- We reaffirm our BUY recommendation on Parkson Holdings (PHB) with an unchanged fair value of RM3.85/share, pegged to a PE of 22x FY15F earnings – one standard deviation above its 5-year historical mean PE. Stripping out its net cash, PE stands at 10x.

- We hosted a corporate luncheon with PHB’s Tan Sri William Cheng and institutional funds, and came away more upbeat over PHB’s future prospect as a regional departmental store operator. More importantly, management has put in place a detailed turnaround plan to curtail losses in China and improve its merchandising mix.

- Our conviction stays: PHB is at the inflexion point and is still at the early stages of an earnings recovery. Earnings recovery is expected given the margin uplift and low base comparison. Its on-going and proactive store rationalisation and optimisation plan, and improving merchandising mix are starting to bear fruit, evidenced by the five young stores turnaround in 1H14.

- Key takeaways from the luncheon:

1) There are 20 loss-making stores (1H14: RMB150mil) out of 57 in China. 13 of these loss-making stores are young (aged less than three years). We expect the ramp-up of these younger stores to turn around as they mature. Nonetheless, its leasing strategy (88% of GFA) provides the flexibility of closing down stores that are non-performing. One store closure is expected by year-end.

2) In line with our expectations, management views that SSSG in China has bottomed and should stabilise, moving forward. Note that China experienced SSSG contraction in the past two years. The improving macro backdrop should be supportive of an improving SSSG.

3) PHB continues to explore for potential collaborations with global brands on an exclusive basis. Management plans to introduce at least 20 new brands in China and Malaysia to improve merchandise mix and boost footfall traffic.

4) Similar to a retail mall concept, the group plans to allocate about 40% of GFA for F&B, entertainment and service for its mall in China, given the structural issue faced by departmental store and consumer preference over retail mall.

- All said, we think that there is a potential partnership with other China-based departmental store operators to improve merchandise mix and cost control. Moreover, we do not rule out the possibility of a divestment of loss-making self-owned properties given its store rationalisation plans.

- At the current level, the stock is trading at 17x forward PE, on par with its 5-year historical mean trend.

Source: AmeSecurities