Hong Kong, May 27, 2019 -- Moody's Investors Service ("Moody's) has upgraded Maoye International
Holdings Ltd.'s ("Maoye") corporate family rating (CFR) to B2 from
B3.
The outlook is stable.
RATINGS RATIONALE
"Maoye's B2 CFR reflects our expectation that the company will maintain
positive free cash flow and further reduce its debt levels over the next
12-18 months," says Danny Chan, a Moody's Assistant
Vice President and Analyst.
"The improving financial metrics and record of access to funding
alleviate our concerns over Maoye's weak liquidity," adds
Chan.
Moody's also says that Maoye's growing property sales recognition
and stable retail operations will support EBITDA growth over the next
12-18 months.
Maoye's overall sales and profitability continued to improve in 2018.
It registered a 9.4% year-on-year increase
in revenue in 2018 to RMB7.8 billion. The improvement was
attributed to the increase in property sales during the same period,
which accounted for 12% of Maoye's revenue in 2018 and about
10-15% of EBITDA.
Moody's expects that Maoye's revenue and EBITDA will grow
by about 25% and 15% respectively, to RMB9.7
billion and RMB4.2 billion in 2019, boosted by higher property
revenue. Revenue from property sales is likely to increase to around
RMB2.5-RMB3.0 billion in 2019 from RMB1.0
billion in 2018, based on the contracted sales growth over past
two years.
Maoye has accelerated disposal of its property inventory since 2017,
with the aim of reducing its leverage. Because the company is unlikely
to meaningfully replenish its land bank, the increase in property
sales will continue to support strong cash flow generation over the next
12-18 months.
Maoye will likely maintain operating cash flow of around RMB2-RMB3
billion per annum and prove free cash flow positive in 2019-20.
Its capital expenditure should stay below RMB800 million, because
major renovations have been completed.
The company intends to further reduce reported debt to RMB16-RMB17
billion over the next two years from RMB18 billion in 2018. Consequently,
leverage will improve to 4.5x over the next 12-18 months;
a situation which will provide Maoye with better financial flexibility
to buffer against market volatility and its weak liquidity profile.
Maoye's debt leverage — as measured by adjusted debt/adjusted
EBITDA — fell to 5.8x at the end of 2018 from 7.7x
at the end of 2017.
The company aims to improve its capital structure, and has become
more disciplined with its capital expenditures over the past two years.
Specifically, Maoye has maintained positive free cash flow over
the past two years and reduced its reported debt by about RMB1.5
billion to RMB18.2 billion in 2018.
Maoye's credit profile is also supported by its stable retail operations,
a result of the prime locations of many of its malls, as well as
its constant efforts on store renovation and optimization. Despite
a flattish same store sales growth in 2018, Maoye's sales
from retail operations increased moderately by 4.1% to RMB4.8
billion, driven by higher rental income.
Maoye's liquidity is weak. Its cash balance of RMB3.3
billion at the end of 2018 was insufficient to cover its short-term
debt and obligations maturing in the next 12 months.
Nonetheless, the concerns over liquidity is alleviated by its improved
operations and resultant cash flow, as well as its track record
of tapping the capital markets and the rolling over of bilateral short-term
banking facilities.
The company has also been managing its maturity profile over the past
two years, enabling its short-term debt as a percentage of
total borrowings to fall to 39% at the end of 2018 from 56%
at the end of 2016.
Maoye's B2 CFR takes into account its (1) strong market position in its
home market, as well as its self-owned store strategy and
concessionaire business model; (2) ability to manage the challenges
in China's evolving retail market; (3) track record of growth through
acquisitions; (4) exposure to property development risk, until
such time as it fully disposes of its current inventory; and (5)
moderate credit metrics.
The stable outlook reflects Moody's expectation that the company will
maintain stable retail operations and property sales, while remaining
prudent in its capital expenditure and debt management.
Rating upgrade pressure could arise if Maoye can: (1) meaningfully
improve its liquidity, while remaining prudent in its expansion;
(2) maintain debt/EBITDA below 4.5x and EBITDA/interest above 3.0x-3.5x,
all on a sustained basis.
On the other hand, Maoye's rating could come under downgrade pressure
if (1) its liquidity position deteriorates, for example, if
it cannot refinance its short-term debt or materially increases
its short-term debt; or (2) the company undertakes significant
debt-funded acquisitions. Indicators of a downgrade include
debt/EBITDA above 5.5x-6.0x and EBITDA/interest below
2.0x.
The principal methodology used in this rating was Retail Industry published
in May 2018. Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Maoye International Holdings Ltd. is a leading department store
operator in China (A1 stable).
Headquartered in Shenzhen, Guangdong Province, the company
has built a strong position in its home market, while strategically
expanding elsewhere in the country. The company had 57 stores in
19 cities across China's four main regions at the end of 2018.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
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the final issuance of the debt, in each case where the transaction
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Please see www.moodys.com for any updates on changes to
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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
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
