Fitch Downgrades Parkson to 'B' on Weak Operations; Outlook Negative

Parkson Retail

25/02/2016 03:43

(The following statement was released by the rating agency)

HONG KONG, February 24 (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 'B+'. Fitch 
has assigned a Negative Outlook to the IDR 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. 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 few years due to weaker consumer spending and 
competition from other retail formats, such as e-commerce and shopping malls. 
Same-store sales declined 8% in 2015 while gross sales proceeds fell by 6.9%. 
The full-year numbers also suggest that core operations further deteriorated in 
2H15. 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 many department 
store operators rated by Fitch. 

High Leverage: Parkson's leverage has risen in the past few years and it has 
moved into a net debt position on an accounting basis. Parkson's operating lease 
expenses are high compared to its peers, which adds to its financial burden. 
Fitch expects payables-adjusted FFO net leverage to reach 6.9x in 2016 and 
continue rising. At the same time, coverage ratios are also deteriorating - 
Fitch expects FFO fixed-charge coverage to fall to 1.2x for 2016 and 2017.

Share Buybacks, Dividends Continue: Parkson has been repurchasing shares through 
the Hong Kong Stock Exchange since 2013. So far the company has bought back 
around 5% of total shares outstanding using cash. It spent CNY65.5m on share 
buybacks in 2015 and a further CNY11m in January 2016. In addition to share 
buybacks, the company has also declared a final dividend after the 2015 results 
despite reporting a net loss. 

Near-Term Liquidity Sufficient: Parkson had CNY3bn of cash, term deposits and 
principal guaranteed investments at end-December 2015. Liquidity is not a 
concern for the next 12 months as current debt is only CNY644m. Parkson's 4.5% 
USD500m (CNY3.2bn) bonds will mature in May 2018. Fitch believes the company 
could face difficulties refinancing the bonds if operations do not improve in 
the next 12-18 months. 

KEY ASSUMPTIONS

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

- Low single-digit decline in gross sales proceeds and revenues

- EBITDA margin of 8%-9%

- Capex of CNY500m per year for 2016-18

RATING SENSITIVITIES

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

- Same-store sales decline stabilises or same-store sales turn to growth 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 1.2x 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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