Beijing Easyhome Investment Holdings And Its Guaranteed Notes Assigned 'BB+' Rating; Outlook Stable

  • Beijing Easyhome Investment Holdings Group Co. Ltd.'s (Easyhome) solid market position and asset-light growth strategy should result in stable cash flows and scalability of its business.
  • We expect the China-based home improvement and furniture retail operator's leverage to remain high, owing to capital outlays to buy back and develop malls in strategic locations.
  • On Feb. 25, 2019, we assign our 'BB+' long-term issuer credit rating to Easyhome. We are also assigning our 'BB+' long-term issue rating to the proposed notes issued by China Bright (Hong Kong) Ltd. Easyhome guarantees the notes. The proposed notes rating is subject to our review of the final issuance documentation.
  • The stable outlook reflects our view that Easyhome will continue to generate steady cash flows and maintain its solid market position over the next 12 months.
The rating reflects our view that Easyhome's solid market position and 
asset-light strategy will result in stable cash flows and scalability of its 

We believe Easyhome is likely to expand its scale through a subletting 
business model. Therefore, the company may be subject to high lease-adjusted 
debt and have limited control over its operational fixed assets. At the same 
time, the company's plan to buy back malls and develop self-owned malls in 
higher-tier cities will increase capital outlay and stretch its leverage. We 
forecast its adjusted debt-to-EBITDA ratio will stay at around 6.0x over the 
next 12-24 months.

Nonetheless, Easyhome is strategically positioned to gain market share in the 
home improvement and furnishing business. It operates in a fragmented home 
improvement and furnishings retail mall sector, with a market size of Chinese 
renminbi (RMB) 2.95 trillion in 2017. This sector grew at a compounded 
annualized rate of 12.4% in the past five years in China. As of June 2018, the 
company has 10 self-owned, 71 leased, and 134 franchise malls across 149 
cities in 29 provinces--making it the second largest player in the industry by 
number of malls.

We believe Easyhome's clear, focused, and consistent operating strategy 
strengthens its competitiveness. The company has a 20-year record of providing 
value-added services to upstream suppliers and retailers as well as 
purchasers. For example, it was the first to implement a centralized return 
policy on behalf of furniture retailers. Market participants along the value 
chain rely heavily on Easyhome's distribution platform because of its stronger 
branding compared with that of individual furniture brands. This is reflected 
in its over 95% occupancy rate and 11%-15% same-store sales growth over the 
past three years. We expect the company's occupancy to remain above 95% over 
the next two years.

Easyhome's recurring income from its self-owned and sublet malls provides cash 
flow stability. The company runs a unique hybrid business model, where it 
operates retail malls without carrying inventory risks. About 80% of its 
earnings come from fixed rental income from more than 1,000 tenants, with very 
little reliance on turnover rent. Easyhome typically signs one-year leases 
with tenants and we believe its high tenant retention rate partly mitigates 
such a short-term lease profile.

In our view, Easyhome's subletting business model will continue to drive 
growth. The company leases the majority of its malls from independent property 
owners for a duration of 15-20 years and sublets to third-party retailers. 
Given the customized design and construction of these malls as well as the 
long-term lease agreements, Easyhome has more control than a typical retailer 
and a much lower replacement risk. 

Nonetheless, the lack of ownership limits Easyhome's flexibility on asset 
enhancement and expansion, and adds to margin pressure if property owners 
increase rent. 

We expect Easyhome's leverage to remain high, despite a large equity raising 
in 2018, which partly offsets the mall buybacks. In our base case, we project 
that Easyhome will spend RMB4 billion-RMB5 billion in capex each year to buy 
back malls and develop self-owned malls. We believe contributions from 
self-owned malls will gradually increase. Easyhome acquired a 40% stake in a 
third-party company that owns its flagship store, Beijing 4th Ring Road Mall, 
for RMB7.2 billion last year.

The equity raising stemmed from a strategic alliance with Alibaba Group 
Holding Ltd. (A+/Stable/--) among other strategic investors, which we believe 
will benefit Easyhome in various ways. This could include shared data and 
technology as well as access to Alibaba's vast online customer base. In 2018, 
the group of strategic investors invested RMB13 billion for a 36% shareholding 
in Easyhome's key subsidiary, Beijing Easyhome Home New Retail Chain Group Co. 
Ltd. (Easyhome New Retail). 

The potential public listing of Easyhome New Retail will likely improve the 
transparency of financial reporting and reduce key-man and governance risks. 
However, the listing may affect Easyhome's accessibility of cash flow even if 
we expect the company to remain the largest and controlling shareholder of the 
subsidiary. The company announced plans for a backdoor listing in January 
2019, pending regulatory approval. We have not factored this in our base case, 
given the uncertainty.

The stable outlook reflects our view that Easyhome will maintain its solid 
market position and generate steady cash flows from its home improvement and 
furnishing retail outlets over the next 12 months. We expect the adjusted 
debt-to-EBITDA ratio to remain elevated at about 6.0x over our forecast 
period, given the company's plan to buy back shopping malls and develop 
self-owned malls.

We could downgrade Easyhome if the company undertakes large and aggressive 
debt-funded acquisitions or if its cash flow significantly weakens from our 
base case, such that the EBITDA interest coverage is less than 2.0x or the 
debt-to-EBITDA ratio fails to stay at around 6.0x.

We may raise the rating if the company meaningfully transitions toward 
becoming an asset owner or if it adopts a more conservative financial policy, 
such that its EBITDA interest coverage exceeds 3.0x and debt-to-EBITDA ratio 
improves toward 4.0x on a sustainable basis.

  • China's real GDP will increase by 6.2% in 2019 and 6.0% in 2020 from 6.6% in 2018.
  • China's furniture industry will continue to grow ahead of GDP because of increasing urbanization and property sales in both primary and secondary markets.
  • Primary property sales in China to mildly drop in 2019, with prices dropping by up to 5% and volume declining 3%-7%.
  • Easyhome's revenue will increase 7%-8% to RMB10.5 billion-RMB11.5 billion over the next 24 months, compared with RMB9.8 billion in 2017. This is mainly because of the opening of new malls and rising income driven by growth in same-store sales, despite moderating property sales.
  • Its adjusted gross margin to improve to 55%-56% over the next 24 months from 49% in 2017, mainly because of lower rental expenses following the buyback of flagship malls.
  • The company's selling, general, and administrative expenses will remain stable at 24%-26% of revenue.
  • Its capex was RMB11 billion-RMB12 billion in 2018 due to the acquisition of the Beijing 4th Ring Road Mall, but should lower to RMB4 billion-RMB5 billion in 2019 and 2020, for buying back leased malls and developing self-owned malls.
  • Its dividend payout will be RMB300 million-RMB400 million each year.
Based on these assumptions, we arrive at the following credit measures:

  • Debt-to-EBITDA ratio of about 6.0x in 2018 and 2019, from 6.5x in 2017.
  • EBITDA interest coverage of about 2.5x in 2018 and 2019, from 2.4x in 2017.
We assess Easyhome's liquidity as adequate. In our base-case scenario, we 
expect the company's sources of liquidity to exceed uses by 1.3x in the 12 
months to June 2019. The company will maintain surplus liquidity even if its 
EBITDA declines by 15% from our forecast.

In our view, Easyhome has a record in the onshore bond market and good 
relationships with banks domestically. We believe the recent application to 
tap the equity market will also benefit its standing in the onshore capital 

Principal liquidity sources include:
  • Cash balance and liquid investment of RMB5.6 billion as of June 30, 2018.
  • Cash funds from operations (FFO) and working capital inflows of RMB2.0 billion-RMB2.2 billion.
  • New debt drawdown of RMB0.9 billion (including RMB0.6 billion issuance of domestic corporate bonds in the second half of 2018).
Principal liquidity uses include:
  • Short-term borrowings of RMB3.3 billion due in the 12 months to June 2019.
  • Domestic bonds of RMB2 billion puttable in the period.
  • Committed capex of RMB1.0 billion-RMB1.2 billion. We have not factored in the full spending in our liquidity calculation because we believe it is not fully committed.
  • Dividend of RMB300 million-RMB400 million.

We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000