Moody’s lowers Parkson Retail Group debt outlook to negative
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Moody’s Investors Service has lowered the outlook for Parkson Retail Group Ltd’s Ba3 corporate family and senior unsecured debt ratings to negative from stable.
In a statement issued on Wednesday, Moody’s has also affirmed Parkson’s Ba3 corporate family and senior unsecured debt ratings.
A Moody’s vice president and senior credit officer Lina Choi said: “The outlook change reflects Parkson’s weaker-than-expected financial results for 3Q 2015.
“Our expectation that its profitability and financial leverage will likely remain weak for its Ba3 ratings over the next 12-18 months, given the ongoing challenges apparent in China’s retail market.”
Parkson, which is listed on the Hong Kong Stock Exchange and one of the largest operators of department store chains in China, reported a normalised operating profit of 86.7mil renminbi — after excluding a one-off litigation penalty of 140mil renminbi — in the first nine months of 2015 compared with 346.4mil renminb in 2014.
“This decline was due to the consideration that the company faced strong competition during this time and also experienced a 9.4% decline in gross sales proceeds (GSP) in 3Q 2015, a further deterioration from the 3% fall in 1H 2015.
“Moody’s notes that subdued retail sentiment and strong competition have prompted Parkson to offer more promotions and discounts on its products,” it said.
Moody’s also estimated Parkson’s profitability — as measured by EBITDA/GSP — would decline to 11% for all of 2015 from 12.7% in 2014.
At end-2014, it owned and managed 60 stores spread across 34 Chinese cities. It targets the middle-end of the Chinese retail market. It is 53.1%-owned by Parkson Holdings Bhd (unrated), an affiliate of Malaysia’s Lion Group.
Moody’s said despite the company’s plan to improve profitability through more direct sales, Moody’s expects EBITDA/GSP to fall to around 10%-11% in the next 12-18 months. Such a range would be close to its rating downgrade trigger level.
The ratings agency also said Moody’s expected Parkson’s retained cash flow (RCF)/net debt to decline to 8% at end-2015 from 11.3% at end-2014 due to the fall in cash holdings.
“Moody’s notes that subdued retail sentiment and strong competition have prompted Parkson to offer more promotions and discounts on its products,”
It pointed out Parkson’s cash and cash equivalent fell to 3.6bil renminbi in 3Q 2015 from 4.8bil renminbi at end-December 2014 due to increased working capital outflow and capital expenditure on new stores.
Moody’s expects RCF/net debt to stay around 8% over the next 12-18 months, a level which provides little space from our downgrade trigger of 8-10%.
At the same time, Parkson’s liquidity remains adequate, although its cash buffer has narrowed. Cash and cash equivalent of 3.6bil renminbi at end-September 2015 could cover its short-term debt of 700mil renminbi.
Moody’s said Parkson’s Ba3 corporate family rating reflects its competitive position in China’s highly fragmented department store industry, underpinned by its well-recognised brand name and national presence.
“The rating also considers its low level of collections risk and adequate liquidity profile. However, the rating is constrained by structural challenges, such as intense competition from other retailers, rising rental rates, online retailing and the execution risks associated with its aggressive expansion into lower-tier cities in China.
“In particular, Parkson’s dependence on leased stores is high, exposing the company to the risk of reallocations and escalating rents. These challenges, together with its ambitious investments in new stores, will continue to pressure its profitability and financial metrics.
“The outlook could return to stable if Parkson curbs the deterioration in gross sales proceeds, and demonstrates an ability to restore profit margins,” it said.
Moody’s said the metrics which it would consider for a return to a stable outlook include:
(1) adjusted EBITDA/gross sales proceeds recovering to above 10%-11%; and (2) adjusted retained cash flow/net debt rising above 10% on a sustained basis.
The ratings could experience downward pressure if Parkson fails to stabilise its profitability and financial metrics due to: (1) rising competition; (2) reduced bargaining power over its concessionaires/suppliers; or (3) the need to make large investments for store expansions.
Credit metrics indicative of downgrade pressure include the likelihood of adjusted EBITDA/gross sales proceeds trending below 10%-12% or of adjusted retained cash flow/net debt trending below 8%-10% on a sustained basis.
Any sign that the company is extending financial support to its parent, the Lion Group, will also pressure Parkson’s corporate family rating.
Questions & Answers
Q.What were the main reasons for Moody's lowering Parkson's debt outlook?
What were the main reasons for Moody's lowering Parkson's debt outlook?
Moody's lowered the outlook due to Parkson's weaker-than-expected financial results for 3Q 2015 and expectations that profitability and financial use will remain weak given ongoing challenges in China's retail market.
Q.How did Parkson's operating profit compare between 2014 and 2015?
How did Parkson's operating profit compare between 2014 and 2015?
Parkson reported a normalised operating profit of 86.7 million renminbi in the first nine months of 2015. This was significantly lower than the 346.4 million renminbi recorded in 2014 for the same period.
Q.What are the structural challenges impacting Parkson's rating?
What are the structural challenges impacting Parkson's rating?
Intense competition from other retailers, rising rental rates, the growth of online retailing, and execution risks from aggressive expansion into lower-tier cities are constraining Parkson's rating. Its high dependence on leased stores is also a factor.
Q.What would allow the debt outlook to return to stable?
What would allow the debt outlook to return to stable?
The outlook could return to stable if Parkson curbs the deterioration in gross sales proceeds and can restore its profit margins. Key metrics for this include adjusted EBITDA/gross sales proceeds recovering above 10%-11%.
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