Parkson Retail Group (PRG), Parkson Holdings’ (PHB) China operations reported a net loss of CNY33.5m for 3QFY18, 41.2% wider than 3QFY17’s net loss of CNY23.7m. Cumulative 9MFY18 net loss, however, was smaller at CNY15.8m (9MFY17 net loss: CNY28.1m), cushioned by the stronger growth in previous 1Q. 3QFY18 revenue grew by 8.2% YoY to CNY1.05bn. At operating level, this is the seventh consecutive quarter in which PRG reported a profit. Though PRG’s business model is now operationally profitable, the momentum has been weaker than expected, with translation into net profit now likely to take longer. This, coupled with operational challenges in Southeast Asia will keep earnings subdued at Group level. We increase the discount in our valuation to 75% (from 50%) due to these prolonged weaknesses, arriving at a TP of RM0.40. Our Neutral call is retained.

• Lower operating expenses. PRG reported lower gross sales proceeds this quarter by 3.0%, mainly due to the closure of underperforming stores in 2017 and weaker same-store-sales growth (SSSG), which declined by 2.9% and 1.9% in 3QFY18 and 9MFY18 respectively. Excluding COGS, 3QFY18 total operating expenses decreased by 3.6% due to cost rationalization.

• Merchandise sales mix continues to reflect PRG’s focus on high margin products. 3QFY18 direct sales made up 18.8% of total merchandise sales (3QFY17: direct sales 15.8%), while on product mix, contributions from the Fashion & Apparel and Cosmetics & Accessories segments were consistently above 91% for 3QFY18 and 3QFY17.

Source: PublicInvest Research - 21 Nov 2018