Parkson’s timely move

by **Cals** Sun 27 Sep 2015, 22:55

Parkson’s timely move

Saturday, 26 September 2015
By: P. ARUNA

THE proposal by Parkson group of companies to streamline its retail business in the region under Parkson Retail Group Ltd could not have come at a better time.
The challenging regional landscape and slowing economy of China are among reasons for Malaysia-listed Parkson Holdings Bhd to divest its interest in Singapore-listed Parkson Retail Asia Ltd (PRA) to Parkson Retail in a corporate exercise that would go to shareholders for approval next month.
Parkson Holdings says the sale of PRA is aimed at consolidating the retail business in the region with that of Parkson Retail which operates a similar business in China.
Parkson Retail is listed on the Hong Kong stock exchange and is one of Malaysia’s biggest success stories of local companies breaking into mainland China market. But the market in China has slowed down, hence giving it a chance to expand in the region.
As for PRA, it has not been able to replicate the success of Parkson Retail. The regional operations of Parkson under PRA that cuts across four countries with 67 stores has been loss-making.
Singapore-listed PRA recorded a S$52.8mil (RM163mil) in losses for the financial year ended June 30, 2015, compared to the S$32.06mil (RM99mil) in profits it made the previous year.
The Hong Kong-listed Parkson Retail, meanwhile, is profitable, although net profit dropped by 34% to 245.77 million yuan (RM169.64mil) from 372.6 million yuan (RM256.73mil) the previous year, according to its 2014 annual report. Parkson Holdings owns 53.49% of PRG.
The company takes cognisance of PRA’s challenging operating environment. According to its latest annual report, Parkson Holdings said the business in South-East Asia had become increasingly challenging, while in China, it was expected to grow.
“The group anticipates China’s domestic consumption will gain more forward momentum in line with the Chinese government’s economic rebalancing programmes to maintain a sustainable growth in the country.
“On the South-East Asian retail scene, the challenges are expected to continue in the near future,” it said.
For the financial year ended June 2014, the group had registered a weaker set of operating results with marginally higher gross sales proceeds of RM11.6bil, up by about 2% compared to RM11.3bil in the previous year.
It posted lower profit before tax of RM384mil, down 38% from RM615mil, and lower net earnings of RM139mil, down by about 42% from RM238mil a year ago.
Parkson Holdings said the corporate exercise was aimed at consolidating PRA’s retail business, which has a presence in South-East Asia, with that of Parkson Retail, which operates a similar business in China.
“The proposed acquisition would allow Parkson Retail to geographically diversify into high growth markets, enabling it to seek opportunities in South-East Asian markets. PRA has an established platform in South-East Asia, and this would allow PRG to establish an immediate foothold in the region, with a unique geographic footprint of 67 stores as at July 15, 2015 across cities in Malaysia, Indonesia, Vietnam and Myanmar, and at completion, be one of the leading Pan-Asian department store retailers,” it added.
In the corporate exercise announced in July, Parkson Holdings proposed to sell off its entire 67.6% stake in loss-making PRA to its profitable Hong Kong-listed subsidiary, Parkson Retail.
Retail industry officials say that there are “plus and minuses” to the streamlining of operations.
The downside of the deal, says an official, is Parkson Retail of Hong Kong has to bear with the capital required to grow the PRA operations in markets that are competitive.
“There is potential in Vietnam, Indonesia and Myanmar where there is an affluent middle-class growing,” says the official.
The bright side of the proposed transaction is that the Parkson group team in Parkson Retail of Hong Kong knows best how to handle the markets in the region.
“They have experience from growing Parkson into a success in Hong Kong.
“The team in Parkson Retail is best equipped to handle the operations of the region that are loss making,” says the official.
Singapore-listed PRA operates and manages an extensive network of 67 stores spanning about 797,000 sq m of gross floor area across cities in Malaysia, Vietnam, Indonesia and Myanmar. The Malaysian listed Parkson Holdings will receive RM641.42mil in proceeds from the proposed sale which the company says will be used to expand its business and to explore new investment opportunities.
In a reply to StarBizWeek, a company spokesperson says that of the proceeds, a sum of RM531.16mil is to be used as working capital and another RM109.26mil will be distributed as dividend to shareholders.
“The acquisition will enable PHB to raise cash proceeds and is expected to contribute positively to the company in the long term as and when benefits from the utilisation of proceeds crystalise,” it says.
Shareholders of Parkson Retail would deliberate on the corporate exercise in an extraordinary shareholders meeting on Oct 12. In the circular to shareholders issued by Parkson Retail, the company said the acquisition of stakes in PRA will enable them to realise economies of scale across Asia.
“The group is principally engaged in the operation and management of department stores offering a range of fashion brands and lifestyle elements in China.
“Given the target group’s retail business follows an identical retail format to that of the group, the acquisition would enable the group to realise economies of scale across Asia,” it says.
As at July 15, 2015, it said PRA has 43 stores in Malaysia, 14 in Indonesia, nine in Vietnam and one in Myanmar.
“At completion, the group would be one of the leading pan-Asian department store firms,” it says.
Parkson Retail said it intended to continue to leverage on the “Parkson” brand and to continue rolling out new stores in both China and South-East Asia. Kenanga Research had said that the divestment would dilute Parkson Holdings earnings next year by an estimated 15% to 20% but the cash proceeds can be utilised for business expansion and new investment opportunities.
“Upon completion of the proposal, Parkson’s effective equity interest in PRA will be diluted from 67.6% to 35.9% which will result in lower earnings contribution to the PHB Group going forward,” Kenanga had said in a research note.
“Looking ahead over the next subsequent quarters, we expect Parkson to continue facing a tough operating environment on the back of weak consumer sentiment due to the economic slowdown, particularly in the China market, which contributes the crux of its earnings,” it said.