Fitch Ratings has revised the Outlook on China-based department store operator Golden Eagle Retail Group Limited's (Golden Eagle) Long-Term Issuer Default Rating (IDR) to Negative, from Stable, and has affirmed the Long-Term IDR at 'BB'.

Fitch has also affirmed Golden Eagle's senior unsecured rating at 'BB'.

The Outlook revision reflects the high impact of the coronavirus outbreak on the retail sector, and uncertainty over the timing of recovery. Golden Eagle's core business has been interrupted, with a meaningful decline in sales in 1Q20. Fitch anticipates revenue to decline by a quarter in 2020 before returning gradually to 2019's level by 2022.

KEY RATING DRIVERS

Challenging Retail Environment: Retail sales in China slumped by 20.5% year-on-year from January to February 2020. The coronavirus outbreak has been largely contained in China, though foot traffic in shopping malls is still affected to some extent by social distancing measures. In addition, slowing economic growth may weaken consumer demand, particularly in the discretionary segment where Golden Eagle is focusing.

Coronavirus Pressures Financial Profile: Fitch expects leverage and profitability metrics to exceed our downgrade trigger temporarily. Fitch estimates payables-adjusted FFO net leverage to reach 5.1x in 2020 from 3.2x in 2019 due to weak cash flow from operations. Leverage could decline to 4.5x in 2021, based on our assumption of significant growth in 2021 against a weak 2020.

Fitch expects the EBITDA margin to deteriorate amid declining revenue. Cost-reduction measures carried out by the company in response to the pandemic and low rental expenses thanks to a high proportion of self-owned stores will support recovery in profitability, but a shift in sales mix towards revenues other than concessionaire sales will weigh on the EBITDA margin in the medium term.

Business Profile Intact: Golden Eagle's credit profile continues to be supported by a high proportion of self-owned stores and a broadening diversification of revenue. Its operating performance has been more resilient than peers in recent years as it makes continued investments in new store formats to cater to consumer needs. Stores in the format of lifestyle centres represented 79.2% of total gross floor area at end-2019, compared with 58.6% at end-2015.

The company has also enriched merchandise selection and service offerings. Lifestyle elements contribute increasingly to total revenue, with direct sales and rental income accounting for 60% of total revenue in 2019, up from 47% in 2015. However, the company remains very geographically concentrated, with the bulk of revenue generated from the Yangtze River delta area.

Sufficient Near-Term Liquidity: Golden Eagle has ample liquidity to support business operations during this downturn. Its readily available cash of CNY0.9 billion (reported CNY5.1 billion) was more than sufficient to cover short-term debt of CNY273 million at end-2019. In addition, it has unutilised banking facilities of CNY16 billion. It has USD430 million and HKD1,781 million in syndicated loans due in April 2021, of which Fitch expects Golden Eagle will refinance some of the outstanding balance.

DERIVATION SUMMARY

Golden Eagle has a weaker market position and significantly smaller scale than Macy's Inc. (BB+/Negative), but benefits from potentially more favourable consumer demand, and has been more resilient after corrective actions taken over the last few years to offer more relevant retail formats.

Golden Eagle has a smaller store footprint and higher leverage than Dillard's, Inc. (BB/Negative), which offset its stronger profitability than Dillard. Both companies are regionally concentrated.

No Country Ceiling, parent/subsidiary or operating environment aspects have an impact on the rating

KEY ASSUMPTIONS

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

Gross sales proceeds to decline by a quarter in 2020, with rental income and concessionaire declining by more than direct sales (2019: -1% excluding sale of properties)

EBITDA margin relative to operating revenue of 38% in 2020 and improving to 41% in 2023 (2019: 42%), excluding the contribution related to property development

Capex of CNY1 billion (including capex for projects under development) in 2020-2023 (2019: CNY466 million, capex for projects under development is not included)

55% dividend payout rate annually (2019:50%)

RATING SENSITIVITIES

Developments That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Operating performance avoiding the negative sensitivities below for a sustained period may lead to a revision of the Outlook to Stable

Developments That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Payables adjusted FFO net leverage (adjusted for lease, payables and customer deposits) sustained above 4.5x (2019: 3.2x)

EBITDA margin sustained below 40% (2019: 42%)

Sustained negative free cash flow

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

Sufficient Liquidity: Golden Eagle had readily available cash and cash equivalents of CNY0.9 billion (reported CNY5.1 billion) at end-2019, against short-term debt obligations of CNY0.3 billion. In addition, it had unutilised banking facilities of CNY16 billion.

SUMMARY OF FINANCIAL ADJUSTMENTS

Leases: Fitch has adjusted the debt by adding 8x annual fixed operating lease expenses (2019: fixed rental expense of CNY19 million)

Payables-Adjusted Net Leverage: 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

Operating EBITDA: 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

Readily available cash: Fitch has classified structured deposits as readily available cash (2019: CNY611 million)

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONS

ENTITY/DEBT	RATING		PRIOR
Golden Eagle Retail Group Limited	LT IDR	BB 	Affirmed		BB

senior unsecured

LT	BB 	Affirmed		BB

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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