News  In an announcement to Bursa Malaysia, 52.1%-owned Parkson Retail Group (PRG) listed in Hong Kong Stock Exchange is buying the Qingdao Shopping Mall for cash RMB1,422,320,000 (RM800m) via indirect wholly owned subsidiary, Qingdao Lion Plaza Retail Management Co., Ltd., which has entered into a Sales and Purchase Agreement with Shanghai Industrial Qingdao Development Co., Ltd (Vendor, a property developer in China).

 To recap, the Qingdao Shopping Mall is an integrated commercial development project located at Laoshan District of Qingdao City. The Project sits on a vacant land with total site area of approximately 227,674.7 square metres. The site area apportioned to the Qingdao Shopping Mall is approximately 45,714 square metres, with a total planned gross floor area of approximately 216,000 square metres, of which approximately 131,000 square metres is for retail use and the balance of 85,000 square metres is for ancillary and an estimate 2,000 car parks lots. The land use rights of the Qingdao Shopping Mall is for a total period of 40 years expiring on 5 Dec 2050.

Comments  We are not surprised by this latest corporate development by Parkson as management has guided on the construction of the Qingdao and Tianjin malls to be completed somewhere in 2HCY2015.

 The Qingdao Shopping Mall is currently under construction and it is expected to be completed in July 2015, which is inline with our assumption.

 This acquisition is also inline with management strategy to build stand alone shopping malls in China in a bid to revive the flagging fortunes of Parkson China apart from its other initiatives, including consolidation of its portfolio of stores in China, and improving merchandising mix via brand collaboration. PRG’s costs pressure due to higher rentals and hence downwards margins pressure is expected to be mitigated by having its own mall.

 This acquisition can be funded by PRG’s cash of >RMB1bn as at 30 Sept 2014.

Outlook  Looking ahead over the next subsequent quarters, 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.

Forecast  We have already factored earnings from Qingdao mall into our earnings model. No change to our earnings forecasts.

Rating & Valuation Maintain Market Perform with an unchanged SoP target price of RM2.63.

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

Source: Kenanga