- We reaffirm our SELL recommendation on Parkson Holdings with a lower SOP-based fair value of RM2.20/share (vs. RM3.00/share previously) following the weaker-than-expected 1HFY14 numbers.

- PHB reported 2QFY14 net profit of RM26mil, which lifted 1HFY14 net profit to RM56mil.

- At 37% and 27% of our and consensus estimates, respectively, 1HFY14 results came in below expectations. The results were dragged by weaker-than-expected 1HFY14 same-store-sales growth (SSSG) in China (-5%) and Malaysia (+0.1%).

- While 1HFY14 revenue rose by a marginal 0.7% YoY, EBIT dipped by 51% YoY. Gross merchandise margins narrowed to 19.1% from 19.4% in 1HFY13.

- Faced with increasing competition in China, new store losses and subway constructions, EBIT fell by a massive 72% YoY despite a 1.7% growth in revenue YoY.

- Expectations of weak consumer spending in Malaysia from the subsidy rationalisation together with temporary closure of some stores for renovation, led to a marginal SSSG growth.

- As expected, strong SSSG of 5.8% was recorded in Indonesia, given the small base. Vietnam and Myanmar continued to experience weak SSSG of -2% mainly due to cost pressures and underperformance of store at Vietnam.

- Post-results, we trimmed our FY14F by ~28% to reflect weaker EBIT margins at 8% vs. FY13’s 16%. We have reduced our SSSG assumption for Malaysia to 1% from 2% previously and maintain China’s SSSG at -4% for now.

- To improve profitability moving forward, management will embark on:- (1) closing non-performing stores; (2) remodel and revamp existing stores; (3) upgrade brand mix; and (4) develop private labels to offer value-for-money products.

- Current share price appears to have largely factor in the expectation of a SSSG deceleration in China. Share price have fallen by 64% from its 52-week high at RM4.61/share in March.

- At the current level, the stock is trading at 25x FY15F PE, above its 5-year historical average of 15x, which is unjustified, in our view.

- PHB earnings are likely to remain muted in view of China’s lacklustre earnings coupled with a more challenging operating environment. 

Source: AmeSecurities