- We re-affirm our HOLD recommendation on Parkson Holdings Bhd (PHB), with an unchanged fair value of RM4.43/share, based on a sum-of-parts valuation for FY14F.

- PHB cumulative 9MFY13 results came in at no surprise of RM210mil (-30%YoY, +4% QoQ) – within our forecasts at 80%, but below consensus at 63%. This follows the expected continued weakness in consumer spending, particularly in China, which commands 76% of the group’s EBIT, followed by Malaysia with 20%.

- Softer economy growth experienced in China and Vietnam consequently lead to same-store-sales growth (SSSG) contraction of 2% and 1%, respectively. Having said that, Malaysia and Indonesia are sustaining positively with 6% and 5% SSSG respectively. We believe Chinese New Year spending had somewhat supported 9MFY13 SSSG, but were offset by higher discounting activities. Nonetheless, a seasonal lower performance is expected in 4Q in absence of major festivities.

- Despite a shy 3% YoY increased in revenue, overall merchandise gross margin compressed to 19.1% from 19.4% in 9MFY12. This weighed down EBIT significantly by 26% YoY – which were also impacted by slow sales and new stores opening.

- Intensifying competition for brands and tenants in China are partly the major reasons for Parkson Retail Group’s (PRG) decline, which have generated lower sales due to shift in footfall, in our view. In addition, product mix is reckoned to have further dragged profitability down to lower levels, as witnessed by China’s EBIT margins shrinking to 21% 1HFY12’s 31%.

- Going forward, we expect PRG’s SSSG to contract 2% for the full year of FY13F, with a moderate recovery, at best in FY14F of 1%. That said, we think much of these negatives arising from PRG in particular – slower SSSG expectation and slowing network of expansion considerations – have been reflected in PHB’s share price. PHB’s share price hit a four-year historical low yesterday.

- Rolling out of new stores, albeit at a slower pace, appears to be well on track, with upcoming opening of:- 7 stores in China by end year and 1 store each in Malaysia, Vietnam, Indonesia and Myanmar by FY13F. Given Parkson China’s earlier entry, efforts are undertaken to revamp existing portfolio of stores as its competitors’ stands to benefit from a sweet spot of younger store portfolio.

- We maintain our HOLD rating given the:- (1) Lack of near-term catalysts to re-rate the stock; and (2) PHB’s muted earnings growth and vulnerability to adverse change from a macro perspective, particularly for China’s deceleration in SSSG. Valuations wise, the stock is trading at 13x FY14F’s PE – slightly below its 5-year historical mean of 14x.

Source: AmeSecurities