Period

1Q16

Actual vs. Expectations

Recorded 1Q16 core LATAMI of RM28.5m compared to a profit of RM20.2m in 1Q15 after stripping out gain from disposal of a subsidiary amounting to RM92.2m (Parkson’s effective portion by virtue of its 67.6%-owned Parkson Retail Asia). The results came in below our RM90.6m and consensus RM124.8m full-year net profit forecasts. The negative variance was due to higher-thanexpected losses in the China operations.

Dividends

No dividend was declared in this quarter. Key Result

Highlights

YoY, 1Q16 revenue rose 10% to RM933.4m driven by same-store-sales (SSS) growth for Indonesia (10% vs 5.7% in 1Q15) and Maymmar (6% vs 33% in 1Q15) which more than offset Vietnam (-4% vs - 5.5% in 1Q15), Malaysia (-15% worsened from - 4.4% in 1Q15) and China (-10% compared to - 4.5% in 1Q15) albeit from a higher base. Due to stores start-up losses in China, Myanmar and Indonesia, 1Q16 reported a core net loss of RM28.5m compared to a profit of RM20.2m in 1Q15 after stripping out gain from disposal of a subsidiary amounting to RM92.2m (Parkson Holding’s effective portion by virtue of its 67.6%- owned Parkson Retail Asia).

In China, 1Q16 SSS growth fell 10% YoY due to weak consumer sentiment coupled with intensifying competition leading to operating loss on weak sales growth and costs incurred by new business ventures and ramp-up of new stores.

The Malaysian operations recorded a decline in YoY SSS growth of -15.2% due to headwinds including: (i) transitional period of sales adjustment following the introduction of GST on 1 April 2015, and (ii) weak consumer sentiment resulting from the weakness in the local currency and political uncertainty.

The Vietnam operations recorded decline in YoY SSS growth of -3.6% in 1Q16. The discretionary retail environment in Vietnam continued to be difficult for the reported quarter despite signs of economic recovery.

The Indonesia operations recorded YoY SSS growth of +9.6% in 1Q16. Consumer sentiment remained robust with Bank Indonesia reporting the country’s consumer confidence index for the 3Q 2015 remaining above the 100-point confidence threshold at 106.7 points.

The Myanmar operations recorded SSSG of +6.1% in 1Q16. The store in FMI Centre, Yangon recorded robust sales growth in its 3rd 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 will take a longer period of time for Parkson to reverse its declining trend in SSSG.

Change to Forecasts

We are downgrading our FY16E and FY17E net profits by 22-26% to take into account the lower SSS growth in China and higher start-up losses.

Rating & Valuation

We are downgrading our target price from RM1.17 to RM1.01 as we impute the consensus’ latest lowered 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 - 25 Nov 2015