Parkson – Moody’s revises outlook to negative Moody’s changed Parkson’s outlook to negative due to weaker than expected 3Q15 results where SSSG fell by 9%, and on expectations that profitability and leverage will remain weak over the next 12-18 months. With RCF/net debt expected to decline to ~8% levels, they guide there is little headroom in the current ratings. That said, liquidity remains strong with cash of RMB3.6 billion which is more than sufficient to cover RMB700 million in short term debt. Moody’s currently rates Parkson Ba3/neg which is one notch higher than Fitch’s B+/neg ratings.
In our view, the bonds are likely to stay here to slide bit weaker given we do not see upside in underlying operating yet and hence are maintaining UW. Assuming the company pays down RMB700 million in ST debt, its cash balance will be just enough to meet RMB3.2 billion required for USD bond due in 2018. The company should be able to raise some secured funding in 2018 against its properties(17% store ownership and the recently acquired Qingdao mall) which form part of its RBM3.7 billion plant and property line item on balance sheet although there is also RMB1.7 billion of negative working capital liabilities.
Also, we note that the business still needs investments for increasing store ownership such as last year’s acquisition should would allow it to better compete with others which makes us believe that the company could burn cash meanwhile. We maintain our UW recommendation. (Varun)