Period  4Q13/12MFY13

Actual vs. Expectations  The FY13 net profit of RM240.4m (-37% YoY) came in below expectations, which only accounting for 80% and 83% of our and consensus full-year net profit forecasts. The variance from our forecast was due to lower-than-expected same-store-sales growth ("SSSG") in China.

Dividends  No dividend was declared during the quarter.

Key Result Highlights  FY13 revenue rose 2.4% YoY to RM3.5b, driven by SSSG rates for Malaysia (4.5%) and Indonesia (5.6%) but negated by China (-1%) and Vietnam (-0.7%).

 In China, due to intensifying competition and increasing number of younger and new stores led to the decline in SSSG as well as lower margin performance arising from incremental operating loss of new stores. The operating loss of new stores for 1H2013 (4 stores opened last year and 2 stores opened in 1H2013) came in at approximately RMB59m.

 SSSG for Indonesia in 4Q13 was strong at +8.5%. However, the weaker performance of its store at Plaza Semanggi (due to the opening of a nearby competing mall) in previous quarters resulted in a lower than expected SSSG rate of 5.6% for FY13. Excluding the store at Plaza Semanggi, the SSSG for Indonesia for FY13 would have been 9.5%.

 The Vietnam operations faced a difficult 1H13 due to its economic slowdown. However, sales have improved in the 2H13 amid signs of economic stability. The SSSG for Vietnam in the 1H13 was negative 7.4% but has rebounded in the 2H13 to +5.7%. Due to the drag of the negative SSSG in the 1H13, the SSSG for FY13 ended relatively flat at minus 0.7%.

 However, the 36% FY13 net profit decline rate was deeper than the turnover decrease due: to (i) start-up losses from new stores opening, (ii) higher promotional costs incurred due to weaker market conditions and intense competitions, (iii) early extension on five leases, which raise the group’s rental expenses by 8%; and (iv) higher borrowings arsing from issuance of 5-year US$500m notes.

Outlook  Looking ahead, we expect Parkson to continue to face a tough operating environment on the back of the weak consumer sentiment due to the economic slowdown, particularly in its China market, which contributes the crux of its earnings, and also due to higher operating expenses from rental and staff costs and intense competitive field.

 It is planning to expand by opening an estimated 18 stores per annum over the next two years. Parkson plans to open an average of 5-6 new stores per year in China, 2 in Malaysia, 2-3 in Vietnam and 3-4 in Indonesia.

 The saving grace at the moment is a 3.6% dividend yield.

Change to Forecasts  We are downgrading our FY14 and FY15 net profit forecasts by 8% to take into account the lower SSSG for China from 4% to 2%.

Rating   Maintain MARKET PERFORM

Valuation  We are cutting our target price from RM4.06 to RM3.36 as we impute consensus latest target prices, which have been downgraded for both its listed operating units (Hong Kong listed Parkson Retail Group Limited and Singapore listed Parkson Retail Asia Limited).

Risks  A faster than expected slowdown in the global economy especially that of China, which will cut the purchasing power of consumers.

Source: Kenanga