Moody’s downgrades Parkson Retail Ba1 rating outlook

by **Cals** Fri 11 Oct 2013, 08:30

Posted on 11 October 2013 - 05:39am

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PETALING JAYA (Oct 11, 2013): Moody's Investors Service has downgraded Parkson Holdings Bhd's 51.5%-owned subsidiary Parkson Retail Group Ltd's Ba1 rating outlook to "negative" from "stable" as it expects the group's weak performance to continue due to China's economic slowdown and intensified competition in the retail sector.

Hong Kong-listed Parkson Retail Group is one of the largest operators of department-store chains in China. As of June 30, 2013, it has 54 self-owned stores and one managed store in 35 cities.

It targets the middle- and middle-upper-end of the Chinese retail market.

Moody's has affirmed Parkson's Ba1 corporate family and senior unsecured debt ratings.

"The change in outlook reflects Moody's conclusion that Parkson Retail Group's weak performance will continue for some time due to China's economic slowdown and intensified competition in the retail sector," said Moody's vice-president and senior analyst Alan Gao in a report yesterday.

The ratings agency opined that near-term rating upgrade pressure will be limited, given the negative outlook.

However, the outlook could change back to stable if Parkson Retail Group maintains strong liquidity and can stabilise the performance of its mature stores and achieve sales ramp-ups at its new stores.

In such a situation, Parkson Retail Group's earning before interest and tax's margins will be above 30%-35% and debt/earnings before interest tax, depreciation and amortisation (ebitda) below 3.5 times to 4 times.

A recovery in Parkson Retail Group's profitability is uncertain in the near term because most of its revenue comes from its mature stores in major cities, where competition is rising. There is also competition from internet retailing.

Moreover, its new stores are experiencing slow rises in sales and high incubation costs.

"Parkson's weakened level of profitability and high capital requirements for expansion into lower tier cities have translated into weaker credit metrics," Gao said.

Moody's said Parkson Retail Group's ratings could experience further downward rating pressure if it is unable to recover profitability due to rising competition, and/or an erosion in its bargaining power over its concessionaires/suppliers; or increases acquisitions, resulting in a decline in liquidity, or an increase in debt leverage.

Any sign of Parkson Retail Group extending financial support to its parent, the Lion Group, would also pressure its ratings.

Parkson's first-half 2013 (H1 2013) operating profit dropped by 32% year-on-year to RMB441 million, while its overall merchandise gross margin declined to 17.4% from 18.1% in 2012, continuing the downtrend evident since 2010 when it was 19%.

The decline in profitability was driven by lower concessionaire rates and increased operating costs, mostly from lease renewals and new store openings.

Parkson owns less than 20% of its stores, a situation which exposes it to rent increases and relocation risks, said Gao.
Its rent/gross sales proceeds ratio increased to 5.9% in H1 2013 from 5.3% in 2012 and 4.1% in 2011.

"The ability to anchor in the right location is key to success in lower tier cities, and without self-owned stores, Parkson's growth in such cities will be challenging," he added.

Parkson expands at the rate of four to six stores per year and plans to increase ownership in stores may drive up its level of leverage.