1QM17 core LATAMI widened to RM62.6m compared to the core loss of RM28.9m in 1Q16. The results came in below our net profit forecast of RM37.6m and consensus’ RM54.3m forecast. The negative variance was due to higher-thanexpected losses in start-ups and lower same-store-sales growth. Maintain UNDERPERFORM. Our target price is reduced from RM0.70 to RM0.66 as we impute lower target prices for both its listed operating units.

Key Result Highlights QoQ, 1Q17 revenue fell marginally by 0.7%, no thanks to negative same-store-sales growth (SSSG) across the board including China (- 7.3% vs. -9.7% in 4Q16), Vietnam (-10.3% vs. +4.1% in 4Q16), Myanmar (-28.2% vs. -25% in 4Q16), Malaysia (-6.6% vs. +21.5% in 4Q16) and Indonesia (-13.1% vs. +7.3% in 4Q16). The SSSG weakness in China continued to be a drag to earnings. The Vietnam operations continued to be challenging amidst an increasingly crowded retail scene. While weakness in Indonesia was due to the early festive shopping due to a shift in the Hari Raya/Lebaran calendar. The subdued economic growth and store closures coupled with losses at some stores in China, Myanmar and Vietnam, declining margins and weak consumer sentiment resulted in 1Q17 core net losses widening to RM62.6m compared to losses of RM34.6m in 4Q16 (excluding one-off impairment losses on goodwill, property and receivables amounting to RM61.2m).

YoY, 1Q17 revenue fell 6% due to lower SSSG across the board. However, Parkson recorded losses of RM62.6m compared to a loss of RM28.9m in 1Q16 (excluding gain from disposal of a subsidiary amounting to RM92.2m in 1Q16). In China, the government’s austerity measures and keen competition from different retail formats resulted in continuous negative SSSG of -7.3% compared to -10.0% in 1Q16. The weak SSSG in Malaysia (-6.6% vs. -15.2% in 1Q16) was impacted by weaker-than-expected consumer sentiment confidence which remained below the threshold for the ninth consecutive quarters and less festive shopping days following the shift in the Hari Raya calendar. In Vietnam (- 10.3% vs. -3.6% in 1Q16), discretionary retail spending remained weak despite signs of economic stability amidst an increasingly crowded retail scene. Indonesia was worst hit (-13.1% vs +10.0% in 1Q16) also affected by less festive shopping days in 1Q17 due to the shift in the Lebaran calendar. Its Myanmar operations suffered the worst decline (- 28.0% vs. +6.0% in 1Q16) due to an impending closure of FMI Centre.

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 platforms and oversupply of retail space, we believe it will take a longer period of time for Parkson to reverse its declining SSSG trend. Recall, the proposed Beijing Huadesheng Property Management Co Ltd, which owns a building named Beijing Sun Palace Parkson, is expected to generate a total cash consideration of RMB2.3b (RM1.4b) and a net gain of RM300m to the group, expected to be completed somewhere in FY17.

We are forecasting a loss of RM48.9m in FY17E compared to a net profit of RM37.4m to take into account higher start-up losses and lower same-stores-sales growth. Our target price is reduced from RM0.70 to RM0.66 as we impute lower target prices for both its listed operating units (Hong Kong-listed Parkson Retail Group Limited and Singaporelisted Parkson Retail Asia Limited). Reiterate UNDERPERFORM.

Source: Kenanga Research - 24 Nov 2016