Fitch Downgrades Parkson to 'B+', off RWN; Outlook Negative

Parkson Retail

14/10/2015 10:22

(The following statement was released by the rating agency)

HONG KONG, October 14 (Fitch) Fitch Ratings has downgraded China-based 
department store operator Parkson Retail Group Limited's (Parkson) Long-Term 
Issuer Default Rating (IDR) and senior unsecured rating to 'B+' from 'BB-'. The 
ratings have been removed from Rating Watch Negative. Fitch has assigned a 
Negative Outlook to the ratings and a Recovery Rating of 'RR4' to the senior 
unsecured rating.

The downgrade reflects the continued deterioration in Parkson's core business 
and its rising leverage despite the cancellation of the proposed Parkson Retail 
Asia Limited (PRA) acquisition.  The Negative Outlook reflects the uncertainty 
over when same-store sales will stabilise.

KEY RATING DRIVERS

Declining Sales and Profitability: Parkson's fundamentals have steadily 
deteriorated over the past three years due to weaker consumer spending and 
competition from other retail formats, such as e-commerce and shopping malls. 
Same-store sales declined 4.6% and same-store profits fell 25% yoy in 1H15. Of 
the 60 stores in operation, 23 were unprofitable in 1H15. Parkson's heavy 
reliance on rented properties has exacerbated the impact of the sales decline on 
margins. EBITDA has fallen to 2%-3% of Gross Sales Proceeds, compared with 
EBITDA margins in the low teens for most department store operators rated by 
Fitch. 

High Leverage: Fitch expects Parkson's payables-adjusted FFO net leverage to 
remain elevated at more than 6.3x, which is not in line with levels expected for 
a 'BB' category rating. Parkson's minority shareholders at an extraordinary 
general meeting on 12 October 2015 rejected a proposed acquisition of a stake in 
PRA for CNY1.05bn. The cancellation of the deal is a marginal positive; but it 
does not offset the decline in Parkson's core operations in China. 

Share Buybacks Continue: Parkson has been repurchasing shares through the Hong 
Kong Stock Exchange since 2013. Over the past three years, the company has 
bought back more than 4% of total shares outstanding using cash, and it has so 
far in 2015 already spent CNY52m on share buybacks. 

Adequate Liquidity: Parkson's liquidity position remains healthy, despite rising 
leverage. Liquidity is supported by its cash-generating concessionaire business 
and CNY3.9bn in cash and investments in principal-guaranteed deposits as of June 
2015.  USD500m of bonds mature in 2018 and its bank borrowings are fully secured 
with time deposits and principal-guaranteed deposits.

KEY ASSUMPTIONS

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

- Gross sales proceeds decline by 1.5% a year in 2016-18

- EBITDA margin of 11%-12% in 2016-18

- CNY900m capex in 2015 and CNY500m a year thereafter

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to 
positive rating action include:

- Same-store sales growth stabilises or turns positive on a sustained basis

Negative: Future developments that may, individually or collectively, lead to 
negative rating action include:

- FFO fixed-charge coverage at less than 1.3x on a sustained basis

- Payables adjusted (adjusted net debt plus 85% trade payables and customer 
deposits) FFO net leverage sustained above 7x

- Continued deterioration in same-store sales and margins

Contact: 

Primary Analyst

Yee Man Chin

Director

+852 2263 9696

Fitch (Hong Kong) Limited

19/F Man Yee Building

68 Des Voeux Road Central, Hong Kong

Secondary Analyst

Yi Zhang

Analyst

+86 21 5097 3390

Committee Chairperson

Kalai Pillay

Senior Director

+65 6796 7221

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 Methodology - Including Short-Term Ratings and Parent and 
Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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