Parkson Holdings - China a dampener in the near term HOLD

- We are re-initiating coverage on Parkson Holdings Bhd (PHB), with a HOLD at our fair value of RM4.43/share, based on a sum-of-parts valuation for FY14F.

- Over the past year, PHB has rapidly expanded into China and Southeast Asia via its respective 52%-owned and 68%-owned listed-subsidiaries, Parkson Retail Group (PRG) and Parkson Retail Asia (PRA). PRA has further expanded into Southeast Asia’s least developed markets – Vietnam, Sri Lanka, Myanmar and Cambodia – following its foray into Indonesia in 2011.

- On the revenue front, PHB is driven by China (66%), followed by Malaysia (26%) and Indonesia (4%). China and Vietnam have been adversely impacted by slower economic growth, resulting in weak consumer spend.

- China’s SSSG has hit historical lows, with contractions of 1% and 2% in 1QFY13 and 1HFY13, respectively. There, we believe, were largely attributed to intensification of competition among China-based retailers (including Golden Eagle and Intime). There appears to be a footfall shift towards more appealing malls amid their proliferation in numbers.

- Despite efforts to improve merchandising mix and establishment of an ecommerce portal to circumvent the slowdown in SSSG, the impact of these efforts is too early to gauge. Parkson undergoes facelifts once every 4-5 years in order to maintain footfall momentum.

- All in, we opine management’s guidance of a mid-single digit SSSG in FY13 may not be achievable. We are mainly uncertain about China’s turnaround in SSSG, given that the key issue stems from a more competitive landscape. We believe China’s 3Q SSSG growth would remain flat at best, and any recovery will be gradual. Expansion will be at a slow pace, at 5 new stores per annum.

- PRA will continue to expand its network in Indonesia based on a dualbranding strategy (Parkson and Centro). The recent acquisition of Ordel is deemed as a strategic platform for PRA to further expand into the larger Indian sub-continent. Underpinned by stable recurring income, PHB aims at a higher ratio of self-owned properties, moving forward.

- For FY13F, we project a healthy SSSG at 5% for Malaysia and Indonesia, riding on stable consumer spending. This should cushion a muted outlook in China and Vietnam given the near-term cyclical SSSG that is in negative territory.

- FY13F-FY15F growth will be driven by an enlarged network of outlets – China (FY13F: +8 and FY14F: +5) and Southeast Asia (FY13F: +7 and FY14F: +8), coupled with the foray into Myanmar and Cambodia. Our annual new store assumption is at two for each market.

- On a more positive note, the stock is a great play in the Asian consumer sector. Balance sheet is healthy, with a strong cash pile of RM1.5bil as at end-1HFY13.

- It is trading at 15x FY14F PE, on par with its 5-year historical mean and at a 33% discount to local peer AEON Co (M) Bhd’s (AEON Mk Equity, Nonrated) 20x.

Source: AmeSecurities