TEXT-S&P summary: Intime Department Store (Group) Co. Ltd.

(The following statement was released by the rating agency)

Dec 17 -

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Summary analysis -- Intime Department Store (Group) Co. Ltd. ------ 17-Dec-2012

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CREDIT RATING: BB-/Stable/-- Country: China

Primary SIC: Miscellaneous

retail stores,

nec

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Credit Rating History:

Local currency Foreign currency

04-Jul-2011 BB-/-- BB-/--

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Rationale

The rating on Intime Department Store (Group) Co. Ltd. reflects the

China-based department store operator's business concentration in its home

market of Zhejiang, and its "aggressive" financial risk profile due to a rapid

growth strategy. Intime's leadership in its home market and its good growth

momentum from a younger network than peers' temper these weaknesses. The

company's favorable concessionaire business model and the good long-term

growth prospects for the Chinese retail sector also support the rating. We

assess Intime's business risk profile as "fair."

Intime's business is likely to remain concentrated in its home market and the

company's speed of diversifying into more provinces is slow. As of Sept. 30,

2012, 74.9% (78.2% in 2011) of Intime's gross sales proceeds (GSP) came from

Zhejiang, where 62% of the company's stores are located. The growth in retail

sales of consumer goods in Zhejiang in the first six months of 2012 lagged the

national growth of 14.4% for the first time. Sales in Zhejiang rose 13.0% in

the period compared with a 17.4% growth in 2011. Any economic or developmental

shock to the region might reduce Intime's cash flow substantially. In

addition, Intime's store concentration remains high--its flagship Hangzhou

Wulin store accounted for 18% of GSP in the first nine months of 2012. The

company's leading market position in the province, Zhejiang's higher

disposable per capita income, and the still strong retail growth in China

partly offset this risk.

In our view, Intime's growth strategy has been aggressive but is toning down.

The company's ratio of average capital expenditure to revenue for 2009-2011

was 67%. We expect this ratio to be about 60% over the next three years.

Intime's gross floor area (GFA) grew at a compounded annual rate of 57.4% in

2006-2011, higher than the industry average of 25%. We expect the company's

GFA growth to slow to about 20% in 2012, in line with an industry-wide trend.

Intime increased the number of its stores to 29 at the end of September 2012,

from three stores at the end of 2005. In the first nine months of 2012, the

company added three stores compared with its previous plan to open four to

five stores during the year. We anticipate that Intime will open four to five

stores in 2013.

Intime's revenue growth will likely be solid in the next 12 months. Factors

that underpin growth are: (1) aggressive network expansion in the past; (2)

higher-than-national-average disposable income in Zhejiang province, despite a

softening in growth rate; (3) good growth potential in the less competitive

and penetrated central and western China markets, and (4) younger stores. We

also expect Intime to benefit from a positive long-term retail sales outlook

in China.

In our opinion, Intime will continue to benefit from its favorable

concessionaire sales model that contributes almost 90% of revenues. The

company is also centralizing brand management at the group level to increase

bargaining power to push up the concessionaire rate. We expect the share of

revenues from concessionaire sales to remain stable in 2012 despite a slightly

lower concessionaire rate stemming from increased competition and a weakening

economy.

We anticipate that Intime's lending exposure to property development will

weaken its business risk profile. The company has been involved in the

construction of residential property and office spaces along with building its

own department stores. This has been through loans from Intime to other

companies related to Intime's chairman, Mr. Shen Guojun. Such loans edged up

to Chinese renminbi (RMB) 1,101.4 million as of June 30, 2012, from RMB1,069.2

million at the end of 2011. These loans account for about 6.2% of Intime's

total assets. So far, we have not seen material risks to Intime's corporate

governance practice; we note that the company's property-related exposure is

mainly to support its policy to own 50% of its department stores. Increased

checks and balances at the board level after The Government of Singapore

Investment Co. Pte. Ltd. (not rated) became a more significant shareholder in

Intime have mitigated corporate governance risks.

Intime's financial metrics, particularly the ratio of operating-lease-adjusted

total debt to EBITDA, are aggressive, in our view. As of June 30, 2012, the

ratio of total adjusted debt to EBITDA edged down to 5.7x, from 5.8x at the

end of 2011. Excluding about RMB4.2 billion of operating-lease-adjusted debt,

the leverage ratio would have been 3.9x as of June 30, 2012. We continue to

fully adjust Intime's operating leases and anticipate that the ratio will fall

back to about 5.5x by the end of 2012, according to our base case.

Nevertheless, in our opinion, Chinese retailers often have greater flexibility

to terminate their operating leases compared with peers in other countries.

Liquidity

We view Intime's liquidity is "adequate," as defined in our criteria. We

expect the company's sources of liquidity to exceed its uses by more than 1.2x

over the next 12 months. Our liquidity assessment incorporates the following

factors and assumptions:

-- Intime's liquidity sources include an unrestricted cash balance of

about RMB1.5 billion at the end of November 2012, cash flow from operations of

more than RMB1.1 billion for the next 12 months, and working capital inflows.

-- The company's liquidity uses include committed capital expenditure,

debt repayment, and dividend payments totaling less than RMB2 billion.

-- Net sources will remain positive and Intime will be able to maintain

compliance with the financial covenants on its renminbi bonds even if EBITDA

declines 15%. The convertible bonds and onshore borrowings have few financial

covenants. The bond document has a change of control clause and delisting put

option for bondholders.

-- The company can absorb low-probability high-impact shocks because of

its good conversion of EBITDA to discretionary cash flow.

-- Intime had undrawn banking facilities of about RMB2.0 billion-RMB2.5

billion at the end of November 2012. We do not consider such facilities in our

liquidity calculation due to their uncommitted nature in China. Nevertheless,

they do provide financial flexibility.

We also note that the convertible bonds the company issued in 2010 may not be

converted into equity before Oct. 20, 2013, given the weak performance of

Intime's stock price over the past year. A full redemption of these bonds will

weaken Intime's liquidity position in 2013. We treat the convertible bonds as

debt.

Outlook

The stable outlook reflects our expectation that Intime will maintain its pace

of store expansion, keep a stable concessionaire rate, and improve operating

efficiency to match its enlarged scale. We also expect the company to continue

to focus on its core business and improve its operating cash flow.

We could lower the rating if Intime's sales ramp-up from new stores is slower

than our expectation, the company deviates from its core business, corporate

governance risk heightens, or if the company's financial risk profile weakens.

Downgrade triggers would be the ratio of adjusted debt to EBITDA staying above

6x on a sustained basis.

Upgrade potential is limited at the moment and hinges on Intime's ability to

execute its expansion plan with financial discipline, generate stable cash

flow, and rely less on debt financing. These measures could lead to

sustainable improvements in the company's scale, diversification, and

financial risk profile, such that the ratio of adjusted debt to EBITDA stays

below 4x.

Related Criteria And Research

-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global

Corporate Issuers, Sept. 28, 2011

-- Key Credit Factors: Business And Financial Risks In The Retail

Industry, Sept. 18, 2008

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008

Source: http://news.yahoo.com/text-p-summary-intime-department-store-group-co-090001581--sector.html

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