1H19 CNL of RM49m expanded, compared to CNL of RM22m in 1H18, and vs. our/consensus RM16.6m/RM29.5m of full-year estimates. We consider the results to be within expectations as the overall performance had improved from last quarter, especially for the Malaysian and China operations. No changes to FY19E/FY20E CNP. Maintain MARKET PERFORM with an unchanged TP of RM0.250.

1H19 deemed within expectations. 1H19 CNL of RM49m expanded, compared to CNL of RM22m in 1H18, and vs. our/consensus RM16.6m/RM29.5m full-year net profit forecasts. We consider the results as within expectations as the overall performance had improved from last quarter, especially for the Malaysian and China operations. No dividend was declared, as expected.

YoY, 1H19 revenue declined marginally due to improved SSS growth from Malaysian and Indonesian operations which more than offset the lower SSS growth in China and Vietnam/Myanmar operations. China’s 1H19 SSS growth was lower at -3% vs. +2% in 1H18 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 (+5.2% vs. 1H18 of -4%) which benefited from the spending spree during the zerorated tax holiday and year-end sales, while Indonesia’s (-0.2% vs. 1H18 of -8.0%) improved SSS was mainly driven by the targeted promotions and increasing house brands’ contribution. On the other hand, Vietnam’s (-18.2% vs. 1H18 of -5%) 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. Furthermore, 53%-owned Parkson China recorded lower operating efficiencies to report an operating profit of RM29m compared to an operating profit of RM32m in 1H18. This resulted in 1H19 CNL expanded to RM49m compared to CNL of RM22m in 1H18.

QoQ, 2Q19 revenue surged 14% mainly due to higher consumer spending during the year-end festivities and holiday seasons across all the retailing regions. Coupled with improved operating efficiencies and stores’ productivity, the group turn profitable at the operating profit level at RM21m compared to operating loss of RM29m in 1Q19, mainly contributed by Malaysia and China operations following the closure of underperforming stores. This brought 2Q19 core net loss to RM5.9m compared to core net loss of RM43m in 1Q19.

Outlook. We believe that Parkson’s strategy of optimising its retail format, expanding its product and services offerings are gradually paying off as it is minimising stores losses via optimising store effectiveness and efficiency. However, South-East Asia continues to remain challenging. As of 30th December 2018, the group’s department stores network comprises of 46 stores in China and 66 stores in SouthEast Asia, including Malaysia (45 stores), Vietnam (5 stores), and Indonesia (16 stores). Note that, Parkson has ceased its Myanmar operation with the closure of its only store in 2Q19.

Maintain MARKET PERFORM with an unchanged TP of RM0.250 based on Sum-of-Parts (SoP).

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 - 27 Feb 2019