This article first appeared in Corporate, The Edge Malaysia Weekly, on July 4 - 10, 2016.
PARKSON’S shares are on sale, having skidded to their all-time low in Singapore and Hong Kong and hovering at a 13-year low in Malaysia. The darling of investors when the new money in China and Southeast Asian consumers frequented its glitzy department stores across Asia, its shares have slipped to penny-stock levels on all three bourses. They now fetch a mere fraction of what their assets should be worth on the books.
Despite the long queue at the opening of its latest retail brand Shoopen, a Korean fast fashion shoe and accessories outfit, at Fahrenheit88 mall in the heart of Kuala Lumpur, investors are in no hurry to pick up Parkson’s shares.
Investor concerns are not without cause. All three listed companies bearing the Parkson name have bought back their own shares but it was to no avail as the share prices dropped below their average cost, filings show.
Bursa Malaysia-listed Parkson Holdings Bhd owns 54.3% of Hong Kong-listed Parkson Retail Group Ltd, which operates 60 department stores in China, and 67.9% of Singapore-listed Parkson Retail Asia Ltd, which runs its Southeast Asian retail operations in Malaysia (45 stores), Indonesia (16), Vietnam (9) and Myanmar (1 with negligible contribution). It will have a store in Cambodia at the end of the year. The two stakes are worth about RM700 million or 83% of Parkson Holdings’ market capitalisation of RM845.8 million.
At the time of writing, Parkson Holdings had spent RM45.4 million or an average of 92.6 sen apiece buying back 4.6% of its share base in eight months (from Nov 27, 2015, to June 30, 2016). The stock has fallen 19.8% year to date to close at 81 sen last Friday, just under a third of its net asset value per share of RM2.47 as at end-March. The ratio is still less than half after stripping out intangibles and receivables. Just a year ago, the stock had fetched RM1.57 and was over RM6 apiece in its heyday in 2008.
In Hong Kong, Parkson Retail Group had spent HK$57.4 million (about RM29.6 million) or an average of 98.8 Hong Kong cents apiece on buying back 58.1 million shares or 2.13% equity interest between August 2015 and March 4, 2016. The shares closed at 68 Hong Kong cents last Friday, significantly lower than HK$9.87 in July 2011 and HK$14.94 in December 2007.
In Singapore, Parkson Retail Asia spent S$549,000 (RM1.63 million) or an average of 15.7 Singapore cents on buying back 3.5 million shares or 0.52% equity interest in March, the same month in which both the Singapore and Malaysia-listed entities were queried by their respective stock exchanges for unusual market activity. Parkson Retail Asia closed at 15.3 Singapore cents last Friday — 0.59 times its net asset value of 26 cents per share — versus 44.8 cents just a year ago and S$1.37 in February 2013.
The huge discount to its book value might not go away until earnings begin to pick up. The share price declines are on expectations of losses as Parkson spends on restoring its appeal to increasingly demanding Asian consumers, many of whom may have less money to spend in these tight economic conditions.
Operationally, same store sales growth has been down in most jurisdictions except Indonesia, where growth was flat in the quarter ended March 31, 2016. China, which contributes two-thirds to group revenue and earnings, was loss-making in 2015 due to costs incurred in new store openings, a one-off litigation loss as well as lower footfall. Not only are the Chinese shoppers buying more online, the increased competition among brick-and-mortar retailers has affected Parkson’s sales and profits.
Sales are also under pressure in Malaysia, which contributes 20% to 25% to group sales and was the second largest profit contributor after China before the latter fell into the red last year.
Cost is also higher as Parkson switches from an asset-light strategy to building and managing its own malls — something that is not entirely new to the group as Lion Group used to own Subang Parade shopping mall in Subang Jaya and Mahkota Parade shopping mall in Melaka but had to sell them in the early 2000s to pare its debt.
Lion Group and Parkson chairman “Steel King” Tan Sri William Cheng, who controls about 60% of Parkson Holdings (32.26% directly) and spends most of his working hours driving transformation at Parkson, asks investors to be patient as the changes underway would take time to bear fruit.
“To capture the crowd, you’ve got to have the right mix. Retail is changing fast, so we need to change fast … in-house brands take time, at least two three years, to show [results],” Cheng says, pointing to the group’s growing portfolio of in-house brands (LOL, MARQ, MAVE, ESTELA, FASZ and kor) as well as exclusive distributorships of third-party international fashion and retail brands, such as South Korea’s MIXXO, SPAO and WHO.A.U, Spain’s Trucco, and the UK’s French Connection and Pepe Jeans. Riding the Korean retail wave, Shoopen’s sales totalled RM400,000 in the first two days of its opening on June 25. Shoppers started queueing before 7am to grab early bird discounts at the two-storey outlet.
Parkson has also expanded its food and beverage portfolio to include brands such as Quiznos café, Franco and Johnny Rockets and has brought into Malaysia such edutainment brands as the UK’s Little Kingdom, Royal Unicorn Education and Pygmalion.
With over 6.2 million Parkson cardholders in China and 1.2 million in Malaysia, the group is well positioned for more targeted marketing activities as it refreshes its offerings.
“If we do everything right, [gross profit] margins can add 2% to 4% to about 25% now,” adds Cheng, who seems especially pleased with Parkson’s first FoodPark at the Maju Junction mall in Kuala Lumpur. He says it has a wide selection of good-quality fresh produce, including a wide variety of cheeses. A second FoodPark is set to open in Puchong soon.
In the past 18 months, riding Lion Group’s diversified background, which includes consumer finance, Parkson Holdings has grown a new consumer financing unit, Parkson Credit, which provides easy payment plans to middle-income consumers for the purchase of motorcycles (up to RM15,000 at 9.84% to 14.3% per annum) as well as consumer products such as electrical appliances (up to RM10,000 at 10.68% to 18.6% per annum).
Between November 2014 and May this year, Parkson Credit won a 4.5% market share of motorcycle registration, processed 43,000 applications and disbursed RM79 million in loans while serving over 450 merchant partners. The potentially high margin model that needs good credit checks is not new and there are established large rivals, including AEON Credit Sdn Bhd, Berjaya Group’s Singer appliances and Singapore-listed Courts Asia Ltd’s Courts Mammoth.
Cheng admits that current operating conditions are tough but adds that Parkson has no choice but to change to remain attractive to enough customers while keeping costs in check. “We didn’t have all these brands two years ago … There is always a need to refresh our brands but we’re heading in the right direction. People will be willing to spend if they like our products.”
If Parkson is able to deliver on its numbers, investors will return.