Parkson goes big in China with Qingdao mall

The Parkson group has done well by riding the Asian consumer boom these past few years.

Investors like Bursa Malaysia-listed Parkson Holdings Bhd for its healthy cash flow and operations that require little capital expenditure. And its 51.5%-subsidiary Parkson Retail Group (PRG) offers a direct play into China's strong consumer spending.

However, the group has changed its asset-light strategy by acquiring malls in Malaysia and China to secure recurring income from rental. "This will be more secure compared to dependence on consumer spending, which is volatile," says an analyst from HwangDBS.

Nevertheless, the move still raises concern due to its huge capital outlay. "Instead of having its capital tied up in one mall, the group can use the cash to open more departmental stores," opines an analyst.

Parkson Holdings has bought a mall in Setapak, Kuala Lumpur, and is building another in Melaka.

But its biggest splash is building a mall in Qingdao, China, for RMB1.57 billion (RM770 million). This is double the group's first foreign mall acquisition in northern city Tianjin for RMB704.6 million last year. Apart from that, the group owns 53 stores in China. Two weeks ago, Hong Kong-listed PRG's wholly-owned unit Beijing Huadesheng Property Management Co Ltd announced plans to acquire the land use and building ownership rights for the mall in Qingdao.

It will be part of an integrated development called Beer City Project, and will span 216,000 sq m, 60% of which will be retail space. The group will operate a departmental store in the mall and lease space to tenants. It is expected to begin operations in 2015 while the land rights expire in 2050.

Some analysts voiced concern over the capital outlay, which will take a lot more to generate decent returns on the investment. Consequently, investors who intend to gain exposure to pure retail businesses may shy away from the two stocks.

Others were more positive about the deal. Public Invest Research says the acquisition will allow the group to capitalise on the retail industry in Qingdao where urban disposable income per capita grew 14.3% in 2011 from the year earlier. "The group has been operating a department store in Qingdao since 1998 with a strong branding amongst the middle class. We believe this acquisition will strengthen the group's profitability prospects," it says. AmResearch analyst Low Soo Fang says the acquisition was not surprising as the management has expressed plans to fortify its presence in second-tier cities in China.

"This is part of the long-term strategy to ride on the growing retail market in the republic. PRG is moving out of first-tier cities as the market is already saturated. In comparison, second-tier cities in China are less competitive and PRG will be able to tap onto the growing income group with first mover's advantage," she adds.

Despite the huge capital outlay, analysts say PRG is able to manage the investment due to its strong balance sheet and healthy cash flow.

While concern is not unwarranted, the HwangDBS analyst says it is important to note that both PRG and Parkson Holdings have strong balance sheets. The impact will not be great on Parkson Holdings as the investments will be incurred at PRG level. As at end-September, Parkson Holdings' deposits and bank balances amounted to RM3.08 billion, with short-term and long-term borrowings of RM1.2 billion. PRG is also in a net cash position.

The analyst views the acquisition as a long-term positive move as the rentals will provide recurring income to the group. "This is a defensive step to ensure stable income during a slowdown in retail sales," he adds, pointing out that earnings have been subdued recently due to lower consumer spending in China.

In the last quarter, same store sales growth in China declined by 1% while profits fell 44% to RM93 million from RM166 million a year earlier.

"Renting out space to tenants is a way to mitigate against any downside in consumer spending patterns," says the analyst.

In the last fiscal year, Parkson's mall in Setapak generated RM8 million in operating profit on the back of RM20 million in revenue after eight months of operation. It is 99% occupied.

Nevertheless, there are risks of not being able to secure tenants that could result in losses for the group. "There are a few malls [owned by other parties] that were unable to find tenants, thus affecting cash flow. But it is unlikely in Qingdao as it is part of a mixed development in the business district," says an analyst.

The move is also in line with the group's long-term plans to eventually list a real estate investment trust. The group first bought a mall in Tianjin city with a total gross floor area of 45,000 sq m for RMB704.6 million in cash.

Nevertheless, these purchases did little to stir investor interest. Since the Tianjin deal was announced in November 2011, Parkson Holdings' share price has fallen 16% and it closed at RM4.68 last Thursday while PRG fell 33% to HK$6.17. Analysts say the muted performance is due to poor earnings caused by slowing consumer spending in China. "Inflationary pressure has somewhat affected consumer spending but we believe the group will do better next year as inflation moderates," says the HwangDBS analyst. Almost 70% of the group's revenue is derived from China.

AmResearch's Low says downside risk is quite limited at current prices. "Peers such as Golden Eagle Retail Group Ltd and Maoye International Holdings Ltd also saw their earnings depressed. At current prices, it is a good opportunity to ride China's recovery," she adds.

As at June, the Parkson group operates 54 stores in China (of which 53 are owned), 38 in Malaysia and eight each in Vietnam and Indonesia. According to Bloomberg data, it has four "buy", eight "neutral" and one "sell" calls with a 12-month target price consensus of RM4.84.


This story first appeared in The Edge weekly edition of Dec 31, 2012-Jan 4, 2013.

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