Beijing Easyhome Investment Holding Group Co., Ltd.

Transcription

1 Credit Opinion 19 November 2018 Beijing Easyhome Investment Holding Group Co., Ltd. Hong Kong Category: Corporate Rating Rating Type: Solicited Rating Industry: Home Improvement and Furniture Shopping Mall Operator Long-term Credit Rating: A g + Rating Outlook: Stable Analysts: Jacky Lau Vincent Tong jacky_lau@ccxap.com vincent_tong@ccxap.com Director of Credit Ratings: Guo Zhang guo_zhang@ccxap.com Tel.: Key Indicators Beijing Easyhome Investment Holding Group Co., Ltd. [1] 2018H Total Assets (RMB billion) Total Assets (USD billion) [2] Net Assets (RMB billion) Net Assets (USD billion) [2] Total Revenue (RMB billion) Total Revenue (USD billion) [2] Net Profits (RMB billion) Net Profits (USD billion) [2] EBITDA Margin (%) Total Capitalization Ratio (%) Net Gearing Ratio (%) Total Debt / EBITDA (x) Net Debt / EBITDA (x) EBITDA / Interest (x) [1] Consolidated financial statements from 2015 to 2017 in accordance with PRC GAAP audited by Zhongxinghua Certified Public Accountants LLP. 2018H1 figures denote for the six months ended 30 June 2018 from unaudited results. [2] Exchange rates for 2015 (1 USD = CNY), 2016 (1 USD = CNY), 2017 (1 USD = CNY) and 2018H1 (1 USD = CNY) announced by PBOC Source: Company data, CCXAP research 1

2 Rating Drivers Leading market position in home improvement and furnishings industry Nationwide business coverage and high brand recognition Moderate credit metrics by steady revenue growth Adequate liquidity position, improving cash generations and good funding capability Rapid business expansion with increasing capital expenditure Rating Rationale The A g + rating of Beijing Easyhome Investment Holding Group Co., Ltd. ( Easyhome or the Company ) is underpinned by the Company s (1) solid market position in Mainland China with reputable brand name; (2) reputable brand recognition and multiple mall network underpinned by asset-light model; and (3) adequate liquidity buffer. However, the rating is also constrained by (1) the volatile business nature of China s property market which may affect the retail market of chain home improvement; (2) increased capital expenditure pressure due to self-owned shopping mall project pipeline; and (3) rapid expansion of franchised shopping malls which may exert pressure on management capability. Rating Outlook The stable outlook reflects our expectation that Easyhome will continue to be the market leader in chain home-improvement retail mall sector, benefitting from strong home refurbishment demand and rising number of home buyers. The Company is expected to generate steady earnings and cash flows from its mall business. What could upgrade the rating? The rating could be upgraded if the Company (1) improves its market share in home improvement retail mall sector in Mainland China; (2) achieves a track record of enhancing profitability; (3) improves its credit metrics; and (4) robust asset quality, such as growing holding of well-located properties. What could downgrade the rating? The rating could be downgraded if the Company s (1) profitability deteriorates obviously; (2) credit metrics worsen than anticipated; or (3) liquidity weakens significantly. Corporate Profile Founded in 1999, Easyhome is a leading operator of home improvement and furniture shopping malls. As of 30 June 2018, Mr. Wang Linpeng was the controlling shareholder of the Company who directly held 17.5% and indirectly held 76.3% of the Company s shares through Beijing Zhongtian Jiye Investment Management Co., Ltd. and Beijing Hualian Zongyi Advertising Co., Ltd.. 2

3 Detailed Rating Considerations 1. The home improvement and furnishings retail market expanded rapidly under intensive market competition Benefited from ongoing increase in consumer demand and national disposable income in China, the demand of home building materials and products grew strongly in the past decade, which leaded to rapid growth in retail sales of chain stores of home improvement and furnishings as well. According to the statistics of the National Bureau of Statistics in 2016, the accumulative value of retail sales of furniture category, construction and decoration material categories grew by 14.0% YoY. However, the home furnishing demand was partly fluctuated by the housing market. Affected by the cooling down of domestic property market in late 2017, the gross sales of national above-scale home improvement and furniture shopping malls was RMB billion according to the Department of Circulation Industry Development in Ministry of Commerce, decreased by 22.6% from RMB 1,185.3 billion in Rivalry has come of age as competition in China s home improvement and furnishings market grew stronger. Business of home building materials and furniture retail presented lower concentration than in other retail industries since a number of small and medium-sized enterprises operated business with high dispersity across the country. Thus, the mall operators were keen to develop a reputable brand name and provide premium services to enhance customers stickiness and ultimately outperform the competitors. After years of market development and integration, well established companies with strong business background, as well as large-scale operation with sufficient number of malls became the well-known market leaders like Red Star Macalline, Easyhome, Jeshing Group and B&Q. In addition, the newly online business model, such as Internet-based home improvement, has become a big challenge to the traditional home furniture mall operators. The online sales procedure simplified the traditional buying process for customers, and was more cost saving in terms of rents, advertising fees and operational cost for producers, thus increased efficiency in production management. The cost and channel advantages of Internet-based home improvement model fascinated a number of online commercial giants entering into the sector. We expect that the market competition will be more intense and operators who successfully combine traditional strengths with the modern internet plus business model will gain benefit in the new business cycle. 2. Market leading mall operator with nationwide business coverage deep to countylevel Easyhome is the second largest home improvement and furniture shopping mall operator in Mainland China. The Company targets the medium and high-end market, providing one-stop services with comprehensive range and brands of interior design and decoration, as well as furnishing materials to improve the customer shopping experience. 3

4 As of 30 June 2018, the Company operated 223 malls with a total operating area of 8.5 million sqm spanning 29 provinces from tier-one to tier-five cities across China, including self-operated malls (selfowned mall or leased mall) and franchised malls (entrusted management chain or franchised chain). In terms of regional breakdown, the shopping malls were mainly located in North China, Central China and East China with 23.3%, 17.5% and 17.5% of the total number, respectively. The rest primarily spread over Northwest China, Southwest China, Northeast China and South China. The Company has actively and strategically achieved expansion of self-operated malls in key cities such as centralgoverned municipalities and provincial capitals, entrusted management chain in prefecture-level cities and franchised chain in county-level cities. The strategic market presence ideally adapting to various levels of cities enables Easyhome to possess significant bargaining power and establishes longstanding relationship with brands, customers and property owners. Exhibit 1. Number of shopping malls by area as of 30 June 2018 Benefited from strong home refurbishment demand from the rising number of home buyers and existing property owners, Easyhome is expected to maintain its market position impelled by strong pipeline of malls and nationwide business coverage. Albeit the intense competition in home improvement and furnishings retail market, we expect that the Company will maintain its leading position because of its scale advantage and liquidation of small-sized enterprise in this highly fragmented and competitive industry. 3. High brand recognition and multiple mall network underpinned by asset-light model With its proven track record in opening successful malls and experienced management under assetlight business model, Easyhome continued to expand its shopping mall business. As of 30 June 2018, the Company operated 82 self-operated malls with an operating area of 4.2 million sqm nationwide, 71 of which were leased from property owners, while the remaining 11 malls were self-owned. Easyhome entered into property lease contracts that ranged from 15 to 20 years and therefore the cost of rents remained relatively stable, though upward pressure on rents may exist in the future. The standardized mode of operation and asset-light business model alleviated the capital expenditure pressure from growing operating scale and intensive property investment. 4

5 Easyhome further leveraged its branding power through franchised malls, whereby the Company cooperated with the franchisee and provided pre-project consultation, business management consultation and other services. In return, Easyhome received initial franchise fees and regular royalty fees. As of 30 June 2018, there were 141 franchised malls, including 100 entrusted management chains and 41 franchised chains, with a total operating area of 4.3 million sqm, growing from 42 franchised malls at end of 2015 and to 70 franchised malls at end of Exhibit 2. Number of malls, operating area, gross merchandise volume and occupancy rate by types of shopping malls Easyhome's gross merchandise volume was RMB 53.8 billion in 2017, comparing with that of RMB 42.8 billion in 2016 and RMB 35.2 billion in 2015, representing improvement in attractiveness to tenants. This was also supported by the Company's stable occupancy rate in the past three years, of which the average occupancy rates of self-operated malls and franchised malls were at around 97% and 93%, respectively. Some of the renowned brands offered in the shopping malls included Siemens, Nippon Paint, Ligne Roset, TATA Wooden Door, etc. As tenants valued a strong network and brand recognition, the Company s strong market presence and good reputation help it solicit tenants with high quality to ensure successful opening and operation of the shopping malls, and vice versa. 5

6 4. Speedy business expansion partially supported by strategic investors may exert capital expenditure pressure In February 2018, the Company received a combined RMB 13 billion of strategic investment from 16 investors, including Alibaba Group ( Alibaba ), Taikang Insurance Group and Yunfeng Capital. Alibaba invested about RMB 5.5 billion for a 15% stake in Yundihui New Retail, a subsidiary of Easyhome. The two parties declared to have strategic cooperation in digital transformation of Easyhome s malls through mobile payment, logistics platform and e-commerce systems. In the next 5-10 years, the Company is planning to complete online and offline integration based on home furnishing business and supported by four pillars including e-commerce, logistics, finance services and Big Consumption Model, which will offer extensive products like Easyhome Experience Mall covering entertainment, restaurants, supermarkets, cinema, fitness and so on. According to the expansion plan, Easyhome is determined to boast over 600 physical malls and achieve over RMB 100 billion gross merchandise volume through online and offline platform annually before In line with the strategy, the Company may consider acquisition of the leased malls by taking advantage of its excess cash position. In August 2018, Easyhome acquired 100% equity interest of Guangdong Dejun Investment Company Limited for BMB 7.2 billion. The above investment was aimed to optimize the Company s asset allocation in first-tier cities which mainly changed the Beijing North Fourth Ring Mall into self-owned one. As of 30 June 2018, the Company s major projects under construction included Guangdong Shengya mall and Hainan Sanya mall. The aggregated investment amount was approximately RMB 1.4 billion with invested amount of RMB 0.5 billion. The aggregated investment amount of five projects under planning was estimated at approximately RMB 7.3 billion while the invested amount recorded RMB 2.4 billion. Exhibit 3. Projects under development as of 30 June 2018 Projects Planned GFA (thousand sqm) Total investment Invested amount Additional investment amount needed Guangdong Shengya Hainan Sanya Total , Exhibit 4. Projects under planning as of 30 June 2018 Projects Planned floor area (thousand sqm) Total investment Invested amount Additional investment amount needed Hubei Huanggang ,370-1,370 Hubei Luotian Xinjiang Hongguangshan ,520 1,097 1,423 6

7 Taiyuan Hexi Changchun Gaoxin ,700 1,221 1,479 Total ,290 2,431 4,859 Rapid business expansions may exert certain pressure on its capital expenditure and managerial resources, such as self-owned properties with high initial investment and bore fair value fluctuation risk. Increasing numbers of franchised malls operated by the franchisees could adversely affect its reputation if any negative incident concerning the shopping premises occurred. Besides, development on logistics sector and financial service platform to diversify its operations could also place a substantial strain on its managerial and financial capability in the future. 5. Improved in revenue, but relatively weak profitability given large proportion of rent expenses With expanding shopping mall portfolio, Easyhome recorded stable growth in revenue. The Company generated total revenue of RMB 9.8 billion in 2017, significantly increased as compared to RMB 6.9 billion in 2015 and RMB 7.3 billion in In 2017, the Company participated in the shopping malls decorating projects, which helped increase the revenue from home decorating segments by 135.8% YoY to RMB 1.0 billion. Yet, the gross profit margin decreased to 18.6% in 2017 from 34.0% in 2016 given the low profitability of those projects. In 2018, the Company decided not to accept any new shopping mall decorating projects, and hence, we expect that the revenue from home decorating will decline while the gross profit margin will improve as compared to Exhibit 5. Revenue and Profitability in H1 Easyhome demonstrated a relatively weak profitability in terms of EBITDA margin as compared to peers given adherence of asset-light operating model with large proportion of rent expenses. The Company s EBITDA margin was 35.1% in 2015, 33.7% in 2016 and 26.2% in The decrease in fair value gain weakened the profitability of the Company, while change in fair value was RMB million in 2015, RMB million in 2016 and RMB 57.0 million in If excluding the change in fair value, the adjusted EBITDA margin would be 24.7% in 2015, 23.7% in 2016 and 25.6% in

8 In 2018H1, the Company reported total revenue of RMB 4.6 billion, increasing by 9.5% YoY. Given the expansion plan of the Company, we expect that the revenue from home furnishing and building materials shopping malls will demonstrate an upward trend in the next months. 6. Moderate credit metrics due to strong revenue generation With the development of self-owned malls and mall improvement projects, Easyhome reported total debt of RMB 11.0 billion as of 30 June 2018, significantly increased as compared to RMB 1.6 billion at end-2015, RMB 5.1 billion at end-2016 and RMB 9.5 billion at end-2017, respectively. Easyhome demonstrated an increasing trend on debt leverage, of which total capitalization ratio increased to 53.0% at end-2017 from 21.9% at end In 2018, the Company received RMB 13 billion of strategic investment, which helped strengthen its capital base and improve its debt leverage. As of 30 June 2018, the total capitalization was 37.0% and the net gearing ratio was 34.4%. Exhibit 6. Short-term debts, long-term debt and debt leverage The credit metrics of Easyhome weakened because of heightening debt level, but still maintained a moderate credit metrics with strong revenue generations. The net debt/ebitda ratio was 2.7x and EBITDA interest coverage ratio was 7.7x in 2017, as compared to 1.0x and 23.4x in Given sizeable capital expenditure and expansion plan on self-owned stores, we expect that the debt level of the Company may increase and we will continue to monitor its credit metrics. 7. Adequate liquidity position, improving cash generations and good funding capability The concentrated debt structure of Easyhome may exert refinancing pressure. The short-term debt increased from RMB 1.7 billion at end-2017 to RMB 3.3 billion at mid-2018 due to the acquisition of investment properties. As of 30 June 2018, the Company reported that RMB 0.6 billion and RMB 6.7 billion of debt will be matured in 2018H2 and 2019, accounting for 5.1% and 60.2% of total debt respectively. 8

9 As of 30 June 2018, the cash/short-term debt ratio was 1.4x, implying that the Company had enough cash reserve for short-term debt repayments. As of 30 June 2018, the restricted assets of the Company amounted to RMB 9.1 billion RMB, or accounted for 20.6% of total assets, which included investment properties and fixed assets. Rely to its asset-light operating model, the Company had a relatively small scale of restricted assets as compared to its peers. The cash generating capability of the Company improved with the expansion of shopping mall portfolio. The net cash flow from operating activities of the Company amounted to RMB 2.4 billion in 2017, as compared to RMB 1.1 billion in 2015 and RMB 1.3 billion in Given the acquisition of investment properties and shopping malls development, the Company demonstrated a sizeable cash outflow from investing activities in 2018H1, recording a net cash outflow of RMB 7.5 billion. Easyhome had good funding capability on the onshore market, which helped maintain a relatively low borrowing cost. In 2018H1, the Company average borrowing cost was about 5.4%. In July and October 2018, the Company issued RMB 0.6 billion corporate bonds in aggregate with coupon rate of 7.5% and 6.9% respectively. In addition, the Company had credit facilities of RMB 11.7 billion as of 30 June 2018, of which the unutilized credit facilities amounted to RMB 4.5 billion. The adequate liquidity position and improving cash generations could provide a consolidate liquidity buffer to the Company. However, we will continue to monitor the funding channels as well as funding costs of the Company given its concentrated debt structure and sizeable capital expenditure that may exert financing pressure to the Company. 9

10 Appendix. CCXAP s Credit Rating Symbols and their Meaning China Chengxin (Asia Pacific) Credit Ratings Company Limited uses simple, consistent, and comparable rating symbols expressed in letters to represent the credit worthiness of rated entities and rated debt issues. A. Long-Term Credit Ratings A long-term credit rating refers to a rating for a period of more than 12 months. Rating Symbol AAAg AAg+ AAg AAg- Ag+ Ag Ag- BBBg+ BBBg BBBg- BBg+ BBg BBg- Bg+ Bg Bg- CCCg CCg Cg Dg Definition Capacity to meet commitments on short-term and long-term debts is extremely strong. Business is operated in a virtuous circle. The foreseeable uncertainty on business operations is minimal. Capacity to meet short-term and long-term financial commitments is very strong. Business is operated in a virtuous circle. Foreseeable uncertainty in business operations is relatively low. Capacity to meet short-term and long-term commitments is strong. Business is operated in a virtuous circle. Business operation and development may be affected by internal uncertain factors, which may create fluctuations in profitability and solvency of the issuer. Capacity to meet financial commitment is considered adequate and capacity to meet short-term and long-term commitments is satisfactory. Business is operated in a virtuous circle. Business is affected by internal and external uncertainties. Profitability and solvency may experience significant fluctuation. Principal and interest may not be sufficiently protected by the terms of agreement. Capacity to meet short-term and long-term financial commitment is relatively weak. Financial commitment towards short-term and long-term debts is below average. Status of business operations and development is not good. Solvency is unstable and subject to sustainable risk. Financial commitment towards short-term and long-term debts is bad. Business is affected by internal and external uncertain factors. There are difficulties in business operations. Solvency is uncertain and subject to high credit risk. Financial commitment towards short-term and long-term debts is very bad. Business is affected by internal and external uncertain factors. There are difficulties in business operations. Poor solvency with very high credit risk. Financial commitment towards short-term and long-term debts is extremely bad. Business operations are poor. There are very limited positive internal and external factors to support business operation and development. Extremely high credit risk is found. Financial commitment towards short-term and long-term debts is insolvent. Business falls into a vicious circle. Very limited positive internal and external factors are found to support business operations and development in positive cycle. Extremely high credit risk is seen and is near default. Unable to meet financial commitments. Default is confirmed. B. Long-term Credit Rating Outlook A rating outlook is the medium- and long-term trend of the credit rating of a rated entity. In formulating a rating outlook, CCXAP considers the potential change in economic and commercial factors from a medium- and longterm perspective for a period of 12 to 18 months. Positive Negative Stable Indicates a rating with an ascending trend Indicates a rating with a descending trend Indicates the rating is likely to be stable 10

11 Copyright China Chengxin (Asia Pacific) Credit Ratings Company Limited. All rights reserved. Disclaimer Credit ratings assigned by China Chengxin (Asia Pacific) Credit Ratings Company Limited ( CCXAP ) are based on CCXAP s rating principles of independence, fairness and objectivity. A credit rating reveals and ranks specific risks, but it does not cover all risks embedded in the rated entity or the rated debt issue. Credit ratings are not recommendations for investors to buy, sell or hold debt securities, nor measurements of market value of the rated entities or the rated debt issues. While CCXAP has obtained information from the rated entity and sources it believes to be reliable, CCXAP does not perform an audit and undertakes no duty of due diligence or independent verification of information it receives from the rated entity. CCXAP s public ratings are available at (Rating Results) and may be distributed through media and other means. The methodology used in this rating is Rating Methodology for REITs and REOCs dated July 2018, available at (Rating Process -> Rating Methodology). CCXAP has distributed and disclosed this solicited credit rating report to the rated entity prior to the publication date. All information published in this document belongs to CCXAP and is subject to change without prior notice by CCXAP. CCXAP considers the information contained in this document reliable. However, all information is provided on an as is and as available basis and CCXAP does not guarantee the accuracy, adequacy, completeness or timeliness of any information included in this document. None of the information may be used, including without limitation reproducing, amending, sending, distributing, transferring, lending, translating, or adapting the information, for subsequent use without CCXAP s prior written permission. CCXAP is not liable for any in whole or part caused by, resulting from or relating to any error (neglect or otherwise) or other circumstance or contingency within or outside the control of CCXAP s or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, interpretation, analysis, editing, transcription, publication, communication or delivery of any such information, or any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation lost profits), even if CCXAP, or representatives thereof, are advised of the possibility of such damage, losses or expenses. China Chengxin (Asia Pacific) Credit Ratings Company Limited Address: Suites , 8/F, Jardine House, 1 Connaught Place, Central, Hong Kong Website: info@ccxap.com Tel: Fax: