Hong Kong, April 01, 2016 -- Moody's Investors Service has downgraded to Ba3 from Ba2 Hengdeli
Holdings Limited's corporate family rating and senior unsecured
bond rating.
The rating action concludes Moody's review for downgrade initiated on
19 February 2016.
The ratings outlook is negative.
RATINGS RATIONALE
"The downgrade of Hengdeli's ratings reflects our concerns over a rapid
deterioration in the high-end retail watch market in China and
Hong Kong, which has in turn lowered the company's revenues
and weakened its credit metrics," says Lina Choi, a Moody's
Vice President and Senior Credit Officer.
Hengdeli reported a 9.9% year-on-year decline
in its 2015 revenue to RMB13.3 billion.
Moody's notes that the revenue decline accelerated in 2H 2015 to
13.3% from 6.2% in 1H 2015, indicating
further deterioration on a sequential basis.
Hengdeli's Hong Kong business demonstrated the highest year-on-year
revenue decline of 27%, while its China business recorded
a 7% revenue decline from 2014.
Its Hong Kong operations were more reliant on revenues from the sales
of high-end watches.
In Moody's view, the revenue decline could be more severe
if the company had not increased its discount commission.
Despite this strategy, the company's inventory level was high,
as reflected by the inventory days-on-hand, which
rose to 248 days in 2015 from 227 days in 2014.
Moody's also notes that the company's selling, general
and administrative expenses as a percentage of total revenues went up
to an all-time-high of 24.9% in 2015 as the
company's gross revenues declined.
Its adjusted EBITDA margin (after adjusting for one-off items)
also fell to 12.1% in 2015 from 13.0 % in
2014 due to revenue weakness and increased commission costs.
In view of the slowing economy in China, Moody's does not
anticipate meaningful improvements in Hengdeli's revenue or profitability.
Though the company has proactively diversified its product mix in favor
of mid-end products, sales of discretionary-type products
will face formidable challenges amid subdued consumer sentiment.
Therefore, the company's revenue will remain weak and uncertain
for the next 12--18 months.
Moody's estimates that the company will suffer a revenue decline
of 5%-10%. And its adjusted EBITDA margin
will fall to around 10%.
The company's credit metrics -- measured by adjusted
debt/EBITDA and retained cash flow/net debt -- will be 5x-5.5x
and 15%-18%, respectively. Such levels
position the company in the lower Ba rating level.
On the other hand the company's liquidity position remains strong.
Its cash to short term debt ratio was high at 2.7x as of end-2015.
In addition, the company's business has been cash generative
and it reported annual positive operating cash flow. Moody's
estimates Hengdeli's operating cash flow to be around RMB500 million
in 2016.
Hengdeli's Ba3 corporate family rating reflects the company's leading
position in China's fast-growing market for luxury and fine watches,
supported by its large retail and distribution network.
The rating is also supported by the execution of the company's strategy
to shift its product mix towards mid-end watches from high-end
products, as well as an increased focus on customers in Tier 2 to
Tier 4 cities.
In addition, the rating takes into account the company's solid track
record of achieving growth, its good liquidity profile, and
its close relationships with key suppliers, including Swatch Group
and LVMH. Both companies are also strategic shareholders.
On the other hand, the rating is constrained by Hengdeli's exposure
to the economic cycles associated with luxury and fine watches.
Because of the weaker demand for luxury and fine watches in an economic
downturn, Hengdeli's strategy of offering discounts on certain products
has led to a decline in its profitability.
The negative outlook reflects Moody's expectation that Hengdeli's
revenue, profitability and credit metrics will continue to be under
pressure in the next 12-18 months, when economic growth in
China will likely remain slow.
Given the negative ratings outlook, upgrade ratings pressure is
unlikely. However, the ratings outlook could return to stable,
if Hengdeli can (1) arrest the fall in revenue and profitability;
and (2) improve its credit metrics such that its adjusted debt to EBITDA
ratio is below 4.5x--5.0x and adjusted retained cash
flow to net debt in excess of 15%-18% on a sustained
basis.
However, Hengdeli's ratings will be under downgrade pressure if
its revenue, profitability and cash flow continue to decline,
such that its (1) adjusted debt/EBITDA is in excess of 5.0x-5.5x,
or (2) retained cash flow/net debt trends below 12 %-15%,
all on a sustained basis.
The principal methodology used in these ratings was Retail Industry published
in October 2015. Please see the Ratings 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 was HKD5.3 billion as of 2 September
2015. As of end-2014, the Zhang family was the largest
shareholder, with a 31.96% stake, followed by
Swatch Group (unrated) (9.12%) and LVMH Group (unrated)
(6.37%).
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
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
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.
Lina Choi
VP - Senior Credit Officer
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
Moody's downgrades Hengdeli to Ba3; outlook negative
