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Rating Action:

Moody's upgrades Golden Eagle Retail's CFR to Ba2, outlook stable

 The document has been translated in other languages

02 Apr 2019

Hong Kong, April 02, 2019 -- Moody's Investors Service has upgraded Golden Eagle Retail Group Ltd's corporate family rating (CFR) to Ba2 from Ba3.

Moody's has also upgraded Golden Eagle's senior unsecured debt ratings to Ba3 from B1.

The rating outlook was changed to stable from positive.

RATINGS RATIONALE

"Golden Eagle's Ba2 corporate family rating reflects our expectation that the company can sustain its improved core retail operations and disciplined capital expenditure, which have improved its credit metrics over the past year," says Danny Chan, a Moody's Assistant Vice President and Analyst.

Golden Eagle registered 32.7% year-on-year revenue growth in 2018 due to its ability to ramp up additional new retail space and as it recognized increased property development revenues.

The company's overall profitability also improved in 2018. Its operating margin improved to 36.6% in 2018 from 34.6% in 2017, reflecting successful sales contributions from new retail space. Its adjusted EBITDA consequently grew 22.8% year-on-year to RMB3.09 billion in 2018.

The company has also showed more discipline in its capital expenditures amid a weaker economic environment, reducing its spending by 75% to RMB240 million in 2018 from RMB962 million in 2017.

As a result, the company was able to keep adjusted debt at RMB9.9 billion, almost unchanged from 2017, while operating at a larger scale as measured by GFA. The company's GFA increased by 41% to 2.5 million square meters between 2015 and 2018. The number of stores in its retail portfolio also increased to 32 from 29 over the same period, including the addition of its flagship store, Golden Eagle World in Nanjing.

The company's debt leverage -- as measured by adjusted debt/adjusted EBITDA -- declined to 3.2x at the end of 2018 from 4.0x at the end of 2017.

Moody's expects the company will slow down the pace at which it adds new operating malls in 2019 and 2020, and that it will instead focus on growing its retail revenue and profits through improved operating efficiencies and costs, upgrading its merchandise mix and store renovations.

Moody's expects the company's property sales will remain cyclical, but its adjusted EBITDA for 2019 will remain largely unchanged from the level in 2018 through growth in retail EBITDA. The company's adjusted EBITDA should then tick up to RMB 3.3 billion in 2020 as it ramps up property development sales.

The company has indicated that it will remain cautious in its capital expenditures, keeping total spending at moderate to low levels in 2019 and 2020.

On the basis of this company guidance, Moody's expects Golden Eagle' debt leverage -- as measured by adjusted debt/adjusted EBITDA -- will remain around 2.9x-3.1x and retained cash flow (RCF)/net debt around 25%-29% over the next 12-18 months. These levels are supportive of its Ba2 rating.

Golden Eagle's Ba2 CFR also reflects its strong market position in operating retail stores in the affluent Jiangsu Province, the prime locations of the company's retail store assets, the benefits of its concessionaire model, and its self-owned properties to ensure business sustainability.

On the other hand Golden Eagle's Ba2 rating is constrained by its relatively small scale, high level of 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 the CFR because of the risk of structural and legal subordination. This risk reflects the fact that the majority of claims are at the operating subsidiaries level. These claims have priority over Golden Eagle's senior unsecured claims in a bankruptcy scenario. In addition, the holding company lacks significant mitigating factors for structural subordination. As a result, the expected recovery rate for claims at the holding company will be lower.

Golden Eagle's liquidity is strong. Its cash balance of RMB6.46 billion at the end of 2018 covered 3.8x of the company's debt maturing over the next 12 months. Moreover, the company reported positive operating cash flow and free cash flow in 2018.

The stable rating outlook reflects Moody's expectation that the company will continue to improve the efficiency of its retail operations, operating costs, and competitiveness to support its revenue growth and profit margins. Moreover, Moody's expects the company will remain prudent in its capital expenditure and debt management, and will limit connected transactions with its parent company and property development business.

The ratings could be upgraded if the company: (1) grows in scale and reduces its regional exposure; (2) remains disciplined in its capital expenditure and investments; and (3) maintains good liquidity and improves its credit metrics, such that adjusted debt/adjusted EBITDA falls below 2.5x-2.0x and adjusted RCF/net debt rises above 30%-35%, all on a sustained basis.

However, the ratings could be downgraded in case of: (1) a material revenue decline due to increased competition; (2) a weakening in liquidity position; (3) growth in its property development business or a substantial increase in its connected transactions with key shareholders; or (4) weakening credit metrics, such that adjusted debt/adjusted 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. 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.

At 31 December 2018, Golden Eagle operated 32 stores, including 15 lifestyle centers, in the Jiangsu, Anhui, Shaanxi, Yunnan and Shanghai regions.

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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

Danny Chan
AVP - 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

Peter Choy
Senior Vice President
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

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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