After several years of rapid expansion, in 2019, the home store leader Red Star Macalline Home Furnishing Group Co., Ltd. (referred to as "Red Star Macalline", 01528.HK, 601828.SH) has not had a good life, although it is open Revenue still maintains a double-digit growth rate, but net profit has hardly increased, and the cash flow situation has deteriorated significantly from 2018.

Fitch Ratings recently believes that Red Star Macalline's cash and bank balances are no longer sufficient to cover the short-term debt of 12.5 billion yuan. Therefore, Red Star Macalline's long-term foreign currency issuer default rating, advanced unsecured rating, and 2022 due, 3 The rating of 100 million USD senior notes was lowered from "BBB-" to "BB +".

Increasing income does not increase profits, financial expenses increase substantially

The financial report shows that in 2019, the operating income of Red Star Macalline was RMB 16.469 billion, an increase of 15.7% from the 14.24 billion yuan in the same period of 2018; the gross profit was 10.734 billion yuan, an increase of 13.9% from the 9.426 billion yuan in 2018 ; But the overall gross profit margin was 65.2%, which was a decrease of 1.0 percentage point from 66.2% in 2018.

Although operating income increased substantially, net profit growth was minimal. In 2019, the net profit attributable to shareholders of the parent company of Red Star Macalline was 4.48 billion yuan, which was basically the same as that of 4.477 billion yuan in 2018; after deducting non-recurring gains and losses, the net profit attributable to shareholders of the parent company was 2.614 billion yuan. This is only an increase of 1.85% compared to 2.566 billion yuan in 2018.

According to the analysis of Red Star Macalline's financial report, "Financial Graffiti" shows that the rapid growth of sales expenses, management expenses and financial expenses is the main reason for dragging its profit in 2019, and the increase in financial expenses is the most obvious.

In 2019, the sales cost of Red Star Macalline was 2.291 billion yuan, an increase of 34.7% from 1.70 billion yuan in 2018; the management cost was 1.752 billion yuan, an increase of 17.5% from 1.491 billion yuan in 2018.

The largest increase was in financial expenses, which increased from 1.533 billion yuan in 2018 to 2.260 billion yuan in 2019, an increase of 47.4%, of which interest expenses increased from 1.874 billion yuan in 2018 to 2.677 billion yuan in 2019, an increase 42.9%.

Red Star Macalline believes that the increase in financial expenses is mainly to meet the needs of business development. In 2019, new bank borrowings and the issuance of domestic corporate bonds and commercial real estate mortgage-backed securities led to the increase in the scale of interest-bearing liabilities and the overall increase in market interest rates. 

Operating net cash inflow fell by more than 30%

It is worth noting that the operating net cash inflow of Red Star Macalline has dropped significantly compared with 2018, and the cash on the account is not enough to repay the debt due within the next year.

In 2019, the net cash inflow from the operating activities of Red Star Macalline was 4.094 billion yuan, a decrease of 1.764 billion yuan compared with the net inflow of 5.858 billion yuan in the same period of 2018, a decrease of more than 30%.

Monetary funds and cash also decreased significantly. As of the end of 2019, Red Star Macalline held monetary funds of 7.229 billion yuan, of which the balance of cash and cash equivalents was 6.776 billion yuan, compared with 8.528 billion yuan at the end of 2018 (including the balance of cash and cash equivalents It was 7.615 billion yuan) a decrease of 1.299 billion yuan.

Monetary funds and cash have been significantly less than short-term debt. Of the total interest-bearing liabilities of Red Star Macalline, the portion repaid within one year or on demand is 12.537 billion yuan, and the portion repayable within one year but not more than two years is 98.18. 100 million yuan, the part that should be repaid over two years but not more than five years is 11.939 billion yuan, and the part that should be repaid over five years is 6.907 billion yuan.

In terms of asset mortgages and pledges, as of the end of 2019, Red Star Macalline has invested / pledged investment real estate with a total book value of 69.039 billion yuan and construction in progress and other equity instruments with a total book balance of 707 million yuan Restricted monetary funds are used to obtain loans, and the balance of loans obtained is 30.211 billion yuan.

While the asset-liability ratio continues to rise, the interest multiple is also declining.

Large capital investment reduces operating efficiency

In order to continuously enhance its core competitiveness and implement development strategies, in recent years, Red Star Macalline has continuously promoted the construction of home shopping malls. The number of operating malls and business area have expanded significantly. However, the construction of home shopping malls is a highly capital-intensive industry. The dependence of capital investment is relatively large.

Data shows that at the end of 2015, Red Star Macalline operated and managed a total of 177 "Red Star Macalline" home shopping malls, with an operating area of ​​11,665,000 square meters, distributed in 126 cities across the country; , With a business area of ​​20,161,700 square meters, covering 204 cities across the country.

As of the end of September 2019, Red Star Macalline had 16 projects under construction and planned to be built, with an expected capital expenditure of approximately 6.317 billion yuan.

In recent years, the total asset turnover of Red Star Macalline has always been at a relatively low level of less than 0.2. For the reason that the total asset turnover rate is low, the company believes that it is mainly due to holding a large number of properties. Although this part of the business has strong profitability, it has a long recovery period.

In recent years, the inventory turnover rate has also decreased significantly, from 64.88 in 2016 to 18.23 in the first nine months of 2019. The company believes that the main reason is that since 2017, the development of the import business of high-end furniture has led to an increase in inventory, inventory turnover decline.
 
On May 27, 2019, Red Star Macalline and Alibaba signed a new strategic cooperation agreement to cooperate in the construction of new retail stores and logistics and warehouse distribution. Subsequently, the Red Star Macalline stores in Nanjing and Shanghai took the lead in joining Tmall's home improvement "Tongcheng Station".

In addition, in order to fully stimulate the vitality and enthusiasm of employees, in February this year, the Red Star Macalline equity incentive plan was launched. There are a total of 1,023 incentive objects granted for the first time in this incentive plan. The number of stock options to be granted to this incentive plan is 30.85 million shares, accounting for 0.87% of the company's total share capital of 3.55 billion shares before the incentive.

Financing is the key to future development. Red Star Macalline said that if the financing requirements cannot be met, it will affect the realization of future capital expenditure plans and development strategies and adversely affect the operating activities.

Not enough cash to cover short-term debt, downgrade

On April 7, Fitch downgraded Red Star Macalline ’s long-term foreign currency issuer default rating (IDR), advanced unsecured rating, and senior notes due in 2022, with US $ 300 million in notes, from “BBB-” to “BB +” The reason is that due to the interference caused by the corona virus outbreak and the uncertainty surrounding the overall economic recovery, the financial status of Red Star Macalline will deteriorate.

Fitch believes that the credit rating of Red Star Macalline may not return to the level equivalent to the "BBB-" rating in the medium term. Due to the outbreak of the epidemic, Red Star Macalline has suspended its expansion plan and may review its capital expenditure rate, which will affect the sustainability of its leverage.

Rapid expansion has led to higher capital expenditures and increased leverage. Fitch believes that the leverage ratio of Red Star Macalline may rise to more than 8.0 times in 2020, and the interest coverage rate will drop to less than 2.0 times; the company ’s recurring interest in 2018 The coverage rate is 2.1 times, and is expected to be 2.0 times in 2019.

The data also shows that in addition to pledged investment real estate with a book value of 69 billion yuan to obtain loans, Red Star Macalline also publicly issued 500 million yuan of corporate bonds at a coupon rate on March 10 this year. 4.95%, the remaining amount of corporate bonds is 1.5 billion yuan.

Fitch believes that Red Star Macalline's cash and bank balances in 2019 are 7.2 billion yuan, which is not enough to cover the short-term debt of 12.5 billion yuan.

In terms of its domestic rating, after being assessed by China Integrity International, Red Star Macalline's main credit rating is AAA, and its rating outlook is stable.

At the same time, China Chengxin International is also concerned about the relatively large proportion of restricted assets and the rapid rise in debt scale. In the future, it will face certain capital expenditure pressures and other factors that may affect the operation and overall credit status of Red Star Macalline.