- 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 7x.

- 52%-owned Parkson Retail Group (PRG) announced 3QFY14 core earnings of RMB23mil, bringing 9MFY14 core earnings to RMB275mil. Based on consensus estimates, PRG’s 9MFY14 core earnings were within expectations, accounting for 77%.

- More importantly, SSSG contraction slowed to a single mid-digit (-4.5%) in 3Q from double digit (-11.6%) in 2Q – in line with our expectation. On a 9MFY14 basis, SSSG came in at -7%, compared to 1HFY14’s -8.9%.

- The slower SSSG contraction indicates that operations in China are turning around, we believe.

- The improvement of a few flagship stores’ performances, merchandising mix – i.e. exclusive brand collaboration (Mango started in 2Q), and introduction of new brands were also supportive of the SSSG improvement.

- Brand-building initiatives in China have started to show positive recovery whereby merchandise gross margin had continued to stabilize – increasing by 50bps to 18.4% in 3QFY14 YoY, and by 60bps to 17.9% in 9MFY14 YoY.

- 3Q is generally a lull quarter in view of the absence of festivities. We expect a stronger 4Q for PRG.

- In 9MFY14, PRG had opened three new stores in Zhongshan, Zhengzhou Mix C and Chongqing Mix C, and closed two stores. We believe management will continue to monitor store progress and close non-performing stores that cannot be turned around. Another store closure is expected by year-end.

- We are unmoved by PHB share price weakness as company fundamentals remain intact. We view the share price weakness as a good buying opportunity ahead of improving profitability, underpinned by the PHB’s low base comparison and expectations of improving SSSG at PRG. We believe that PHB earnings recovery momentum remains on track.

- The results for Parkson Retail Asia and PHB will be released on 13 and 24 Nov, respectively.

- The stock is trading at 14x forward PE, below its 5-year historical mean trend of 17x.

Source: AmeSecurities