Intime Retail (Group) Co . Ltd. Rating Raised To #BBB-# And #cnA-# On Alibaba#s Group Outlook Stable

Stocks and Financial Services Press Releases Thursday May 18, 2017 17:22
HONG KONG--18 May--S&P Global Ratings

HONG KONG (S&P Global Ratings) May 18, 2017--S&P Global Ratings today raised   its long-term corporate credit rating on China-based department store operator Intime Retail (Group) Co. Ltd. to 'BBB-' from 'BB-'. The outlook is stable. At the same time, we raised our long-term Greater China regional scale rating on Intime to 'cnA-' from 'cnBB+'. We have removed the ratings from CreditWatch, where they were placed with positive implications on Jan. 10, 2017.

We raised the rating because we expect Intime to benefit from extraordinary group support from its new controlling shareholder, Alibaba Group Holding Ltd. (A+/Stable/--; cnAAA/--). Following the approval of the privatization by Alibaba Investment Ltd., a wholly-owned subsidiary of Alibaba Group, its founder Shen Guojun and other joint offerors, Alibaba will hold a majority 73.9% stake in the company and expects to carry out its strategic integration   plans with Intime.

We assess Intime as strategically important to Alibaba Group, and therefore   incorporate three notches of uplift in our rating on the department store   operator, due to the following considerations:

Intime is important to the group's long-term strategy despite its limited financial contribution to the overall group. We consider Intime will reinforce Alibaba's strategy of integrating online and offline platforms, given Intime's store network of department stores and shopping malls in the Zhejiang province. In addition to its importance to the group's strategy, Intime is unlikely to be sold given Alibaba's Hong Kong dollars (HK$) 12.5 billion investment for the privatization.Alibaba has a long-term commitment in Intime, given the existing board representation by Zhang Yong, the CEO of Alibaba, who is also the chairman of Intime.

We believe there will be further changes to the board representation after the completion of the transaction. Intime has a satisfactory market position as a leading department store operator in China, with 29 department stores and 20 shopping malls in China. Its largest presence is in Zhejiang province, where Alibaba is headquartered. We estimate Intime's debt-to-EBITDA ratio to marginally increase to 5.0x-5.5x in the next 12-24 months, from 4.8x in 2016, due to continued high capital expenditures and working capital outflows.

However, we expect the company to maintain its EBITDA interest ratio at 2.8x-3.3x in the next 12-24 months, compared with 3.0x in 2016, due to its competitive funding costs. We have not factored in potential debt reduction or lower funding costs after the transaction, given it is still uncertain at this stage.

Intime has been improving its retail mix toward shopping malls, in line with consumers' preferences for lifestyle concepts. In our view, this will support the company's differentiation strategy and sales growth, despite subdued sales prospects of department stores in China in the next 12 months due to rising competition.

The stable outlook reflects our expectation that Intime will be a strategically important subsidiary of Alibaba Group, given our view of its importance to the group's long-term strategies.

We also expect the company will remain financially disciplined and not undertake material debt-funded expansion or shareholder-friendly measures, such that it can maintain its EBITDA interest coverage ratio at 3.0x-4.0x over the next 12-24 months. We may downgrade Intime if the company's operating performance deteriorates significantly, such that its EBITDA interest coverage declines toward 2.0x without signs of improvement. This could happen if: (1) the company's sales growth or margins are significantly lower than we expect; or (2) the company takes on more aggressive debt-funded expansions or pursue shareholder-friendly measures.

We may raise the rating on Intime if there is a higher likelihood of extraordinary parent support or an improvement of Intime's stand-alone credit profile.

We would assess stronger group support if Intime (1) transitions to playing a more integral role in the group's strategy and operations, such as having significant business overlap, material synergy, and integration in financial management; (2) forms a closer link with the group's reputation, brand name, and risk management; or (3) demonstrates stronger, long-term commitment of support from the group's senior management.

An improvement in the stand-alone credit profile can occur if Intime's operating efficiency, cash flow adequacy, and leverage improve significantly, such that its debt-to-EBITDA ratio decreases below 4.0x and EBITDA interest coverage remains above 3.0x.


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