This article first appeared in The Edge Malaysia Weekly, on October 19 - 25, 2015.

It would have been good if Parkson Holdings Bhd in Kuala Lumpur could have tapped into Hong Kong-listed subsidiary Parkson Retail Group Ltd’s (PRG) large war chest of RM2.4 billion for its venture into shopping malls.  

Controlling shareholder Tan Sri William Cheng sees investing in shopping malls as a strategy to move away from the department store model, which he believes is getting obsolete. He wants Parkson Holdings to own shopping malls and have its own fleet of consumer brands. He is also eyeing a slice of the online shopping pie. 

This grand plan sounds good as it will keep Parkson relevant to consumers, especially when the group’s earnings are dropping.  However, it seems to have hit a speed bump. The minority shareholders in Hong Kong have rejected a proposal to buy a 67.6% stake in Parkson Retail Asia Ltd (Parkson Asia), which is listed in Singapore, from Parkson Holdings  for RM641 million cash.  

Parkson Holdings (valuation: 1.10; fundamental: 1.35) is currently the controlling shareholder of both PRG and Parkson Asia, holding 53.1% and 67.6% respectively. Parkson Asia has 67 stores in Malaysia, Vietnam, Indonesia and Myanmar.  

The proposed reorganisation was set to see RM614.4 million cash channelled from PRG to Parkson Holdings through the share sale. But this is not going to happen. So, some are waiting to see how Cheng will pull a rabbit out of the hat to kick-start the venture into shopping malls, considering the bulk of the cash is held at its subsidiary in Hong Kong.  

According to its 2014 annual report, Parkson Holdings’ cash balance at the company level amounted to RM8.9 million as at June 30, 2014, whereas its consolidated balance sheet reveals a cash balance of RM2.6 billion.   

But the termination of the share sale deal is not going to jeopardise the grand plan, according to Parkson Holdings, as the group can always look for project financing. 

Parkson Holdings spokesman told     The Edge    in an email reply that the expansion plans do not hinge on the now scrapped internal reorganisation exercise. 

“Pursuant to Parkson Holdings’ announcement dated Aug 17, 2015, it has been generally described that the utilisation of proceeds is for business expansion, new investment opportunities and/or working capital and at this juncture, the proportion of which has not been determined.

“However, the business expansion could include the construction of a shopping mall in Cambodia, and in this respect, with this new development, we will pursue other options such as project financing and/or a joint venture to carry on with the shopping mall project,” says the spokesman.  

In an earlier interview with The Edge, Cheng said the plan was to transform Parkson group into an integrated mega mall owner and manager over the next 10 years, changing its course from the asset-light model operations of its department stores.  He envisions having at least 10 self-managed malls in 10 years. 

The first mall opened its doors last May in Qingdao, China. Meanwhile, the group is also building a RM400 million seafront mall on reclaimed land in Melaka. Parkson is also planning to construct a 70,000 sq m development in Cambodia that will be anchored by the department store. 

It is worth noting that Cheng, through Lion group, was once the owner of Subang Parade, Mahkota Parade, Ipoh Parade, Klang Parade and Seremban Parade. But they were sold at RM700 million in early 2000 in order to repay Lion group’s mounting debt.   

AmResearch says in a report that there is some upside in its current earnings estimates after the termination of the proposed internal restructuring, which would have resulted in lower earnings contributions to Parkson Holdings because of the reduced effective stake in Parkson Asia. 

“Parkson Asia’s earnings will now be consolidated as opposed to equity accounted for had the reorganisation taken place,” says AmResearch in a report, which has a “buy” call on the retailer and a target price of RM1.60 per share. 

Parkson group’s China venture, which started off on a good footing, has become shaky in the past three years amid decelerating economic growth in China and Beijing’s efforts to curb corruption that resulted in weaker consumer spending. 

It didn’t help that online shopping has become an increasingly fierce competitor to traditional bricks-and-mortar retailers in China.  This was a blow to Parkson Holdings as it derives the bulk of its revenue and profit from its Chinese operations. 

Parkson Holdings’ earnings have been on the decline for a while.  The retail group’s net profit has fallen from RM380.08 million in FY2012 to RM139.05 million in FY2014. Net profit for FY2015, shrank 69% to RM42.84 million from RM138.15 million in the previous year. Revenue increased marginally by 3.1% to RM11.94 billion from RM11.58 billion a year ago. 

Its business operations in Malaysia, China, Vietnam and Myanmar have been plagued with contraction of same store sales (SSSG). Only Indonesia had positive SSSG of 8% in FY2015.  

Parkson Holdings, which once traded above RM5, has halved from RM2.18 per share to RM1.08 last Friday.

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