Parkson Retail Group Ltd.
Price (21 Nov 13 , HK$) 2.75
TP (prev. TP HK$) 2.10 (2.50)
3Q13 review: Near 0% margin and no break on expansion—A cash cow turning into cash burner
● Parkson's 3Q13 net profit fell 77% YoY to Rmb 33 mn (only achieving 30% of consensus estimate for 2H13); net margin fell 3 pp YoY to 1%. 3Q Gross sales proceeds grew 1% YoY; SSSG was -4.2%.
● Nearly 30% of the total 57 stores are loss-making. We estimate eight are comp stores that should be closed; they generated c. Rmb70 mn of loss in 9M13, offseting over 10% of earnings, per our estimate.
● Negative free cash flow, difficulty in cancelling pipelines: 2013 new store opening is revised down to the five opened YTD. The remaining two are delayed, leading to six pipelines in 2014 (vs. previous four planned). Because the prohibitive clauses make it hard to cancel leases, we expect 2013 and 2014 capex to double from 2012 level, turning free cash flow to negative for the first time in past five years.
● Lower TP to HK$2.10 (from HK$2.50). We cut our 2013/14/15E EPS by 15–18% on rising margin pressure from underperforming stores and large expansions. We continue to see low earnings visibility. Our TP is based on 8.5x 12M-fwd P/E. Catalyst:(1) Expedited closure of underperforming stores and (2) Efforts to renegotiate rent may help deliver higher-than-expected comp store margins.
Headwind on SSSG in 2014: (1) MTR construction affected four stores which make up 20% of the total group GSP. Construction near Wuxi store is expected to complete by 2Q14. MTR construction next to the Hefei, Nanchang, Nanning stores just started in 2013 and will last through 2016. (2) Declining trend of prepaid card sales is unlikely to reverse in near term (we think it used to contribute to 15–20% of GSP), and affects particularly flagship stores such as Beijing store.
Margin erosion: On both comp stores and new stores
3Q EBIT margin declined 330 bp YoY: (1) New and acquired stores incurred losses of Rmb60 mn in 3Q (9M13, loss was Rmb 133 mn), (2) On a same-store level, operating margin also declined by 70 pp.
20 unprofitable stores: Rmb200 mn total loss in 9M13.
Over 1/3rd of the total 57 stores are loss-making: among which, eight are comp stores that should be closed, we think. These eight comp stores should have generated c.Rmb70 mn of loss in 9M13, which offset at least 10% of total earnings. One such store was closed in August; two identified for the next 12 months. We believe a lot more need to be closed, as their average size is only c. 33,000 sqm (20% smaller than peers') and hence are less capable to accommodate crucial amenities.
Hard to cancel its pipeline, bulging capex ahead: Parkson has signed most of its 2014–15 pipelines' leases, which mandate minimum occupancy years (some upto three years). Breaking it would trigger compensation to landlords for their rental income lost over the mandatory years. The prohibitive clause will likely make management stick to the original plan, at least in 2014. Thus, we estimate the announced new expansions and acquisitions (e.g. Qingdao mall) together require Rmb1 bn p.a. in 2013–14, doubling 2012's Rmb 0.5 bn. Capex will offset all operating cash flow, turn free cash flow to negative for the first time in its past five years. (Net cash stood at Rmb 1.3 bn as of 20 Sept 2013.)
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 22/11/13