HONG KONG, 14 May 2019. Pengyuan International has assigned a first-time global scale long-term issuer credit rating (LTICR) of ‘B+’ to Maoye International Holdings Ltd (Maoye). The outlook is stable.

Maoye is an established department store chain in China, which operates and manages 57 stores with an aggregate gross floor area of approximately 2.89 million square meters at the end of 2018. Department store contributed 82% and property development contributed 14% of total revenue in 2018.

Maoye’s rating reflects its strong market position, high quality assets, and improving financial profile. On the other hand, Maoye ’s rating is also constrained by its weak liquidity, smaller scale and high business concentration in retail market.

KEY RATING RATIONALES

Credit Strengths

Established department store. Started in 1990s, Maoye is an established department store operator in China, with leading market position in southern China. Targeting the medium- to high-end segment of the retail market, Maoye owns and operates a few famous department store brands. Benefited from its strong market position, the Company has grown its customer base and established strong relationships with merchandise suppliers in China.

Improving profitability. Maoye has improved its EBITDA margin to 43% in 2018 from 36% in 2016 thanks to its better operating efficiencies in department store segment and strong sales in property development segment. The Company has optimized its revenue composition by increasing the rental’s contribution to the total department store revenue to 15% in 2018, from 6% in 2015. In addition, property contracted sales has increased 81% year-on-year in 2018. We expect EBITDA margin to maintain above 40% every year in 2019 to 2021. In addition, Maoye has abundant new store pipeline with four stores to open in 2019 and two to open in 2020. We expect the EBITDA to grow 28% and 9% in 2019 and 2020 respectively.

Deleveraging trend and improved debt structure. Thanks to the lower capital expenditure (capex) and improved EBITDA, Maoye’s financial leverage has continuously decreased since 2015. Debt to EBITDA ratio reduced to 4.5x in 2018 from 7x in 2017 and 8.1x in 2016. We expect the deleveraging trend to continue and the Company will manage its capex below RMB 1 billion every year in 2019 and 2020. In addition to a lower leverage, Maoye has improved its debt structure by reducing the percentage of short-term debt to total debt to 39% in 2018 from 44% in 2017 and 56% in 2016.

High quality assets. Maoye owns a portfolio of valuable assets that can be easily liquidated in the market with a reasonable discount. The owned department stores are commercial properties with privileged locations in the first or second tier cities in China. The Company had RMB 7.5 billion properties available for sale and RMB 800 million liquid equity investments at the end of 2018. We believe Maoye’s asset-heavy business model and its high quality assets provide a source of stable cash flow in the long term and can help reduce the Company’s financial leverage when needed.

 

Credit Weaknesses

Weak liquidity. We assess Maoye’s liquidity is weak. We estimate Maoye’s 12-months forward cash flow liquidity ratio is 1.08x. The Company had non-restricted cash balance of RMB 3.3 billion at the end of 2018, compared to its short-term debt of RMB 7 billion. In addition, the Company has some liquid equity investments and properties available for sale that can provide additional source of liquidity to the company when needed. We expect the Company’s liquidity condition to improve as it reduces short-term debt.

High concentration risk. Maoye has majority of its revenue generated from the retail business in China, with department store contributing 82% of its revenue and 85% of its EBITDA in 2018. The Company’s financial performances are largely influenced by the cyclicality of the Chinese economy and its retail market.

Smaller scale. Maoye has a relatively smaller scale in terms of recognized revenue, compared to the peers within or outside the retail industry. Maoye reported a revenue of RMB 7.8 billion in 2018 and we estimate the Company’s revenue to be in a range of RMB 8.5 billion to RMB 9.5 billion during period of 2019 and 2020.

RATING OUTLOOK

The stable outlook reflects our expectation that the Company will be able to continuously improve its financial profile and, in the meantime, to expand its business operations and strengthen its market position.

We would consider a downgrade action if the Company’s credit profile deteriorates substantially, which could be caused by: 1) financial leverage increases materially to a prolonged period, which may be evidenced by debt to EBITDA ratio increasing to above 5x and EBITDA interest coverage decreasing to below 2x; 2) liquidity condition deteriorates to a level that we assess the Company may face a liquidity crunch pressure.

 

We would consider an upgrade action if the Company’s credit profile improves substantially, which could be caused by: 1) financial leverage decreases noticeably on a sustained basis, which may be evidenced by debt to EBITDA ratio decreasing to below 3.5x and EBITDA interest coverage improving to above 5x; 2) material improvements of operating scales and market position.

 

 

 

ANALYSTS CONTACT

MEDIA CONTACT

OTHER ENQUIRIES

Primary Analyst

Winnie Guo

+852 3615   8344

winnie.guo@pyrating.com

 

Secondary Analyst

Christine   Zhang

+852 3615   8276

christine.zhang@pyrating.com

 

 

Committee Chair

Tony Tang

+852 3615   8278

tony.tang@pyrating.com

 

media@pyrating.com

contact@pyrating.com

 

Date of Relevant Rating Committee: 10 May 2019

Additional information is available on www.pyrating.com

Related Criteria

General Corporate Rating Criteria (15 March 2019)

Industry Credit Guidelines Chinese Homebuilders and Property Developers (31 August 2018)

Corporate Financial Adjustments and Ratio Definitions (7 May 2018)


 

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