Parkson Holdings’ (PHB) China operations, Parkson Retail Group (PRG) reported 2QFY17 net loss of CNY5.6m while cumulative 1HFY17 saw smaller net loss of CNY4.5m due to the CNY1.1m profit made last quarter. We view the results positively as it illustrates a much-needed improvement from 1HFY16’s net loss of CNY124.2m. At operating level, PRG reported profit for a second consecutive quarter, at CNY39.3m. The positive operating profit was attributed to favorable product mix, lower staff costs and lower rental expenses. We are pleased with the positive momentum following the previous quarter’s, thus we keep our earnings estimates and retain our Neutral call with TP of RM0.75 unchanged. While potential upsides appear attractive, near-term operational challenges may keep price movements subdued.

• Positive operating profit. 2QFY17 revenue grew marginally by 1.3% YoY to CNY980.8m. This is the second quarter PRG recorded positive operating profit, with 26% improvement from the previous quarter. Last year’s 2Q reported an operating loss of CNY66.3m. The progress is attributed to PRG’s consistency in executing its transformation plans, which involves diversification of its retail formats, operational optimization and closure of underperforming stores. Despite a decline of 4.3% YoY for its 1HFY17 gross sales proceeds due to store closures, same-store-sales-growth (SSSG) increased by 0.1% for 1HFY17. 2QFY17 direct sales made up 15.2% of total merchandise sales (15.4% in 1QFY17), while on product mix, contribution from the Fashion & Apparel and Cosmetic & Accessories segments were higher at 91.4% for 2QFY17 (91.1% in 1QFY17).

• Zooming out to PHB level, it should be noted that its Southeast Asia arm, Parkson Retail Asia (PRA) had issued a profit guidance where PRA expects to conclude FY17 with losses, due to headwinds faced in each of its operating countries, mainly Malaysia, Indonesia and Vietnam, on top of further write-downs to PRA assets. PRA guided a net loss of c.SGD62m for FY17. Last quarter, PRA reported 9MFY17 net loss of SGD16.5m. Though PRA’s current weak operations will weigh down PRG’s improved contributions at Group level, we believe similar transformation efforts in PRG will take stronger place in PRA’s business operations in managing its stores going forward. At this juncture, however, we are relieved that things are looking up for PRG, and we look out for the momentum to continue in the quarters ahead. Investors with higher risk appetites and longer-term horizons may want to relook at PHB’s prospects and valuations however, despite current challenges. Our rough estimation of PHB’s book value (BV) based on a combination of PRG and PRA’s individual BVs at a 50% discount would already equal to c.RM0.90-RM1.00, significantly higher than current share price levels.

Source: PublicInvest Research - 18 Aug 2017