Hong Kong, September 07, 2020 -- Moody's Investors Service has affirmed Golden Eagle Retail Group
Ltd's corporate family rating (CFR) of Ba2 and senior unsecured
debt rating of Ba3.
The outlook remains stable.
"The affirmation of the ratings reflects Golden Eagle's gradual
but solid recovery in its operations and revenues since the second quarter
of 2020, in the face of disruptions related to the coronavirus pandemic.
Additionally, the company's EBITDA margin has been steady
due to its relatively high level of self-ownership of its stores
and various cost reduction initiatives implemented by its management in
the first half of 2020," says Shawn Xiong, a Moody's
Assistant Vice President and Analyst.
"The stable outlook reflects Golden Eagle's very good liquidity
position and our expectation that the company will continue to improve
its operations and revenues over the next 12-18 months,"
adds Xiong.
RATINGS RATIONALE
Golden Eagle's Ba2 CFR reflects the company's strong market
position in the affluent Jiangsu Province, and the benefits of its
concessionaire model and its self-owned properties.
On the other hand, the rating is constrained by the company's
relatively small scale and high geographic concentration, the intense
competition in the retail industry, and the risks and volatility
associated with its property development business.
Golden Eagle's Ba3 senior unsecured bond rating is one notch lower than
its CFR because of the risk of structural and legal subordination.
This risk reflects the fact that most of the outstanding claims are at
the operating subsidiaries level and that in a bankruptcy scenario,
they rank higher in the priority of claims over Golden Eagle's senior
unsecured claims. In addition, the holding company lacks
significant mitigants for structural subordination.
Due to coronavirus-related disruptions, Golden Eagle's
revenue and reported EBITDA for the first half of 2020 declined by 15.3%
and 12.9%, respectively, to around RMB2.50
billion and RMB1.1 billion, respectively, from the
corresponding period a year ago. Nevertheless, its reported
EBITDA margin held steady at around 44%. As a result,
the company's financial leverage, as measured by adjusted
debt/EBITDA, registered at around 2.6x for the last 12 months
ended June 2020.
Moody's expects Golden Eagle's revenue growth to decline by
13%-15% in 2020 as sales of properties weaken compared
to 2019, before returning to 14%-15% growth
in 2021. As a result, its leverage will increase to around
3.0x in 2020 before improving to around 2.7x in 2021.
These levels are below the downgrade triggers of 3.5x-4.0x.
Nevertheless, Moody's expects that a gradual improvement in
Golden Eagle's concessionaire sales as shoppers return to stores,
its improved online sales channels, as well as a move towards more
premium merchandise will drive an increase in revenue and EBITDA over
the next 12-18 months. At the same time, Moody's
expects the company's adjusted EBITDA margin will remain relatively
stable at around 42%-44% over the same period.
In terms of environmental, social and governance (ESG) factors,
Golden Eagle's ratings also considers the following.
From a social perspective, Moody's regards the coronavirus
outbreak as a social risk under its ESG framework, given the substantial
implications for public health and safety. Moody's ratings
also consider the impact on Golden Eagle of the breadth and severity of
the shock, although some of the impact has been offset by the company's
flexible business model and solid financial buffer.
The ratings also reflects social risk from changes in consumer preference
toward online shopping, which has resulted in structural weakness
for traditional retail operators like Golden Eagle.
In terms of governance, Golden Eagle's ownership is concentrated
in its board chairman and former CEO Roger Wang who owns a 67.01%
stake in the company. This risk is partially mitigated by the company's
status as a listed and regulated entity and the fact that the company's
six-member board consists of three independent directors.
Additionally, the company appointed Mr. Chen Yihang as CEO
in August 2020, following Mr. Wang's resignation.
Moody's views the separation of the company's chairman and
CEO roles as a positive development.
Moreover, Moody's expects the company will limit connected transactions
with its property development business.
Golden Eagle's liquidity is very good. The company's
cash balance of RMB5.27 billion as of 30 June 2020, combined
with an estimated operating cash flow of RMB1.3-1.5
billion over the next 12 months, is sufficient to cover its short-term
debt of around RMB4.23 billion and its estimated capital spending
of around RMB800-900 million over the next 12 months.
In addition, Golden Eagle had RMB14.8 billion in fixed assets,
including property, plants and equipment, land use rights,
investment properties, as well as properties under development and
completed for sale, which were unencumbered as of 30 June 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on the rating reflects Moody's expectation that
Golden Eagle will maintain its very good liquidity position and continue
to improve its operations and revenues over the next 12-18 months.
Moreover, Moody's expects the company will remain prudent
in its capital spending and debt management, as well as limit connected
transactions with its property development business.
Moody's could upgrade Golden Eagle's ratings if the company
(1) grows in scale and reduces its regional exposure; (2) remains
disciplined in its capital spending and investments; and (3) maintains
good liquidity and improves its credit metrics, such that its adjusted
debt/EBITDA falls below 2.0x-2.5x and adjusted retained
cash flow/net debt rises above 30%-35%, all
on a sustained basis.
Conversely, Moody's could downgrade Golden Eagle's ratings
if (1) the company's revenue declines materially; (2) its liquidity
weakens; (3) its property development business or connected transactions
with key shareholders increase; or (4) its credit metrics deteriorate
such that adjusted debt/EBITDA rises above 3.5x-4.0x
or adjusted RCF/net debt falls below 20%.
The principal methodology used in these ratings was Retail Industry published
in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120379.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Golden Eagle Retail Group Ltd is one of the largest department store operators
in China. Based in Nanjing, the company is strategically
positioned in second- and third-tier Chinese cities,
catering to mid- to high-end customers. As of the
end of June 2020, Golden Eagle operated 31 stores, including
16 lifestyle centers, in Jiangsu, Anhui, Shaanxi,
Yunnan and Shanghai.
REGULATORY DISCLOSURES
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Shawn Xiong
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
