9M19 CNL of RM76m expanded, compared to CNP of RM5m in 9M18, and both our/consensus RM16.6m full-year estimates. We consider the results to be below expectation due to higher-than-expected finance costs and tax expenses. We cut our FY19-20E estimates to CNL/CNP of RM60.9m/RM8.5m (from CNP of RM16.6m/RM18.8m). Nevertheless, overall performance had improved from last quarter, especially for China operation. Maintain MP with a lower TP of RM0.240 (from RM0.250).

9M19 below expectations. 9M19 CNL of RM76m expanded, compared to CNP of RM5m in 9M18, and both our/consensus RM16.6m full-year estimates. We consider the results to be below expectations due to higher-than-expected finance costs and tax expenses. No dividend was declared, as expected.

YoY, 9M19 revenue increased 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 9M19 SSS growth was lower at -2.7% vs. +2% in 9M18 mainly due to lower direct sales arising from stores closures in 2018 but improving operating revenue was seen from strong sales performance of the Cosmetics & Accessories category (51% of merchandise sales). SSS growth rate was stronger for Malaysia (+5.1% vs. 9M18 of -1.2%) which benefited from the spending spree during the zero-rated tax holiday and year-end sales, while Indonesia’s (-1.4% vs. 9M18 of -5.9%) improved SSS was mainly driven by the targeted promotions and increasing house brands’ contribution. On the other hand, Vietnam’s (-18.9% vs. 9M18 of - 6.5%) 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. Nevertheless, 53%-owned Parkson China recorded higher operating efficiencies to report an operating profit of RM93m (+7%), which more than offset other region’s losses to record EBIT of RM45m. Nevertheless, due to higher finance costs and higher tax expenses, 9M19 CNL expanded to RM76m compared to CNP of RM5m in 9M18.

QoQ, 3Q19 revenue rose 4% mainly due to higher consumer spending during the CNY festivities and extended holiday seasons across all the retailing regions. Coupled with improved operating efficiencies and stores productivity, the group recorded higher operating profit of RM53.7m (+162%), mainly contributed by China operation following the closure of underperforming stores. Nevertheless, higher tax expense brought 3Q19 Core Net Loss to RM6.5m compared to RM5.9m in 2Q19.

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 March 2019, the group’s department stores network comprises of 44 stores in China and 64 stores in South-East Asia, including Malaysia (44 stores), Vietnam (5 stores), and Indonesia (15 stores). Note that, Parkson has ceased its Myanmar operation with the closure of its only store in 2Q19.

We cut our FY19-20E earnings to CNL/CNP of RM60.9m/ RM8.5m from CNP of RM16.6m/RM18.8m to reflect the higher-than-expected finance costs and tax expenses.

Maintain MARKET PERFORM with a lower TP of RM0.240 (from RM0.250) based on the revised Sum-of-Parts (SoP) which implied 30x FY20E PER.

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 - 30 May 2019