14th Aug 2013
GRANTED, the lacklustre growth of China's retail and consumer market has pulled Parkson Holdings Bhd's earnings down so far this year, but the medium to long-term prospects for the group, especially its China operation, are still good.
Briefly, department stores in China are facing challenges from the slowing economy, rising wage costs and heightened competition, not to mention the advent of online shopping.
While not that many analysts are excited about Parkson, with at least two out of three calling a "hold" on the stock, the sheer size of China's consumer market cannot be ignored. Plus, Parkson's share price has declined 19.83% to RM3.80 from a year ago.
According to Affin Investment Bank analyst Mandy Teh, China's retail market will recover by the second half of the year at the very least. Meanwhile, Parkson's plan to expand selectively and close non-performing stores on the mainland will reflect on the group's earnings going forward.
"Even though China is not doing very well now, I think the worst is over. Moving forward, definitely the situation in China will improve. Parkson's management has also become more cautious about expanding there," Teh tells The Edge.
She has upgraded Parkson to an "add" from "reduce" with a target price of RM4.16, following a recovery in the group's China operation as management implemented its selective expansion strategy, refurbished its stores and upgraded its brand mix.
In China, Parkson operates through its 51.5% subsidiary Parkson Retail Group Ltd (Parkson China), that is listed on the Hong Kong Stock Exchange. In its first quarter ended March 31, the unit's net profit tumbled 21% from the previous corresponding period to RMB227 million (RM113.6 million). This in turn saw Parkson's 3QFY2013 earnings for the period ended March 31 plunge to RM76.9 million, from RM102.4 million in the previous corresponding period.
"Operating profit was significantly lower compared to a year ago, as the retail industry in China remained soft due to weak demand and higher marketing and promotional costs," Parkson states in its results announcement.
Affin IB's Teh believes Parkson's battered share price offers an opportunity for investors to start buying. The company is trading at an attractive 13 times historical earnings, she points out.
Other major department store operators in Southeast Asia are trading at higher valuations. For example, PT Matahari Putra Prima Tbk, Indonesia's largest retail chain, is trading at 59.19 times historical earnings while Thailand's Robinson Department Stores plc is trading at 41.62 times.
While sanguine about China over the medium term, Teh opines that Parkson's results for the quarter ending June 30 will be muted because there is no sign yet of a strong pick-up in consumer demand in the world's second largest economy.
BOCOM International, a China-based research firm, states in a May 9 note that same-store-sales (SSS) growth on the mainland improved in April. However, this has been limited to the gold, jewellery and cosmetics sub-segments.
"By product category, gold, jewellery and cosmetics continued to post above-average SSS growth while menswear remained an underperformer. Consumer sentiment remained sluggish as we did not see a recovery in SSS in the other product categories."
JPMorgan Asia Pacific Equity Research, in a May 1 note, advised investors to avoid discretionary consumer stocks, including Parkson China, as demand for discretionary items remained low year to date.
"There has been no notable pick-up in demand and volumes remain lacklustre. Following a weaker-than-expected start to the year, we lower our estimates for the discretionary space to about 4% earnings growth compared with our previous estimate of 11%."
Within the Parkson group, the performers appear to be its Malaysia and Indonesia operations, which posted SSS growth of 5% and 6% respectively. The company's operations in Malaysia, Indonesia and Vietnam are parked under its Singapore-listed, 67.6% subsidiary Parkson Retail Asia Ltd (Parkson Asia).
In 3QFY2013, Parkson Asia recorded a slightly higher net profit of S$9.78 million compared with S$9.66 million in the previous corresponding period. Its share price has risen 6.94% over the last year and closed at S$1.54 last Thursday.
The Parkson stores in Malaysia and Indonesia may have performed well, but they account for only a quarter of the company's earnings before interest and tax, and cannot make up for the sluggish Parkson China.
"Decent growth in Malaysia and Indonesia cannot offset the slowdown in consumer demand in China because the country contributes about 75% to group earnings, while Malaysia and Indonesia combined account for only 23%," says Teh.
Nevertheless, the group hopes to expand its retail network in China, increasing its gross floor area by about 14.7% to 2.07 million sq m in FY2013. It will achieve this by opening eight more stores in third-tier cities, where there is less competition in the department store sector.
In FY2014, management plans to open another five stores in China, increasing its gross floor area by another 7.9% to 2.24 million sq m. In Southeast Asia, Parkson Asia will increase its retail network by 9.6% to 690,722 sq m in FY2013 and 19.6% to 825,870 sq m in FY2014.
"It is always positive whenever you expand your operation. However, it depends on the approach to the expansion," says Teh, adding that the group's growth in China's third-tier cities would be positive for its profitability, because discounts are not as high as in first-tier cities while operating costs are lower.
Although China's retail landscape is weak at the moment, the long-term prospects for its economy make Parkson Holdings a hard stock to ignore. At the same time, its expansion in the dynamic Southeast Asian market will give the group an advantage over its peers.
[Source]
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