Monday, August 19, 2013

Worst over for Parkson Retail?

Worst over for Parkson Retail?
Business & Markets 2013
Written by Siow Chen Ming & Afiq Isa of    
Monday, 19 August 2013 09:02

KUALA LUMPUR: Tan Sri William Cheng's most prized holding, Parkson Retail Group Ltd (PRG), saw a slight recovery in its share price after the Hong Kong-listed counter slumped to a historical low of HK$2.93 (RM1.57) in early July, which was less than a third of its HK$9.80 IPO price in late 2005.

Along with a slight reversal in investors' pessimism on China following an expansion of the mainland's Purchasing Managers' Index in July, PRG's stock regained some positive traction to HK$3.52 last Friday, giving it a market capitalisation of HK$9.7 billion.

At its peak, PRG was traded at over HK$15 in early 2010, with its market capitalisation stretching to over HK$40 billion.

However, the European sovereign debt crisis, followed by concern of a growth deceleration in China sent PRG's stock spiralling down, along with other major retail players in the mainland such as Belle International Holdings Ltd, Golden Eagle Retail Group Ltd and Intime Retail (Group) Co Ltd to new lows.

Compared with other sectors, retail stocks in China had been among the most affected by concerns of a slowdown in the mainland's growth.

"That being the case, the bombed-out retail stocks could benefit from any slight improvement in sentiments on China," said a private investor avid in China.

Last Friday, PRG stock was up a further 7 Hong Kong cent or 2.03% despite Hong Kong and the Asia market being generally in the red, taking the cue from overnight Wall Street trading where sentiment was hit by fresh worries of a stimulus curb in the US.

Meanwhile, some funds have recently started to pick up shares in its Malaysia-listed parent PARKSON HOLDINGS BHD [] (PHB), which controls 51.2% of PRG. According to filings with Bursa Malaysia, Kumpulan Wang Persaraan (Diperbadankan) had purchased 527,000 shares in PHB towards end of July, slightly nudging up its holdings to 5.19%.

PHB has also initiated a share buyback exercise since the beginning of this year, with 3.87 million shares bought as at Aug 1. The shares buyback were carried out amid a 29.4% slide in its stock price year-to-date, to RM3.67 last Friday. PHB's stock movement is highly correlated to that of PRG's, as the latter contributed about 70% of its parent's revenue.

It is worth noting that PHB also owns a 67.6% stake in Singapore-listed Parkson Retail Asia Ltd (PRA), which essentially controls the Malaysian as well as Asean departmental store operations. Although PRA has been registering strong growth amid its expansion drives, its contribution to PHB still trails far behind that of PRG.

Nevertheless, while PRG's stock has shown some positive traction, challenges remain for the mainland departmental store operator, compared with some of its other rivals there.

"We continue to view PRG's fundamentals as worse than its peers' given its mature store portfolio (6.6 years vs. peers' 4.7 years in FY13), rising new store loss on the sector's trend of lengthening break even period, and low self-owned store property ratio (15% of store gross floor area in FY13)," wrote BOCOM International in a recent report.

BOCOM was however positive on PRG's rival Intime, calling a buy on the stock "justified by its above-peer growth (13% FY13-14E earnings per share CAGR-compounded annual growth rate versus peers' average of 6%), earnings quality improvement and fast transformation into the department store-plus-shopping mall model (estimated to account for 51% of total GFA in FY15E versus 25% in FY12)".

In a filing with the Hong Kong Exchange last Friday, PRG reported that total gross sales proceeds for the six months ended June 30, 2013 increased by 4.9% to RMB 8.98 billion (RM4.8 billion), while same store sales had dropped marginally by 0.7% from a year ago. However, net profit had dropped 38% to RMB 324.7 million.

The sharp drop in earnings last Friday may impact its stock's performance Monday. Still, PRG continues to sit on a strong balance sheet, with net cash of RMB 1.33 billion and a war chest of RMB 4.38 billion.

In its notes to account, PRG said it has been revamping and remodelling its existing flagship stores as part of  continuous efforts to enhance store image and improve productivity. "Such strategy has been generally successful with a majority of flagship stores showing noticeable improvement in its performance thereafter," it said.

"The group continued its expansion programme with two new stores opened in 1H2013 and is expected to open another five new stores before the end of the year. The group has also completed the acquisition of four managed stores from its parent company in February 2013 and terminated the management agreement of a managed store in Guizhou in March 2013," it said.

PRG further shared that it will continue its "refined expansionary strategy" with fewer but bigger new stores to be opened in existing markets or nearby cities to better utilise its advantageous positions.

This article first appeared in The Edge Financial Daily, on August 19, 2013.

Publish date: 19/08/13

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