1Q19 CNL of RM43.0m narrowed, compared to CNL of RM43.5m in 1Q18, and vs. our/consensus RM34.7m/RM29.5m full-year net profit forecasts. We consider the results as below expectation due to lower-than-expected China SSS growth. As such, we cut our FY19E/FY20E CNP by 52%/45%. However, we are positive on steady earnings recovery ahead underpinned by the group’s transformational strategies. Maintain OP. Our TP is lowered from RM0.810 to RM0.370 based on SOP to reflect the slower business condition in both of its operating units.

1Q19 hit by unexpected lower China SSS growth. 1Q19 Core Net Loss (CNL) of RM43.0m narrowed, compared to CNL of RM43.5m in 1Q18, and vs. our/consensus RM34.7m/RM29.5m full-year net profit forecasts. We consider the results below expectation due to lower-thanexpected China SSS growth.

YoY, 1Q19 revenue rose 0.5% due to improved SSS growth from Malaysian and Indonesian operations which more than offset the lower SSS growth in China and Vietnam operations. China’s 1Q19 SSS growth was lower at -2.9% vs. 1.4% in 1Q18 mainly due to lower direct sales from stores closures in 2018 but improving operating revenue from strong sales performance of the Cosmetics & Accessories category. SSS growth rates were stronger for Malaysia (+5.9% vs. 1Q18 of -6.8%) which benefited from the spending spree during the zero-rated tax holiday, while Indonesia’s (+0.3% vs. 1Q18 of -13.8%) improved SSS was mainly driven by the targeted promotions and increasing house brands’ contribution. On the other hand, Vietnam’s (-16.5% vs. 1Q18 of -7.8%) SSS growth rates sunk deeper due to intense competition, especially with the launch of Vincom Center Landmark 81 Mall on 30 July 2018, which is located at the tallest building in Ho Chi Minh City. Nevertheless, 53%- owned Parkson China recorded improved operating efficiencies to report an operating profit of RM10m compared to an operating profit of RM1m in 1Q18. This resulted in 1Q19 CNL narrowing to RM43.0m compared to CNL of RM43.5m in 1Q18.

QoQ, 1Q19 revenue decreased 9% mainly due to seasonally stronger 4Q, with lower overall SSS growth but cushioned by the stronger SSS growth for Malaysian operation (+5.9% vs. 4Q18 of -2.4%) from the zerorated tax holiday. This brought 1Q19 core net loss to RM43.0m compared to core net loss of RM35m in 4Q18.

Outlook. We like Parkson for the following; (i) its strategy of optimising its retail format, expanding its product and services offerings, which is paying off, (ii) it is minimising stores losses via optimising store effectiveness and efficiency, which are bearing fruits, and (iii) China operation’s improvement to gain further momentum. However, SouthEast Asia continues to remain challenging. As of 30th September 2018, the group’s department stores network comprises of 42 stores in China and 64 stores in South-East Asia, including Malaysia (44 stores), Vietnam (5 stores), Indonesia (14 stores), and Myanmar (1 stores).

Cut FY19E/FY20E CNP by 52%/45%. We cut our FY19E/FY20E CNP respectively by 52%/45% to account for the lower China SSS growth.

Maintain OUTPERFORM. We lowered our TP from RM0.810 to RM0.370 based on sum-of-parts (SOP) as we lowered target prices for both listed operating units due to the slower business condition in both of its operating units. However, we are positive on a steady earnings recovery ahead underpinned by the group’s transformational strategies.

Key risks to our call are: (i) higher-than-expected losses in the SouthEast Asia region, and (ii) slower-than-expected SSS growth.

Source: Kenanga Research - 26 Nov 2018