A red beginning

Parkson Holdings Berhad (PKS)’s 1Q17 revenue dropped by 5.9% to RM872m and recorded a core net loss of RM56.6m which was worse than 1Q16’s net loss of RM30.5m. Earnings continued to diminish as segmental losses were recorded across China, Vietnam/Myanmar and Indonesia, with Malaysia also recording a segmental loss after four previous quarters of profit. Maintain SELL with a lower TP of RM0.51.

Reported 1Q17 core net loss of RM 56.5m

PKS recorded a drop in 1Q17 revenue by 5.9% yoy to RM 872m as while the revenue from the Malaysian operations increased by 4.8%, the Group’s other operations registered declines (China:-7%, Vietnam and Myanmar:- 10%, Indonesia:-2%). Operating expenses were 117% of revenue, resulting in a core net loss of RM 56.5m which is worse than 1Q16 (note that a large exceptional gain on the partial disposal of Parkson Hanoi Co Ltd in 1Q16 pulled it into a RM30.5m loss. This came largely below our and consensus expectations and is the 5th quarter of losses for PKS.

Regional losses across all operations

Note that while the Group has generally been seeing segment losses in China, Vietnam, Myanmar and Indonesia over the last four quarters, Malaysia has now recorded a 1Q17 loss of RM 12m. China remains the largest contributor to losses at RM 48.7m. Overall, this was due to the losses incurred by new stores, store closures and weak consumer sentiment which has led to negative same store sales growth (SSSG). Indonesia was also affected by less festive buying days this quarter. Current SSSG was negative across the board (China: -7%, Malaysia: -7%, Vietnam: -10%, Indonesia: -13% and Myanmar: -28%).

Maintain SELL with lower RNAV-based TP of RM0.51

The Group has actively taken measures to revamp existing stores and upgrade existing brands such as the Korean themed floors in Fahrenheit 88, Malaysia and the opening of a Korean themed outlet in China. They are also developing an e-commerce platform for the Chinese market. However, we believe these measures will take some time to bear fruit and operations in the group’s key markets will remain challenging in the near-term. Thus, we modify our earnings forecast by -57% to -1% for FY17-19E and maintain our SELL call on the stock with a lower TP of RM 0.51 from RM0.67. Key upside risks include a sharp rebound in regional consumer discretionary spending and lower than expected operating costs

Source: Affin Hwang Research - 24 Nov 2016