Regarding RHB's report on Parkson

Was reading the report on Parkson Holdings dated 17th March from RHB Research.

The following are some key issues pointed out in the report.

• Same-store sales (SSS) growth to remain strong. In 2007, Parkson recorded same-store sales growth of 18.4% for its China operations, 8% for Parkson Malaysia and 37% for Parkson Vietnam. Parkson China remained the main income driver, contributing more than 90% to the groupfs operating income in FY07. Its stellar performance was in tandem with the burgeoning retail sales in China, which grew 16.8% in 2007 underpinned by improved consumer confidence and rising rural income. Going forward, we expect China retail sales to remain robust in the advent of the Beijing Olympics. However, we reduce our SSS growth projections for China to 17% (from our earlier projections of 20%) for FY08-10, to be in line with management guidance of 15-18% p.a.. As for Parkson Vietnam, we raise our SSS growth projections to 25-27% (from our earlier projections of 20%) for FY08-10. The compelling SSS growth in Vietnam is mainly attributable to the low-base effect. We maintain our SSS growth projections of 6% for Parkson Malaysia for FY08-10.
  
  Average 10-13 new stores per year to be opened in FY08-10. Over the next three years, Parkson plans to open an average 5-7 new stores per year in China, 2-3 in Malaysia and 4 in Vietnam. This is higher than our original assumptions of 4-5 new stores per year for China and 0-1 for Malaysia for the FY08-10 period. Specifically for 2008, Parkson plans to open 7 new stores in China, 5 in Malaysia and 4 in Vietnam. In China, Parkson and its 53.1%-owned Hong Kong-listed Parkson Retail Group (PRG) could expand its presence via: 1) acquisition of Parkson's managed stores; 2) purchase of minority stake in stores which are not wholly-owned by the group; or 3) acquisition of competitors' stores. Currently, Parkson has 12 managed stores, which could be part of its acquisition targets going forward. According to management, it would consider paying an average of 10x earnings for the managed stores. Alternatively, Parkson could also acquire the minority stakes of the 9 Parkson stores which are not fully owned, to fuel growth. PRG is already in the midst of acquiring the minority 49% stake in Xi'an Chang'an Parkson, pending the procurement of the requisite confirmation letters from all minority shareholders. We expect PRG to conclude this deal in 1H2008. On the domestic front, Parkson plans to open one new store each in Kuching, Kuantan, Melaka, Kuala Terengganu and Kota Baru this year. Given the more aggressive store expansion plans, we now increase our new store assumptions to 5-7 stores per year (from 4-5) for China, and 1-5 stores (from 0-1) for Malaysia for FY08-10. We maintain our assumption of 3-4 new stores per year to be opened in Vietnam in FY08-10.
  
  Margin improvement on the way. Parkson has been adopting an asset-light approach when setting up new stores in China, i.e. leasing the property instead of acquiring. This would allow the company to expand expeditiously without locking up too much capital. Capex for FY08-10 is projected at RM106-182m p.a., which is mainly for new stores and refurbishment. New stores are estimated to break even after 2 years of operation. Parkson has a high operating leverage in which fixed costs (rental and staff costs) account for a significant 29% of the group's total operating expenses. As such, according to management, SSS growth of 18% for its China operations would translate into a higher EBIT growth of more than 30%. Our forecasts have already factored this in, as we have projected higher EBIT growth of 30-50% p.a. over the next three years, compared to revenue growth of 20-40%.
  
  Risks
  
  Risks to our view. A sharp slow down in consumer spending in China, Malaysia and Vietnam.
  
  Mitigating factors. China's retail sales grew by 20.2% per month in January and February 2008, which indicates that consumer spending in China remains robust at the moment. As such, we believe a sharp drop in consumer spending in China is unlikely to occur in the near term. Post-2008, we expect retail sales to moderate slightly and have projected a lower SSS growth for China of 16% for 2009-10 from the estimated 17% in 2008. As for Malaysia, consumer spending in 2008 should remain relatively stable, given that the expectation of a petrolprice hike after the general election could now be delayed. Post-2008, we expect consumer spending to remain resilient, underpinned by increasing consumerism of the relatively young population. As for Vietnam, we expect to see an influx of foreign investments in Vietnam over the next few years, which would create job opportunities,thus boosting consumer spending power.

Their investment justification is reasoned as follows.

• Investment case. We continue to like Parkson for its exposure to fast growing economies, i.e. China and Vietnam. Given its size and extensive network in China, Parkson should appeal to world class brand merchandisers who intend to start retail businesses in China. This is particularly important to Parkson as having the right portfolio of brands is one of the core competencies in setting up a department store in China. Specifically, we believe 2008 will be an exciting year for Chinese retailers like Parkson due to the potential growth in GDP and consumer spending brought about by the Beijing Olympics. According to ArgMax.com's research, "Prior to the Olympics and during the Olympic year, the host countries would experience higher than average GDP growth, maxing out at nearly 1.5% above average GDP in the 3rd year before the Olympics. However, the growth rates are lower in the years after the Olympics". According to the Beijing Municipal Statistics Bureau, the Olympics is expected to add no less than 2 percentage points a year to the nationfs GDP growth for the seven years to 2008 and to create as many as 2.1m new job opportunities. As such, we continue to be positive on the retail industry prospects in China over the next 3 years.
  
  Over in Vietnam, Parkson is one of two foreign retail operators who have been granted a licence to set up department stores in Vietnam before it is opened up to other foreign operators in 2009. This will provide the group the first mover advantage to position itself to enlarge its size and market share to be more competitive against other foreign department store operators in future years. As such, with the first mover advantage and using an identical business model as the one adopted in China, we believe Parkson would be able to reap similar successes in Vietnam within the next few years. Parkson Malaysia, meanwhile, should continue to record stable consistent growth over the three years, underpinned by the increasing consumerism of the relatively young population.

Caught the early morning news on Nike. Nike Profit Tops Forecasts on Strong Overseas Sales

• The company has seen rapid growth in emerging markets for its Nike footwear as it ramps up for the Beijing Olympics and robust demand for its smaller, non-Nike brands. It claims sports items are relatively immune to economic downturns, but has been controlling inventory in a challenging U.S. marketplace as athletic shoe retailers struggling.

Sales in Asia were simply astounding.

Which reflected what's said in the ArgMax.com's research mentioned in the RHB report. "Prior to the Olympics and during the Olympic year, the host countries would experience higher than average GDP growth, maxing out at nearly 1.5% above average GDP in the 3rd year before the Olympics. However, the growth rates are lower in the years after the Olympics".

I believe that one should not discount this issue if one wants to be a long term investor in Parkson. At this moment of time, sales are simply booming in China but would there be a possibility that it could slow down after the Olympics? However, I reckon that most that have actually shopped and witnessed what's happening in Parkson stores in China would very much argue that sales should still continue to boom.

Parkson's potential in Vietnam as first mover as pointed out by RHB is most interesting.

And of course the statement by the management on same store sales is most interesting.

• According to management, SSS is expected to grow at 15-18% in China, 6% in Malaysia and 25-30% in Vietnam in 2008.

As projections tend to be rather optimistic by most management, a same store sales projection of 6% reflects my pessimistic view on Parkson Malaysia.

Anyway, here is a screen shot of how RHB is valuing Parkson Holdings.

Would you be a buyer of Parkson Holdings?