- We reaffirm our SELL recommendation on Parkson Holdings (PHB) with an unchanged SOP-based fair value of RM2.20/share.

- Local dailies reported that PHB plans to build stand-alone shopping malls and lease out the net lettable area (NLA) to improve margins given the rental increases for its existing leases.

- This move is seen as an alternative source of revenue for PHB to bump up its gross margins given the operating pressure faced on multiple fronts. PHB’s costs is said to be 30% lower if it were to build its own mall.

- This news did not come as a surprise as PHB has already embarked on this route and had expressed its intention to increase mall ownership going forward.

- At present, Parkson owns and manages the KL Festival City mall in Setapak. It also owns seven malls in China and one in Vietnam.

- Moving forward, PHB is set to build a shopping mall in China. It is earmarked to open in 1HCY15, followed by openings in Cambodia and Malacca in CY17. We understand that the total estimated cost involved in building these three malls is RM2.4bil – China (RM952mil), Cambodia (RM554mil) and Malacca (RM900mil).

- These malls will be funded by internally-generated cash. As at end-1HFY14, Parkson is sitting on a cash pile of RM3.4bil, with a net gearing of 0.4x.

- Local dailies also highlighted that PHB plans to establish six Parkson stores in Johor Baru over the next three to four years. To date, Parkson has a total of 118 stores under its portfolio. PHB intends to introduce 30 new brands in its China and Malaysia operations each by year end, and to have 100 new brands in China and Malaysia by 2016.

- Our EPS estimates are maintained for now pending the release of results of Parkson Retail Asia (8 May), Parkson Retail Group (15 May), and PHB (22 May). We believe that China’s earnings remains vulnerable and challenging given its shrinking market share against e-commerce players and new retail malls. 

Source: AmeSecurities