Period

3Q15/9M15

Actual vs. Expectations

9M15 core PATAMI of RM68.7m (+2% YoY) derived after stripping out: (i) gain from disposal of Festival City mall (RM108.9m) and (ii) one-off provision due to arbitration in respect of tenancy agreement amounting to RM43.8m (Parkson’s effective portion by virtue of its 53.1%-owned Parkson China) came in below expectations at 55% and 57% of our and consensus full-year forecasts, respectively. The negative variance was due to higher-than-expected operating expenses.

Dividends

No dividend was declared in this quarter. Key Result

Highlights

YoY, 3Q15 revenue grew 7% YoY to RM1,048m largely driven by same-store-sales (SSS) growth from Malaysia (8% vs +0.1% in 3QFY15) due to increase in consumer spending prior to the implementation of the Goods and Services Tax (GST) effective April 1. However, overall consumer spending remained weak following the concerns over rising cost of living. While Indonesian market contributed growth (+7% vs +8.9% in 3QFY14), but the Vietnam operations recorded decline in SSSG of 2.1% in 3Q15 compared to 7.2% fall in 3Q14. Separately, the Myanmar operations recorded SSSG of 12.7% in 3Q15 driven by strong ramp-up in sales after the 1st year of operations in FMI Centre, Yangon. China continued to register negative SSSG growth of 3.4% (vs. - 8% in 3QFY14). Due to stores start-up losses in China, Myanmar and Indonesia and one-off provision in respect of the arbitral award arising from the dispute in the Beijing Metro City Shopping Plaza’s Tenancy Agreement, which amounted to RM82.4m, 3Q15 recorded a PATAMI of RM3m (-95%). Stripping out the arbitral losses, 3Q15 would have reported CORE PATAMI of RM46.8m (-16%).

YTD, 9M15 revenue rose 5% to RM2.9b. However, core PATAMI rose to RM68.7m (+2% YoY) after stripping out the RM108.9m gain from disposal of Festival City Mall and one-off provision due to arbitration in respect of tenancy agreement (RM43.8m). In China, the government’s austerity measures and keen competition from online retailers have affected discretionary spending resulting in negative SSS growth of 5%. EBIT declined by 26% to RM201m due to the negative SSS growth and increased operating costs despite continuous improvement of margin from effort in allocating more space for complementary service, which is bearing fruits albeit at a slow 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. The weak SSS growth in Malaysia (-1.2% 9M15) was impacted by weaker-than-expected consumer confidence. In Vietnam (-4% SSSG), discretionary retail spending remained weak despite signs of economic stability. A provision of RM6m was made for closure of a store in Hanoi.

Outlook

Looking ahead, Parkson could continue to face 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 declining trend in SSSG.

Change to Forecasts

We are downgrading both our FY15E and FY16E net profits by 18% to take into account the lower SSS growth in China and higher start-up losses.

Rating & Valuation

We are downgrading our target price from RM2.26 to RM2.12 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). Maintain Market Perform rating.

Risks to Our Call

Upside risk : A stronger-than-expected economic recovery in China.

Source: Kenanga Research - 28 May 2015