Rating On Maoye International Raised To 'B'; Outlook Stable

  • We expect Maoye International Holdings Ltd.'s refinancing risk to decrease--supported by both improving cash flow from rental income and property sales as well as multiple liquidity resources.
  • Although the company's debt remains high, we believe Maoye's debt leverage is likely to gradually improve under the company's deleveraging effort.
  • On May 10, 2019, S&P Global Ratings raised the long-term issuer credit rating on Maoye to 'B' from 'B-'.
  • The stable outlook reflects our forecast of the company's stabilized capital structure and improved liquidity position for the next 12 months.
HONG KONG (S&P Global Ratings) May 10, 2019--S&P Global Ratings today raised the long-term issuer credit rating on Maoye International Holdings Ltd. to 'B' from 'B-' to reflect the company's declining refinancing risks--thanks to improving operation performance, stronger cash inflows from property sales, and moderating capital structure. Despite Maoye's deleveraging effort, the company's debt leverage remains relatively high.
Maoye's longer-term strategy to move away from conventional department stores to modern shopping mall formats has been effective and we expect the rise in rental income to support the company's cash flow over the next three years. Maoye has become less involved in direct sales or profit sharing with vendors and incurred more stable and predictable cash flow from rents.
Maoye's investment in the property business prior to 2016 has started to provide returns. As Maoye focuses on its retail business, it does not plan to invest in property development going forward and we do not expect large cash outflows from the property business. In 2018, net cash inflows from its property business was around Chinese renminbi (RMB) 1.4 billion and contributed 16% of total revenue. Given that Maoye still has properties worth around RMB7.05 billion at hand--which are ready to sell--we expect the inflows to remain between RMB1.4 billion-RMB1.8 billion over the next one to two years.
We see a gradual reduction in Maoye's debt balance and reliance on short-term maturities in the past three years, thanks to the company's deleveraging efforts and maturity controls. Maoye repaid around RMB0.9 billion in 2018--approximately 5% of its total reported debt--and its short-term debt ratio declined to around 39% as of December 2018 from 60% at the end of 2015. It issued a two-year U.S.-dollar denominated bond in the second half of 2018 when market sentiment was very cautious, which slightly lengthened its average debt maturity.
After Maoye made aggressive debt-funded acquisitions totaling RMB3.3 billion in 2016, it became more conservative. It has utilized more fixed assets to secure debt, which now account for 82% of debt from 74% two years ago. Overall, the debt-to-EBITDA ratio dropped to 5.0x in 2018 from 9.3x in 2016, partially thanks to large gains from property sales. There were no significant mergers and acquisitions within the same period.
The stable outlook reflects our view that Maoye's capital structure will continue to improve through its deleveraging efforts and that refinancing risk will decrease with improving cash flow generation over the next several years as well as access to multiple sources.
We could lower the rating if Maoye's liquidity or capital structure deteriorates. More specifically, we could lower the rating if liquidity sources can cover less than 0.7x of the company's liquidity needs over the next 12 months or if the company's debt to EBITDA exceeds 8x. The most likely drivers of these are: a significant reduction in revenue and cash flow from Maoye's property segment relative to our expectation, a material deterioration in the retail business that causes a decline in operating cash flow, or aggressive debt-funded acquisitions.
We could raise the rating if Maoye's debt leverage improves further. This could happen if the company's operating performance exceeds our expectation significantly, or if the company repays its debts while maintaining sufficient liquidity buffer, to the extent that debt leverage volatility is reduced and the debt-to-EBITDA ratio is sustainably lower than 5x.
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