Period  1Q15

Actual vs. Expectations 1Q15 PATAMI of RM20.2m (-34% YoY) came in below expectations at 10% and 12% of our and consensus full-year net profit forecasts, respectively. The negative variance from our forecast was due to lower-than-expected same-stores-sales growth and higher-than-expected start-up losses.

Dividends  No dividend was declared during the quarter.

Key Result Highlights YoY, 1Q15 revenue grew 2% YoY to RM849m driven by same-store-sales (SSS) growth for Indonesia (+5.7% vs 3.9% in 1Q14) and maiden first year of operations in Maymmar (33%) which more than offset Vietnam (-5.5% vs -1.1% in 1Q14), Malaysia (-4.4% worsened from -0.1% in 1Q14) and China (-4.5% compared to -4.2% in 1Q14) albeit a higher base. Due to stores start-up losses in China, Myanmar and Indonesia, 1Q15 PBT margin crimped by 3.6%pts to 5.9% from 9.5% in 1Q14. This brings 1Q15 PATAMI to RM20.2m (-34%).

 In China, the narrowing of SSS growth from 5.5% in 2QCY14 to 4.5% in 3QCY14 and continuous improvement of margin from effort in allocating more space for complementary service is bearing fruits albeit at a slower pace. Separately, two new stores were opened, namely the Zhengzhou Mix C Store and also the Chongqing Mix C Store. In line with the initiative to build a successful brand portfolio that complements its departmental store business, the Group added another international brand namely Tous from Spain following its maiden collaboration with Mango. Elsewhere, start-up losses in China continue to weigh down on its bottomline.

 The weak SSS growth in Malaysia was impacted by by weaker-than-expected consumer confidence and the rise in costs of living emanating from the government’s implementation of subsidy rationalization programmes and the central bank’s tightening measures to curb household debt.

 In Vietnam, discretionary retail spending remained weak despite signs of economic stability. Sales at stores in Hanoi were especially affected by the significant increase in new retail space amid a weak retail environment. The Myanmar operations recorded SSS growth of +33.2% in Q1 FY2015. The store in FMI Centre, Yangon recorded strong rampup in sales after the 1st year of operations.

 The strong SSS growth for Indonesia was due to strong consumer sentiment. Consumer sentiment remained strong with Bank Indonesia reporting the country’s consumer confidence index for the 3^rd quarter calendar year 2014 remaining above the 100-point confidence threshold at 119.9 points.

Outlook  Looking ahead, we expect Parkson to continue facing a tough operating environment on the back of 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 would take a longer-than-expected period of time for Parkson to reverse its SSSG’s declining trend given that these stores have reached maturity.

Change to Forecasts  We are downgrading both our FY14 and FY15 net profit forecasts by 10% to take into account the lower SSS growth in China and higher start-up losses.

Rating & Valuation  We are downgrading our target price by 15% from RM3.11 to RM2.63 as we impute the consensus’ latest target prices which have been lowered for both its listed operating units (Hong Kong listed Parkson Retail

Group Limited and Singapore listed Parkson Retail Asia Limited). The stock offers a potential total return of 9%.

As such we maintain our Market Perform rating.

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

Source: Kenanga