Fitch Upgrades Golden Eagle to 'BB'; Outlook Stable

Golden Eagle Retail

14/06/2018 06:11

(The following statement was released by the rating agency)


Fitch Ratings-Hong Kong-June 14: Fitch Ratings has upgraded China-based 
department-store operator Golden Eagle Retail Group Limited's (Golden Eagle) 
Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BB' from 
'BB-'. The Outlook on the IDR is Stable. 

The upgrade reflects the stabilisation in its core retail business and 
deleveraging supported by cash inflows from property development. Fitch expects 
the deleveraging to continue in the forecast period to 2021 as free cash flow 
remains positive. 

KEY RATING DRIVERS

Improving Retail Operations: Fitch expects Golden Eagle's revenue recovery to be 
sustainable in the near term with same-store sales (SSS) having bottomed in 
2016. SSS growth increased by 3% in 2017 compared with a decline of 4%-6% in 
2014-2016. The retail environment in China has been challenging since 2014 due 
to consumers' changing shopping preferences and a lack of differentiation among 
department stores but Fitch thinks Golden Eagle has been able to successfully 
adapt. 

Upgraded Shopping Formats: We expect Golden Eagle's revenue growth to also be 
supported by other sources, such as direct sales, rental income, management-fee 
income, and auto services, in addition to the stabilisation of the 
concessionaire business. In Fitch's view, these complementary offerings can help 
Golden Eagle to better meet customer needs and support traffic growth. 
Concessionaire sales as a percentage of gross sale proceeds (not including sale 
of properties) have gradually dropped to 83% in 2017 from 91% in 2013. 

Stable Profitability: Fitch expects profitability to remain stable or show a 
slight improvement in the short term as sales improve. Golden Eagle has been 
concentrating on increasing its operational efficiency and streamlining costs, 
which would support its financial profile. Newer stores opened in 2017 could 
potentially offset some of the margin improvement but Fitch expects the impact 
to be limited and for the company to generate over CNY2 billion in EBITDA 
annually for its core retail operations (excluding sale of properties). 

Cash Inflows from Property: Fitch expects cash inflows from property sales to be 
supportive of deleveraging if no further sizeable land acquisitions are made. 
Payables-adjusted net leverage jumped to 5.9x at end-2015 (2014: 3.3x) after the 
acquisition of Global Era Group, which included a large office and residential 
property project in Wuhu, in China's Anhui province. But leverage has been 
reduced to 4.0x by end-2017, supported by cash inflows of CNY0.9 billion from 
deposits and prepayments received from the pre-sale of properties in Yangzhou, 
Jiangsu province and CNY314 million from sales of the Wuhu project in 2017.

Positive Free Cash Flow: Fitch expects positive free cash flow to be sustainable 
over the next few years. Stable EBITDA contribution from the core retail 
business in addition to cash inflows from property would be more than sufficient 
to cover our estimate of CNY1 billion in annual capex, assuming a 50% dividend 
payout rate in-line with the historical average. Retail-related capex is likely 
to be lower than in previous years as the company has no new store openings in 
the pipeline for 2018. Pre-sale proceeds can also be used for capex on 
properties under development. 

DERIVATION SUMMARY

Golden Eagle's scale is generally smaller and its financial profile weaker than 
investment-grade global peers. Golden Eagle has a smaller store footprint, 
higher leverage and lower free cash flow generation than Dillard's, Inc. 
(BBB-/Stable), which justifies the two-notch differential. Golden Eagle has 
better diversification in its revenue base and a higher proportion of self-owned 
stores, which contribute to the company's better business profile and financial 
metrics compared with peers in China such as Parkson Retail Group Limited 
(B-/Stable). 

No Country Ceiling, parent/subsidiary or operating environment aspects impact 
the rating. 

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- Mid-single-digit growth in gross sales proceeds in 2018-2019 moderating to 
low-single-digit growth in 2020-2021, with mild growth in concessionaire sales 
complemented by higher growth in direct sales, rental and service income (2017: 
+6% excluding sale of properties) 

- Mid-single-digit revenue growth in 2018-2019 moderating to low-single-digit 
growth in 2020-2021 (2017: +8% excluding sale of properties) 

- EBITDA margin relative to operating revenue of 42%-43% (2017: 42%) excluding 
contributions related to property development

- Capex of CNY1 billion annually (2017: CNY962 million)

- 50% dividend payout rate annually (2017: 47%) 

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 (2017: 4.0x) 

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% (2017: 42%)

- Sustained negative free cash flow 

LIQUIDITY

Robust Liquidity: Golden Eagle repaid its CNY4.8 billion equivalent syndicated 
loan that matured in April 2018 through a facility agreement, which has improved 
its liquidity position and extended its debt-maturity profile. Golden Eagle had 
over CNY5 billion of cash and short-term investments in addition to available 
unutilised banking facilities of CNY16 billion and no remaining short-term debt 
obligations in 2018. 

Contact: 

Primary Analyst

Cathy Chao

Director

+852 2263 9967

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Yee Man Chin

Senior Director

+852 2263 9696

Committee Chairperson

Su Aik Lim

Senior Director

+852 2263 9914

Summary of Financial Statement Adjustments 

- Leases: Fitch has adjusted the debt by adding 8x annual fixed operating lease 
expenses (2017: fixed rental expense of CNY27 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 sale of properties and cost of properties sold 
as non-operating items and cash flow from sale of properties as non-operating 
cash flow

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: 
wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Corporate Rating Criteria (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023785

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. 16 Apr 2018)

https://www.fitchratings.com/site/re/10026835

Sector Navigators (pub. 23 Mar 2018)

https://www.fitchratings.com/site/re/10023790

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10034515

Solicitation Status 

https://www.fitchratings.com/site/pr/10034515#solicitation

Endorsement Policy 

https://www.fitchratings.com/regulatory

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