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04 Jan 2017
Hong Kong, January 04, 2017 -- Moody's Investors Service has placed Hengdeli Holdings Limited's
Ba3 corporate family rating and the Ba3 rating of its senior unsecured
bonds under review for downgrade.
The action follows Hengdeli's announcement on 30 December 2016 that
it would make a very substantial asset disposal, subject to conditions,
including regulatory and independent shareholder approvals.
RATINGS RATIONALE
"The announced sale of Hengdeli's core watch retailing and
distribution business in China will materially change the company's
business profile," says Gloria Tsuen, a Moody's
Vice President and Senior Analyst.
Hengdeli plans to sell its wholly-owned subsidiary, Xinyu
Fine Watch Service Co., Ltd. (unrated). It
also plans to sell its 75.54% stake in Harvest Max Holdings
Limited (unrated), which recorded a RMB42 million loss in 2015.
Both sales will be to Hengdeli's chairman, who owns 33%
of the company.
If the sale is finalized, Hengdeli will no longer be the largest
retailer and distributor of luxury and fine watches in China. Instead,
after completion, it will be principally engaged in watch retailing
in Hong Kong and Taiwan (around 15% of Hengdeli's total revenue
in 1H 2016), and the manufacturing of watch accessories (less than
5% of revenue during the same period).
Moody's points out that Hengdeli's retail revenue in Hong
Kong has underperformed that in China, declining 16% in 1H
2016 and 27% in 2015, compared with declines of 10%
and 7% over the same periods in China.
The potential disposal will generate RMB5.8 billion in net cash
inflow, of which, RMB3.2 billion will be used for debt
repayment. Hengdeli expects that it will be almost debt free after
the disposal, although it will also seek acquisition opportunities
to expand its retail business outside China, and to expand its watch
accessory manufacturing business.
"The future financial profile of the remaining company is unclear,
but the shrinkage of the business to a fraction of its current size,
the loss of its core China business, and increased dependence on
the weak Hong Kong market, suggest a business profile that is weak
for the current Ba3 ratings," adds Tsuen.
In reviewing Hengdeli's ratings for downgrade, Moody's
will focus on the progress of the proposed disposal, the application
of the net proceeds, and the business plans and capital structure
of the remaining company.
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 HKD5.4 billion at 30 December
2016. At end-2015, the Zhang family was the largest
shareholder, with a 33.06% stake, followed by
the Swatch Group (unrated) (9.16%) and LVMH Group (unrated)
(6.40%).
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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
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China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
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