Nationwide Presence: Parkson's well-established and geographically diversified presence in China across 37 cities supports its rating. Its top five stores accounted for 30% of gross sales proceeds, compared with around 60% for rated major peers. Parkson's low concentration risk also partly offsets the lower sales growth at its older stores relative to its key competitors.
Healthy Liquidity: Parkson's rating is still supported by its cash-generative concessionary model and its healthy liquidity position. Parkson has no short-term borrowings and maintains cash and liquid investments of CNY4.8bn. Parkson would also be able to support its planned capex for the next two years using internal cash.
Management Changes Add Uncertainty: The resignations of Parkson's CEO effective 1 March 2014 and CFO from 30 June 2013 increases the uncertainty in terms of strategic planning and could delay the execution of a turnaround plan. The company will be led by an interim CEO, Mr Chong Sui Hong, who has more than 18 years' experience with Parkson, while it seeks to appoint a new CEO within the next six months.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
-FFO adjusted net leverage sustained above 5x
-Deterioration in fixed charge coverage to below 1.5 times.
The Outlook will be revised to Stable if:
-FFO adjusted net leverage sustained below 5x
-Neutral FCF is being generated on a sustained basis
-Maintaining fixed charge coverage above 1.5 times.