Parkson Holdings Bhd
(July 13, RM5.47)
Reiterate outperform at RM5.47 with target price of RM6.50: We reiterate our outperform recommendation based on a sum-of-parts (SOP) valuation, with CY2011 EPS of 35.4 sen and PER of 10 times for Malaysia; 12 times for Vietnam; 22 times for China; and 10 times for China excluding stores. Based on SOP, our target price is RM6.50. We like Parkson Holdings Bhd for: (i) its conservative management, reflected by its same-store-sales growth (SSSG) target of 10% for China; 5% to 6% for Malaysia; and 20% to 25% for Vietnam; (ii) the improving consumer sentiment underpinned by a more positive global economic outlook; and (iii) its focus on the mid-high income target market which is more resilient to economic vulnerabilities.

According to management, plans for ongoing store acquisitions, particularly in China, and the setting up of new stores in the tri-country area are on target. Among the key highlights is the progress of the Festival Mall in Danau Kota, Kuala Lumpur, Parkson's first owned-and-operated mall in Malaysia, and the performance of existing stores.

The mall is scheduled to open by end-CY2010 will have 500,000 sq ft of net lettable area (NLA). The management has said that 120,000 sq ft will be occupied by either Giant or Cold Storage. The mall is expected to contribute RM20 million to RM30 million to Parkson's Ebit (earnings before interest and tax) in FY2011.

9MFY2010 SSSG grew by 11% for China, 10% for Malaysia and 27% for Vietnam, as opposed to management's expectation of 10%, 5%-6% and 20%-25% respectively for these countries. This lifted its 9MFY2010 revenue by 5% year-on-year to RM2.1 billion despite the economic slowdown. The revenue boost was also due to the inclusion of the Chinese New Year sales, which were included in the 3QFY2010 revenue.

The earnings before interest, tax, depreciation and amortisation (Ebitda) margin in FY2010 is expected to be slightly lower at 31.5% against 32.7% in FY2009 owing to unplanned promotions and additional discounting in 1HFY2010 to entice customers during the sluggish period. According to management, there will not be any additional impromptu sales in 2HFY2010 and 1HFY2011, while discounting will be at a more reasonable level.

We believe the worst is over for retailers, reflected by an improving consumer confidence index for both China and Malaysia. Malaysia's Consumer Sentiment Index rose to 114.2 points in 1QCY2010 (trough 71.4 in 4Q2008), while China's Consumer Confidence Index was at 108 points in May 2010 (trough of 100.3 in March 2009). As of June 2010, Parkson has 45 stores in China, 6 in Vietnam and 35 in Malaysia.

With Parkson's focus on the mid-high level income consumers in Malaysia, the uncertainty over the government's decision on subsidy cuts will have little impact on its earnings as the upper income level is typically impervious to such cuts.

We can observe a similar scenario in Vietnam, where Parkson is the only foreign upscale retailer operating in major cities. Demand in Vietnam for retail products is expected to grow in CY2010 because of improving consumer purchasing power on the back of steady economic growth. We have projected Vietnam's real GDP to expand by 6% in CY2010 and 6.5% in CY2011.

? Inter-Pacific Research, July 13