Wednesday, August 21, 2013

Parkson Retail Group : The extent of miss is a surprise (CIMB)

Parkson Retail Group
Current HK$3.52
Target HK$2.20
The extent of miss is a surprise

 After a series of misses since 2011, Parkson’s 1H13 results miss was not a complete surprise, but the magnitude was. We believe Parkson will continue to underperform its peers and the HSI until it can deliver a positive trend in SSSG but expect this to only happen in late 2014.

1H13’s earnings were 34% below our forecast and 32% short of consensus on higher staff and rental costs, and lower GSP. 2Q13’s yoy earnings drop widened to 54% vs. 1Q13’s 27.4% drop. 1H13 SSS fell 0.7%, as expected. We cut our FY13-15 EPS by 19-22%, and lower our target price to HK$2.20, based on 8x CY14 P/E, vs. 7x before, to bring it in line with peers Maoye and NWDS. Reiterate Underperform. The lack of a CFO replacement plan is a negative share price catalyst.

1H13 overall margins down
1H13’s gross sales proceeds (GSP) rose 5% yoy but SSS fell 0.7%, unfavourable when compared to Intime’s 13.7% and Maoye’s 7.7%. 1H13’s OP plunged 32% on higher staff (ESOP Rmb13m) and rental costs (straight-line accounting treatment of five new leases). The total OP loss of the six new stores opened since 2012 was Rmb59m. About half of Parkson’s stores recorded profit declines in 1H13. Its Beijing flagship store sales growth was below group average due to the government’s extravagance crackdown. Net income fell 38% on a 1-3%pt margin drop across the board. Average comm. rate fell 1%pt yoy to 17.6%.

New target looks stretched
Parkson has kept its 10-11% GSP growth and 2-3% SSSG target, but raised margins contraction to 0.6%pt (0.3% prev.) in FY13. QTD, SSSG has been flat, implying that it has to achieve 5-6% SSSG in 2H13 to meet its target. We think this is difficult as Parkson’s smaller and older stores could drag sales and traffic growth.

Still in the tunnel; Sell
Parkson trades at a ~10% discount to GE & Intime’s 2014 P/E. We do not advocate buying Parkson on valuation grounds as we think a sales turn-around could be more difficult for Parkson than GE or Intime because of its ageing store portfolio and lack of large stores in the pipeline. Switch to Intime (Outperform, TP: HK$9.00).

1H13 results review
1. GSP rose 5% yoy to Rmb9bn on 0.7% SSS decline.
2. Total operating revenue up 2% yoy to Rmb2.6bn.
3. Operating profit plunged 32% to Rmb441m.
4. Net earnings plummeted by 38% yoy to Rmb325m.
5. EBIT to GSP, on a same-store basis, (excluding the two closed stores, Shanghai Hongqiao and Guizhou Phoenix, and the Shanghai flagship store which is temporarily closed for renovation) was down 0.6%pts yoy to 6.9%.
6. Gross margin from merchandise sales (a combination of commission rate and direct sales margin) declined 0.8%pt yoy to 17.4% due to lower profit from mature stores and dilution from new stores.
7. The average commission rate dropped 0.8%pt yoy to 17.6% due to i) increasing sales mix of gold-related products which yielded lower margins; ii) lower sales contribution from stores with higher commission rates, especially the Beijing and Shanghai flagship stores, and iii) dilution from new stores.
8. The direct sales gross margin dropped 1.5%pt yoy to 15.5% due to the dilution from new stores, lower sales contribution from the Beijing and Shanghai flagship stores due to the on-going renovations, and dilution from the higher sales contribution from supermarket items.
9. The board has recommended an interim DPS of Rmb0.05, representing a 43% payout. Management plans to maintain its payout ratio at 40-50% in the long term.

Our forecasts vs. consensus, and our forecast revisions
Key changes to our FY13 assumptions:
1. GSP growth from 5.6% to 5.7%;
2. Average commission rate declines from 18.2% to 17.7%;
3. Cost of sales to direct sales ratio decreases from 86.4% to 85.6%;
4. SG&A to sales ratio increases from 53.1% to 57.5%; and
5. Staff cost to sales ratio rise from 9.5% to 11.0% as we see employees’ share options as a recurrent expense as Parkson finds it increasingly more important to maintain good quality staff to turnaround its business in weaker regions.

Key changes to our FY14 assumptions:
1. GSP growth from 13.2% to 11.4%;
2. Average commission rate declines from 18.4% to 17.9%;
3. Cost of sales to direct sales ratio decreases from 86.5% to 86.1%;
4. SG&A to sales ratio increases from 52.7% to 57.5%; and
5. Staff cost to sales ratio increases from 9.4% to 10.8%.

Key takeaways from results conference call
No CFO succession plan yet
1. There is no replacement plan for the CFO role yet, Mr Sam Au will continue to act as the deputy CFO.

SSSG performances in 1H13 and expectations for 2H13
2. SSS (excluding Shanghai flagship which was closed for renovations) was -0.7% in 1H13 ( 1Q13’s SSS =-2.8%, 2Q13 = 2.2%). 2Q13 SSS excluding the impact of gold items was about negative 1%.
3. Gold and jewellery products SSS in 1H13 was 12%, apparel declined by the low single digit, while cosmetics outperformed the group average.
4. Parkson maintains the current target of Rmb150m-160m new store losses for 2013.
5. Parkson is seeing sequential improvement in SSSG QTD and management believes this will continue in 2H13, helped by the removal of a blockage at the entrance of its Nanchang store which will improve the traffic of this store.
6. The renovation at the Beijing flagship store is on-going with target completion in 3Q13, while the Shanghai store will be closed until the end of August. Parkson is expecting performance to slowly rebound 3-6 months after the Shanghai store is reopened in September.

New stores openings pipeline and store closures
7. Parkson’s store opening plans remain unchanged in FY13 with 7 new stores (2 opened in 1H13, 2 opened in July, with 3 more stores opening in the remaining months in FY13). Beyond FY13, Parkson plans to open 4-5 stores per year vs. 6-7 new stores previously planned.
8. New stores in 2H13 will be in Baoding (GFA: 30,000 sq m), Zhongshan (GFA: 22,000 sq m), and Nanchang (GFA: 30,000 sq m).
9. Parkson plans to open most of its new stores in cities where there are existing stores already, with 20% of new stores going to new cities.
10. As for the company’s store closure plan, Parkson will continue to monitor loss-making stores and if it does not see prospects for a certain loss-making store in the foreseeable future, it will not hesitate to close the store. The Shijiazhuang store will be closed in Aug 2013.
% of self-owned properties remain low vs. GE and Intime
11. About 15% of the underlying properties are self-owned, unchanged from last quarter, vs. GE & Intime’s ~60%.

Loss-making stores and other losses
12. Parkson currently has 18 loss making stores, with most of these stores opened in the last 3-4 years. Some of these stores were opened prior to FY09, such as the Chengdu store. The company sees an opportunity for this store to break even in 2015, but will need to bring in better brands to make this store more competitive.
13. For the four managed stores acquired from the parentco in 2013, they incurred Rmb7m losses in 1H13. Under PRC accounting standards, they were all profitable (except for the Dalian store) in 1H13. However under IFRS, due to the requirement of straight line accounting, they have become loss making (net losses of Rmb3m).
14. Parkson’s e-commerce platform is expected to show a loss of Rmb15m-16m in FY13.

Anti-corruption campaign and sales in Beijing
15. Traffic declined by 7-8% in 1H13 and Parkson forecasts a full year decline of 5%. The traffic decline occurred mostly at stores in tier 1 cities. Reasons for the decline include competition from shopping malls and the crack-down of extravagant spending by the Chinese government.
16. The decline in corporate card sales has also been due to the government’s crackdown on extravagance. This has been more of an phenomenon at Parkson’s Beijing store and is the reason why the store is underperforming.

Expense items at a glance
17. On a same store level, rental expense increased by 3.9% in 1H13. The next lease up for renewal will be in 2016 (Hefei store).
18. Additional efforts will be made to control staff costs in 2H13. The company is introducing mobile POS, which will reduce headcount at stores.

Capex and cashflow
19. FY13 capex (renovation and new stores) will be at Rmb400m-500m. Capex in 1H13 was Rmb180m. There is no budget for FY14 yet.
20. The negative operating cash flow at end-June is due to seasonality. At the end of FY13, it is expected to be positive.
21. 1H13 interest expense included a one-time Rmb10m charge due to early repayment of its syndicated loan.

Source/Extract/Excerpts/来源/转贴/摘录: CIMB-Research,
Publish date: 19/08/13

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