Fitch Ratings has affirmed China-based department store operator Golden Eagle Retail Group Limited's Long-Term Issuer Default Rating (IDR) at 'BB+'.

The Outlook is Stable. Fitch has also affirmed Golden Eagle's senior unsecured rating at 'BB+'.

Simultaneously, Fitch is withdrawing the ratings of Golden Eagle as it is no longer considered by Fitch to be relevant to the agency's coverage after the company repaid its US dollar bond on 22 May 2023.

Key Rating Drivers

The ratings are supported by Golden Eagle's resilient performance following efforts to offer more relevant retail formats and sustained positive free cash flow. The ratings are constrained by its relatively small scale and geographic concentration, with the bulk of revenue generated from the Yangtze River Delta area.

Derivation Summary

Golden Eagle has a weaker market position and significantly smaller scale than higher-rated US department store peers such as Macy's Inc. (BBB-/Stable) and Kohl's Corporation (BBB-/Negative). Golden Eagle has more resilient performance than its US peers due to its flexible cost structure with a high proportion of self-owned stores, and efforts to add more relevant retail formats and build online capacity. Its strong financial profile with sustained positive free cash flow supports its ratings.

Golden Eagle and Dillard's, Inc. (BBB-/Stable) are both regionally concentrated. Golden Eagle has stronger profitability than Dillard's with a more resilient performance over the past few years. However, Golden Eagle has a smaller EBITDAR scale and store footprint than Dillard's and is more geographically concentrated. Golden Eagle also has higher leverage than Dillard's.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Gross sales proceeds to increase by the low teens in 2023 before moderating to a low single digit in 2026

EBITDA margin in the range of 45%-46% in 2023-2026

Capex of CNY0.6 billion to CNY1.2 billion (including capex for projects under development) in 2023-2026

Resume 50% dividend payout rate from 2023

RATING SENSITIVITIES

No longer relevant. The ratings are withdrawn.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Net Cash Position: Golden Eagle reported cash and cash equivalents of CNY7.8 billion at end-2022, against short-term debt obligations of CNY2.9 billion. Golden Eagle also had unutilised banking facilities of CNY16 billion at end-2022.

Issuer Profile

Golden Eagle is a China-based retail store operator with a nationwide network of 30 department stores and lifestyle centres, with most stores located in Jiangsu province.

Summary of Financial Adjustments

Fitch has adjusted debt by adding an 8x annual fixed operating lease expense (2022: fixed rental expense of CNY32 million)

Fitch subtracts customer prepayments and 85% of trade payables from readily available cash. This metric applies mainly to Chinese department stores operating under the concessionaire model

Fitch treats the sale of properties and cost of properties sold as non-operating items and cash flow from the sale of properties as non-operating cash flow

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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