OREANDA-NEWS. Fitch Ratings says China-based department-store operator Parkson Retail Group Limited's (B/Negative) proposed disposal of a store in Beijing ought to reduce the company's leverage, even as its ratings remain constrained by the weak profitability and continued sales decline of its core operations.

Parkson announced on 14 September that it expects to generate CNY2.3bn in gross proceeds (CNY1.9bn in net proceeds) from the proposed disposal of: i) a subsidiary that owns, amongst other things, the building that houses Beijing Sun Palace Parkson, a store that has been unprofitable since it started operations in 2010, and ii) a shareholders loan owed by the subsidiary it plans to sell. Fitch estimates Parkson may swing to a small net cash position after the transaction is completed. After adjusting for operating leases, customer prepayments and 85% of trade payables, Fitch expects payables adjusted FFO net leverage to fall to below 6x by the end of 2016, compared with our previous forecast of 6.9x.

Still, the disposal does not create upward rating pressure, as it does not address Parkson's core issue of declining sales and profitability. Parkson had reported a 9.7% decline in same-store-sales and a 12% decline in gross sales proceeds in 1H16, and reported a small operating loss.

We may take negative rating action if its FFO fixed-charge coverage were to stay less than 1.2x, payables-adjusted FFO net leverage remained above 7x, and its same-store-sales and margins were to keep deteriorating. We may take positive rating action if Parkson could at least halt the decline in same-store sales or stabilise them.