- We downgrade Parkson Holdings from HOLD to SELL with a revised fair value of RM3.00/share, based on a sum-of-parts valuation, as we update our earnings model to account for weaker FY14F numbers.

- We maintain our cautious outlook on the group’s operations given the challenging operating environment and general macro slowdown in China. In addition, consumers are now tightening their string purse in Malaysia due to the recent subsidy cuts. As such, we project earnings to decline by 37% in FY14F, underpinned by same-store-sales growth assumption (SSSG) of -14% for China, Malaysia (+2%), Indonesia (+5%) and Vietnam (-1%).

- The 1QFY14’s earnings of RM31mil were largely in line, meeting 20% of our full-year forecast but were below consensus, at only 11%. The main variance is mainly due to a more optimistic consensus SSSG in China, which recorded a decline of 4.2% in 1Q.

- We expect China’s weak SSSG to persist and deteriorate further in FY14F, given the continuing weak consumption sentiment, operating losses of new stores, 20 loss-making stores, subway construction and fiercer competition. Aggressive plans to open six stores next year will further drag earnings. Management will review its operation – i.e. close nonperforming store; one was recently closed and two more will be closed next year.

- Meanwhile, Malaysia reported a flat SSSG of -0.1% due to softer consumer sentiment as a result of subsidy rationalisation and central bank’s tightening measures. However, this could be marginally offset by the influx of tourists as CY2014 is Visit Malaysia Year.

- Indonesian sales remained robust and it was the only market with a positive SSSG of 3.9%. However, we see earnings risk from the depreciating Rupiah. Consumer spending in Vietnam remain patchy despite signs of economic stability, achieving -1.1% SSSG (vs. -6.3% in 1QFY13). The first store in Myanmar was opened in May 2013.

- We do not discount the possibility of further decline in EBIT margin due to intensifying playing field, particularly in China, Malaysia and Indonesia. EBIT margin currently stands at 9.2% (vs. 10.6% in 4QFY13 and 16.3% in 1QFY13). A total of 17 new stores are in the pipeline for FY14F:- China (6), Malaysia (2), Vietnam (2), Indonesia (6) and Cambodia (1).

- We advocate a SELL rating as Parkson lacks immediate nearterm catalysts for revaluation. We remain cautious over the group’s earnings delivery in light of uncertainty of improving macroeconomics conditions, particularly in China. The stock is trading at 18x PE for FY14F, above its historical 5-year average of 14x.

Source: AmeSecurities