Parkson Holdings reported a net loss of RM37.6m (+170.8% YoY) attributable to its shareholders for 2QFY19, with its operations in China the Group’s only notable bright spot though Malaysia also surprised this current quarter. Cumulative 1HFY19 net loss is now a wider RM80.6m (+40.4% YoY). While the Chinese operations’ business model is now operationally profitable, momentum remains weak, with translation into net profit likely to take longer than expected. Coupled with operational challenges in Southeast Asia with traditional brick-and-mortar retail businesses succumbing to higher competitive pressures, earnings will be subdued at the Group level. The recent closure of Parkson’s flagship store in Suria KLCC is case in point. Given the distinct lack of re-rating catalysts and constant earnings disappointments and negative visibility, we are ceasing coverage on Parkson Holdings. Our last call is a Neutral, with target price of RM0.40 based on a 75% discount to its book value. The earnings estimates should no longer be relied on as basis of investment decisions.

• Malaysia. 1HFY19, Parkson Malaysia benefited from the strong consumer confidence resulting in a positive same store sales ("SSS") growth of 5%. The operations reported revenue of RM522m (+3% YoY) following the closure of underperforming stores. Savings arising from rationalisation of stores and improved operating efficiencies resulted in operating loss narrowing considerably to RM1m compared with RM15m a year ago.

• China. The market here has seen slowdown amid macroeconomic headwinds resulting in Parkson China reporting a negative SSS growth of 3% during the period under review. However, a marginally higher revenue of RM1,324m was reported for the 6 months ending 31 December 2018 mainly due to contribution from the beauty specialty stores that were launched a year ago. Lower operating profit of RM29m against RM32m a year ago was mainly attributable to the negative SSS growth.

• Vietnam and Myanmar. The Group's Vietnam operations recorded a negative SSS growth of 18% for 1HFY19 as a result of the increasing competitive retail scene; whilst the only store in Myanmar was closed down in this quarter after due consideration, resulting in the division recording a lower revenue of RM35m with a higher operating loss of RM12m for the current financial year-to-date.

• Indonesia. A marginal negative SSS growth of 0.2% was recorded. Lower revenue of RM69m was mainly due to the closure and downsizing of underperforming stores over the years to optimise store effectiveness. This had accordingly enabled the operations to report a lower operating loss of RM7m for 1HFY19 compared with RM13m a year ago.

Source: PublicInvest Research - 27 Feb 2019