Period  2Q15/1H15

Actual vs. Expectations  1H15 core PATAMI of RM21.9m (-60% YoY) after stripping out RM108.9m gain from disposal of Festival City mall came in below expectations at 12% and 16% of our and consensus full-year net profit forecasts, respectively. The negative variance from our forecast was due to lower-thanexpected same-stores-sales growth and higher-thanexpected start-up losses.

Dividends  Share dividend on the basis of 1 for 20 was declared.

Key Result Highlights  YoY, 2Q15 revenue grew 3.5% YoY to RM981m driven by same-store-sales (SSS) growth for Indonesia (+8.8% vs +7.3% in 2QFY14) and first year operations in Maymmar (29%) which more than offset Vietnam (-5.8% vs -2.7% in 2QFY14), Malaysia (-6.7% vs +0.2% in 2QFY14) 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, 2QFY15 recorded a loss of RM3m compared to a profit of RM25.6m in 2QFY14. However, including gain from disposal of Festival City mall amounting to RM108.8m, 2QFY15 reported PATAMI came in at RM105.8m.

 YTD 1HFY15 revenue rose 2% to RM1.8b. However, core PATAMI collapsed to RM21.9m (-61% YoY) after stripping out the RM108.9m gain from disposal of Festival City mall. In China, the government’s austerity measures and keen competition from online retailers have affected discretionary spending in China resulting in negative SSS growth of 6%. Operating profit declined by 25% to RM49m due to the negative SSS growth and increased operating costs 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 weakerthan- expected consumer confidence. In Vietnam, discretionary retail spending remained weak despite signs of economic stability. The Myanmar operations recorded SSS growth of +30% in 1HFY15, driven by FMI Centre, Yangon which recorded strong ramp-up sales after the 1st year of operations.

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 to 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 period of time for Parkson to reverse its SSSG’s declining trend.

Change to Forecasts  We are downgrading both our FY14E and FY15E net profits by 25-32% to take into account the lower SSS growth in China and higher start-up losses.

Rating & Valuation  We are downgrading our target price by 14% from RM2.63 to RM2.26 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). Maintain Market Perform rating.

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

Source: Kenanga