- We reaffirm our BUY recommendation on Parkson Holdings (PHB) with a revised fair value of RM2.65/share, pegged to a revised 16x PE on FY16F earnings. We have also roll forward our valuation base year.

- Taking into account the one-off provision for the arbitral award in respect to the dispute arising from the Beijing Metro City Shopping plaza tenancy agreement and gain arising from disposal KL Festival City mall with the impairment loss of goodwill, 9MFY15 core earnings stands at RM151mil (3QFY15: RM85mil), which is above expectations.

- We have tweaked our numbers upward by 15% to account for better SSSG for Malaysia and higher EBIT margin assumption given our conservative estimates previously.

- 9M topline was up 5% YoY while merchandising margin decreased marginally by 0.3ppt. However, EBIT declined 2.2ppts YoY due to increased operating costs.

- SSSG saw an improvement in its key market. China’s SSSG decelerated at a slower pace to -3% in 3Q compared to 2Q’s -7.5% and 1Q’s -8%. On a 9M basis, SSSG improved to -5% from -6%YoY.

- Malaysia division did better than expected with SSSG turning positive to +8% in 3Q from 2Q’s -6.7%, supported by increased pre-GST buying. Nonetheless, overall 9M SSSG is still negative at -1.2%. We expect a post-GST lull for at least two quarters before a rebound in consumer spending.

- On the bright side, the drag from Landmark Tower in Vietnam had been removed (3Q SSSG at -2.1% vs. -5.8% in 2Q). Growth at Indonesia and Myanmar remain robust thanks to the strong domestic consumption and low base.

- Nevertheless, the loss of arbitration case in China does not entirely derail our investment thesis of a gradual recovery in earnings for PHB (as 9M15 core earnings were still up 36% YoY excluding the one-off items) over the medium term. We do not expect immediate significant earnings recovery as PHB’s rebuilding and reinventing phase would take some time.

- PHB’s repositioning to thelifestyle concept retail business and regional-wide branding exercise should help sustain near-term sales/psf, while the persistent brand building phase (i.e. greater focus on investing exclusive brand and in-house labels) bodes well for margins.

- The stock is presently trading at a PE of 12x FY16F PE, below its 5-year historical average PE average of 19x.

Source: AmeSecurities Research - 28 May 2015