Period

2Q16/1H16

Actual vs. Expectations

Reported 1H16 core LATAMI of RM60.3m compared to a profit of RM44.8m in 1H15 after stripping out: (i) 1Q16 gain from disposal of a subsidiary amounting to RM92.2m (Parkson’s effective portion by virtue of its 67.6%-owned Parkson Retail Asia), (ii) 1H15 gains from disposal of Festival City mall (RM108.9m), and (iii) one-off impairment amounting to RM22.8m. The results came in below our RM67m and consensus RM84.7m full-year net profit forecasts. The negative variance was due to higher-thanexpected losses in start-ups and declining margins in the China operations.

Dividends

No dividend was declared in this quarter. Key Result

Highlights

YoY, 2Q16 revenue rose 5% despite weak samestore- sales (SSS) growth across the board, including Indonesia (+1.4% vs 8.8% in 2Q15), Myanmmar (-5% vs 29% in 2Q15), Vietnam (- 0.4% vs -5.8% in 2Q15), Malaysia (-7.3% vs - 6.7% in Q15) and China (-8% compared to -4.5% in 2Q15) albeit from a higher base. Due to stores start-up losses in China, Myanmar and Indonesia, declining margins and weak consumer sentiment, 2Q16 reported a core net loss of RM31.4m compared to a profit of RM24.6m in 2Q15 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).

YTD, 1H16 revenue rose 7%. However, Parkson recorded losses of (core PATAMI) RM60.3m compared to RM44.8m in 1H15 after stripping out: (i) 1Q16 gain from disposal of a subsidiary amounting to RM92.2m (Parkson’s effective portion by virtue of its 67.6%-owned Parkson Retail Asia), (ii) 1H15 gain from disposal of Festival City mall (RM108.9m), and (iii) one-off impairment amounting to RM22.8m. In China, the government’s austerity measures and keen competition from online retailers have affected discretionary spending resulting in negative SSS growth of 11% compared to -6% in 1H15. The weak SSS growth in Malaysia (-11% vs. -6% in 1H15) was impacted by weaker-than-expected consumer confidence and the implementation of the GST. In Vietnam (-2% vs -5.7% in 1H15), discretionary retail spending remained weak despite signs of economic stability. Only Indonesia (+6% vs +7.3% in 1H15) showed positive growth.

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. 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 23% and 59%, respectively, to take into account the lower SSS growth in China and higher start-up losses.

Rating & Valuation

We are downgrading our target price from RM1.01 to RM0.82 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). As such, rating further downgraded from Market Perform to Underperform.

Risks to Our Call

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

Source: Kenanga Research - 25 Feb 2016