HSI : 23,580
Price Target : 12-Month HK$ 2.54 (Prev HK$2.92)
More patience needed
3Q13 net profit dropped 78% to RMB33m (9M13: -47%), below expectations.
Recent SSS continued to show a falling trend. We cut FY13-14 net profit by 17-18% and revise down TP to HK$2.54.
Management will enhance cost rationalization and streamline underperformed stores. Without key near-term catalysts and trading at 11x 12-mth rolling PE, HOLD.
Results below expectations. For 3Q13, Parkson reported 0.7% y-oy increase in gross sales proceeds to RMB3.8bn (9M13: +3.6%), 0.1% growth in operating revenue to RMB1.2bn (9M13: +1.4%), and 78% dip in net profit to RMB33m (9M13: -47%). Its deteriorating performance was mainly attributable to slower same-store sales (SSS) that fell 4.2% (9M13: -1.8%; 1H13: -0.7%), along with weaker operating environment and impacts of nearby constructions on 4 stores in Wuxi, Nanchang, Hefei and Nanning. Merchandise gross margin dropped 0.5ppt to 22.3% (9M13: -0.7ppt). Coupled with share option expenses and higher effective tax rate, net margin dipped substantially by 10ppt to 2.9% (9M13: -8.6ppt to 9.5%).
Operating profit on same-store basis declined 15% (9M13: -11%), should impacts of store closures, new store operations and share option expenses be excluded. By Sep 2013, Parkson had a total of 57 stores, with 20 loss-making stores that incurred nearly RMB200m losses for 9M13.
Latest performance yet to recover. SSS for Oct to mid-Nov sustained a falling trend. Renovated flagship store in Shanghai only recovered 70% of previous performance after re-opening and needs another 3-6 months for better progress. 2 new store openings have also been postponed to 2014, suggesting 6 new stores to be added next year (2013: 5) and new store losses could linger. Looking ahead, adjustments to open fewer but bigger stores in existing markets, raising floor space productivity and product differentiation, streamlining underperformed stores, and further cost rationalization might help medium-term outlook. Yet, given disappointing 2H13 performance so far and lack of key catalysts for the near-term, we cut target price to HK$2.54 on 10x 12-mth rolling PE. It is a HOLD.