Is Parkson Holdings a value trap (Part 1 of 3)

Value Investing Case Study 12-1: Parkson Holdings has 2 listed subsidiaries so that overall, we are looking at 3 listed stocks in 3 different countries.  Parts 1 and 2 will cover the analysis and valuation of the holding company.  In Part 3, I will address the question that if you were limited to investing in only one of the 3 listed companies, which would you select.

As of 26 of Mac 2021, Parkson Holdings Bhd (PHB or PHB Group) was trading at RM 0.22 per share compared to its Book value of RM 1.53 per share (as of the end of Dec 2020).

With such a large discount to the Book value, you must be wondering whether it is a value trap.

PHB Group is mainly in the department store business that is being disrupted by digital technology. Would such a large discount from the Book value offer a significant margin of safety?

When analyzing a value trap, which would provide a better estimate of intrinsic value - Book value or Earning-based value?

Join me in a 3-part series where I analyze and value PHB Group to show that it is not a value trap.

Part 1 is published here while Part 2 and Part 3 will be published next week and in 2 weeks' times respectively.

Would there be a fantastic buying opportunity at such a price? Well, read my Disclaimer.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you. Learn more.

Contents

• What is so unique about the Group?

• Has it used its Funds in the Best Way?

• Can you describe the Current Performance as Outstanding?

• Is there a Rich and Unique History?

• Pulling it all together

Valuation Date	26 Mac 2021
Company Name	Parkson Holdings Bhd
Stock Name in Bursa	Parkson
Company’s Stock Co	5657
Bursa Sector	Consumer Products and Services
Listing Date on Bursa	Oct 1993
Financial Year-End	June
Latest Quarterly Results	2nd Quarter 2020, 31 Dec 2020
Shareholders’ Equity	RM 1.6 billion (31 Dec 2020)
Market Capitalization	RM 0.2 billion (26 Mac 2021)
Corporate Website	http://www.lion.com.my/WebCorp/phb.nsf/corp_profile

Table 1: Company data.

What is so unique about the Group?

PHB is part of the Lion Group of Malaysia that was established in the 1930s.   The Lion Group is today involved in the retail, property development, mining, steel, agriculture, and computer sectors in many ASEAN countries, China, and the USA.

PHB was formerly in the steel fabrication business. It assumed its present name in 2007 when it divested its steel fabrication business. It then acquired a strategic stake in some retail assets in China, Malaysia, and Vietnam from another member of the Lion Group. 

PHB's business model comprises a blend of concessionaire sales, anchor tenant, customized product mix, and state-of-the-art management tools.

There are currently 3 listed entities within the PHB Group as shown in the chart below.

Chart 1: Parkson Group Corporate Structure

• Parkson Retail Asia Ltd (PRA) was listed on SGX in 2011. It is the leading Southeast Asian department store retailer with 58 department stores in Malaysia, Vietnam, and Indonesia as of 31 Dec 2020.
  
  
• Parkson Retail Group Ltd (PRGL) which made its debut listing on HKEX in 2005, is one of the premier retail operators in China. The PRGL Group has 42 stores in 28 cities in China. 

• PHB Group is the holding company for PRA, PRGL, and other subsidiaries which are not under PRA or PRGL. 

In 2020, PRGL accounted for about 72 % of the PHB Group revenue while PRA accounted for 26 %.

Case Notes "Chain listing" is a situation where a subsidiary of a listed company is seeking its own listing. To qualify for this listing, the subsidiary should have a distinct and viable business of its own.  And it must not be in conflict or in competition with the parent company. The idea is that the listing of the subsidiary should not affect the interests of the shareholders of the already listed company.  PHB Group is a good example of a group that undertook a chain listing.  It listed its retailing business in Malaysia, Vietnam, and Indonesia in SGX. This was both to raise funds for the expansion but also to unlock the value of its subsidiaries.  From an analysis perspective, chain listing can provide much more information about the group’s operations.  The listed subsidiaries have their respective Annual Reports for you to extract information. Apart from the chain listing history, when you analyze the PHB Group, you need to ask what business it is in. Is it owning and managing department stores? Or is it retailing?  This is the same question that the buggy whip companies had to answer a century ago. Were they in the buggy whip business or were they in the transportation business? If they saw themselves as in the transportation business, they might still be around today. If PHB sees itself in the business of distributing goods, then the department store is one of the many vehicles to enable the distribution. If PHB views itself as in the department store business, then it may go the way of the other department stores in the US.  PHB Group may have been lucky to be operating in China.  Many of the department store groups there have re-invented themselves to meet the online challenge. PHB seemed to have followed suit. As you can see, fundamental analysis is more than just applying some formula.  If you don’t have the business background to undertake such an analysis and yet want to invest based on fundamentals, you may have to rely on financial advisers to do them for you.  There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.

Case Notes

"Chain listing" is a situation where a subsidiary of a listed company is seeking its own listing. To qualify for this listing, the subsidiary should have a distinct and viable business of its own.  And it must not be in conflict or in competition with the parent company.

The idea is that the listing of the subsidiary should not affect the interests of the shareholders of the already listed company. 

PHB Group is a good example of a group that undertook a chain listing.  It listed its retailing business in Malaysia, Vietnam, and Indonesia in SGX. This was both to raise funds for the expansion but also to unlock the value of its subsidiaries. 

From an analysis perspective, chain listing can provide much more information about the group’s operations.  The listed subsidiaries have their respective Annual Reports for you to extract information.

Apart from the chain listing history, when you analyze the PHB Group, you need to ask what business it is in. Is it owning and managing department stores? Or is it retailing? 

This is the same question that the buggy whip companies had to answer a century ago. Were they in the buggy whip business or were they in the transportation business? If they saw themselves as in the transportation business, they might still be around today.

If PHB sees itself in the business of distributing goods, then the department store is one of the many vehicles to enable the distribution. If PHB views itself as in the department store business, then it may go the way of the other department stores in the US. 

PHB Group may have been lucky to be operating in China.  Many of the department store groups there have re-invented themselves to meet the online challenge. PHB seemed to have followed suit.

As you can see, fundamental analysis is more than just applying some formula.  If you don’t have the business background to undertake such an analysis and yet want to invest based on fundamentals, you may have to rely on financial advisers to do them for you. 

There are several financial advisers who provide such analyses. Those who do this well include people like Seeking Alpha.* Click the link for some free stock advice. If you subscribe to their services, you can tap into their business analysis and valuation.

Has it used its Funds in the Best Way?

PHB has a total capital employed (TCE) of RM 8.53 billion as of the end of Dec 2020, with SHF and MI accounting for 32 % of it.  Debt and Lease funded the majority of the TCE. The result is that PHB only has a Book Value of RM 1.53 per share compared to the Total Assets per share of RM 9.89. 

About 80 % of the TCE is deployed for its operations with the balance tied up in cash, investments in associates, joint venture, and securities.

Items	Ref	RM million
Shareholders’ Equity	SHF	1,628
Minority Interests	MI	1,078
Total Debt	Debt	1,943
Total Lease	Debt	3,878
TCE		8,527

Items	Ref	RM million
Net Operating Assets	Net OA	6,805
Net Financial Assets	Net FA	1,515
Asso/JV, Securities	Non-OA	207
Total		8,527

Table 2: Sources and Uses of Funds Dec 2020.

Chart 2: Sources and Uses of Funds

An analysis of the TCE by regions shows that the majority of the RM 8.53 billion has been deployed in China. 

Chart 3: TCE by regions

Note: The TCE for PRA and PRGL was derived from the TCE of the respective listed entities c/w with those of PHB with the balancing sum assumed to be under “Others”.

Can you describe the Current Performance as Outstanding?

For Q2 2021, PHB Group reported a YTD loss after tax of RM 70.3 million compared to a loss after tax of RM 200.0 million for the same period last year.  Actually, an improvement.

This was despite a reduction in the revenue to RM 1.69 billion for the first half of the financial year ending 31 Dec 2020 compared to RM 1.87 billion for the same period last year. 

• The revenue for China increased by 3% compared to that for the same period last year.

• The revenue for the other countries declined due to the Covid-10 pandemic.  

The main reason for the “better” loss performance this year was due to the improved operating efficiencies. 

I classified the PHB Group as undergoing a turnaround because of its performance over the past few years. I tracked the relative performance of the Group from 2009 to 2020 based on 3 metrics as shown in the Performance Index chart below.  

Chart 4: Performance Index

• Revenue has been growing since 2009.  But the 2020 revenue declined due to the Covid-19 pandemic.

• Except for 2020, gross profitability has been maintained over the past few years. 

• PAT has declined because of declining gross profit and increasing expenses as shown in the chart below. In fact, the PHB Group has been suffering losses after tax since 2015.  This is represented by the PAT line falling below the zero levels in the Performance Index chart. 

Chart 5: PHB Gross Profit vs Expense Profile

The PHB Group return has declined over the past 12 years. This is despite that for the past 3 years average revenue is 37 % higher than the average revenue for 2009 to 2011.

• From 2009 to 2011, the average ROE was 22 % compared to the past 3 years' average loss on equity.

• From 2009 to 2011, the average gross profitability was 26 % compared to the past 3 years average of 22 %

Table 3: Past 3 years performance

Note: Gross profitability = gross profit margin / total assets 

You can infer that the main reason for the current poor performance is due to the interest and other expenses incurred by the PHB Group.  An analysis of the gross profit and expense items by the respective listed subsidiaries showed the following.

PRGL

Chart 6: PRGL Gross Profit vs Expense Profile

The losses from 2015 onwards were due to a combination of declining gross profit and some high one-off expenses.  You can infer a loss in the chart when the gross profit is at the same level or lower than the total expenses.     

• In 2015 there was a one-off litigation loss of RMB 140.9 million.

• The profit in 2016 was due to a one-off gain of RMB 1,282.9 million. This more than offset the one-off impairment of RMB 402.0 million.

• The loss in 2017 was due to a one-off litigation loss of RMB 136.0 million and impairment in associates and goodwill of RMB 18.4 million. 

• In 2018, although RPGL had a positive PBT of RMB 125.8 million there was a loss after tax. The tax was higher than the statutory rate because there were tax losses not recognized as well as expenses not deductible for taxes.

• In 2019, although RPGL reported an EBIT of RMB 538.9 million there was a loss after interest due to the adoption of IFRS 16. This resulted in an interest charge of RMB 425.0 million on the lease liability.  Note that under IFRS, the rental was reduced and replaced with additional depreciation expenses. 

PRA

Chart 7: PRA Gross Profit vs Expense Profile

From 2015 onwards, the lower revenue due to the challenging market condition led to lower gross profits. Together with the higher expenses, it meant that PRA incurred losses every year.  The exception was 2016 when there was a one-off gain of SGD 46.8 million due to the disposal of a subsidiary.

The major one-off expenses incurred from 2015 onwards were as follows:

• One-off provision of SGD 64.7 million for early termination on a store lease in Hanoi.

• In 2017 there was an impairment charge of SGD 26.1 million.

• In 2018, there was an impairment of SGD 12.3 million although this was partly offset by an impairment reversal of SGD 9.7 million. 

• In 2019, there was an impairment and contract provision of SGD 17.1 million although this was partly offset by an impairment reversal of SGD 3.1 million.

• In 2020, apart from the lower revenue due to the Covid-19 pandemic, the adoption of IFRS 16 resulted in an additional expense of SGD 38.2 million 

Is there a Rich and Unique History?

The Lion Group retailing business had its roots in 1987 when it acquired the net assets of selected stores of Emporium Holdings Bhd. It then began to establish many department stores under the Parkson brand.

Parkson Malaysia spearheaded the Lion Group retailing business. It established itself as a diversified retail chain with different retail formats catering to different market segments. By the time of its acquisition by PHB in 2007, Parkson Malaysia had a total of 30 department stores in Malaysia and 3 department stores in Vietnam. 

The Parkson brand was introduced to China with the opening of the Parkson department store in Beijing in 1994.  PRGL which was set up to operate the Parkson department store in China, had 40 stores in 27 cities in China under its wing by the time it was acquired by PHB.

Over the past 12 years, China and Malaysia retail stores accounted for the majority of the PHB Group sales. This is despite operating in few other countries as can be seen from the chart below.

• The PHB Group closed its Myanmar retail store in 2018 after being in the country since 2013.

• The PHB Group was in Sri Lanka in 2013 and 2014 via a listed associate.

• Its plans for opening a store in Cambodia in 2016 had been affected by the landlord's failure to hand over the store premises.   

Chart 8: Revenue by Country

Note: Others refer to non-retail store operations 

While the PHB Group revenue has shown a growth trend from 2009, it hides the fact that same-store sales have been declining. You can see this from the chart below.

Over the past 10 years, the same-store sales in all the countries have been declining. This reflected the challenging environment. The same-store sales in Malaysia and China seemed to show signs of improvement from 2017.  Note that the Covid-19 pandemic affected the 2020 performance.

Chart 9: Same-store sales

Note: China 2020 based on half-year results

Throughout the past 12 years, the PHB Group had expanded beyond its department store business.  It went into mall ownership, provision of credit lines, and F&B. But, the contributions from these are still not substantial.

• In its 2014 Annual Report, RPGL stated that it will focus on an Omni-channel strategy. This is a combination of online and offline business.  It also operated several different retail formats. These included shopping malls, department stores with lifestyle elements, specialty stores as well as fashion outlets.

• In 2016, PRA ventured into the lifestyle retail concept.   The department store operations had elements of entertainment and food and beverages. It has also introduced private label brands as well as agency lines of numerous international brands. 

Yet, the sales of goods and concessionaire commissions still accounted for 91 % of the PHB Group revenue in 2020 down from 95 % in 2009. Refer to the chart. The only area that seemed to have a significant contribution is rental with the 2020 rental income being more than doubled that of 2009.

Besides, direct sales of goods have become larger than concessionaire commissions.

Chart 10: Revenue profile

Apart from managing a diversified collection of retail formats, the PHB Group has also become a significant property developer/owner.  From 2008 to 2020, the value of the Investment Properties of the PHB Group has tripled as can be seen from the table below. 

However, the fair value of the Investment Properties as of Jun 2020 is RM 2 billion rather than the RM 375 million recognized in the Balance Sheet.  This is a substantial “hidden” value. 

Table 4: Investment Property Portfolio

Note: a) One under construction

Pulling it all together

Is PHB Group a value trap?

A value trap is a stock that while appearing cheap is actually cheap for a reason. The trap springs when the reason for the low price eventually surfaces. You belatedly found out that there was some insurmountable secular trend that will lead to a declining business.

Can we say this about PHB Group? There is no question that it faced declining profits over the past few years. Same-store sales were declining and it faced the threat of online sales.

The decline in same-store sales in China, the biggest revenue contributor, appeared to have been arrested. This was achieved by adopting an Omni-channel strategy together with a new retail format.  

At the same time, Malaysia seems to have turned the corner. There appears to be a turnaround in the same-store sales. Malaysia is the next biggest revenue contributor to the Group. 

These are not the sign of a company facing a secular decline. While digital tech is disrupting the “brick and mortar” retail sectors in China and Malaysia, the PHB Group has addressed this. 

I would thus conclude that PHB Group is not likely to be a value trap even before determining the intrinsic value. However, if you want a definitive answer, join me in Part 2 of this series.

End of Part 1 of 3

Part 2 of 3 was published on 11 April 2021

Part 3 of 3 was published on 18 April 2021

Note that Part 3 is restricted to subscribers of the blog. It will be password protected. I would encourage you to subscribe if you want to be able to access all the restricted pages.

Reading guide

If you are a first-time visitor to this blog, you may not be familiar with some of the concepts that I have used in my analysis and valuation.  I suggest that you check up the Foundations series - Fundamentals 01,  Fundamentals 02, and Fundamentals 03.   I also have a Definitions page in case you are not familiar with the terms I have used. 

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Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

This blog is reader-supported. When you buy through links in the post, the blog will earn a small commission. The payment comes from the retailer and not from you.

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