- We reaffirm our BUY recommendation on Parkson Holdings (PHB) with a lower fair value of RM2.85/share (vs. RM3.40/share previously), pegged to 22x CY15F PE, given the slower-than-anticipated turnaround of China’s operation.

- Excluding the one-off provision in relation to store closure, Parkson Retail Group’s (PRG) FY14 earnings had declined by 4% YoY. Its 4Q SSSG decelerated further to -6.1% vs. 3Q’s -4.5%. FY14’s SSSG was -7.1% vs. FY13’s - 1.8% given the intense playing field. EBIT margin compressed further due to the gestation losses of new and young stores and greater discount given to suppliers.

- We have thus trimmed PHB’s FY15F-FY17F earnings estimates by ~19% to account for greater SSSG and margin compression. We now project China’s SSSG at - 6% vs. 0% previously. PHB’s result is due for release on February 25.

- We see a potential improvement in China’s operation in 2HFY15, underpinned by continuous branding initiatives – i.e. expanding brand portfolio (Mango and Tous were introduced in 2014), improving merchandise mix and new dining concepts (targeted for 40% of NLA).

- PRG will nevertheless continue to progressively close down non-performing stores. As it is, four loss-making stores were closed down last year. We understand that management plans to close 2-3 stores this year.

- SSSG for Malaysia contracted further in 2QFY15 to -6.7% affected by softer consumer sentiment. We believe this is a temporary setback and sales momentum should pick up in 1Q/2QFY16F post GST rollout.

- The recent closure of Landmark Tower should improve Vietnam’s bottom line in the coming quarters, which is currently in the red. Indonesia continued to show robust SSSG (+8.8% in 2QFY15).

- More importantly, share price will be well supported by PHB’s active share buybacks, which provide limited downside risk to share price. We believe the weak China’s performance has been factored in as share price have retracted by 31% in the past 6 months.

- At the current level, the stock is trading at 19x PE, which is slightly above of its 3-year PE band of 18x. On an ex-cash basis, the stock is trading at an attractive 10x PE, which we deemed cheap for the leading departmental store operator in the region.

Source: AmeSecurities