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May 3 (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
-Significant changes on its business model, e.g. moving away from the concession
-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