OREANDA-NEWS. Fitch Ratings says that the proposed spin-off of Lifestyle International Holdings Limited's (Lifestyle; BBB-/Stable) China business will substantially reduce capex requirements and thus improve the company's financial profile. However, this will mean the company will rely entirely on its Hong Kong stores, where sales are declining. As a result, Fitch does not see positive rating pressure in the next 12-18 months.

Lifestyle recently announced a plan to spin off its China business by distributing shares in the business to existing shareholders. The China business includes three department stores in Shanghai, Suzhou and Dalian, and a commercial complex in Shanghai that is under construction. The commercial complex will include retail premises, office buildings, and the company's second store in Shanghai. The company also owns an equity stake in Beiren Group, a leading retailer in Shijiazhuang, Hebei province. Lifestyle's China business accounted for just 20% of revenue and 10% of segment profit in 2015. At the same time, most of the planned capex for the group in 2016-2018 will be for the new Shanghai commercial complex.

After the deal is completed, Lifestyle will comprise mainly of the Hong Kong assets, namely SOGO Causeway Bay and SOGO TST. The Hong Kong business is highly profitable (46% EBITDA margin in 2015) and operating leverage is low as the company owns the property for SOGO Causeway Bay. Despite a weakening retail environment and Fitch's expectation for mid-to-high single-digit decline in revenues in 2016, Fitch expects the Hong Kong business to remain free cash flow positive as there is little capex needed in the next few years.