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May 15 (The following statement was released by the rating agency)
Fitch Ratings has assigned China-based department store operator Golden Eagle Retail Group Limited's (Golden Eagle) USD400m notes due 2023 a final rating of 'BBB-'. The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 6 May 2013.
The notes are rated at the same level as Golden Eagle's senior unsecured rating of 'BBB-' as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.
Key Rating Drivers
Strong market presence in Jiangsu: Golden Eagle is the leading department store operator in Jiangsu province, which has the highest GDP per capita and retail sales per capita growth among Chinese provinces. Its dominance in Jiangsu and strong focus on tier 2 and below cities have enabled the company to post high growth and store productivity. As a result, the company has the highest concessionaire rate and profit margins among rated industry peers.
Self-owned property strategy: Nearly 60% of total gross floor area of its stores is self- owned. The high proportion of self-owned stores enables the company to post higher profitability than similarly rated peers due to lower rental expenses, and mitigates the risk of rising rental expenses. It also enables the company to have stronger credit metrics than similarly rated peers with a lower self-owned store ratio.
Low leverage: With a prudent expansion track record, the company has maintained a strong balance sheet and net cash position. Fitch expects the net cash position to narrow and net rental-adjusted debt to turn positive over the next two to three years with aggressive expansion plans. However, Fitch expects the rental-adjusted net leverage ratio to be close to zero in the coming years. The company's strong cash position can also be attributed to its concessionaire business model and the reliance on prepaid card (gift voucher sales) which generates negative working capital. Adjusting for payables (trade payables plus customer deposits), Fitch expect the company's net leverage to exceed 2x from 2013 onwards but to stabilise at around 2x thereafter.
High but flexible capex: Golden Eagle is in an expansionary phase and plans to open on average five stores a year from 2014-2016. As a result, Fitch expects capex to double to CNY2bn in 2013 and remain above this level until 2016. The company also expects to post negative free cash flow until 2014. However, the company has flexibility to adjust its capex according to the market environment. High geographical & store concentration risks: The rating is constrained by its reliance on the flagship store and on Jiangsu province. The flagship store accounted for 23% of gross sales proceeds (GSP) and its top five stores represented nearly 60% of GSP in 2012. Furthermore, the company derives nearly 80% of its GSP and nearly 90% of operating profit from Jiangsu province.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- Payables (trade payables plus customer deposits) adjusted net debt/EBITDAR being sustained above 2.5x
- EBITDA margin being sustained below 40% (2012: 48.5%)
Positive: Positive rating action is not envisaged in the short to medium term, unless the company is able to reduce dependence on its flagship store and on Jiangsu province.
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