Fitch Affirms Golden Eagle at 'BB'; Outlook Stable

Golden Eagle Retail

11/06/2019 03:30

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-June 10: Fitch Ratings has affirmed China-based 
department store operator Golden Eagle Retail Group Limited's (Golden Eagle) 
Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BB'. The 
Outlook on the IDR is Stable. 

The affirmation reflects solid execution and stable performance in the retail 
operations, which should allow Golden Eagle to generate positive free cash flow 
and gradually deleverage. However, the company faces moderating growth in 
China's retail sales and a high level of competition from both online and 
offline retailers. 

KEY RATING DRIVERS

Stable Retail Operations: Golden Eagle's performance has been more resilient 
than peers in the past thanks to a high proportion of stores that it owns and 
continued investments in new store formats to meet customer demand. Gross sales 
proceeds increased by 10.2% in 2018, driven by property sales and strong growth 
from new stores. Same-store sales growth (SSSG) was flat year-on-year for 2018, 
implying SSSG turned negative in 2H18 from the 1.5% increase in 1H18 and 3% rise 
in 2017. However, overall sales were pushed up by strong growth from new stores 
opened in 2017, which were not included in SSSG. 

The retail environment remains challenging given the increasing competition from 
both online and offline retailers and rising trade tension between China and the 
US. Retail sales growth in China slumped to 16-year low in April 2019. However, 
Fitch expects Golden Eagle to be able to adapt to a changing environment as it 
has been adjusting its retail formats to stay relevant. 

Positive FCF Supports Deleverage: Fitch expects Golden Eagle to maintain 
positive free cash flow over the next few years, which will support 
deleveraging. Fitch estimates FFO adjusted net leverage will decline to 2.8x by 
2020 from 3.6x at end-2018, assuming a stable dividend payout rate and no share 
buybacks. This is a result of stable retail operations and sufficient cash 
inflow from property sales to cover property construction costs. Fitch expects 
Golden Eagle's capex to be manageable given a limited new store pipeline in 
2019-2020 and flexibility in spending as some of it is related to store upgrades 
and renovation. 

Increasing Revenue Diversification: Golden Eagle has added more lifestyle 
elements to its stores, such as healthcare, education and entertainment, as 
consumers look increasingly to lifestyle and experiential offerings. Stores in 
the format of lifestyle centres represented 74.1% of total gross floor area 
(GFA) at end-2018, compared with 58.6% at end-2015. The company has also 
enriched merchandise selection and service offerings and launched a variety of 
creative marketing campaigns to drive foot traffic. These initiatives should 
help Golden Eagle stay competitive and relevant amid intensifying competition. 

Fitch expects a change in the sales mix, as a result of the introduction of more 
lifestyle elements, to drive longer-term growth. Contribution from other revenue 
sources, such as direct sales (e.g. high-end supermarket) and rental income 
(e.g. restaurants), have increased to 58.8% of total revenue in 2018 from 54.3% 
in 2017. Most of these new revenue streams are important to Golden Eagle because 
they drive foot traffic growth. However, the company remains geographically 
concentrated, with the majority of revenue from Yangtze River Delta area.   

Stable Profitability:  Fitch expects profitability to remain stable or improve 
slightly in the short term as sales improve. Golden Eagle has been concentrating 
on increasing its operational efficiency and streamlining costs, which should 
support the financial profile. EBITDA margin (excluding property sales) expanded 
to 44.4% in 2018 from 42.2% in 2017. Change in the sales mix may eventually 
weigh on EBITDA margin, but Fitch expects the impact to be offset by improvement 
in the concessionaire business.  

Fire Outbreak Impact Limited: Fitch expects a fire at the building where Golden 
Eagle's Nanjing Xinjiekou Store is located to have only limited impact on 
revenue and net profit. The fire occurred on the ninth floor of the building, 
where a hotel that does not belong to Golden Eagle Group is located. The Nanjing 
Xinjiekou Store is one of Golden Eagle's largest revenue and net profit 
contributors, and it accounted for about 15% of the company's gross sales 
proceeds in 2018. Block A of the store has closed as a result of the fire, but 
Block B of the store continues to operate as usual. Management expects the 
damage caused by the fire to be covered by insurance and the responsible party.

DERIVATION SUMMARY

Golden Eagle's scale is generally smaller and its financial profile weaker than 
investment-grade global peers. Compared with Dillard's, Inc. (BBB-/Stable) for 
instance, Golden Eagle has a smaller store footprint, higher leverage and lower 
FCF generation, which justifies the two-notch differential. In Greater China, 
Lifestyle International Holdings Limited (BB+/Stable) is rated one notch higher 
than Golden Eagle due to the far more mature and stable retail market in Hong 
Kong compared with China. In addition, the property value of Lifestyle's main 
Causeway Bay store provides support to its rating. 

KEY ASSUMPTIONS

 Fitch's Key Assumptions Within Our Rating Case for the Issuer

- Low-single-digit growth in annual gross sales proceeds in 2019-2022, with mild 
growth in concessionaire sales complemented by higher growth in direct sales, 
rental and service income (2018: 4% growth, excluding sale of properties) 

-   Low-to-mid single digit growth in annual revenue in 2019-2022 (2018: 12% 
growth, excluding sale of properties) 

-  EBITDA margin relative to operating revenue of 43%-44% (2018: 44%) excluding 
contribution related to property development

-  Capex of CNY1.3 billion in 2019 and CNY0.7 billion a year thereafter (2018: 
CNY240 million, capex for projects under development is not included)

-    55% dividend payout rate annually (2018:55%)

RATING SENSITIVITIES

Developments that May, Individually or Collectively, Lead to Positive Rating 
Action

- Payables adjusted FFO net leverage (adjusted for lease, payables and customer 
deposits) sustained below 3.0x (2018: 3.6x) 

Developments that May, Individually or Collectively, Lead to Negative Rating 
Action

- Payables adjusted FFO net leverage (adjusted for lease, payables and customer 
deposits) sustained above 4.5x 

- EBITDA margin sustained below 40% (2018: 44%)

- Sustained negative free cash flow

LIQUIDITY

Robust Liquidity: Golden Eagle repaid its CNY4.8 billion equivalent syndicated 
loan maturing in April 2018 through a facility agreement, which has improved its 
liquidity position and extended its debt maturity profile. Golden Eagle had over 
CNY6 billion of cash and short-term investments as well as available unutilised 
banking facilities of CNY16 billion, which are sufficient to cover short-term 
liabilities of CNY1.7 billion. 

Contact: 

Primary Analyst

Crystal Guo

Associate Director

+852 2263 9608

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Cathy Chao

Director

+852 2263 9967

Committee Chairperson

Yee Man Chin

Senior Director

+852 2263 9696

Summary of Financial Statement Adjustments 

- Leases: Fitch has adjusted the debt by adding 8x annual fixed operating lease 
expenses (2018: fixed rental expense of CNY22 million)

- Payables-Adjusted Net Leverage: Fitch subtracts customer prepayments and 85% 
of trade payables from readily available cash. This metric applies mainly to 
Chinese department stores operating under the concessionaire model

- Operating EBITDA: Fitch treats the sale of properties and cost of properties 
sold as non-operating items and cash flow from the sale of properties as 
non-operating cash flow

- Readily available cash: Fitch has classified structured deposits and wealth 
management products as readily available cash (2018: CNY1,020 million)

Media Relations: Yee Man Ko, Hong Kong, Tel: +852 2263 9953, Email: 
alanis.ko@thefitchgroup.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 19 Feb 2019)

https://www.fitchratings.com/site/re/10062582

Corporates Notching and Recovery Ratings Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10024585

Country-Specific Treatment of Recovery Ratings Criteria (pub. 18 Jan 2019)

https://www.fitchratings.com/site/re/10058988

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https://www.fitchratings.com/site/dodd-frank-disclosure/10078579

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https://www.fitchratings.com/site/pr/10078579#solicitation

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https://www.fitchratings.com/regulatory

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