Fitch Ratings: China Consumer Retailers Face Cash Flow Pressure

Golden Eagle Retail

27/04/2020 09:33

(The following statement was released by the rating agency)


Fitch Ratings-Shanghai/Hong Kong-April 27: China’s consumer-retail sector will 
face operating cash flow pressures in 1H20, propelling the exit of some small 
and financially weak players, says Fitch Ratings. However, we expect overall 
retail revenue to return to yoy growth by 2H20 as the economy recovers. 

Chinese consumer companies’ business performance in 1H20 will depend on their 
demand stickiness, with daily necessities outperforming other parts of the 
market. China retail sales fell by 20.5% yoy over January-February. They posted 
another steep decline, of 15.8%, in March, even though various lockdowns in 
place across the country were eased over the course of the month. 

The impact of the pandemic on profitability will be greater than on revenue for 
many retailers. Several may find it difficult to avoid price discounting as they 
seek to fend off competition for scarce demand. Firms will also face a variety 
of fixed costs, such as long-term leases, and with revenue falling, the ratio of 
costs to sales will rise. 

The authorities have attempted to encourage spending through the distribution of 
shopping coupons and extended weekends since end-March. As of 27 April, 20 
provinces had issued over CNY4.5 billion in consumption vouchers, and eight 
provinces and cities had urged companies to extend weekends to 2.5 days. Policy 
support for retailers may also extend to loan forbearance from financial 
institutions for some larger companies. 

Consumption growth has rebounded in provinces with stimulus measures in place, 
but the effectiveness of such moves, particularly over the longer term, is 
difficult to quantify. The capacity of some local governments to adopt 
consumption subsidy programmes remains constrained by their financial position.

The sub-sectors hit hardest by the retail downturn include catering, department 
stores and tourism, where businesses rely heavily on outdoor traffic. The 
lingering effects of the coronavirus on consumer confidence mean sales for many 
sub-sectors that rely on outdoor traffic will continue to contract yoy in 2H20. 
Same store sales (SSS) of Yum China, a good indicator of consumer traffic, fell 
by 20% yoy over March 2020. SSS for Starbucks (BBB+/Negative) in China also 
contracted, declining by 42% yoy for the last week of March, although this was 
an improvement from the 78% plunge in February. Fitch affirmed department-store 
operator Golden Eagle Retail Group’s Long-Term Issuer Default Rating at ‘BB’ in 
April, but revised the Outlook to Negative from Stable, reflecting the 
coronavirus’ impact on sales and uncertainty over the timing of the recovery.

Some consumer-focused sub-sectors still expect to post earnings growth, even 
over 1Q20. These include pork breeders, frozen-food producers and milk-powder 
makers. Large corporates with stronger pricing power and supply chains that 
faced less disruption from lockdowns are more likely to outperform. Wens 
Foodstuff (BBB+/Stable) recorded net profit of CNY1.9 billion in 1Q20, compared 
with a CNY460 million loss in 1Q19, on the back of tighter supply conditions and 
high pork prices. 

E-commerce sales rose by 3% yoy in January-February, accelerating to 6.3% in 
March. Their contribution to total retail revenue rose to 27.6% in March, up 6 
percentage points from a year earlier. The coronavirus crisis may prompt many 
retailers to accelerate digital investments.

Online-focused retailers continue to outperform the sector as a whole. JD.com 
anticipates revenue will rise by over 10% yoy in 1Q20. Fitch expects Alibaba 
(A+/Stable) to record a revenue decline in 1Q20 on temporary supply disruptions. 
However, transactions at its ‘new retail’ platform, Freshippo, surged by over 
300% during the period, according to iResearch. The rising audience for 
livestreaming during the crisis has also stimulated the medium’s popularity 
among merchants and may help to drive online sales.

Contact:

Becky Han 

Associate Director, Corporates

+86 21 6898 7973

3401, 34/F, Shanghai Tower, 

No.479, Lujiazuihuan Road. Shanghai, 200120

Jenny Huang 

Director, Corporates

+86 21 6898 7979

Li Chen

Associate Director, Corporates

+86 21 6898 7976

Duncan Innes-Ker

Senior Director, Fitch Wire

+852 2263 9993

Media Relations: Alanis 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.

The above article originally appeared as a post on the Fitch Wire credit market 
commentary page. The original article can be accessed at www.fitchratings.com. 
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