Pengyuan International Affirms ‘B+’ Rating to Maoye International Holdings Ltd; Outlook Stable


29 May 2020

    HONG KONG, 29 May 2019. Pengyuan International has affirmed Maoye International Holdings Ltd (Maoye)’s global scale long-term issuer credit rating (LTICR) of ‘B+’. The outlook is stable. 

    Maoye’s rating is supported by its established market position in China’s department store sector and its high-quality assets but constrained by its weak liquidity, high leverage and high business concentration in the retail market. Due to Maoye’s weak liquidity, we will closely observe its refinancing progress and expect the company will be able to rollover its USD 250 million note due in September and October 2020. 

    As one of the leading department store operators in China, Maoye operates and manages 48 department stores with an aggregate gross floor area of more than 3 million square meter as of the end of 2019. Department store operations and property developments contributed 79% and 19% respectively of the company’s total revenue in 2019. 

    KEY RATING RATIONALES 

    Credit Strengths

    Market position maintained. Maoye has been able to maintain its leading market position in the department store sector in southern China. Targeting the medium- to high-end segment of the retail market, Maoye owns and operates several famous department store brands. In recent years, Maoye has been actively managing its store portfolio and integrating its offline and online businesses. Benefiting from its strong market position, the company has grown its customer base and established strong relationships with merchandise suppliers in China. 

    Improving EBITDA margin. Maoye has increased its EBITDA margin to 44.7% in 2019, up from 42.7% in 2018 and 36.4% in 2017 thanks to its improved operational efficiencies in the department store sector and solid sales in its property development sector. Though the company’s net profit declined in 2019 due to non-cash expenses and accounting rule changes, we expect this impact to only be a one-off. We believe the company will have solid property sales in 2020, which will help to offset weaknesses in the retail sector impacted by Covid-19. We expect the EBITDA margin to be maintained at above 40% from 2020 to 2021.

    Optimizing department store business. Maoye has augmented its department store operations during the market downturn. Its new store operating areas increased by 4% in 2019, with Jinzhou Maoye Complex, Huaian Maoye Complex and Qinhuangdao Maoye Complex put into operation, and three new stores are expected to open in 2020 and 2021. In addition, the company increased rental contributions as a percentage of total department store revenue to 18% in 2018, up from 6% in 2015. We expect rental contributions to continue to increase and to become a stable revenue source in the future. 

    High quality assets. Maoye owns a portfolio of valuable assets that can be easily liquidated in the market at a reasonable discount. The department stores owned are commercial properties with privileged locations in first- or second-tier cities in China. The company had RMB 4 billion (USD 559 million) of residential properties available for sale and RMB 3 billion of equity investments at the end of 2019. We believe Maoye’s asset-heavy business model and its high-quality assets provide a stable cashflow source in the long term and could help reduce the company’s financial leverage when needed. 

    Credit Weaknesses

    Weak liquidity. We assess Maoye’s liquidity as weak. We estimate Maoye’s 12-month forward cashflow liquidity ratio to be 1.01x. The company had a non-restricted cash balance of RMB 1.2 billion at the end of 2019, compared to its short-term debt of RMB 9.3 billion. However, 82% of its short-term debt is pledged with collaterals, which is likely to roll over. We believe the company’s liquid equity investments and properties available for sale can provide an additional source of liquidity when needed. We expect the company’s liquidity conditions to improve as it reduces its short-term debt. 

    High concentration risk. The majority of Maoye’s revenue is generated from its retail business in China, with department stores contributing 79% of its revenue and 85% of its EBITDA in 2019. The company’s financial performance is largely influenced by the cyclicality of the Chinese economy and its retail market. 

    High leverage. Maoye’s Debt to EBITDA has increased to 5.0x in 2019, up from 4.5x in 2018 due to the increase in working capital requirements. The company’s payable days has decreased to 325 days in 2019, down from 353 days in 2018, which has led to a lower operating cashflow in 2019. However, the company has been able to manage its capital expenditure at RMB 4-5m since 2017. We expect the company’s Debt to EBITDA to increase slightly to 5.2x in 2020 before dropping in 2021. 

    RATING OUTLOOK 

    The stable outlook reflects our expectation that the company will be able to continuously improve its financial profile and, in the meantime, expand its business operations and strengthen its market position.

    We would consider a downgrade action if the company’s credit profile deteriorates substantially, which could be caused by: 1) financial leverage increasing materially over a prolonged period, which may be evidenced by the Debt to EBITDA ratio increasing to above 5.5x and EBITDA interest coverage decreasing to below 2x; or 2) liquidity conditions deteriorating to a level where we assess the company may face liquidity crunch pressure.

    We would consider an upgrade action if the company’s credit profile improves substantially, which could be caused by: 1) financial leverage decreasing noticeably over a prolonged period, which may be evidenced by the Debt to EBITDA ratio decreasing to below 3.5x and EBITDA interest coverage improving to above 5x; 2) material improvements in the scale of operations and market position. 

    ANALYSTS CONTACT

    Primary Analyst

    Winnie Guo

    +852 3615 8344

    winnie.guo@pyrating.com

    Secondary Analyst 

    Simon Lee, CFA

    +852 3615 8307

    simon.lee@pyrating.com

    Committee Chair

    Tony Tang 

    +852 3615 8278

    tony.tang@pyrating.com

    MEDIA ENQUIRIES

    Charley Lui 

    +852 3615 8296

    charley.lui@pyrating.com

    RATING SERVICES ENQUIRIES

    Gloria Song

    +852 3615 8324

    gloria.song@pyrating.com

    Date of Relevant Rating Committee: 22 May 2020

    Additional information is available on www.pyrating.com

    Related Criteria 

    General Corporate Rating Criteria (15 March 2018)

    Industry Credit Guidelines Chinese Homebuilders and Property Developers (31 August 2018)

    Corporate Financial Adjustments and Ratio Definitions (7 May 2018)

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