Share Price HK$3.52
Target Price HK$2.47
2Q13: Not Out Of The Woods Yet
Parkson’s 1H13 results fell short of expectations, with net profit falling 38% yoy to Rmb325m vs our forecast of a 19% yoy decline. This was mainly due to: a) slower recovery in SSS, b) jump in rental and staff costs mostly from new and managed stores acquired from parent, c) share option expense of Rmb12.9m, and d) Rmb15m losses from e-commerce. Cut 2013-15 estimates by 22-30% and lower target price to HK$2.47. Maintain SELL.
• Parkson Retail’s 1H13 net profit decline of 38% was steeper than expected largely due to higher operating expenses. Staff costs jumped from 8.8% of 1H12 sales to 12.6% in 1H13 while rental expenses also increased from 17.3% to 20.2% of sales. 1H13 results included Rmb12.8m share option expense, Rmb59m losses from new stores as well as accelerated amortisation of bond issuance costs totaling Rmb10m.
• At the investors’ call, management lowered 2013 same-store sales (SSS) guidance from high single-digit to 2-3%. While sales trends in August showed some improvement over July, the combined July and August SSS growth was merely flat. Given the current environment and the company’s ongoing store refurbishment programme, management is not hopeful for a rebound anytime soon. Parkson is also slowing its store opening to 5-6 p.a..
• The only positive from the results was the milder-than-expected deterioration in concessionaire rates, which management assured was due to heavy discounting during the period. Contracted rates with tenants remain unchanged, which supports our view that because of the poor sales performance of some brands, they have less bargaining power with department stores even at a time when retail space is abundant in China.
• Operating de-leverage was more severe than expected in 1H13, largely due to a surge in operating costs related to new stores and previous managed stores that were acquired from parent. EBIT margin based on gross sales proceeds lost 11.4ppt yoy to 13.9% in 2Q13. We do not expect this trend to reverse anytime soon, given that: a) Parkson will have opened 7 new stores before end-13 and this will result in new store losses of Rmb160m in 2013, and 18 out of the existing 55 stores are still lossmaking, and b) ongoing refurbishment of existing stores will result in disruptions and newly renovated stores will need a year to revive store traffic. We look for operating margin to fall from 24.7% in 2012 to merely 16.4% in 2013 and 16.7% in 2014.
• Parkson will continue to monitor sales and profitability of its nonperforming stores and will close the ones, which management does not think will turn around. In addition to the Hongqiao store in Shanghai and Guizhou JinFengHuang stores, which Parkson closed in Jul 12, the company will be shutting its store in ShiJiaZhuang in 2H13.
• In view of the slow recovery in SSS and surge in operating costs and losses from new stores, we have lowered our sales and margin assumptions for 2013-15. As such, our EPS estimates are reduced by 22.6%/28.0%/30.0% in 2013/14/15 respectively.
• Maintain SELL. As we expect moderate improvement in concessionaire rates and stabilising SSS growth will not be sufficient to offset the jump in operating expenses and new store losses, we are now expecting 2013 EPS to drop 26% yoy but mildly improve by 8% in 2014.
• Earnings visibility remains low and whether its store refurbishment will yield positive results remains to be seen given the highly competitive landscape and Parkson’s lack of market dominance and clear positioning. Given its weaker growth profile, we now apply 8x PE (10.3x previously) which is on a par to its trough valuation. We also roll forward our target from 2013 to 2014. Consequently, our target price is cut from HK$3.80 to HK$2.47. We expect the market to downgrade earnings on the back of the results, pushing the share price to lower levels. We thus maintain our SELL rating for Parkson.
Publish date: 19/08/13