Period  1Q14

Actual vs. Expectations The 1Q14 net profit of RM30.7m (-48% YoY) came in below expectations, accounting for only 11% of our and consensus full-year net forecasts. The variance from our forecast was due to lower-than-expected same-store-sales growth (SSSG) in China and higher-than-expected start-up stores losses.

Dividends  No dividend was declared during the quarter.

Key Result Highlights YoY, 1Q14 registered a net profit of RM30.7m (-48% YoY) backed by RM837m in revenue (-0.7% YoY). Overall samestore-sales growth (SSSG) was lower across the board led by China (-4.2%), Vietnam (-1.1%) and Malaysia (-0.1%) which was more than offset by improvement from Indonesia (+3.9%). However, earnings was dragged down by : (i) new stores' losses in China and Indonesia; and (ii) temporary closure of the Shanghai flagship store and three performing stores in Malaysia owing to major renovations. KL Festival City shopping mall continued to generate stable revenue of RM8m with an impressive occupancy rate of about 99%. This has enabled its Property and Investment Holding Division to post a higher operating profit of RM4m.

 Parkson China registered marginally higher revenue for the current quarter, contributed by the new stores despite a negative SSSG of 4% resulting from the weaker operating environment. 1Q14 operating profit was 60% lower YoY due mainly to the impact from the new stores' losses and certain non-comparable expenses as well as temporary closure of the Shanghai flagship store for renovation.

 In Vietnam, the recovery in retail spending remains patchy, specifically stores in Hanoi, despite signs of economic stability. Nevertheless, the SSSG slowdown was reduced from -6.3% in 1Q13 to -1.1% in 1Q14.

 In Indonesia, the consumption spending remains robust despite the inflationary pressure affecting consumer sentiment from the significant hike in the price of subsidized fuel in June 2013 coupled with the weakening of the Indonesian Rupiah during the quarter. However, operating profit decline due to start-up of new stores.

Outlook  Looking ahead, we expect Parkson to continue facing 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 competition.

Change to Forecasts We are downgrading our FY14 and FY15 net profit forecasts by 4% to take into account the lower SSSG for China from 2% to 1% and higher start-up losses.

Rating  We are cutting our target price from RM3.36 to RM2.97 as we impute consensus latest target prices for both its listed operating units (Hong Kong listed Parkson Retail Group Limited and Singapore listed Parkson Retail Asia Limited) which have been downgraded lately. At the current market price, the stock offers a total return of -16%. As such, we downgrade our Market Perform call to Underperform.

Risks to Our Call A steeper-than-expected economic recovery in China.

Source: Kenanga