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PP 7767/09/2010(025354)

19 August 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
19 August 2010
MARKET DATELINE

Parkson Holdings Share Price


Fair Value
:
:
RM5.45
RM7.72
Encouraging Growth Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (Parkson; Code: 5657) Bloomberg: PKS MK


Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
June (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009a^ 2583.7 263.2 25.4 31.6 20.3 - 2.9 27.7 15.0 net cash 1.0
2010f 2923.8 305.4 29.5 16.0 18.5 29.0 3.5 17.1 15.4 net cash 1.3
2011f 3668.4 386.7 37.3 26.6 14.6 37.0 4.5 8.7 16.9 net cash 1.5
2012f 4478.7 496.6 47.9 28.4 11.4 44.0 5.7 6.1 18.5 net cash 1.7
Main Market Listing /Non-Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates
^Core net profit

♦ Whopping 1HCY10 SSS growth for Malaysia. We understand that 1H Issued Capital (m shares) 1,036.4
CY10 Same Store Sales (SSS) growth for Malaysia was at a phenomenal Market Cap (RMm) 5,648.4
17%, while the momentum is expected to carry on to the 2H CY10. Daily Trading Vol (m shs) 1.7
Together with 1HFY10 SSS growth of 7%, this will bring full year FY06/10 52wk Price Range (RM) 4.91-6.20
SSS growth to approximately 11-12%, which is a lot higher than Major Shareholders: (%)
management’s guidance and our forecast of 4-5% and 4% respectively. We Cheng family 23.6
are thus adjusting our SSS growth assumption for Malaysia in FY06/10 to Excel Step 19.49
10% (to be on the conservative side), from 4% previously, while we are
leaving SSS growth assumptions for FY11-12 unchanged at 5% p.a. With
regards to new store openings, Parkson opened 3 stores in FY06/10, which FYE June FY09 FY10 FY11
is above our previous assumption of 2 stores. EPS chg (%) 0.9 2.8 4.2
Var to C.EPS (%) 1.7 0.8 8.9
♦ Vietnam SSS growth was above expectations too. For the 1H CY10,
Vietnam chalked up a respectable SSS growth of 27%, which is slightly PE Band Chart
above management’s earlier guidance of 20-25% but significantly above our
expectations of 15% for FY10. The reason for the stronger-than-expected PER = 21x
PER = 17x
SSS growth for Vietnam is the lack of competition, with virtually no other PER = 13x
stores targeting Parkson’s middle to upper middle income retail segment.

♦ The major growth driver, China, is in line with expectations. Despite


both Malaysia and Vietnam chalking up above expectations 1H CY10 SSS
growth, our original expectations on the overall group bottomline is still
mostly intact as China’s contribution, which comprises 72% and 95% to
revenues and PBT respectively, are in line with our expectations. For 1Q
CY10, China recorded a SSS growth of 10.8%, while management expects
Relative Performance To FBM KLCI
the same level of growth for the 2Q CY10, which is in line with our SSS
assumptions of 10%. . For 1H CY10, China recorded an SSS growth of 10-
11%, while the beginning of 2H CY10 continues to see double-digit SSS Parkson
growth. Assuming this growth is maintained for the rest of the CY, this
would be in line with our SSS assumptions of 10% for FY12/10 FBM KLCI

♦ FY10-12 earnings increased by 0.9-4.2%, after accounting for the


changes in assumptions for Malaysia’s SSS growth, Vietnam’s SSS growth
and new store assumptions, and China’s new store assumption.

♦ Reiterate Outperform. After the earnings upgrade, our SOP derived fair
value for Parkson is thus increased to RM7.72 (from RM7.45 previously).
We like Parkson as it provides a cheaper alternative to the robust China
retail industry, at less demanding valuations than its HK listed subsidiary,
Parkson Retail Group. We also favour the company due to its stable
expansion strategy, along with its strong cashflow and asset light business
model. We thus reiterate our Outperform call on the stock. Hoe Lee Leng
(603) 9280 2641
Please read important disclosures at the end of this report. hoe.lee.leng@rhb.com.my

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Company Visit Highlights

♦ Whopping 1HCY10 SSS growth for Malaysia. We understand that 1H CY10 Same Store Sales (SSS)
growth for Malaysia was at a phenomenal 17%, while the momentum is expected to carry on to the 2H CY10.
Together with 1HFY10 SSS growth of 7%, this will bring full year FY06/10 SSS growth to approximately 11-
12%, which is a lot higher than management’s guidance and our forecast of 4-5% and 4% respectively. The
higher-than-expected SSS growth was mainly due to a rise in customer traffic in Parkson stores, as we
understand that the average item price and transaction values were more or less unchanged during the year,
at RM50 and RM110 respectively; and a growth in market share in the middle to upper middle income retail
segment at the expense of its competitors, namely Isetan, Metrojaya, Tangs, etc. We are thus adjusting our
SSS growth assumption for Malaysia in FY06/10 to 10% (to be on the conservative side), from 4%
previously, while we are leaving SSS growth assumptions for FY11-12 unchanged at 5% p.a. Management
continues to guide for a 5-6% SSS growth in FY11-12, as it believes the strong growth in FY10 will most
likely not be repeated due to the low base effect in FY09. Although the strong growth numbers are
encouraging, we note that Malaysia only contributes 25% and 3.8% to PHB’s total revenues and PBT
respectively. With regards to new store openings, Parkson opened 3 stores in FY06/10, which is above our
previous assumptions of 2 stores. We understand that management plans to open 2 stores in FY06/11, and
one store in FY06/12, in line with our forecasts. We are thus increasing our FY06/10 new stores opening
assumption for Malaysia to 3.

♦ Vietnam SSS growth was above expectations too. For the 1H CY10, Vietnam chalked up a respectable
SSS growth of 27%, which is slightly above management’s earlier guidance of 20-25% but significantly above
our expectations of 15% for FY10. The reason for the stronger-than-expected SSS growth for Vietnam is the
lack of competition, with virtually no other stores targeting Parkson’s middle to upper middle income retail
segment. Parkson plans to open one store in 4Q CY10, in Ho Chin Minh City, which is below our forecast and
management’s previous guidance of 2 stores for FY10. We understand that the process of opening new stores
in Vietnam has been challenging due to the difficulty in obtaining government permits, thus holding up
development programme. Despite this, management continues to hold on to its target of opening 3 stores
per year in Vietnam in FY11-12 for now. Nevertheless, while we are upping our SSS growth assumptions for
Vietnam to 20% (from 15-18%) for FY10-12, we are reducing our new store assumption to one store (from 2
stores) in FY10 and 2 stores (from 3 stores) in FY11-12.

♦ The major growth driver, China, is in line with expectations. Despite both Malaysia and Vietnam
chalking up above expectations 1H CY10 SSS growth, our original expectation on the overall group
bottomline is still mostly intact as China’s contribution, which comprises 72% and 95% to revenues and PBT
respectively, are in line with our expectations. For 1H CY10, China recorded a SSS growth of 10-11%, while
the beginning of 2H CY10 continues to see double-digit SSS growth. Assuming this growth is maintained for
the rest of the CY, this would be in line with our SSS assumptions of 10% for FY12/10. Store openings in
China have also been on track, with the latest store opening at Shaoxing in May, and another store in Beijing
due to open in end-August 2010. Management expects another three stores to be opened in 4Q CY10,
bringing total number of new stores in CY10 to 5, which is above our expectation of 4 new stores. For CY11-
12, management expects to open another 5 new stores p.a., which is above our assumption of 4 new stores
in CY11, but in line with our assumption of 5 new stores in CY12. We are thus changing our new store
assumption to 5 for CY10-12. We are maintaining our SSS growth assumptions at 10% for CY10 and 11% for
CY11-12 respectively, although we note our CY11-12 projections are slightly below management’s targets of
12-15% p.a..

♦ Injection of PRG managed stores. PRG is likely to inject 2 stores by the end of this year, namely Shantou
and Qingdao, and as previously mentioned, the price will likely be within its historical acquisition PE of 13-17
times. In terms of financing the acquisitions and new store openings, we note that although Parkson has the
capacity to further leverage its current 0.5x net gearing, it would not need to obtain any additional financing
in the medium term, barring any major acquisitions, given its annual operating cashflow of RM800-900m.
Parkson has recently refinanced its US$125m bonds that were due in May 2010, with a lower effective
interest rate of less than 5% (previously more than 6%). Management is looking for its bonds to be upgraded
to investment grade to secure more favourable interest rates when it is time to refinance its US$200m bonds
which are due in Nov 2011.

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19 August 2010

Forecast

♦ FY10-12 earnings increased by 0.9-4.2%, after accounting for the changes in assumption for Malaysia’s
SSS growth and new store assumptions, Vietnam’s SSS growth and new store assumptions, and China’s new
store assumption.

Risks

♦ Risks to our view. The risks include sharper-than-expected contraction in consumer spending in China,
Malaysia and Vietnam.

Valuations And Recommendation

♦ Reiterate Outperform. After the earnings upgrade, our SOP derived fair value for Parkson is thus increased
to RM7.72 (from RM7.45 previously). We like Parkson as it provides a cheaper alternative to the robust China
retail industry, at less demanding valuations than its HK listed subsidiary, Parkson Retail Group. We also
favour the company due to its stable expansion strategy, along with its strong cashflow and asset light
business model. We thus reiterate our Outperform call on the stock.

Table 2. Earnings Forecasts Table 3. Forecast Assumptions


FYE June (RMm) FY09 FY10F FY11F FY12F FYE June FY10F FY11F FY12F

Turnover 2583.7 2923.8 3668.4 4478.7 China ^


Turnover growth (%) 15.2 13.2 25.5 22.1 - New stores 5 5 5
- Same store sales growth 10.0% 11.0% 11.0%
EBITDA 845.7 942.3 1164.1 1428.5
EBITDA margin (%) 32.7 32.2 31.7 31.9 Vietnam
- New stores 1 2 2
Depr&Amor (125.2) (143.8) (165.0) (167.7) - Same store sales growth 20.0% 18.0% 18.0%
Net Interest (61.7) (47.5) (26.6) (11.9)
Associates 0.7 0.3 0.3 0.3 Malaysia
- New stores 3 2 1
Pretax Profit 659.5 753.1 972.8 1249.2 - Same store sales growth 10.0% 5.0% 5.0%
Tax (163.6) (177.0) (243.2) (312.3)
Minorities (232.7) 270.8 342.9 440.4
Net Profit 263.2 305.4 386.7 496.6
Source: Company data, RHBRI estimates

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19 August 2010

Chart 1: Parkson Technical View Point


♦ After hitting a high of RM6.20 in Jan 2010, the
share price of Parkson retreated sharply to a low of
RM5.11, near a key support of RM5.00, before
experiencing a technical rebound in early Mar 2010.

♦ However, as the stock failed to sustain its gain at


above the RM5.72 level, it encountered another
round of selldown in Apr.

♦ But this time, the stock floored at the solid support


of RM5.00, before relaunching another round of
technical rebound.

♦ From Jun onwards, the stock stabilised at above


the RM5.45 level, but its technical readings have
slowly deteriorated, due to the dwindling buying
support.

♦ The 10-day SMA cut to below the 40-day SMA


recently to suggest a possible negative medium-
term outlook ahead.

♦ Sealed with a “hangman” candle earlier and a


negative candle yesterday, the stock could suffer
further downside pressure soon, in our view.

♦ Coupled with the mixed momentum readings, the


stock will head towards RM5.00 once again, if it
loses RM5.45 immediate support level soon.

♦ Nonetheless, its long-term trend remains


moderately positive if it still sustains at above
RM5.00.

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
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contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

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19 August 2010

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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actions of third parties in this respect.

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