- We reaffirm our SELL recommendation on Parkson Holdings (PHB) with an unchanged sum-of-parts- (SOP) based fair value of RM2.20/share. Our fair value implies an FY15F PE of 15x.

- PHB reported earnings of RM55mil for the 3QFY14, which brought 9MFY14 earnings to RM111mil. The result exceeded our expectation, accounting for 95% of our full-year forecast but was 65% of consensus’ estimates.

- The main variance to our estimates is our weaker EBIT margins expectations of 7.9% vis-a-vis its 9MFY14’s 10.7%, which is still lagging behind its 9MFY13’s 18.7%.

- Margins in China improved to 9% from 1HFY14’s 5.5% following the closure of some loss-making stores and the reopening of its flagship Shanghai store. We have therefore tweaked our FY14F-FY16F earnings to RM147mil-RM162mil to incorporate better margins for China.

- Same-store-sales growth (SSSG) remain subdued in China (-6%), Malaysia (+0.1%) and Vietnam (-4%), except for Indonesia (+7%). Merchandise gross margin was compressed further by 0.2ppt to 18.9%.

- While margins in China have improved, SSSG contraction is likely to persist (-4% in 1QFY14 vs. -2% in 9MFY13) and has yet to bottom. We think sales in China will remain weak due to slowing economic growth, weak consumer sentiment, 16 loss-making stores, disruption of subway construction, and stiff competition. Furthermore, the group is facing weak operating efficiency due to the low level of store ownership compared to its peers, and it is still embarking on an aggressive acceleration of store expansion.

- We see upside risks in weaker-than-expected consumer sentiment, currency weakness, and a reduction in tourist arrivals into Malaysia from the MH370 incident. Visit Malaysia 2014 is unlikely to boost sales significantly as the bulk of PHB’s earnings (68% of revenue) derive from China.

- We understand that the group plans to revise its business model – i.e. venture into speciality shops for in-house brands, online shopping, and higher store ownership. This is viewed positively to improve profitability and margins. But it may take some time before any material contributions kicks in.

- The stock is now trading at a forward PE of 19x, above its 5-year trend average. Valuation is unjustified given PHB’s muted earnings in view of China’s lacklustre earnings growth and headwinds. Maintain SELL.

Source: AmeSecurities