News   In an announcement to Bursa Malaysia, Parkson Holdings 53.1%-owned Parkson Retail Group (PRG) listed in Hong Kong Stock Exchange announced that according to the arbitral award issued by China International Economic and Trade Arbitration Commission, an award has been made in favour of an independent third party (the Landlord) while Parkson Retail Development Co., Ltd (Tenant) ordered to pay a fee of RMB36.8m (equivalent to ~RM21.9m) for the occupation of the Premises after the termination of the Tenancy Agreement a rental in the amount of RMB89.9m (~RM53.7m) which the Arbitration Commission had determined to be payable by the Tenant), and a daily fee calculated at the rate of RMB3.46 per square metre for the period from 1 November 2014 up to the date on which the Premises was surrendered to the Landlord, totalling RMB12.6m (~RM7.5m).

  According to the facts of the case, the Landlord had repeatedly requested the Tenant to reduce the total area of the Premises under the Tenancy Agreement or alternatively terminate the Tenancy Agreement. The Landlord had at the same time taken actions adverse to the business of the premises and the Tenant, including suspending supply of airconditioning and installing fences at the Plaza and sealing off the main entrances which resulting in the decline in customers. Subsequently, the landlord has issued a notice of breach of contract to the Tenant which submitted an application to the Arbitration Commission.

  The total amount Parkson Retail Group has to pay is RMB140m (~RM83.6m).

Comments   We are negative on this latest announcement by Parkson, which could further drag down its earnings.   Parkson Retail Group is considering the options available to it, including the submission of an appeal to the court in the PRC to overturn the Arbitral Award. We understand that at this juncture, no provision has been made.

  For illustrative purposes, Parkson Holdings portion of the 53.1% stake will erode our FY15 net profit by RM44m or 21%.

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   No changes to our earnings forecast.

Rating & Valuation   Maintain Market Perform with an unchanged SoP target price of RM2.26.

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

Source: Kenanga