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China Consumer Retailers Face Cash Flow Pressure

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Sunday, May 03, 2020 12:43 PM / by Fitch Ratings/ Header Image Credit: China Daily

China's consumer-retail sector will face operating cash flow pressures in 1H20, propelling the exit of some small and financially weak players, says Fitch Ratings. However, we expect overall retail revenue to return to yoy growth by 2H20 as the economy recovers.

Chinese consumer companies' business performance in 1H20 will depend on their demand stickiness, with daily necessities outperforming other parts of the market. China retail sales fell by 20.5% yoy over January-February. They posted another steep decline, of 15.8%, in March, even though various lockdowns in place across the country were eased over the course of the month.

The impact of the pandemic on profitability will be greater than on revenue for many retailers. Several may find it difficult to avoid price discounting as they seek to fend off competition for scarce demand. Firms will also face a variety of fixed costs, such as long-term leases, and with revenue falling, the ratio of costs to sales will rise.

The authorities have attempted to encourage spending through the distribution of shopping coupons and extended weekends since end-March. As of 27 April, 20 provinces had issued over CNY4.5 billion in consumption vouchers, and eight provinces and cities had urged companies to extend weekends to 2.5 days. Policy support for retailers may also extend to loan forbearance from financial institutions for some larger companies.

Consumption growth has rebounded in provinces with stimulus measures in place, but the effectiveness of such moves, particularly over the longer term, is difficult to quantify. The capacity of some local governments to adopt consumption subsidy programmes remains constrained by their financial position.

The sub-sectors hit hardest by the retail downturn include catering, department stores and tourism, where businesses rely heavily on outdoor traffic. The lingering effects of the coronavirus on consumer confidence mean sales for many sub-sectors that rely on outdoor traffic will continue to contract yoy in 2H20. Same store sales (SSS) of Yum China, a good indicator of consumer traffic, fell by 20% yoy over March 2020. SSS for Starbucks (BBB+/Negative) in China also contracted, declining by 42% yoy for the last week of March, although this was an improvement from the 78% plunge in February. Fitch affirmed department-store operator Golden Eagle Retail Group's Long-Term Issuer Default Rating at 'BB' in April, but revised the Outlook to Negative from Stable, reflecting the coronavirus' impact on sales and uncertainty over the timing of the recovery.

Some consumer-focused sub-sectors still expect to post earnings growth, even over 1Q20. These include pork breeders, frozen-food producers and milk-powder makers. Large corporates with stronger pricing power and supply chains that faced less disruption from lockdowns are more likely to outperform. Wens Foodstuff (BBB+/Stable) recorded net profit of CNY1.9 billion in 1Q20, compared with a CNY460 million loss in 1Q19, on the back of tighter supply conditions and high pork prices.

E-commerce sales rose by 3% yoy in January-February, accelerating to 6.3% in March. Their contribution to total retail revenue rose to 27.6% in March, up 6 percentage points from a year earlier. The coronavirus crisis may prompt many retailers to accelerate digital investments.

Online-focused retailers continue to outperform the sector as a whole. JD.com anticipates revenue will rise by over 10% yoy in 1Q20. Fitch expects Alibaba (A+/Stable) to record a revenue decline in 1Q20 on temporary supply disruptions. However, transactions at its 'new retail' platform, Freshippo, surged by over 300% during the period, according to iResearch. The rising audience for livestreaming during the crisis has also stimulated the medium's popularity among merchants and may help to drive online sales.