Period  3Q14/9M14

Actual vs. Expectations The 9M14 reported net profit of RM111m (-47% YoY) came in below expectations, accounting for only 46% and 65% of our estimate and consensus full-year forecasts, respectively. However, stripping out provision for penalty for early termination of lease contracts for stores in China with potential closure amounting to approximately RM46m, core 9M14 net profit came in at RM157m (-25% YoY) or 65% of our full-year net profit forecast. The negative variance from our forecast was due to lower-than-expected samestore-sales growth (SSSG) in China.

Dividends  No dividend was declared during the quarter.

Key Result Highlights

 YoY, 3Q14 registered PATAMI of RM55m (-28%) backed by RM958m in revenue (+3%). Operationally, 3Q14 gross sales proceeds (GSP) grew 3% YoY to RM3.2b driven by same-store-sales growth (SSSG) for Malaysia (+0.1%) and Indonesia (+8.9%) which more than offset Vietnam (-7.2%) and China (-8%). The overall positive GSP growth was largely due to high base effect from China. The weak SSSG growth in China excludes: (i) the performance of Shanghai flagship store which was closed temporarily for major renovation and (iii) the performance of stores affected by subway constructions, which include the Wuxi flagship store, Nanchang flagship store, the first and second stores in both Hefei and Nanning respectively. Due to start-up losses in China, Myanmar and Indonesia stores, 3QFY14 EBIT margin fell 5.5%-pts to 13.7% from 19.2% in 3QFY13.

 The weak SSSG rates for Malaysia was due to: (i) cautious discretionary spending following the concerns over escalating cost of living arising from subsidy rationalisations and (ii) temporary closure of three performing Parkson stores in Ipoh Parade, Seremban Prima and Klang Parade for major renovations also resulted in loss of sales and profit contribution to Parkson Malaysia.

 In Vietnam, discretionary retail spending remained weak for the quarter despite signs of economic stability. The sales at the stores in Hanoi were especially affected by the significant increase in new retail space amid a weak retail environment.

 The strong SSSG rate for Indonesia was due to strong consumer sentiment with Bank Indonesia reporting the country’s consumer confidence index (CCI) for the 1^st quarter year 2014 remaining above the 100-point confidence threshold with a CCI reading of 117.0. The store in the island of Bali especially benefited from increased tourist arrivals driven by the weak currency and improved flight connectivity.

 For 9M14 YTD, core net profit fell by 26% due to: (i) one-off provisions for store closures in China of approximately RM46m (ii) start-up losses from new stores in Indonesia and China, (iii) China stores affected by subway construction as well as temporary closure of the Shanghai flagship store for major remodeling, (iv) higher promotion expenditure incurred due to weaker market conditions and intense competition, and (v) a higher effective tax rate due to offshore interest expense, which is not tax deductible.

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 the China market, which contributes the crux of its earnings. Coupled with the intense competition from online shopping and oversupply of retail space, we believe it is difficult for Parkson to reverse its SSSG declining trend given that its stores have reached maturity.

Change to Forecasts  We are downgrading both our FY14 and FY15 net profit forecasts by 9% to take into account the lower SSSG in China and higher operating costs.

Rating & Valuation  The stock is down 25% since our downgrade in the previous quarters. We are cutting our target price from RM2.79 to RM2.48 as we impute the 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 recently. At the current market price, the stock offers a total return of -3%. As such, we downgrade our Market Perform call to Underperform.

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

Source: Kenanga