3368 HK / 3368.HK
The worst may not be over
We expect negative SSSG for Parkson in 2H13 for three reasons 1) the anti-corruption campaign which could drag down sales in Beijing and Shanghai, 2) Parkson’s ageing store portfolio and fierce competition in key markets, and 3) lack of large mall-like projects in the pipeline.
For 1H13, we estimate negative SSSG and a 17% yoy earnings drop to Rmb435m. We cut our FY13-15 EPS forecasts by 8-9%and reduce our CY14 P/E from 8x to 7x, based on the average of its close peers, Maoye and NWDS. This lowers our target price to HK$2.60.Investor confidence could be dented by the recent resignation of the CFO even though this is not a surprise to some investors. Maintain Underperform.
In May, Parkson trimmed its FY13 gross sales proceeds (GSP)growth target from low teens to ~10% and its SSSG target from ~5% (set in Feb) to ~3%. We think that Parkson will find it a stretch to hit the targets as SSSG was flat in Apr and May and 1Q13 SSS fell 2.8%. Our channel checks revealed that anti-corruption activities had the most severe impact on sales in Beijing and Shanghai(low-teens % of Parkson’s GSP in 1Q13), which could also explain the weaker menswear and watch sales.
What We Think
We think that 2Q13 SSSG is likely to be negative and Parkson could lower its FY13 sales target further. We forecast a 9% drop inFY13 earnings based on an SSSG decline of 2% in FY13(low-single-digit falls in both 1H13 and 2H13). We expect the average commission rate to drop 0.2%ptsto 18.2% in FY13.
Furthermore, the recent resignation of the CFO could lower investor confidence as Mr Clarence Wong has been the key IR contact since Parkson’s IPO in 2005. The acting CFO, Mr Au Chen Sum is relatively new, having joined Parkson in 2010.The company has yet to announce a replacement plan.
What You Should Do
Parkson’s share price has fallen 52% YTD vs. 8% for the HSI. It is trading at an inexpensive FY13 P/E of 9x, a discount to the sector average of11x.But we see downside risk to its FY14-15 earnings due to its ageing store portfolio and the lack of large stores in the pipeline. Switch to Intime (Outperform,TP: HK$9.00).
Publish date: 10/07/13