Parkson's 1QFY13  earnings  were  below consensus  and  our expectations.  Group net  profit  came  in  lower  by  34.7%  y-o-y  as  the  solid  performance  from  Malaysia and Indonesia were pulled down by the weaker numbers at its China and Vietnam operations.  Meanwhile,  margins  softened  due  to  higher  start-up  losses  from  its new  stores  and  slower  SSS.  After  revisiting  our  FY13  and  FY14  numbers,  we revise lower our FV to RM4.13. Downgrade to NEUTRAL.

China  not  looking  so  good.  Sales  rose  by  5.7%  y-o-y,  mainly  driven  by  the group's Malaysian  and  Indonesian  retail  business  in  tandem  with  stronger  consumer  spending during  the  Hair  Raya  festive  season.  The  retailing  division  posted  a  topline  growth  of 4.7%  y-o-y,  boosted  by  respectable  same-store-sales  (SSS)  growth  in  its  stores  in Malaysia  (+5.7%),  and  Indonesia  (+8.9%).  However,  the  China  and  Vietnam  units  saw weaker  SSS,  which  slipped  1%  and  6.3%  respectively  due  to  the  considerably  weaker operating environment. The group's first local self-owned  and  managed  retail  mall,  KL Festival City, continued to generate decent revenue, contributing RM7.8m to the group's property and investment  holding  division in 1Q.  The  mall  has  a  high occupancy  rate of 99%. Parkson's 1Q earnings,  on  the  other  hand,  slid  34.7%  y-o-y  despite  a  slight increase in revenue, largely due to: i) lower earnings (-20.2% y-o-y) from Parkson Retail Group  (PRG)  Hong  Kong  as  a  result  of  higher  initial  losses  from  its  new  stores (RMB53.4m), and ii) higher rental and overheads. Management is targeting a FY13 SSS growth of 2% for China, 7%-9% for Malaysia, and 9%-10% for Vietnam and Indonesia.

Erosion  in  EBIT  margin.  Merchandise  gross  margin  eased  by  50bps  to  19.7%  y-o-y due to new stores and lower SSS from the group's overall operations, while EBIT margin declined from 31% to 19.4%.

It's payback time for Sri Lanka investment. The group plans to open more new stores in  FY13,  comprising:  i)  two  in  Malaysia,  ii)  two  to  three  in  Vietnam,  iii)  four  to  five  in Indonesia,  and  iv)  five  to  six  in  China.  Meanwhile,  its  newly  acquired  Sri  Lankan associate,  Odel  PLC,  is  starting  to  bear  fruit.  The  44.6%-owned  associate  contributed RM0.7m  in  profit  to  Parkson  this  quarter.  Next  year,  the  group  will  be  opening  its  first Parkson  Department  Store  in  Yangon  via  a  joint  venture  with  two  property  players  in Myanmar.

Downgrade to NEUTRAL. Given the weaker-than-expected showing from PRG, we are slashing  our  FY13  and  FY14  numbers  by  24.7%  and  28.2%  y-o-y  respectively. Downgrade to NEUTRAL, with a lower RM4.13 FV, based on sum-of-parts (SOP).

Source: OSK