- 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 an attractive 8x.

- Following a luncheon with management, we are convinced that PHB’s core fundamentals remain intact and are improving despite a sentiment-driven selldown. Its share price has retraced from its recent high of RM3.13/share in August.

- We view the current share price weakness as a buying opportunity in a weak market ahead of improving profitability given the low base comparison and expectations of improving same-store-sales growth (SSSG) in China.

- The key takeaway is PHB’s earnings recovery momentum that remains on track. Its brand building initiatives in China are starting to bear fruit, signaled by a smaller SSSG contraction in July and August.

- SSSG contraction slowed to a mid-single digit level in July and August, from the double-digit level of -11.6% in 4QFY14. This indicates that operations in China are turning around – further strengthened by PHB’s recent brand collaboration with Mango which begun in 2Q this year. On top of that, Parkson Retail Group (PRG) managed to secure another established brand called Tous from Spain. Similarly, we expect more new brands to be introduced in the coming months.

- We gather that PHB is planning to replicate a model similar to that of KL Festival City Mall. The group plans to venture into integrated development to support its self-owned malls given the lower occupancy cost. The upcoming Qingdao mall is expected to open in 2015, followed by one in Malacca in 2016.

- A key re-rating angle hinges on the possibility of PHB monetising its self-owned retail assets – similar to the recent divestment of KL Festival City Mall. Balance sheet remains strong. Cash pile will be further enhanced by the sale of KL Festival City Mall for RM349mil. A key wildcard is the potential partnership with other China-based departmental store operators to improve merchandise mix and cost control.

- Separately, the acquisition of the 60% equity interest in AUM Hospitality Sdn Bhd (which operates 12 F&B brands) was recently completed.

- We draw comfort that PHB has an active share buyback policy, which implies downside risk to share price. Foreign shareholding stands at 17%. At the current level, the stock is trading at an attractive PE of 15x – below its 5-year historical mean trend.

Source: AmeSecurities