Thursday, January 2, 2014

Parkson. Time for bottom fishing?

A reader asked me whether is it time for Parkson bottom fishing? Parkson Retail Group(HK listed), Parkson(KLSE listed) and Parkson Retail Asia(Singapore listed) have been moving in the same direction - South. Share prices have been performing very badly especially in the last 9 months where its share prices fell between 35 to 50%. Both Parkson Retail Group and Parkson Retail Asia are finding some stabilization footing while Parkson Holdings Berhad is still struggling to find a bottom.

I ran another chart comparing Parkson Retail Group(PRG) to its peers like Golden Eagle Retail and Intime Department Store. The general direction is about the same except the degree of under performing  are different. Overall sentiment towards retail sector has been negative especially with recent corruption clamp down by Xi's government. But then PRG is the worst lot of the three. So fundamentally, there must be differences among them and I suspect PRG is the worst.

Financial Performance of PRG is getting from bad to worse to worst. Operating revenue though exhibit some pressures but the costs are really moving in the wrong direction. Rental cost is escalating. Staff cost is escalating. Over a period of 2 years, the two costs had increased by almost 57%. As a result, margin from operations declined from mid 30s to single digit. Part of the costs increased to be fair are related to losses from six new stores opening and also related to temporary closure of Shanghai flagship for renovation. Even we normalize this, I believe Parkson margin at best may go back to 20s but it is still a lot of works to be done.

To be honest, when I see an analyst issuing a SELL rating, I usually would sit up and take notice -- grill the report and see whether they are wrong and profiting by taking a contrarian  position. When I saw this report a few months ago that the analyst made a sell call when the price was at HKD 3.52 with a target of HKD 2.20, I was impressed with her courage to make such a big call like that. By the way, her target price was really reached that level just recently. The target price was based on 7~8 times PE, cheap but can be dead money for a while to wait for fundamental to catch up.

Now you must be wondering why am I talking so much about PRG and yet to touch on Parkson Holding Berhad(PHB). It's because almost 80% of its profit derives from PRG. The contributions from Indonesia, Vietnam and Myanmar are still small and need to go through a long period of gestation. Malaysia operations is quite decent but kind of stagnant for the last 7 quarters with exception in Q2 of 2013(bungee jump). Let's pray hard Malaysians will still shop a little despite of higher cost of living pressures and hope Visit Malaysia this year can turn things around a bit.

Coming back to PHB. From a technical standpoint, the share price is really in a very oversold territory and a powerful relief rally can happen with RM 3.2 as a first target. If we are lucky, it can continue to climb to RM 3.40 or RM 3.80. Beyond that, I don't have any visibility.

The risk however is lack of institutional buying support. You can see the share price drop accelerated in December when GIC(Government Investment of Singapore) and KWAP(Kumpulan Wang Persaraan) were disposing. Unlike the period from August to November, LTH(Lembaga Tabung Haji) was buying aggressively, hence supporting the share price.

As you can see both KWAP and GIC both hold more than  100 million shares combined, if they turn net sellers as you can see they have been doing so in the last few months - the stock price can be depressed at least 3 ~ 6 months. I hope they can stop selling so that the stock price can have some breathing space.

While the bad news seem to be endless, a lot of bad news had been baked in. I can see now value investors begin to find the stock attractive and beginning to take some positions. From PE stand point, it is cheap. It's selling for a single digit PE with long term direction of consumer spending is there. Having said that, unless one is realy willing to buy and forget(10-15 years horizon with 5% annual dividend yield) or bet more value investors to buy more or making a quick technical rebound trade(1 month horizon) -- I can't really answer whether it is time for bottom fishing. But my advice is don't start with a technical trader to a buy and forget investor when you don't have a stomach to cut loss.


dukuhead said...

Thank you for your fine analysis Turtle. PHB seems to have gone up since the New Year judging from yesterday's performance. I have missed my target price of RM2.72 but it's still cheap now. I think i might snap up a couple or 3 lots of PHB when its price goes down again. But who knows? It could trend up all the way now.

Unknown said...

The real question is - Are there any structural changes that affect the business fundamental of Parkson?

I am guessing the decline may be due to the fast-growing e-commerce & online shopping activities, coupled with rising overseas travel plus some restraint for the wealthy people in China to shop in their own country due to spending curb by senior govt officials. Just my 2 cent (i did not research at tall but just guesswork)