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May 16 (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 asset, prudent expansion: Lifestyle enjoys stable revenue from its flagship Causeway Bay (CWB) Sogo property, which provides strong support to the company's cash-flow in the event of an economic down-cycle. CWB Sogo generated about HKD9.1bn sales proceeds in 2013, contributing to 66% of the company's sales. Lifestyle is also prudent in its expansion in China without leveraging up significantly in recent years. Hence, it has a robust balance sheet that is able to withstand any economic stress.
Disciplined financial management: Although the slowing retail sales environment is unfavourable to Lifestyle, the company's disciplined financial policy enables it to stay comfortably at the 'BBB-' rating level. Lifestyle acquired the Shanghai Zhabei land parcel in end-2011 when the land price was lower, and has not since acquired any projects in China. It had a low funds from operations (FFO) adjusted net leverage of 1.7x and positive free cash flow (FCF) in 2013. We expect Lifestyle to maintain positive FCF in the next few years, assuming no further acquisitions are made.
HK sales growth moderating: We expect sales growth at CWB Sogo to moderate to low-single-digits in 2014, after growing at about 7% each year in 2012-2013. The weaker sales growth forecast is driven by the slower growth in China, a frugality campaign by the Chinese government to rein in spending and a subdued residential property market in Hong Kong. We expect CWB Sogo to register the weakest sales growth this year since 2009.
No recovery signs on China sales: We expect sales at Lifestyle's China stores to remain weak in 2014. Department store operators in China still face declining or negative sales growth in 1Q14. The emergence of e-commerce, the crack-down on corruption and the slowing property market continued to hit sales performance. We expect flat sales growth at the company's Shanghai Jiuguang department store in 2014. As Shanghai Jiuguang has housed more foreign quality brands, it may still outperform other competitors amid the retail sales slowdown.
Takes time ramping up new TST store: Lifestyle will open its new store in Hong Kong's Tsim Sha Tsui (TST) district in 4Q14. It takes time to generate the same sales proceeds as the old store. We estimate that the new store will be profitable in 2016. The loss of cash flow to Lifestyle after the old store closure is manageable, because it only contributed to 7% of the company's sales proceeds in 2013. Besides, sales at its Suzhou Jiuguang department store have almost caught up with the old TST store.
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 to its business model, e.g. moving away from the concession model
- FFO fixed-charge coverage is below 3.0x 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