Hong Kong, March 10, 2017 -- Moody's Investors Service has downgraded Hengdeli Holdings Limited's
corporate family and senior unsecured ratings to B1 from Ba3.
The ratings outlook is negative.
This concludes the rating review initiated on 4 January 2017, following
the announcement by Hengdeli that it would dispose of Xinyu Fine Watch
Service Co., Ltd. (unrated) and Harvest Max Holdings
Limited (unrated).
RATINGS RATIONALE
"The downgrade reflects the continued deterioration in Hengdeli's
existing operations, as evidenced in its profit warning, as
well as the reduction in the company's scale once it completes the
sale of its core watch retailing and distribution business in China,"
says Gloria Tsuen, a Moody's Vice President and Senior Analyst.
"We believe that the company's financial profile has deteriorated
amid the weak retail watch market, and to a level that is no longer
appropriate for a Ba3 rating," adds Tsuen.
Hengdeli issued a profit warning on 13 February 2017, stating that
it expects to record a 62% year-on-year decline in
profit attributable to its equity shareholders for 2016, excluding
the impact of a goodwill impairment and a withholding tax related to a
cash dividend payment by its subsidiaries in Mainland China.
Based on the 62% decline in Hengdeli's full-year net
profit from around RMB190 million in 2015, Moody's estimates
it will record a net loss of around RMB18 million for 2H 2016, compared
to a net profit of RMB90 million for 1H 2016.
Moody's estimates that the company's end-2016 debt
leverage -- as measured by adjusted debt/EBITDA --
was over 5.5x, a level that does not support a Ba3 corporate
family rating and that is unlikely to decline in 2017.
Hengdeli is also selling its China business, Xinyu Fine Watch Service,
and its 75.54% stake in Harvest Max to its chairman,
who owns 33% of the company.
These disposals will remove around 78% of Hengdeli's retail
revenue and 88% of its retail gross profits, based on its
1H 2016 results. Hengdeli plans to use RMB3.2 billion out
of the RMB5.8 billion in net cash inflow from the disposal to reduce
debt.
Moody's is concerned that the remaining businesses in the company
will be small in scale, and that it will take time to develop a
strong stream of EBITDA. Consequently, the company's
debt leverage will likely remain high in the initial period immediately
following the disposal of its China assets.
The proceeds from the asset sales, if completed, will strengthen
Hengdeli's liquidity. However, if the transaction does
not proceed and the operating environment does not improve, the
company's liquidity position could be strained by debt maturities
in the next 12 to 18 months.
Hengdeli's B1 rating continues to reflect its long track record
in selling luxury and fine watches, as well as its entrenched relationships
with key suppliers, including Swatch and LVMH, which are both
strategic shareholders.
In addition, the company has demonstrated prudent financial management
in the most recent down cycle, closing down stores, reducing
inventory, and cutting capex and dividends.
On the other hand, the rating also reflects Hengdeli's exposure
to the economic cycles associated with luxury and fine watches.
The negative outlook reflects (1) Moody's expectation that Hengdeli's
operating performance and credit metrics will remain under pressure in
the next 12-18 months, and (2) uncertainty around the business
plans, acquisition strategy, risk appetite, and financial
policy of Hengdeli after the disposal of its China businesses.
There is no upgrade ratings pressure, given the negative outlook.
However, the ratings outlook could return to stable if Hengdeli
(1) arrests the fall in revenue, returns to profitability,
and improves its credit metrics such that its adjusted debt/EBITDA declines
to 5.0x on a sustained basis, and (2) grows in scale after
the disposal of its China businesses.
Downward ratings pressure could emerge if Hengdeli's scale,
revenue, profitability, cash flow and/or liquidity deteriorate.
Credit metrics indicative of rating downgrade pressure include adjusted
debt/EBITDA above 6.0x.
The principal methodology used in these ratings was Retail Industry published
in October 2015. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Hengdeli Holdings Limited listed on the Hong Kong Stock Exchange in 2005,
and its market capitalization totaled HKD5.8 billion as of 9 March
2017. At end-2016, the Zhang family was the largest
shareholder, with a 33% stake, followed by the Swatch
Group (unrated) (9%) and LVMH Group (unrated) (6%).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Gloria Tsuen, CFA
Vice President - Senior 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
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077
