2011 Equities Reevaluation Part 1

Araya Hargate

Trading/Service: Genting Berhad
Results from annual report 2010 is impressive as expected. Previous DCF target price of RM12.25 is now revised to RM14.05 backed by encouraging outlook of the tourism-related sectors in Singapore. With the global economy in an almost stalemate climate, SG's 2Q11 economic indicator shows a yoy% increase of 3.3% for the services sector while the rest draw blanks (manufacturing @ -5.5% and construction @ 1.6%). Although the services sector has been in the downtrend since 2Q'10, tourism was not the cause of it. Wholesale and retail trade were weaken by trade flows while financial services sectors lag due to sluggish stock activities. Nothing beats the source from the ground and with many Malaysians situated in SG, many of my friends can attest that tourism is a booming industry in SG. Other source: MIDF Equity Beat.

As usual I'm ignoring other segmental info of GENTING (power, plantation, O&G and properties) because it is negligible; contributing only 18% of revenue though I do wish they exit from power generation. This is because the prices of raw materials for power generation such as coal is increasingly volatile and will be as the world struggle more with its power needs. GENTING remains my most favourite long-term (>5 years) pick and is a 5-star choice and SOLID BUY. The biggest risk I see is over expansion which leads to either too much debts OR losing focus; for now this is still in the region of being medium. And I have yet to visit Resorts World Sentosa, I plan to do so one day.

GENTING Chart 1

GENTING Chart 2

Trading/Services: Parkson Holdings Bhd
Parkson added 3 stores in China, 2 in Malaysia and 1 more in Vietnam. Because Parkson China remains the main contributor to the Group's result (71% of revenue & 91% of OP) I tend to overlook Malaysia (which does not have good long term economic outlook) and meager Vietnam due to this. Retail spending has increased 15% over the year, with GDP @ 10% and Parkson China registered store sales growth of 11%, I am optimistic and convinced that Parkson has a grip and strong presence in China's Tier 1 cities. Unlike MAMEE which made a mistake of going into China all by themselves, PARKSON went by proxy just like JOBST which is proving successful. Other healthy indicator includes another year of down trending D/E ratio; evident with rising ROCE.

This time I removed gains on partial disposal of subsidiary for Parkson China; the chart shows it all. Revenue growth rate is expected to balance itself between 5% to 10% as you remembered in my previous analysis that Parkson turned pure retail in 2007. PARKSON is another good pick for the long-term (>5 years) as China's middle class is expanding tremendously and has been for the pass decade. A 4-star choice and GOOD BUY. The risk I see would be the bubbling of China property market; if it goes boom it could spell lacklustre consumer spending like we see in the US. A medium to high risk region. Pay attention to the AR 2011 since they end their financial year in June. As such I have revised DCF target price from RM6.60 to RM6.80. Sources: Forbes & World Bank.

PARKSON Chart 1

PARKSON Chart 2

On a side note: I do not believe US will default and I also do not think the rich stage this, it is too soon for that. US will either increase the ceiling (40% chance) OR get a debt deal out (cut spending & increase taxes @ 60%). Reading: http://aboiwealthpot.blogspot.com/2011/06/taking-look-into-us-dollar.html. Next on I will examine FREIGHT, JOBST and F&N in Part 2. MAMEE and SUPERMX in Part 3. A special part on PANAMY and CARLSBG because some have said I have missed the boat =). Also I will start looking into AirAsia which I have been dragging for a very very long time.

Deborah Henry

Disclaimer: The reports, analysis and recommendations in this blog are solely my personal views. I do not link to any investment body or company. As such, I will not be responsible of any of your investment decision. Consult your investment adviser or come to your own conclusions before making any investment decision.

Question on Parkson: Answered

I just like to moo..prob because I am Taurus. Wait, is a bull same family with cow?

Dear investor, I got this email from my buddy in which I will reply on this post as I also do not have your email, could only see your name on the (to:). Anyway I have included my email on my blog below in the disclaimer portion. Everyone feel free to email me privately if needed, I check my emails everyday.

Subject: NOT A SPAM, from an investor, I have read your blog and aboi's blog

Hi,

I have been an investor in KLSE for 12 years and recently have read both your
blog and aboi's blog.  Firstly, would like to thank you and aboi too for your
contribution to the community as the blogs of both of you has really benefited
me a lot.  Your analysis has indeed impressed me.

Actually I would like to send an email to aboi regarding Parkson which is in his
blog, but couldn't find his email address anywhere, so would appreciate if you
could help  :)  or forward this email to him,  hope it does not trouble you too
much.

ok, my doubt about Parkson is in the unaudited Income statement financial year
ended 30-June-2010 attached, which I found in KLSE website. The net profit for
year 2010 is $532,869 and 2009 is $775,433, which is 31% drop largely due to the lack of one time profit $279,515 of Gain on dilution of interest in
subsidiaries.  However, the diluted earnings per share drop from 51.41 to 27.41
which is almost 47% drop!!

What cause such a big difference? Did it issue new shares?  Again, I would
really appreciate if you could help, thanks  :)

Cheers,
Jay 

---End of Message---

 

12 years!! Wow, that is an amazing long run as an investor on KLSE. I want to say thank you for your compliments as you certainly have more wisdom & experience than me. Let me tackle a few things one at a time.

1. The official 2010 annual report is not out yet. God knows why after 3 months but I am thinking of asking them why so long. I am using THIS which I believed is your source as well.

2. Gain on dilution of interest of subsidiaries came from Parkson Holdings Berhad, the controlling shareholder of Parkson Retail Group (listed in HKSE) selling its stake to independent third parties. By selling the stakes, it gets gain on dilution of interest which is reported in 2009 and 2008 annual reports. Right now the stake is at 51.5% which I believe will not go down any further. To be a major shareholder for a subsidiary you need at least 51%.

3. The drop in revenue is nothing shocking to say the least because it is expected. There is no way that Parkson Holdings Berhad can sustain the revenue figures by continuously selling its stakes in Parkson Retail Group. BUT operating profits does increase year by year. This is the reason why I also didn't use 10% revenue growth rate but opt for a more conservative 7% in my DCF calculation in my previous analysis HERE. To be really safe you can use 5% which will put the discounted fair value to about RM6.10 instead of my target price at RM6.60.

4. The calculations of EPS in annual reports are on a "that point of time" basis. This means that earnings is divided by the number of outstanding shares at that time. Thus when you compare the EPS from this year to another year it is not an apple to apple comparison as long as the number of outstanding shares is not the same. Having said so it makes sense that the drop of revenue % will not be the same with the drop in EPS %. With Parkson buying backs stocks (look at KLSE website) & also converting RCULS into new ordinary shares, therefore the no.of shares is not the same. RCULS is basically a security where it acts like a bond until it turns into an equity.

5. A better way to compare EPS figures from year to year is to use a weighted approach but that takes time to do it and worst it is tedious. Well, I use a book called Stock Performance Guide by Dynaquest. It has past ten years' price range, earnings per share (EPS), dividend per share (DPS), dividend yield (DY) and price earnings ratio (PER). Both EPS and DPS are weighted.

I hope I answered your question. Happy investing and keep in touch!

Trading/Services: Parkson Holdings Bhd

Introduction

Formerly known as Amalgamated Containers (ACB) but exited from the dry cargo container manufacturing in 2002 after 12 years of trying. Following the exit, it ventured into three core activities which are motorcycle/automotive, steel services and international trading businesses. Again except for East Crest International Limited, whose principal activity is investment holding, the activities of all other subsidiaries and its associate were discontinued upon the completion of the disposals of the subsidiaries and associate on September 19, 2007.

Eventually the company changed its name into Parkson after acquiring the brand from Lion Diversified its retail assets. The Company acquired new subsidiaries whose principal activities are in the operations of department stores. On June 11, 2008, the Company acquired Prime Yield Holdings Limited. On June 11, 2008, the Company’s subsidiary, Parkson Corporation Sdn Bhd, also acquired Kiara Innovasi Sdn Bhd. In October 2008, the Company acquired a 30% interest in Nanning Brilliant Parkson Commercial Co., Ltd and the list goes on.

Lion Group boss Tan Sri Wiiliam Cheng holds a 21.9% direct equity stake and 32.5% indirect stake in Parkson Holdings Bhd. Amstell Mills Sdn Bhd also a Lion Group's steel product unit holds a 14.88% direct stake. Meanwhile Parkson Holdings owns a 51.5% stake of Parkson Retail Group which is listed in Hong Kong Stock Exchange and provides exposure to China market.

Now Parkson is a pure regional retail player and operates as you know the "Parkson" brand in China, Malaysia and Vietnam. It has 35 stores in Malaysia. In China, it is the largest department store chain with 43 stores across 26 major cities. The China retail operations are listed on the Hong Kong Stock Exchange via Parkson Retail Group in which its investment arm, East Crest International holds a 55% equity interest. In Vietnam it has 6 Parkson department stores (Ho Chi Minh City, Hai Phong and Hanoi). 

Fundamental

1. Does the company have an identifiable durable competitive advantage?

Being no.1 in China, Malaysia and Vietnam as the largest department store chain is something to boast about. Competition in China is nevertheless heating up with foreign retail players like Wal-Mart Stores Inc and Carrefour SA but they are less than half Parkson's size and operate in quite a different market segment. China also has many many small retail players. In Vietnam, Parkson is dominant while in Malaysia it faces off Isetan, Metrojaya and Tangs in which both are not as big as Parkson either.

2. Do you understand how the product/service works?

Parkson's business model is one that not many people are familiar with. Its focus is on asset-light strategy where it does not own many properties but letting out space to branded names with long term leases and gets commission from sales (called concessionaires). Parkson does not tie up its cash with unsold inventories therefore not an operating expense to worry. The inventory is handled by the manufacturers of the brands instead. 

3. What is the chance that it will become obsolete (KO) in the next twenty years?

Not through my eagle eyes haha. Retailing has been an ever increasing business line since the days shopping malls started. As long as you have a growing population or a big base of population with improving income levels, retailing will always survive as people need somewhere to dispose their hard earned cash.

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes. Ever since it has gone into pure retail in late 2007, it only has plans to expand in its expertise which is retailing. Long gone are the days it tried to venture into different fields. Their said natural expansion will be into the Indochina retail market namely Cambodia (Phnom Penh) in 2012 and also to strengthen their grip in China, Malaysia and Vietnam with 12 additional stores by end of 2010 spending around RM250 million in the process.

5. What is the company's financial history and status?

Financial Chart 1 [Updated]

Net profit margin after taxation and return of equity trends well. I took off the 2007 growth rate as it was 400% after divesting old businesses and go into pure retail.  Also I had to use the 3-year average for the company vs 5-year average of the industry (I have no idea how to get the 3-year average of the industry) is as:

• Net Profit Margin: 23.40% vs 1.29% (Industry), 12.04% (S&P 500)
• Gross Profit Margin: 62.59% vs 22.72% (Industry), 28.88% (S&P 500)
• ROE: 25.76% vs 6.65% (Industry), 10.16% (S&P 500)
• Revenue Growth Rate: 10.34% vs 8.31%, 9.93% (compounded annual growth rate or CAGR)

[Updated] ROCE the true returns to shareholder equity is half of the ROE. If you read on later you will know that Parkson has debts and a lots of them. This big gap between ROE and ROCE simply means Parkson has been able to create so much value to shareholders because it is leveraging a lot from debts. Nevertheless, they have been paying it off as scheduled and you can see that a convergence could very well happen in 2010 or 2011 assuming they continue to par down the debts. With so much cash in hand, they could also close the gap in just one year.

Ignore the pre-retail years (<2007). Earnings Per Share has been on the rise in post-retail years (>2007) with a growth rate of 10.69% thanks to strong retailing income and the divestment of non-profitable business lines. 

Parkson does not have a dividend policy yet but it has been paying out almost half their earnings as dividends to shareholders. Thus there is no clear financial number to show how strong their dividend payout is. A 50% payout ratio is probably a good estimate.

6. Is the company conservatively financed?

Parkson does have a lot of cash in hand with RM2 billion as of 2009. BUT they do leverage on debt as well also around RM2 billion. DE ratio has been at 1.67 (2007), 1.53 (2008) and 1.16 (2009), it is on the downtrend. A ratio greater than 1 indicates that a company has more debt than assets but don't forget Parkson runs on asset light strategy. They managed to par down the ratio by acquiring new assets (new department stores) & improve shareholder equity. If they really do want to pay off they can just do it with that big pile of cash in hand.

7. Is the company actively buying back its shares?

There were many buybacks since 2008 until now. Buybacks turn shares into treasury so in 2009 there was a 1:100 treasury share distribution to each investor.

8. Is the company free to raise prices with inflation?

Parkson does long term leases and profit sharing with their brand partners. As far as Parkson is concerned, it can only raise the price of leasing and have no control on product selling price.

9. Are large capital expenditures required to update plant and equipment?

Reasonable large as Parkson is targeting a 15%-20% retail space growth annually or 9-12 new stores, China (5-6), Malaysia (2-3) and Vietnam (2-3). Parkson also needs cash for potential merger and acquisition opportunities and retail property acquisition. This is why they do not want to simply use they big horde of RM2 billion cash in hand to pay of debts unless absolutely necessary. 

Discounted Cash Flow Analysis

I only have 3 years worth of historical results of Parkson to try and project the revenue for Parkson in the next 5 years. Instead of using 10% revenue growth rate, I will use 7% to be slightly conservative.

Operating Costs: 70% of revenue

Corporate Tax: 25%

Capital Expenditures: RM300 million growing 10% each year

Depreciation: RM125 million growing 10% also each year

Working Capital Cost: 5% each year as asset light model does not require a lot

Discounted Rate: 10%

Parkson Holdings Bhd is fairly valued at RM6.60. Yes you heard me :) The current trading price of RM5.48 puts it at a big discount. The P/E ratio of Parkson is at 21.07 with S&P 500 at 16.10. It shows you high multiple which an investor is willing to pay RM21 for RM1 of current earnings for the stock. The China retail industry PE is 20.9. A high P/E ratio could also indicate that the market has high hopes for this stock's future and bid up the price. It could also mean it is an overpriced stock. With DCF saying otherwise and other retailers in China with the same PE valuation, Parkson's PE is normal in such industry in my humble opinion as investors remain upbeat with high expectations in this sector.

The stock came crashing down hard before the 2009 meltdown after restructuring of ACB selling off its steel service and electronics business. During the meltdown instead of going down it gradually increase to date. 

One reason why Parkson has not been trading at its fair value is because there is lingering concern of the state of other companies under the stable of the Lion Group. Lion Crop, Lion Diversified, Lion Industries are all in net debt positions. Amsteel Corp Bhd and Silverstone Corp Bhd were also removed from Bursa Malaysia before due to debt problems. The Parkson stock does not command the premium it should because investors are concerned with the health of the other companies though not related directly except for having the same major shareholder, Tan Sri William Cheng.

Conclusion

Parkson is the single one company in Malaysia with tremendously large exposure to China consumer market. China having recently just taken over Japan as the world's second largest economy will see China consumer spending taking off as the government is switching growth from expansionism to sustainable growth via domestic spending. Similar to the model in the United States which resulted in the world's biggest consumer market to date. Although it is already the largest department store chain in China the scope for expansion is still tremendous.

I like Parkson so does Tan Teng Boo, fund manger of iCap because it provides a cheaper alternative to the robust China retail consumer industry at undemanding valuations. RM5.50 vs Parkson Retail Group of ~RM6.80. With operations in Malaysia providing consistent profitability & the already profitable but small Vietnam operations, prospects for Parkson looks good. Vietnam with a population of 80 million people is in a current economic state which is quite similar to China 20 years ago which will undoubtedly grow as a powerhouse in the Indochina region. Vietnam will one day surpass the earnings of Parkson Malaysia.

If you are one that has tried to invest in China equities via funds I am quite sure to say that they are not performing well as you expected right haha. This is mainly due to China stock market that is speculative in nature and the performance of its index does not correlate very well with the economic growth. Why not go with Parkson Holdings? I also foresee that Parkson Holdings will have a dividend policy in order to maintain its status as a cash-generating jewel or cash cow. Almost all companies that generate a lot of income sooner or later will begin rewarding shareholders via good dividend payouts (Panamy, DutchLady, GenM to some extend and etc).

If you are like me holding some shares in ICAP, then you already have exposure to Parkson Holdings. At RM5.50 I would still choose to go into Parkson Holdings directly and hold it long-term 5, 10 or maybe 15 years until you see China overtakes US as the world's largest economy estimated to be in the year 2030-2035. I need to say this: Buying into Parkson is an aggressive investment perhaps one of my most because:

• The Lion Group does not have a good track record but Parkson is totally a different entity just the same boss.
• Parkson has debts and the ratio is more than 1. I would normally not invest in companies with more than ratio 1 but I have said before there are exceptions, very few.
• Little data only 3 years since it went into pure retail although Parkson brand started in 1985 but there was no accounting records I could find.
• China arena is nevertheless competitive. The country is simply too big for just one player to dominate unlike Malaysia.

If you have the appetite to eat such calculated risks & be as optimistic as me then you are OK la if not I would recommend ICAP instead of Parkson directly. I still can find something cheap at such bullish times. This is my Merdeka present for all my readers :) Happy 53 years old Malaysia!

First Looks @ PANAMY & PARKSON

The 2 Ps

Panasonic Manufacturing Malaysia Bhd
I chose PANAMY simply because it is as close to Dutch Lady. The corporate structure remains simple with a single associate Panasonic Malaysia Sdn Bhd (PMSB) of roughly 47% stake. For 40 years, it has been involved in the manufacturing and distribution of electrical products. The Panasonic brand name is as ubiquitous as Dutch Lady, which home don't have Panasonich ah?

Look at the share price performance. Does really look like DLADY right? No where but to go up for the last 10 years. From first looks it held my interest on a few items:

• Has no debts with cash in hand as high as ~RM500 million. That's a lot!
• Gross profit margin is more than 13%. Above average for a mfg company.
• Dividend yield is at an average of 7.0% over the last 10 years. WOW!
• Has export sales that contribute 50% to Panamy's turnover.

Parkson Holdings Bhd (formerly ACB)
Mr. Tan Teng Boo's favourite stock. ~27% of his ICAP fund size is Parkson and this made me curious. You can say hold ICAP is like holding some Parkson shares. Parkson is a pure regional retail player and has operations in China, Malaysia and Vietnam. It is an established department store chain since 1987 and currently has 43 stores in China, 35 in Malaysia and another 6 in Vietnam.

Share price performance has been mixed, probably a hyped up stock in the late 2007 before crashing hard and recovering. Nevertheless some key pointers:

• Has debts but has been decreasing down quickly. Current DE at 1.16.
• Net profit margin is very high of approximately 60% (more than Genting!) which is far sufficient to service short term debt obligations.
• Parkson's entry into China has been good and with growing income levels in China's gigantic workforce there is a lot of room for growth.

First looks are certainly nice but more work is needed. For now they have caught my attention and shall be in my research list very soon. Btw both are consumer oriented stocks because I love this sector.