PARKSON HOLDINGS BERHAD - China Continues To Drag

Parkson Retail Group (PRG) contributes 66% and 82% of Parkson Holdings’ (PHB) FY13F revenue and earnings respectively. To gauge PHB’s upcoming quarter performance, we are reviewing PRG’s 2QFY13 results (FYE Dec) which registered revenue of CNY1025.8m (+3.2% y-o-y, -20.4% q-o-q), and PATAMI of CNY98m (-53.7% y-o-y, -56.8% q-o-q). Due to another poor quarter attributed to higher costs and weaker discretionary spending in China, we expect PHB’s 1QFY14 results to reveal a similar sentiment. We are optimistic on some support from Parkson Retail Asia (PRA) which could uplift PHB’s results. Reiterating our Neutral recommendation with TP of RM4.17, we do like Parkson for its i.) strong balance sheet – net cash of c.RM1bn, ii.) growth plans to expand PRA’s contribution and its property and investment divisions which would see more value in the medium-term, and iii.) catalyst of most Asean governments encouraging consumption growth.

Higher Costs. Attributed to substantial increase in i.) staff costs - from new stores opened in FY12 and 1H13, general rise in wages and ESOS, ii.) depreciation – from new stores, inclusion of 4 managed stores acquired from parent company in February 2013 and remodeled stores, iii.) high rental expenses – of new stores, CNY32.4m contingent rental and straight line rental related to early extension of lease agreements of selected flagship stores in 2H12, and increased payment of turnover rent for the performance related lease agreements, and iv.) other expenses.

SSS Growth declined to 0.7%, due to intensifying competition and increasing number of younger and new stores with lower margin performance, in line with PRG’s overall merchandise gross margin which declined by 0.8% for 1H13. Management remains cautiously optimistic, and has guided same-store-sales growth (SSSG) of 2-3% for full year which we are hopeful on seeing as concessionaire sales has continued to grow +5.1% in 1H13, and the Chinese government under its economic transformation program to encourage domestic consumption.

Direction. PRG will continue to i.) refurbish its existing stores and invest in merchandise assortment; (its flagship stores in Shanghai (re-opening September FY13) and Beijing (re-opening 3QFY13) are undergoing its first phase of refurbishment to enhance the competitiveness and productivity stores to stimulate SSSG, ii.) minimise further losses by closing existing stores with lacking prospects (opened since 2009 but are still not meeting profitability expectations), and iii.) new store expansion - opening 7 new stores by 2013 but to slow down store openings to 4-5 sizeable stores in exisiting or nearby cities going forward.