Alibaba Expanding E-Commerce Hurts Department Store Bonds

Chinese department stores are the country’s worst performers in the international bond market this year, as e-commerce rivals such as Alibaba Group Holding Ltd. lure shoppers and an anti-corruption probe pinches sales.

Department-store notes have lost 2.7 percent since Dec. 31, more than any other segment with more than one issuer in a Bank of America Merrill Lynch index of securities from China. In the latest sign of the industry’s falling fortunes, Standard & Poor’s cut its rating on Shenzhen-based store operator Maoye International Holdings Ltd. one step deeper into junk this week.

China’s online retail sales rose 49.7 percent last year, surpassing the 12 percent increase for all retail sales of consumer goods, according to the National Bureau of Statistics. The nation set its slowest economic growth target in more than 15 years at about 7 percent today, as President Xi Jinping leads an anti-graft probe that has crimped sales of everything from shopping vouchers to luxury watches.

“The downturn for China’s department stores has a lot to do with the rapid rise in e-commerce, the ongoing anti-corruption campaign and a soft economy,” said Lillian Chiou, credit analyst at S&P in Hong Kong.

Combined sales through Alibaba’s e-commerce platforms Tmall.com and Taobao Marketplace rose 49 percent in the fourth quarter from the same period in the previous year as the company expands in lower-tier cities, according to company filings. While Alibaba’s overall revenue growth of 40 percent missed estimates, that was in part due to competition from rival JD.com Inc., flagging the growing sway of e-commerce.

Anti-Graft Effects

President Xi has said that corruption threatens the legitimacy of the Communist Party, and his campaign to punish bribe takers is rippling throughout the economy. Chinese department stores depend on gift vouchers for a large part of their sales, and due to the anti-graft push fewer coupons have been distributed, according to S&P’s Chiou.

High-yield notes from Chinese department stores have rebounded from lows marked earlier this year as recent rate cuts by the People’s Bank of China buoy credit-market sentiment. Still, the industry faces long-term challenges as online retailers take business, said Oscar Chow, head of Asia credit research at Mitsubushi UFJ Securities HK Ltd.

“Brick and mortar retailers in China have been shrinking for some time now and I don’t think the turnaround will happen any time soon,” Chow said.

The 2017 notes from Maoye have dropped 3.2 cents on the dollar this year to 94.8 cents, according to prices compiled by Bloomberg. They slid to a record low of 92.8 cents last month.

The securities due 2023 from Golden Eagle Retail Group Ltd., based in the eastern city of Nanjing, remain down 5.3 cents on the dollar since Dec. 31 at 86.6 cents even after rallying from a record low of 81.3 in January.

The 2018 bonds of Parkson Retail Group Ltd. fell to an 11-month low of 89.5 cents in February, and were last at 92.2.

“The role of department stores as a key retail format in China will diminish over time, as more shopping malls are built amid urbanization and online retail platforms grow in popularity as mobile Internet penetration rates rise,” Lina Choi, analyst at Moody’s Investors Service, wrote in a research report this week.

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