9feb12 - parkson

8/3/2019 9Feb12 - Parkson

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DMG & Partners Securities Pte Ltd may have received compensation from the company(s) covered in this report for itscorporate finance or its dealing activities; this report is therefore classified as a non-independent report. Please refer toimportant disclosures at the end of this publication. of this publication

1See important disclosures at the end of this publication

DMG Research

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OSK Research

OSK ResearchDMG Research

February 9, 2012

SINGAPORE EQUITYInvestment Research

DMG & Partners Research Initiation of coverage Private Circulation Only

CONSUMERMelissa Yeap+65 6232 [email protected]

PARKSON RETAIL ASIA NEUTRALPrice SS$1.52

Terence Wong, CFA+65 6232 3896terence.wong@ sg.oskgroup.com

Previous n/a

Target SS$1.50

Retail

PRA is a department store operator with 37Parkson stores in Malaysia, seven inVietnam, six Centro stores and one KemChicks supermarket in Indonesia. It is 68%owed by Parkson Holdings Bhd.

Stock Profile/Statistics

Bloomberg Ticker PRA SPSTI 2,982Issued Share Capital (m) 677Market Capitalisation (US$m) 1,02952 week H | L Price (S$) 1.550 1.045Average Volume (000) 722YTD Returns (%) 22Net gearing (%) Net CashAltman Z-Score NaROCE/WACC 2.2Beta (x) NaBook Value/share (S) 22

Major Shareholders (%)

Parkson Holdings Berhad 67.6PT Mitra Samaya 7.4JP Morgan Chase & Co 7.0

Share Performance (%)

Month Absolute Relative1m 20.2 9.33m 22.1 17.86m Na Na12m Na Na

6-month Share Price Performance

Firing three cylinders

We initiate coverage on Parkson Retail Asia with a NEUTRAL rating andDCF-derived TP of SS$1.50 (WACC of 9.2% ,terminal growth rate of 2%).This translates into an implied FY13F P/E of 18x, in line with its Southeast

Asian department store peers. We like the stock as it offers investors: 1) Aunique multi-country exposure into three high growth developing countries(Malaysia, Vietnam and Indonesia) which are driven by strong domesticconsumption; 2) It is a well-established chain, holding the number one andtwo positions in the department store space in Vietnam (37% market share)and Malaysia (19% market share) respectively; 3) It only entered Indonesiain June 2011 via M&A which has given it a 2.5% market share but webelieve this share will grow once PRA works its magic. We expect FY12-14Fearnings to grow at a CAGR of 24% largely driven by same store salesgrowth and new store openings.

Expect FY12-14F earnings CAGR of 24%. We are forecasting FY12-14Fearnings to grow at a CAGR of 24%, spurred largely by same store sales growth

as well as new store rollout. Apart from the one leasehold property in Hai Phong,Vietnam which it acquired for S$49m (22,603 sq m), the rest of its retail spaceare on long term leases of 15 years. Hence, expansion is not expected to incurheavy capex. The Company intends to distribute 40-50% of its profits toshareholders.

FV of S$1.50, NEUTRAL. We have a DCF-derived TP of S$1.50 (WACC: 9.2%and terminal growth rate: 2%) which translates into FY13F P/E of 18x, in-line withits Southeast Asia peers in the department store space. Over the past year, itsHK-listed sister company, Parkson Retail Group (3368 HK), which operates 49stores in China has traded at an average P/E of 23x while its Malaysian-listedparent company, Parkson Holdings (PKS MK) traded at 18x.

FYE 30 Jun 2010A 2011A 2012F 2013F 2014FTurnover (S$m) 333.0 367.3 474.0 564.7 681.7Net profit (S$m) 21.4 35.0 45.9 55.4 70.3% Chg YoY 87.0 63.8 31.0 20.9 26.9Consensus (S$m) nm nm 45.9 56.0 68.2EPS (S) 3.6 5.9 6.8 8.2 10.4DPS (S) nil 9.4 3.0 3.7 4.7Div Yield (%) nil 6.2 2.0 2.4 3.1ROE (%) 15.2 28.4 30.4 30.0 31.0ROA (%) 7.3 12.2 13.1 13.3 14.2P/E (x) 42.5 25.9 22.5 18.6 14.7P/B (x) 6.5 7.4 6.8 5.6 4.5

Source: Company and OSK|DMG Estimates

.


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See important disclosures at the end of this publication2

See important disclosures at the end of this publication

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TABLE OF CONTENTS

Company description 3

Products/merchandise 7

Retail Network 9

Use of IPO Proceeds 11

Investment Merits 12

Investment Risks 17

Earnings Outlook 18

Valuation 22

Peer Comparison 25

APPENDICES:

Appendix 1: Department Store Industry Outlook: Malaysia 26

Appendix 2: Department Store Industry Outlook: Vietnam 28

Appendix 3: Department Store Industry Outlook: Indonesia 30

Appendix 4: Management Profile 32

Financial Tables 33

Disclaimer 34


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COMPANY DESCRIPTION

Parkson Retail Asia (PRA SP) is a South East Asia department store operator with 36Parkson stores in Malaysia, seven in Vietnam and six Centro department stores as well asone Kem Chicks supermarket in Indonesia. Overall it has 50 stores spanning across497,108 sqm of retail space.

It is the sister company of Hong Kong listed Parkson Retail Group Ltd (PRG) (3368 HK).PRA and PRG are 68% and 52% owned by parent, Malaysian-listed, Parkson Holdings

Berhad (PKS MK) respectively. Parkson Holdings Berhad is, in turn, 20% owned byMalaysian tycoon, Tan Sri William Cheng who also controls the Lion Group.

Figure 1: The Parkson Group

Source: Company data

Figure 2: PRA Milestones


1st

store in Malaysia 24 years ago, now #2. Parkson established its first department storein Malaysia 24 years ago in 1987. That store is still in existence but since then it hasexpanded its retail network to 36 stores across the country, occupying a total leased retailspace of 325,766sqm. According to Euromonitor, Parkson was the number two department

store in Malaysia in 2010, with a 19.2% market share of total retail sales.

Ventured into Vietnam in 2005, now #1. The Group expanded its footprint into Vietnam in2005 where it now operates and manages seven Parkson branded department stores,located in Ho Chi Minh City (5), Hanoi (1) and Hai Phong (1). These seven stores occupy atotal leased retail space of 102,062sqm and owned retail space of 22,603 sqm. Total retailspace amounts to 124,665sqm. It was ranked the top department store in Vietnam, with amarket share of 36.7% in 2010.

Entered Indonesia in June 2011, 2.5% market share. The Group recently enteredIndonesia via the acquisition of PT. Tozy Sentosa (TS) in June 2011. TS is the operator ofsix Centro branded department stores and one Kem Chicks branded gourmetsupermarket in Indonesia, occupying a total leased retail space of 46,677 sqm. It has a 2.5%

market share in Indonesia.


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Overall 50 stores across 497,108sqm. PRA operates 49 departmental stores and onegourmet supermarket across Malaysia, Vietnam and Indonesia.

Figure 3: Summary of Store Network

Source: Company data* Indonesia includes the gourmet supermarket

The following maps show the geographic distribution of its stores in Malaysia, Vietnam andIndonesia.

Figure 4: Parksons 37 stores in Malaysia



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Figure 5: Parksons 7 stores in Vietnam


Figure 6: Parksons 7 stores in Indonesia



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S

See important disclosures at the end of this pu

Figure 7: FY1

Source: Compan

Malaysia: Stiforward we stil

Figure 8: FY0

Source: Compan

ee important disclosures at the end of this publication

blication

1 revenue breakdown by country

data

ll home base. The Group derives ~80% of sll expect Malaysia to be its main earnings contrib

9-FY11 revenue growth

data

Ma

Vietnam,12%

Indonesia,1%

262.8293.5

320

37.4 39.4

6

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les from Malaysia and goingutor.

laysia,7%

.9

42.4

4.0


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Products/Merchandise

Parkson offers a wide range of merchandise in its departmental stores. The Groupcategorises them into four categories. Merchandise sales make up ~96% of revenues.

Fashion and apparel Cosmetics and accessories Household, electrical goods and others

Groceries and perishables

Figure 9: Merchandise sold in FY11


Merchandise are soldvia two avenues: direct sales and through concessionaires.

Direct sales

For direct sales, the Group basically sources and sells its own direct-purchase merchandise.Most of its direct sales includes sales in its household, electrical goods and other andgroceries and perishables product categories as well as cosmetic products in Malaysia.

Concessionaire sales

The Group enters into concessionaire agreements with certain suppliers (known asconcessionaires) who display and sell their products in designated areas in its stores.

Concessionaires are responsible and bear the expenses for the design, display and fitting outof their counters as well as for repair and maintenance while the Group provide generalfacilities such as lighting, air conditioning as well as customer service training to theconcessionaires sales staff to ensure certain standards are met.

Fashion and apparels and cosmetics and accessories account for the bulk ofconcessionaire sales except in the case of Malaysia where cosmetics are sold under directsales.

Fashion &

apparel55%Cosmetics &accessories27%

Household14%

Grocerries3%


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A standard concessionaire agreement will specify the type of product to be sold as well asprice points. Concessionaires are not allowed to alter their product mix nor price theirproducts in the Groups stores higher than elsewhere in the same country. Agreements aresubject to yearly renewals.

A turnover commission in the form of a percentage of sales is agreed upon and charged onconcessionaires, typically based on a agreed minimum commission amount which isdetermined by a minimum sales target. The minimum commission amount typically rangesfrom 15%-30% (excluding groceries and perishable goods) depending on the type of

product.

Sales from concessionaire sales are collected by the Group and then paid out toconcessionaires according to their respective credit terms after deduction of relevantexpenses, fees and commissions. The Group also collects certain other fees fromconcessionaires that include promotional, administration, credit card handling and loyaltyprogramme fees.

Vietnam has a higher portion of concessionaire sales. Between Malaysia and Vietnam,Vietnam has a higher percentage of concessionaire sales at 96%:4% vs Malaysias75%:25%.

The table further breaks down merchandise sales for the respective countries includingIndonesia.

Figure 10: Breakdown in Merchandise Sales for 3 Countries


Concessionaire sales: ~25% of merchandise sales. The Group generated merchandise

sales of S$659.9m, S$767.5m and S$851.6m in 2009, 2010 and 2011 of which proceedsfrom concessionaire sales amounted to S$497.3m, S$598.3m and S$671.1m accounting for25.4%, 25.0% and 25.3% of revenues respectively.

Rental income: Derived from subleasing certain designated areas of its stores torestaurants, fast food outlets, salons, supermarkets and photo shops; and

Consultancy and management service fees: Derived from its three managed stores in HoChi Minh City, Vietnam that it manages

Stated in S$m S$ % S$ % S$ % S$ %

Malaysia

-Concessionaire sales 382.0 71% 467.8 74% 528.4 75% 528.4 75%

-Direct sales 157.8 29% 164.1 26% 173.5 25% 173.5 25%

-Subtotal 539.9 100% 631.9 100% 701.9 100% 701.9 100%

Vietnam

-Concessionaire sales 115.3 96% 130.4 96% 134.6 96% 134.6 96%

-Direct sales 4.8 4% 5.1 4% 5.4 4% 5.4 4%-Subtotal 120.1 100% 135.5 100% 139.9 100% 139.9 100%

Indonesia

-Concessionaire sales 8.1 82% 84.0 81%

-Direct sales 1.7 18% 20.0 19%

-Subtotal 9.8 100% 104.0 100%

TOTAL 659.9 767.5 851.6 945.8

Note:

- Only commissions on concessionaire sales form part of reported revenue. Total concessionaire sales above is for ref only

- Merchandise sales for TS is for full year financial year 2011 including period prior to acquisition on 9 June 2011

2009 2010 2011 2011 (includes TS)


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RETAIL NETWORK

MALAYSIA

36 department stores Total retail space of 325,766 sq m

Figure 11: Retail Network in Malaysia



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VIETNAM

7 department stores Total retail space of 124,665 sq m Spent ~S$49m to acquire leasehold property in Hai Phong with space of 22,603 sq m

Figure 12: 7 Outlets in Vietnam


INDONESIA

Entered market via acquisition of PT Satozy Sentosa (TS) in June 2011 TS operates the six Centro branded departmental stores and one Kem Chicks

supermarket in Indoensia.

Figure 13: 7 Outlets in Indonesia


2-3 years for a store to turn profitable. On average, it takes between 2-3 years for a newstore to turn profitable. As a store matures, sales per sqm will rise.

"Centro" brand

1 Plaza Semanggi Nov 2003 8 7,305 Jakarta

2 Discovery Shopping Mall Dec 2004 7 7,501 Kuta, Bali

3 Margo City Mall Mar 2006 5 6,402 Greater Jakarta

4 Ambarrukmo Plaza Jun 2006 5 7,045 Yogyakarta

5 Mall of Indonesia Sep 2008 3 9,232 North Jakarta

7 Galaxy Mall Aug-11 7,572 Surabaya

"Kem Chicks " brand

7 Pacif ic Place Nov 2007 1,620 Jakarta

Total floor space 46,677

No Indonesia StoresDate

Commenced

Age

(Years)

Retail space

(sqm)City


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Use of IPO Proceeds

With an IPO offer price of S$0.94 per share, the Group generated net proceeds of S$69.2m,which has been earmarked for the following purposes:

~S$60m (US$48.8m) or 79.8 cents for each S$1 of gross proceeds will be for new storeopenings in Malaysia, Indonesia, Vietnam and Cambodia;

~S$5m (US$4.1m) or 6.6 cents for each S$1 of gross proceeds will be for IT investmentand

~S$4.2m (US$3.4m) or 5.6 cents for each S$1 will be for maintenance capitalexpenditure in Malaysia, Vietnam and Indonesia.

Capex will be on new stores and refurbishments. Capex for FY12 will be approximatelyS$41m, comprising S$16m for existing stores and S$20m for new stores and S$5m for ITinvestment. Capex for FY13 is projected to be S$45m, comprising S$5m for existing storesand S$40m for new stores. We estimate capex to range at a similar amount for FY14.

Capital expenditure for new stores varies by country. In Indonesia it is higher at US$2-3mwhile in Malaysia and Vietnam cost are on par and lower at US$1-2m per store.


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INVESTMENT MERITS

Multi-country exposure: Malaysia, Vietnam and Indonesia. PRA is one the uniquedepartment store player that offers a multi-country exposure. Moreover, all the countries it isoperating in are projected to experience healthy economic growth. Between 2011 and 2015,department store retail sales are projected to grow at a CAGR of 4.5% in Malaysia, 9.1% inVietnam and 10.7% in Indonesia.

No. 2 in Malaysia with 19.2% market share. Having been in Malaysia over the past 24years, PRA has established itself as the number two department store in the country with a19.2% market share in terms of retail sales. It is only second to AEON which owns the chainof Jusco department stores in Malaysia with a 42.5% grip on the market.

. and market share has been growing. We note that PRAs market share in Malaysiahas been gradually growing from 16.9% in 2008 to 17.9% in 2009 and to 19.2% in 2010.

Figure 14: Market share of top department stores in Malaysia

Source: Euromonitor International 2011* sales for Parkson includes only non-food sales product sales while others likely to include a mix of food and non-food products

Number one in Vietnam, 36.7% market share. Parkson is the clear market leader in the

Vietnam department store landscape holding a 36.7% market share in terms of retail value

sales in 2010. It is considered the pioneer in the department store business, starting its

operations there since 2005. It was the first company to operate a chain of department stores

whilst others were stand-alone outlets.

where market share has also been growing. PRAs market share in Vietnam has alsobeen growing like in Malaysia. In 2008, it held a 26.5% market share before rising to 32.0% in2009 and 36.7% share in 2010. Its other main competitor is the Diamond brand departmentstore owned by International Business Center Corporation in Ho Chi Minh City.


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Figure 15: Retail value sales market share of departmental store players

Source: Euromonitor International 2011* sales for Parkson includes only non-food sales product sales while others likely to include a mix of food and non-food products

Vietnam: big department stores gaining popularity. It appears that the big departmentstore retailers are gaining market share in the expense of smaller retailers and mom andpop shops which has seen its share fall from 45.4% in 2008 to 33.6% in 2010.

Fast growth in Indonesia. PRA has a 2.5% share of the Indonesian department storeindustry, which was valued at US$2.8b in 2010 and is projected to grow at a CAGR of10.7% between 2011 and 2015.

In June 2011, PRA spent US$12.8m to acquire TS, which operates the Centro brandeddepartment stores in Indonesia and one Kem Chicks gourmet supermarket. The purchasewas for US$12.8m plus a sale of 9.9% in PRA to PT Mitra Samaya(MS), the former ownersof TS at S$15.8m. The stake has been reduced to 7.4% with the IPO.

Figure 16: Retail value sales market share of departmental store players

Source: Euromonitor International 2011* Sales for Parkson include only non-food sales product sales while others likely to include a mix of food and non-

food products


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Well-recognised brand name in Malaysia and Vietnam. Having been in the Malaysiandepartmental store scene over the past 24 years, the Group has managed to establish itselfas one of the premium departmental stores. Its popularity in Malaysia and Vietnam isevident in the numbers where it is ranks number two and number one respectively.

. and China via sister company. Apart from having a presence in Malaysia and Vietnam,Parkson is also a well recognised brand in China where its sister company, Parkson RetailGroup (3368 HK) operates 46 stores as at 30 June 2011.

leading it to be a preferred partner. Due to its strong brand presence and dominantmarket position, it has become the the preferred point of entry for international brandsplanning to enter the Malaysian and Vietnamese retail markets via department stores. Thisallows it to offer customers a better mix of merchandise.

The table below illustrates the awards and accolades it has won.

Figure 17: Parksons Awards and Accolades


Asset light: depends largely on a concessionaire model. PRA adopts a largely assetlight strategy, relying in large part on concessionaire sales. In Malaysia, the mix betweenconcessionaire and direct sales is 75%/25% and in Vietnam 96%/4%. In Indonesia the mixis 82%/18%. The mix lower in Malaysia as cosmetics are sold via direct sales there.

concessionaire sales accounted for 79% of Group merchandise sales. Overall,concessionaire sales make up for 79% of total merchandise sales in 2011. The proportionhas been growing over the past several years growing from 75.4% in FY09, 78.0% in FY10to 78.8% in FY11.

Concessionaire sales are appealing as PRA collects all payments from customers and lateronly remits a portion of these proceeds to its concessionaires. It typically has credit terms of30-90 days from suppliers. Its turnover days was 55 days, 54 days and 56 days for FY09,FY10 and FY11 respectively.

By operating largely on the concessionaire model, the risks and costs of holding inventoriesas well as fit-out, selling and shrinkage costs are all borne by the concessionaires. Asinventory is directly managed by each concessionaire, overall working capital requirement isalso lowered.

Award Awarding Body Year Awarde

5th Most Valuable Brand in Malaysia The Edge Malaysia 2008 -2009

Overall Best Retail Outlet Malaysia Retailers Association 2009/2010

for Parkson Pavilion 2008/2009

Malaysia Retailers Association 2008/2009

Best Department Store Malaysia Retailers Association 2010/2011

Parkson KLCC 2007/2008

Parkson Subang Parade 2006/2007

Parkson One Utama

Most Favourite Vietnamese Brand Sai Gon Giai Phong newspaper 2006-2010

Ho Chi Minh City P eople's Committee

Most Famous Brand in Vietnam AC Nielson 2008

Vietnam Chambers of Commerce & Industry

Cosmopolitan magazine 2010

The Assoc of Accredited Advertising Agents

Malaysia

Innovative Shopping Outlet

(Department Store) category - Parkson

Pavilion

Readers' Choice Award: LifestyleDepartment Store - Centro


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Large pool of loyalty cardholders. PRA participates in a multi-party loyalty programme inMalaysia through BonusLink, which is operated by a third party and allows cardholders touse the card at a variety of other speciality retail and service outlets. In Vietnam andIndonesia, it has its own loyalty programmes.

Loyalty programme members are entitled to points for purchases which can later beredeemed for discount vouchers or products. Members also receive special discounts onselected items and are eligible to participate in special promotional events at stores.

As at 30June2011, the Group has over 1.28m active loyalty cardholders in Malaysia, over65,000 active loyalty cardholders in Vietnam and approximately 200,000 active loyaltycardholders in Indonesia.

Access to this large database of information enhances Parksons ability to understand itscustomers purchasing habits, tailor product and brand mix as well as customize marketingand promotional activities.

50% of sales are generated by loyalty card holders. Evidence of the effectiveness ofits loyalty cards is reflected in its sales. In FY11, 54.5%, 50.0% and 51.0% of totalmerchandise sales in Malaysia, Vietnam and Indonesia respectively were generated byloyalty cardholders.

Same stores sales growth (SSSG) that beats industry. Stores in Malaysia hada SSSGof 11% in FY10 and 9.7% in FY11 beating the Malaysian department store industrys -0.3%in CY09 and 10.7% in CY10.

In Vietnam, SSSG was 26.6% in FY10 and 22.4% in FY11, beating industrys 9.9% in CY09and 5.8% in CY10.

We forecast annual SSSG of 7% in Malaysia, 9% in Vietnam and 5% in Indonesia fromFY12-14.

Efforts taken to further increase store productivity include among others, to increase itsaverage unit selling price, value per transaction and customer traffic. To achieve those goal,

it will periodically change merchandise offerings, maximise customer flow and optimisingspace allocation for each concessionaire or supplier.

Expanding existing store network. The Group will ramp up the rollout of its retail networkacross Malaysia, Vietnam and Indonesia. A store typically takes approximately two to threeyears to become profitable with sales volume growing as an outlet matures.

In Indonesia, the Group has opened a new store in Indonesia at Galaxy Mall in August 2011,aims for another one and it will lease additional floor space for its Centro store in Bali. Webelieve down the road, it will introduce Parkson branded department stores alongside itsCentro stores in Indonesia. In Malaysia it has opened a new store at KL Festival City andand in Vietnam, it will add one more. In total we should expect a total of four new stores byJune 2012.

For FY13, rate of expansion is faster and we can expect two new stores in Malaysia, 2-3 inVietnam and 4-5 in Indonesia. Total new stores would be 7-8.

Capital expenditure for new stores varies by country. In Indonesia, it is higher at US$2-3mwhile in Malaysia and Vietnam cost are on par and lower at US$1-2m per store.


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Figure 18: New Store Pipeline


Location City/Country Lease Area (sq m)

Oct-11 KL Festival City Kuala Lumpur, Malaysia 11,653

Oct-11 Parkson Landmark 72 Hanoi, Vietnam 29,038

Oct-11 Summarecon Mal Serpong Tangerang, Indonesia 10,261

1Q FY13 Setia City Mall Kuala Lumpur, Malaysia 11,459

1Q FY13 Nu Sentral Kuala Lumpur, Malaysia 12,833

1Q FY13 B8 Mall Johor Bahru, Malaysia 10,394

2Q FY13 Metropolitan Grand Bekasi, Indonesia 11,3702Q FY13 Parkson Cantavil Ho Chi Minh, Vietnam 15,293

2Q FY13 Parkson Emperor Complex Ho Chi Minh, Vietnam 11,448

3Q FY13 Parkson Cambodia Phnom Penh City, Cambod 30,000

3Q FY13 Plaza Merdeka Kuching, Malaysia 12,554

3Q FY14 Vinacapital Commercial Center Da Nang, Vietnam 18,791

3Q FY14 TD Plaza Saigon Ho Chi Minh, Vietnam 30,000

Target

Commencement


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INVESTMENT RISKS

Forex risks. PRAs earnings are denominated in Malaysian Ringgit, Vietnamese Dong andRupiah while it reports its earnings in Singapore dollar. It is particularly affected by theSGDMYR rate. That said, this is just an accounting issue as all profits generated in therespective countries are usually re-invested in store refurbishments and new store openings.

Dependance on Malaysia. In FY11, Malaysia accounted for 80% of PRAs revenues. It islargely dependant on the market. Should there be any economic downturn or politicalinstability, it will be negatively impacted. That said, we do not see this risk as high as it hasbeen operating in the country for the past 27 years.

Failure in Indonesia. While PRA has proven itself in Malaysia and Vietnam, the Indonesiandepartment store landscape is very different. When it ventured into Vietnam in 2005, it wasthe pioneer there giving it the first mover advantage. Indonesias market is rather maturewith the two big giants PT Ramayana Lestari Sentosa Tbk and PT Matahari DepartmentStore Tbk dominating the scene. Its acquired Centro department stores just hold a 2.6%market share. There is the risk that it may not be able to succeed as well in Indonesia as ithas done in Malaysia and Vietnam.

Choosing the wrong location for new stores. There is the risk that being new to theIndonesian and Cambodia scene, the Group might choose the wrong site for its new outletand have to shut down. However we view this risk as low as the Group has had many yearsof experience in site location under its belt.


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EARNINGS OUTLOOK

FY11-14F earnings CAGR of 26%. We forecast Group earnings to grow at a CAGR of 26%between FY11-14, driven by same store sales growth as well as new store openings.Demand should remain robust, supported by healthy economic growth in its operatingcountries of Malaysia, Vietnam and Indonesia. Furthermore, we should see improvingmargins stemming from a better merchandise mix as well as economies of scale.

Figure 19: PRA Revenue and Earnings Forecast

Source: Company data and OSK|DMG estimates

Revenue can be broken down into four main categories:

1. Direct sales2. Commissions from concessionaire sales3. Consultancy & management service fees4. Rental income

In S$m Jun-09 Jun-10 Jun-11 Jun-12F Jun-13F Jun-14F

Revenue 301.2 333.0 367.3 474.0 564.7 681.7

Other income: - - - - - -

-Finance income 1.8 3.3 4.9 4.3 5.1 6.7

-Other income 3.2 3.2 5.8 4.3 4.5 4.7

- - - - - -

Chgs in merchandise inventories & consumables (133.1) (140.4) (151.7) (193.8) (229.8) (274.0)

Employee benefits expense (29.8) (35.5) (34.8) (44.6) (51.4) (61.3)

Depreciation & amortisation (13.5) (15.5) (15.2) (15.2) (20.8) (26.1)

Promotional & advertising (5.4) (5.1) (7.2) (9.0) (10.7) (13.0)

Rental expenses (66.3) (67.1) (69.6) (90.1) (106.7) (128.2)

Finance costs (0.1) (0.1) (0.5) (0.2) (0.2) (0.2)

Other expenses (40.7) (43.4) (47.4) (61.6) (72.3) (85.9)Total Expenses (288.8) (307.1) (326.4) (414.5) (492.0) (588.6)

- - - - - -

PBT 17.4 32.5 51.6 68.1 82.3 104.4

Tax (5.3) (10.1) (15.8) (21.1) (25.5) (32.4)

PAT 12.1 22.4 35.8 47.0 56.8 72.0

MI (0.7) (1.1) (0.8) (1.1) (1.4) (1.7)

PATMI 11.4 21.4 35.0 45.9 55.4 70.3

Gross Profit 168.1 192.5 215.6 280.1 334.8 407.6

EBIT 15.8 29.2 47.3 72.7 87.6 111.3

EBITDA 29.2 44.7 62.5 87.9 108.4 137.4

Margins

Gross Profit 55.8% 57.8% 58.7% 59.1% 59.3% 59.8%

EBIT 5.2% 8.8% 12.9% 15.3% 15.5% 16.3%

EBITDA 9.7% 13.4% 17.0% 18.5% 19.2% 20.2%PBT 5.8% 9.8% 14.0% 14.4% 14.6% 15.3%

PAT 4.0% 6.7% 9.8% 9.9% 10.1% 10.6%

PATMI 3.8% 6.4% 9.5% 9.7% 9.8% 10.3%

Tax % -30.3% -31.0% -30.6% -31.0% -31.0% -31.0%

MI % of PAT -5.8% -4.8% -2.3% -2.4% -2.4% -2.4%

Growth 0.0% 0.0% 0.0% 0.0% 0.0%

Revenue 10.5% 10.3% 29.0% 19.1% 20.7%

EBIT 85.3% 61.6% 53.7% 20.6% 27.1%

EBITDA 53.0% 39.6% 40.7% 23.4% 26.7%

PBT 86.7% 58.8% 31.9% 20.9% 26.9%

PAT 84.9% 59.6% 31.2% 20.9% 26.9%

PATMI 87.0% 63.8% 31.0% 20.9% 26.9%

FY11-14F earnings CAGR 26%


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Figure 20: Revenue Breakdown by Category


We have forecast a slight dip in the % of concessionaire sales over direct sales in FY13 asPRA enters Cambodia, a new market. We feel it might take a year before it secures moreconcessaionaires and will have to initially rely more on direct sales.

Figure 21: Merchandise Sales


55% of merchandise sales from fashion & apparels. PRA derives the bulk of its

merchandise sales from the sale of fashion and apparels.

Cambodia to start operations in 3QFY13. Management targets to start its Cambodia storein Phnom Penh in 3QFY13 (Jan-Mar 2014). The store will occupy 30,000sqm of retail space.We are forecasting a very conservative S$800 average sales per sqm in FY13 for the onequarter that it will be under operation and estimating a 10% YoY growth in average sales persm to S$880 in FY14. We have assumed a merchandise sales mix of 80% direct sales and20% concessionaire sales. In terms of commission rates from concessionaire sales, we areforecasting 20%.

Cambodia is expected to contribute S$6.0m to Group revenue in FY13 in its first quarter ofoperations and S$26.4m in FY14.


Revenue 301.2 333.0 367.3 474.0 564.7 681.7

By Category

1) Direct Sales 162.6 169.2 180.6 233.4 279.1 347.0

2) Commissions from concessionaire sales 126.3 149.6 169.5 221.5 264.5 311.0

3) Consultancy & management service fees 0.5 0.9 1.4 1.6 1.7 1.9

4) Rental income 11.8 13.2 15.9 17.5 19.4 21.7

Total Revenue 301.2 333.0 367.3 474.0 564.7 681.7

% of revenue

Direct Sales 54% 51% 49% 49% 49% 51%

Commissions from concessionaire sales 42% 45% 46% 47% 47% 46%

Consultancy & management service fees 0% 0% 0% 0% 0% 0%

Rental income 4% 4% 4% 4% 3% 3%

growth %

Direct Sales 0% 4% 7% 29% 20% 24%

Commissions from concessionaire sales 0% 18% 13% 31% 19% 18%

Consultancy & management service fees 0% 85% 53% 10% 10% 10%

Rental income 0% 12% 20% 10% 11% 12%

Total revenue 0% 11% 10% 29% 19% 21%


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Other revenue/income

Other revenue or income apart from merchandise sales are consultancy and managementservice fee and rental income.

Consultancy and management service fee is derived from its managed stores in Vietnam. InFY11, fees rose by 53% or S$0.5m as a result of the opening of one new managed store inHo Chi Minh City in January 2011.

Figure 22: Consultancy & management service fee Figure 23: Rental income

Source: Bloomberg Source: Bloomberg

Figure 24: Breakdown of FY11 operating expenses


COGS tied only to direct sales not concessionaire sales. In FY11, changes inmerchandise, inventories and consumables (COGS) accounted for 46% of total operatingexpenses. This translated into a gross profit margin of 58.7%, up 0.9ppt from 57.8% inFY10. We note that gross margins have gradually been improving as a result of higherconcessionaire sales.

S$m

S$m

Chgs inmerchandiseinventories &

consumables,46%

Employeebenefits

expense, 11%

Depreciation &

amortisation, 5%

Promotional &advertising, 2%

Rentalexpenses, 21%

Finance costs,0%

Other expenses,15%


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Figure 25: % Operating expenses to revenue


Do not expect A&P costs to fall dramatically. While PRA develops scale in its operations,its operating expenses is expected to fall leading to margin expansion. While advertising andpromotion costs (A&P) usually trend lower, we do not expect it to fall dramatically as it has just entered the Indonesian market and would need to fork out money to promote itself.Likewise it will need to promote aggressively when it enters Cambodia.

. But overall overheads should trend lower. Other expenses such as staff costs and rentshould trend lower as a percentage of sales as it scales up in Indonesia and Cambodia.Rents, labour costs and other overheads are cheaper in these countries.

Figure 26: Margin expansion


Gradual margin expansion. As we expect PRA to derive economies of scale as it expandsits retail network, we should see some margin expansion going forward.


Operating Expenses:

Chgs in merchandise inventories & consumables (133.1) (140.4) (151.7) (193.8) (229.8) (274.0)

Employee benefits expense (29.8) (35.5) (34.8) (44.6) (51.4) (61.3)

Depreciation & amortisation (13.5) (15.5) (15.2) (15.2) (20.8) (26.1)

Promotional & advertising (5.4) (5.1) (7.2) (9.0) (10.7) (13.0)

Rental expenses (66.3) (67.1) (69.6) (90.1) (106.7) (128.2)

Finance costs (0.1) (0.1) (0.5) (0.2) (0.2) (0.2)

Other expenses (40.7) (43.4) (47.4) (61.6) (72.3) (85.9)

Total Operating Expenses (288.8) (307.1) (326.4) (414.5) (492.0) (588.6)

Revenue 301.2 333.0 367.3 474.0 564.7 681.7

% total opex/ revenue -96% -92% -89% -87% -87% -86%


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VALUATION

NEUTRAL with FV of S$1.50. We have a DCF-derived TP of S$1.50 (WACC: 9.2%, terminalgrowth rate 2%) which implies a FY13 P/E of 18x, in line with its Southeast Asian peers in thedepartment store space. Its closest rival in Malaysia, AEON which owns the chain of Juscodepartment stores is trading at a lower forward consensus P/E of 13x.

We think the premium valuation for PRA over AEON is justified given that it offers investors aunique proposition by providing exposure into three high growth markets: 1) Malaysia, 2)

Vietnam and 3) Indonesia. Furthermore it operates on an asset light strategy, leasing all of itsretail space except for one site in Vietnam.

Over the past year, its HK-listed sister company, Parkson Retail Group (3368 HK), whichoperates 49 stores in China has traded at an average P/E of 23x while its Malaysian-listedparent company, Parkson Holdings (PKS MK) traded at 18x.

Figure 27: DCF-derived TP

Total PV 907

Cash 108.4

Debt 1.0

Fair value (S$m) 1,014

No of shares (m) 677

Value per share (S$) 1.50

WACC ( r ) 9.2%

Source: OSK|DMG estimates

Run up of ~62% since IPO. The popularity of Parkson is evident from the recent run up inshare price since its first day of trading. It had an IPO price of S$0.94 and opened at S$1.13on its first day of trading. At last close of S$1.52, it is up ~62% from its IPO price.

Figure 28: Share price performance since IPO

Source: Bloomberg


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Figure 29: PRA SP P/E Trading Band

Source: Bloomberg

Figure 30: Sister 3368HK P/E Trading Band

Source: Bloomberg


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Figure 31: PKS MK P/E Trading Band

Source: Bloomberg

PRAs Malaysian-listed parent, Parkson Holdings Berhad which owns 68% of the latter hasbeen trading at 18x P/E for the past year.

Figure 32: DMG vs consensus

OSK|DMG vs consensus

FY12 FY13 FY14

OSK|DMG Revenue 474.0 564.7 681.7Consensus as at 9Feb12 454.5 528.3 609.3variance % 4% 7% 12%

OSK|DMG PATMI 45.9 55.4 70.3Consensus as at 9Feb12 46.9 57.5 70.0variance % -2% -4% 0%



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Figure 33: Peer Comparison

Source: Bloomberg and OSK|DMG estimates


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S


APPENDIX 1:

Malaysias E

Malaysianfinancial c

GDP per Between

and 6.4%

Malaysias D

The Mala12.3%, 29

Slight decwith a 10.

Between The indus

between 2

PRA rank Have fore

Figure 34: GDP and GDP per capita

Source: Euromonitor International 2011

Figure 36: M

Source: Euromon* sales for Parksofood products ee important disclosures at the end of this publication

blication

DEPARTMENT STORE INDUSTRY OUTLOOK

onomy

economy grew at a CAGR of 17.2% from 20

risis

apita grew at a CAGR of 15% from 2005 to 200

011-2015, GDP and GDP per capita are expect

respectively to reach US$331b and US$10,774 r

partment Store Industry

ysian department store retail market enjoyed

.6% and 13.2% in 2006, 2007 and 2008

line of 3.1% in 2009 due to the global financial

% growth

005-2010, grew at a CAGR of 12.1%

ry was valued at US$2.5b in 2010 and is project

011 to 2015

number two in terms of retail value sales in 201

asted SSSG of 7% annually for FY12-FY14.

(2005-2015) Figure 35: Consumptionexpenditure per capita (

Source: Euromonitor Internation

rket Share

itor International 2011n includes only non-food sales product sales while others lik

26

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OSK Research


- MALAYSIA

5 to 2008 prior to the global

from US$5,280 to US$8,036

ed to grow at a CAGR of 7.9%

espectively in 2015

robust double-digit growth of

l crisis but rebounded in 2010

ed to grow at a CAGR of 4.5%

0

expenditure & consumer005-2015)

l 2011

ly to include a mix of food and non-


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S


AEON Co whiMalaysian demarket share

Its other rival,number of outlhowever isntthe low to mid

Figure 37: Nu

Source: Compan

In terms of nu

Figure 38: Se

Source: Compan

Selling spa


blication

ch owns the Jusco chain of department stores isartment store market. In terms of retail sales valompared to Parksons 19.2%.

The Store which owns the Millimewa and The Stlets in Malaysia but saw its market share declinedirect competitor as it targets a different targetle income consumers.

mber of outlets of top players

data

ber of outlets in Malaysia, Parkson ranks numb

lling space of top players

data

ce ('000 sm)

27

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the leading player in thee in 2010 It held a 42.5%

ore chain, has the mostby 0.8% in 2010. The Storearket than Parkson, serving

er two.


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S


APPENDIX 2:

Vietnams Ec

Between12.1% an

Consume10.6% an

Vietnams De

Vietnamsand 2008

During th The indus

9.1% bet

Have fore



Figure 41: 20

Source: Euromon* Sales for Parksfood products


blication


onomy

011 to 2015, Vietnam is forecasted to experien

GDP per capita growth of 11.2%

expenditure and expenditure per capita are f

9.7% respectively between 2011 and 2015

partment Store Industry

department store retail sales value grew by a

global financial crisis in 2009, it grew by 9.9% a

try was valued at US$355m in 2010 and is pr

een 2011 to 2015

asted SSSG of 9% for FY12-14

(2005-2015) Figure 40: Consumptionexpenditure per capita (


10 Market Share

itor International 2011n include only non-food sales product sales while others like

28

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- VIETNAM

ce GDP growth at a CAGR of

recast to grow at a CAGR of

AGR of 22.5% between 2005

d a further 5.8% in 2010

jected to grow at a CAGR of

expenditure & consumer005-2015)

l 2011



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S


Figure 42: Nu

Source: Compan

Figure 43: Se

Source: Compan

Selling spa


blication


data


data

ce ('000 sm)

29

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S


APPENDIX 3:

Indonesias

Betweenand 19.8

In 2010, it26.5%

GDP and2011 to 2 Consume

11.0% an

Indonesias

Retail val Have ass

still new t



Figure 46: Re

Source: Euromon* Sales for Parksfood products


blication


conomy

005 to 2008, Indonesias GDP and GDP per ca

respectively

experience double digit GDP growth of 27.9%

GDP per capita are expected to grow at a CA15

expenditure and expenditure per capita are f

10.0% respectively between 2011 and 2015

epartment Store Industry

e sales are expected to grow at a CAGR of 10.7

med SSSG of 5% for FY12-14. Assumed rate a

the market

(2005-2015) Figure 45: Consumption

expenditure per capita (


tail value sales market share of departmental

itor International 2011n include only non-food sales product sales while others like

30

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- INDONESIA

pita grew at a CAGR of 21.3%

while GDP per capita grew at

GR of 11.8% and 10.7% from

recast to grow at a CAGR of

% between 2011 to 2015

ppears conservative as PRA is

expenditure & consumer

005-2015)

l 2011

store players



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S


Dominated bgiants PTand PT Rama

PT Mataharimarket shareGeneration stacquired Cent

PRAs storesJava Island w

Figure 47: Nu

Source: Euromon

Figure 48: Se

Source: Euromon

PTRamayana

LestariSentosa

Tbk

Selling spa


blication

two giants. Indonesias department store retaatahari Department Store Tbk (spun off from Pana Lestari Sentosa Tbk.

Department Store Tbk (MDS) is expected to rin 2010). It plans to open 150 new stores withinres targets the middle and high income consu

ro department stores target the middle income.

held a 2.5% share of retail sales in 2010. Fourile one is at Kuta Bali.


itor International 2011


itor International 2011

PT MatahariDepartmentStore Tbk

PT MitraAdiperkasa

Tbk

PT AkurPratama

PTMetropolitanRetailmart

PT Sarinah(Persero)

PTSe

e ('000sqm)

31

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il market is dominated by twoT Matahari Putra Prima Tbk)

etain its top position (32.7%a 10-15 year period. Its Newers while Parksons recently

out of the five are located on

Tozytosa

PT GoldenRetailindo

Tbk

PT RimoSurabaya

Lestari Tbk

Others


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APPENDIX 4: MANAGEMENT PROFILE

Figure 49: Management Profile


Management Role

Datuk Cheng Yoong Choong Been with the Group since 1987

Group Managing Director Also the Group MD of PRGL listed on the Hong Kong Stock Exchange

Bachelor of Science in Business Administration and MBA from University of San Francisco

Mr Toh Peng Koon Also President Director of Indonesian operations

CEO of Malaysian operations Been with Group since 1988

Will oversee the operations and business strategy development of Group in Malaysia

Responsible for growth strategies for Indonesian operations

Mr Tham Tuck Choy Been with Group since 1987

CEO of Vietnamese & Responsible for establishing Group's operations in Vietnam

Cambodian operations Prior to PRA, was with retail group Emporium in Malaysia from 1975-1987


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FINANCIAL TABLES

Source: Company data and DMG estimates

Profit & Loss Statement

FYE Jun (S$m) FY10 FY11 FY12F FY13F FY14F

Revenue 333 367 474 565 682

COGS (140) (152) (194) (230) (274)

Gross Profit 193 216 280 335 408

Other income:

-Finance income 3 5 4 5 7

-Other income 3 6 4 5 5

Operating Expenses:Employee benefits expense (35) (35) (45) (51) (61)

Depreciation & amortisation (15) (15) (15) (21) (26)

Promotional & advertising (5) (7) (9) (11) (13)

Rental expenses (67) (70) (90) (107) (128)

Finance costs (0) (1) (0) (0) (0)

Other expenses (43) (47) (62) (72) (86)

Total Expenses (167) (175) (221) (262) (315)

PBT 33 52 68 82 104

Tax (10) (16) (21) (26) (32)

PAT 22 36 47 57 72

MI (1) (1) (1) (1) (2)

PATMI 21 35 46 55 70

EBIT 29 47 73 88 111

EBITDA 45 62 88 108 137

Balance SheetFYE Jun (S$m) FY10 FY11 FY12F FY13F FY14F

Cash and cash equivalents 127 96 108 127 167

Trade and other receivables 18 24 31 37 45

Inventories 47 52 67 79 95

Others 0 1 1 1 1

Current assets 192 173 208 245 308

Property, plant and equipment 74 70 96 120 134

Intangible assets 0 7 6 6 6

Others 28 36 40 44 48

Non-current assets 101 113 143 170 188

Total assets 294 286 350 415 496

Trade and other payables 125 125 160 190 226

ST Borrowings 0 1 1 1 1

Others 21 29 30 32 33Current liabilities 146 154 191 223 260

LT Borrowings 0 0 0 0 0

Deferred tax 1 0 0 0 0

Others 4 5 5 5 5

Non-current liabiilities 5 5 5 5 5

Total liabilities 151 159 196 228 265

Share capital 21 159 159 159 159

Reserves 1 -133 -131 -128 -124

Retained profits 118 97 122 153 191

Shareholder's Equity 140 123 151 184 227

MI 3 4 4 4 4

Total equity 143 127 154 188 230

Cash FlowFYE Jun (S$m) FY10 FY11 FY12F FY13F FY14F

PBT 33 52 68 82 104

Depreciation & non Cash Adj 20 14 11 16 20

Change in working capital 20 2 13 11 14

Interest income 3 4 4 5 7

Interest expense 0 0 0 0 0

Tax -8 -16 -21 -26 -32

CFO 67 55 75 89 112

Capex -26 -10 -41 -45 -40

Other Investing CF 0 3 0 0 0

CFI -26 -6 -41 -45 -40

Dividends 0 -56 -21 -25 -32

Other Financing CF 1 -15 0 0 0

CFF 1 -71 -21 -25 -32

Free cash flow 41 46 34 44 72


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DMG & Partners Research Guide to Investment Ratings

Buy: Share price may exceed 10% over the next 12 months

Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain

Neutral: Share price may fall within the range of +/- 10% over the next 12 months

Take Profit: Target price has been attained. Look to accumulate at lower levels

Sell: Share price may fall by more than 10% over the next 12 months

Not Rated: Stock is not within regular research coverage

DISCLAIMERS

This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specificinvestment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluateparticular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation toany securities or investment instruments mentioned in this report.

The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warrantynor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject tochange without notice.

This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities.

DMG & Partners Research Pte Ltd is a wholly owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK InvestmentBank Berhad and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Memberof the Singapore Exchange Securities Trading Limited.

DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in thesecurities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporationswhose securities are covered in the report.

As of the day before 9 February 2012, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd,do nothave proprietary positions in the subject companies, except for:

a) Nilb) Nil

As of the day before 9 February 2012, none of the analysts who covered the stock in this report has an interest in the subject companies coveredin this report, except for:

Analyst Companya) Nilb) Nil

DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N)

Kuala Lumpur Hong Kong Singapore

Jakarta Shanghai Phnom Penh

Bangkok

DMG & PartnersSecurities Pte. Ltd.

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Singapore 049315Tel : +(65) 6533 1818Fax : +(65) 6532 6211

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9feb12 - parkson

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