Company Report

15 March 2011 (No. of pages: 23)

Parkson Holdings Bhd

(PKS MK)
Retailing: Malaysia

6-mth rating:

Target price: RM4.80 Share price: RM5.44 (14 Mar)

Pyari Menon
(65) 6499 6566 pyari.menon@sg.daiwacm.com

Initiation: planned store expansion should compress profit margins

Competition, store growth may lead to margin pressure We view Parkson Holdings Bhds (PKS) plans to expand rapidly in China via subsidiary Parkson Retail Group (Parkson Retail) (3368 HK, HK$11.22, 4) as risky, as department stores there have seen the greatest percentage rise in store numbers among retail formats, while sales growth has lagged other formats. Competition remains intense and rapid expansion is likely to add to margin pressure. We therefore initiate coverage with a 4 (Underperform) rating and six-month target price of RM4.80. PKS does appear well-positioned in all its markets In our view, PKS is among the strongest department-store chains in China, Malaysia and Vietnam. This is driven by its strong relationships with global and local brands, store formats that provide a good shopping experience, efficient supply chain, and high net-cash balance. Our target price implies 11.7% downside We initiate coverage with a six-month target price of RM4.80, based on the average of the value of PKS 51.5% holding in Parkson Retail, using Daiwas retail analysts target price and our FCF-derived valuation. Our target price implies a PER of 14x on our FY11 EPS forecast.
Income summary
Year to 30 Jun 2009 2010 2011E 2012E 2013E
Source: Company, Daiwa forecasts

Reuters code

PRKN.KL 1,495.35 (US$bn) 1.82 (US$bn; 11E) 1.96 (US$m) 1.65 (m) 1,019 (%) 51.1 Cheng and Family (31.5%) RM/US$ 3.038 1M (2.3) (1.7) 3M (5.6) (4.6) 6M (6.1) (7.5)

Market data
FBMKLCI Market cap EV 3-mth avg daily T/O Shares outstanding Free float Major shareholder Exchange rate Performance (%)* Absolute Relative
Source: Daiwa Note: *Relative to FBMKLCI

Investment indicators
PER PCFR EV/EBITDA PBR Dividend yield ROE ROA Net debt equity
Source: Daiwa forecasts

2011E 2012E 2013E (x) 15.9 14.5 12.5 (x) 6.1 5.7 5.1 (x) 6.2 5.3 4.3 (x) 2.6 2.3 2.0 (%) 1.9 2.1 2.4 (%) 17.3 16.9 17.4 (%) 5.0 5.2 5.7 (%) net cash net cash net cash

Price and relative performance

(RM) 8.00 6.50 5.00 3.50 2.00 08/3
Rel to FBMKLCI

08/9

09/3

09/9

10/3

10/9

120 105 90 75 60 11/3

Source: Bloomberg, Daiwa

Revenue (RM m) 2,845 3,001 3,578 4,188 4,788

(%) 10.2 5.5 19.2 17.1 14.3

EBITDA (RM m) (%) 846 28.3 887 4.8 960 8.2 1,047 9.0 1,191 13.8

Net profit (RM m) 263 286 348 383 443

EPS (%) 30.2 8.8 21.5 10.1 15.8 (RM) 0.258 0.281 0.341 0.375 0.435 (%) 25.4 8.7 21.5 10.1 15.8

CFPS (RM) 0.897 0.886 0.886 0.958 1.074

DPS (RM) 0.151 0.050 0.102 0.113 0.130

No Capital Markets and Services Licence has been issued by the Malaysian Securities Commission to any member of Daiwa Capital Markets and accordingly this report and any part of its content may not be distributed or made available by any means within Malaysia.

IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED ON THE LAST TWO PAGES OF THIS REPORT.

Global Equity Research

Contents
The three most important charts in this report ... ..............................................................3 Executive summary...........................................................................................................4 Parkson Holdings Bhd financial summary ....................................................................5 Valuations .........................................................................................................................6 Industry structure and trends...........................................................................................10 Operations .......................................................................................................................14 Forecasts .........................................................................................................................17 Company background .....................................................................................................19

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

The three most important charts in this report ...

Per store sales growth in China for different retail formats (2002-08)

Per-store sales for department stores in China have underperformed other formats significantly

80% 70% 60% 50% 40% 30% 20% 10% 0% (10%) (20%) (30%) Department stores
Source: National Bureau of Statistics (NBS)

Hypermarkets

Speciality Stores

PKS: profit margins

We are seeing some profit-margin pressure, which should continue

80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Gross margin
Source: Company, Daiwa forecasts

FY10

FY11E EBITDA margin

FY12E EBIT margin

FY13E NET margin

China: retail sales growth

China: retail sales growth has been very strong (2001-10)

25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: CEIC, Daiwa forecasts

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

Executive summary
Sales per store in Chinas retail market declined by 20% from 2002-08 Speciality stores pose big risks to department stores, in our view Department stores in China saw per-store sales decline by almost 20% over the 2002-08 period (source: NBS). This could be related to the openings of many small department stores, but we note that overall department-store sales growth has lagged that of other types of retail formats, despite the fact that the number of department stores has increased more than those for other types of retail outlets. Besides cannibalisation (from the increase in the number of department stores), speciality stores, in particular, are likely to pose challenges to department stores as they offer brand owners more flexibility in terms of operations and the ability to deliver their brand message better. This is something that most department stores are not very good at, given the diversity of their products and rental business model. Currently, department stores still have bargaining power and the ability to charge brand owners various fees and high commissions. Over time, the overdevelopment of malls and department stores should reinforce brands bargaining power, which may lead to pressure on commissions and rental incomes, except in prime areas. PKS has indicated that it plans to focus its store openings on Chinas second-tier cities. We note that even domestic retail enterprises tend to be reluctant to expand into other regions, due partly to concerns about regional differences in consumer cultures. Amid rapid expansion, such subtleties are more likely to be missed by PKS. Many regional department-store players have strongholds in local markets and these players already occupy stores in the best locations. This could make it challenging for PKS to gain significant market share in new cities.
Risks to our recommendation

Bargaining-power is likely to shift to brands in the long term PKS second-tier city strategy looks easier said than done

In our view, PKS is one of the strongest department-store chains in China, Malaysia and Vietnam. This is driven by its strong relationships with global and local brands, store formats that provide a good shopping experience, efficient supply chain, and high net-cash balance. This could position PKS well during downturns and allow the company to consolidate its leadership during those periods or when competitors close. Malaysia and Vietnam operations performed well in 4Q10 Despite Parkson Retails 4Q FY10 performance, which was worse than Daiwa expected, earnings from PKS Malaysian and Vietnam operations were slightly better than the Bloomberg consensus for 4Q FY10. Additionally, these markets did not see any profit-margin pressure. This could drive PKS share-price outperformance versus Parkson Retail. We also note that despite PKS 14% outperformance versus Parkson Retail over the past six months, the market value of PKS holding in Parkson Retail is at a 15% discount compared with a three-yearlow discount of 5%. Near-term risks with respect to profit-margin pressure at Parkson Retail, due to start-up costs, could also be priced in now given downward revisions to profitmargin and earnings forecasts (by Daiwa and the Bloomberg consensus) based on Parkson Retails guidance for FY11 following its FY10 results. Declining sales per store in Chinas retail market over 2002-08 could be seen by some investors as an indicator of significant consolidation in the sector. We believe PKS, with its high cash reserves, could make opportunistic accretive acquisitions that could lead to a re-rating of the stock. Our bearish call on PKS is driven by the bearish call on Parkson Retail by Daiwas Hong Kong and China Retail Sector analyst, Nicolas Wang. The performance of Parkson Retail affects that of PKS, as the bulk of PKS value is driven by its holding in Parkson Retail. Finally, we note that despite Daiwas earnings forecasts being lower than those of the Bloomberg consensus, we have factored into our model significant cash generation and rising ROIC for 2011-13.
Parkson Holdings Bhd 4

Near term profit-margin risks look priced in

Well-positioned for acquisitions, in our view

A lot hinges on Parkson Retail

Pyari Menon (65) 6499 6566

Company background
Parkson Holdings Bhd (PKS) is the leading regional retail player of department stores. Currently, the company operates a total of 88 Parkson department stores, of which 47 are in China, 35 in Malaysia, and six in Vietnam.

Parkson Holdings Bhd financial summary

Profit and loss (RM m)
Year to 30 Jun Retailing - Operations of Department Stores Investment Holding Others Total revenue Other income COGS SG&A Other op. expenses EBIT Net-interest inc./(exp.) Assoc/forex/extraord./others Pre-tax profit Tax Min. int./pref. div./others Net profit (reported) Net profit (adj.) EPS (reported) (RM) EPS (adj.) (RM) DPS (RM) EBIT (adj.) EBITDA (adj.) 2009 2010 2011E 2012E 2013E 1,109 1,087 1,109 1,131 1,154 12 12 13 14 15 1,724 1,901 2,455 3,042 3,618 2,845 3,001 3,578 4,188 4,788 0 0 0 0 0 (919) (907) (1,141) (1,349) (1,555) (1,080) (1,206) (1,476) (1,792) (2,042) (125) (133) (140) (148) (156) 721 754 820 898 1,035 (62) (57) (45) (39) (31) 280 7 0 0 0 939 705 775 860 1,004 (164) (170) (194) (215) (251) (233) (248) (233) (262) (310) 543 286 348 383 443 263 286 348 383 443 0.533 0.281 0.341 0.375 0.435 0.258 0.281 0.341 0.375 0.435 0.151 0.050 0.102 0.113 0.130 721 754 820 898 1,035 887 960 1,047 1,191 846

Balance sheet (RM m)

As at 30 Jun Cash & short-term investment Inventory Accounts receivable Other current assets Total current assets Fixed assets Goodwill & intangibles Other non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Other non-current liabilities Total liabilities Share capital Reserves/R.E./others Shareholders' equity Minority interests Total equity & liabilities Net debt/(cash) 2009 2,094 214 386 6 2,699 994 1,217 1,616 6,527 0 1,491 35 1,526 2,028 288 3,842 4,580 (2,831) 1,749 935 6,526 (65) 2010 2,274 213 356 2 2,846 1,531 1,244 1,118 6,738 328 1,601 44 1,974 1,674 217 3,865 4,570 (2,687) 1,883 991 6,739 (272) 2011E 2,588 221 374 2 3,186 1,371 1,244 1,331 7,132 328 1,743 46 2,117 1,674 224 4,015 4,570 (2,444) 2,126 991 7,132 (586) 2012E 2,966 231 393 2 3,593 1,269 1,244 1,455 7,562 328 1,894 48 2,270 1,674 232 4,176 4,570 (2,175) 2,395 991 7,562 (964) 2013E 3,464 244 413 2 4,123 1,166 1,244 1,510 8,043 328 2,054 51 2,433 1,674 239 4,346 4,570 (1,864) 2,706 991 8,043 (1,462)

Cash flow (RM m)

Year to 30 Jun Profit before tax Depreciation and amortisation Tax paid Change in working capital Other operational CF items Cash flow from operations Capex Net (acquisitions)/disposal Other investing CF items Cash flow from investing Change in debt Net share issues/(repurchases) Dividends paid Other financing CF items Cash flow from financing Forex effect/others Change in cash 2009 939 125 (156) 221 (216) 913 (593) 196 0 (397) (29) (47) (154) (169) (399) 0 117 2010 705 133 (164) 146 83 903 (350) (72) 0 (421) 45 2 (51) (151) (156) 0 326 2011E 775 140 (190) 116 61 903 (335) 0 0 (335) 0 0 (104) (149) (253) 0 314 2012E 861 148 (211) 122 56 977 (330) 0 0 (330) 0 0 (115) (153) (268) 0 378 2013E 1,006 156 (246) 128 50 1,094 (300) 0 0 (300) 0 0 (133) (164) (297) 0 498

Key ratios
Year to 30 Jun Sales YoY % EBITDA (adj.) YoY % Net profit (adj.) YoY % EPS (adj.) YoY % EBITDA margin % (adj.) EBIT margin % (adj.) Net-profit margin % (adj.) ROAE (%) ROAA (%) ROCE (%) ROIC (%) Net debt to equity (%) Effective tax rate (%) Accounts receivable (days) Payables (days) Net interest cover (x) Net dividend payout (%) 2009 2010 2011E 2012E 2013E 10.2 5.5 19.2 17.1 14.3 28.3 4.8 8.2 9.0 13.8 30.2 8.8 21.5 10.1 15.8 25.4 8.7 21.5 10.1 15.8 29.7 29.6 26.8 25.0 24.9 25.3 25.1 22.9 21.5 21.6 9.2 9.5 9.7 9.1 9.3 17.5 15.8 17.3 16.9 17.4 4.4 4.3 5.0 5.2 5.7 16.7 15.7 16.4 17.1 18.7 25.4 21.9 23.9 27.2 33.3 net cash net cash net cash net cash net cash 17.4 24.1 25.0 25.0 25.0 42.1 45.2 37.3 33.4 30.7 176.9 188.1 170.6 158.5 150.5 11.7 13.3 18.3 23.3 33.4 28.4 17.7 30.0 30.0 30.0

Key assumptions
Year to 30 Jun Same store sales (SSS) change (%) Average comission rate (%) Number of stores (Multiline retail) Total GFA of all stores 2009 2.0 19.3 85 1,328 2010 4.4 19.2 88 1,534 2011E 9.8 18.8 98 1,858 2012E 8.7 18.7 106 2,147 2013E 6.9 18.7 107 2,435

PER bands
(RM) 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Mar-08 Mar-09 Mar-10

37.6x 31.2x 24.9x 18.6x 12.3x Mar-11

Source: Company, Daiwa forecasts

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

Valuations
Target price of RM4.80 We derive a six-month target price for PKS of RM4.80, based on the average of the value of PKS 51.5% holding in Parkson Retail using Daiwas retail analysts target price and our FCF-derived valuation. We summarise our valuation methodologies in the table below. Below is the summary of our valuation of PKS.
PKS: valuation summary
FCF value Valuation based on holding in Parkson Retail Average of both methods
Source: Daiwa estimates

Value per share (RM) 4.83 4.80 4.81

Free-cash-flow valuation
We show our assumptions for our valuation for PKS using our three-stage FCF methodology in the table that follows. Based on this method, we obtain a value per share of RM4.83. We have used the FCF method rather than the dividend discount method, as PKS is generating significant FCF, but the company indicates that it is likely to pay out only about 30% of earnings over the next few years as it expands its operations. The company has a net-cash position currently, implying to us that the cash it is generating is essentially accruing to shareholders.
PKS: FCF valuation (RM m)
Year-end 31 March Net profit Capex-depreciation Change in WC FCF to equity Present value Terminal growth rate FCF in terminal year Cost of equity Value at the end of growth phase Present value of explicit forecast (FY11-13E) Present value of transition phase (FY14-16E) Present value of terminal value Total equity value Value per share (RM) Source: Daiwa estimates and forecasts FY11E 348 (195) 76 229 205 3% 610 11.5% 7,176 722 711 3,768 5,201 4.83 FY12E 383 (182) 86 287 231 FY13E 443 (144) 97 396 286 FY14E 486 (153) 54 386 251 FY15E 516 (163) 57 410 240 FY16E 532 (173) 61 419 220 62 610 Terminal Year 548 Comments FY11-13E based on explicit forecast: for FY14-16E growth tapers off gradually to 3% For terminal year we assume similar capex and depreciation The company has negative working capital. We maintain working capital change/incremental sales constant

Based on a risk-free rate of 5%, equity risk premium of 6.0% and beta of 1.1x

In the next table, we provide a sensitivity analysis of our FCF value to different assumptions for cost of equity and terminal growth.
Sensitivity of FCF value to different COE and terminal-growth assumptions
COE/terminal growth 7.50% 8.50% 9.50% 10.50% 11.50% 12.50% 1% 6.54 5.62 4.92 4.37 3.92 3.55 2% 7.72 6.48 5.57 4.88 4.33 3.89 3% 9.42 7.65 6.42 5.52 4.83 4.29 4% 12.10 9.33 7.57 6.35 5.46 4.78 5% 16.91 11.98 9.24 7.50 6.29 5.41

Source: Company, Daiwa forecasts Note: in RM

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

Valuation of PKS based on its holding in Parkson Retail

PKS holding-company discount has averaged 25% over the past three years We have used our Hong Kong and China retail analysts six-month target price of HK$9.70 for Parkson Retail, which is based on an FY11E PER of 20.4x. We have used a 5% discount to the value of PKS holding in Parkson Retail, which is the minimum discount at which PKS has traded over the past three years. On the basis of PKS 51.5% stake in Parkson Retail, we value PKS at RM4.80/share. PKS has traded at a discount of about 25% on average to the market value of its holding in Parkson Retail over the past three years. Typically, the discount rises when stock markets are weak and narrows when the macro and stock-market environment is relatively benign. The following chart plots the discount at which PKS has traded to the value of its holding in Parkson Retail since January 2008. Generally, a high dividend payout helps reduce holding-company discounts significantly. This is not the case for PKS, as the company has indicated that it will pay out only about 30% of its annual earnings as dividends. Investors perceptions of management are also an issue with respect to the range of holding-company discounts applied by the market. We expect the discount to narrow over the long term, as PKS is likely to pay out more dividends as it slows down its rate of expansion. Over the long term, we would also expect investors to start to recognise the steady cash-generating nature of its Malaysia business and assign more value to it.
Historical discount to holding in Parkson Retail
40% 35% 30% 25% 20% 15% 10% 5% 0%

May-10

May-09

May-08

Nov-08

Nov-09

Nov-10

Jul-10

Jan-08

Jan-09

Jan-10

Mar-09

Mar-10

Sep-08

PKS Mcap discount to its stake in 3368 HK

Source: Company, Daiwa forecasts

Valuation based on holding in Parkson Retail benchmarked on Daiwas target price for Parkson Retail
Business Component Value of China Ops Using 5% discount
Source: Company, Daiwa forecasts

Multiple/Basis Holding in Parkson Retail

Value (RMm) Value Per Share (RM) 5,485 5.1 5,211 4.80

Sum-of-the-parts valuation
Below are our SOTP valuations based on our analyst Nicolas Wangs target price for Parkson Retail and assigning a peer-based value for PKS operations in Vietnam and Malaysia.

Sep-09

Comments Based on 51.5% holdings in Parkson Retail and using our analyst's TP of HK$9.7 5% discount to value of holding in Parkson Retail, which is the historical low

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

Sep-10

Mar-08

Jan-11

Jul-08

Jul-09

SOTP valuation based Daiwas target price for Parkson Retail

Business Component Value of China business Value of Malaysia business Value of Vietnam business Total Value Multiple/Basis Holding in Parkson Retail Earnings multiple Earnings multiple Value (RMm) Value Per Share (RM) 5,485 5.1 751 125 6,361 0.70 0.12 5.9 Comments Based on 51.5% holdings in Parkson Retail and using our analyst's target price 12x FY11E earnings 12x FY11E earnings.

Source: Company, Daiwa forecasts

Below are our SOTP valuations based on the current share price of Parkson Retail and assigning a peer-based value for PKS operations in Vietnam and Malaysia.
SOTP valuation based on current share price of Parkson Retail
Business Component Value of China business Value of Malaysia business Value of Vietnam business Total Value Multiple/Basis Holding in Parkson Retail Earnings multiple Earnings multiple Value (RMm) Value Per Share (RM) 6,163 5.7 751 125 7,039 0.70 0.12 6.5 Comments Based on 51.5% holdings in Parkson Retail and using current share price of Parkson Retail 12x FY11E earnings 12x FY11E earnings.

Source: Company, Daiwa forecasts

If the market starts to assign any value to PKS Malaysian and Vietnam operations and removes the holding company discount, we believe PKS share price could see significant upside. In our view, however, for this to be realised, PKS would need to increase the dividend payout significantly, as this would reduce the holding company discount. The holding company PKS does not have a net-debt position, hence we have not deducted the value of debt in our valuations.

Historical trading multiples

Below we plot PKS Jan 2008-March 2011 rolling-forward PBR and PER.
PKS: rolling forward PBR
8 7 6 5 4 3 2 1 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 10 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11
Source: Company, Bloomberg, Daiwa forecasts

PKS: rolling forward PER

60

Max: 7.6x Min: 1.8x Average: 3.0x

50 40 30 20 Max: 52x Min: 13x Average: 21x

Source: Company, Bloomberg, Daiwa forecasts

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

Relative valuations
Below is the relative valuation of PKS with respect to its regional peers. The company trades at a discount on PER, PBR and EV/EBITDA bases. On a PER basis, the company trades at a 13% discount and on a PBR basis at a 38% discount. A case could be made that the discounts are too steep, but we believe a potential slowdown in earnings growth in FY12, lower ROE, and some of the fundamental factors we indicated in our executive summary, justify the lower multiples.
Peer valuation comparison
Closing price (local currency) as at 14 Mar 2011 5.44 5.98 2.16 18.8 10.98 13.1 10.96 7.98 23.3 85800 419500 16.46 16.4 19.42 2350 76 263 Market cap (US$m) 1,963 693 1,172 4,689 2,692 4,194 3,954 10,772 853 264 10,918 2,225 547 4,186 444 2,007 1,173 PER (x) EV/EBITDA (FY11E) (x) (FY11E) 15.9 5.6 12.1 4.1 18.8 10.4 26.7 16.8 22.7 15.4 15.6 10.3 23.1 14.6 23.1 13.9 18.5 9.9 7.6 4.2 11.5 8.3 17.6 9.1 13.6 4.1 22.8 16.3 13.8 5.0 16.9 6.0 22.9 9.3 18.4 10.2 PBR (x) (FY11E) 2.6 1.7 2.9 7.4 2.9 3.9 5.1 11.9 3.0 n.a n.a 3.4 3.0 4.2 2.2 2.7 1.9 4.2 2011E EPS growth (%) 21 7 31 28 30 14 14 15 -5 n.a. n.a. -19 10 15 36 13 261 34 ROE (%) 17.3 14.8 16.3 30.8 14.3 27.7 23.4 58.0 16.9 22.2 7.9 21.3 23.0 19.3 17.5 16.9 8.3 22

PARKSON HOLDINGS BHD AEON CO (M) BHD PCD STORES GROUP LTD* GOLDEN EAGLE RETAIL GROUP INTIME DEPARTMENT STORE ANTA SPORTS PRODUCTS LTD PARKSON RETAIL GROUP LTD DAIRY FARM INTL HLDGS LTD* ROBINSON DEPARTMENT STORE PU* SHINSEGAE FOOD CO LTD* LOTTE SHOPPING CO* LI NING CO LTD AEON STORES HONG KONG CO LTD* LIFESTYLE INTL HLDGS LTD* MITRA ADIPERKASA TBK PT* BIG C SUPERCENTER PCL* PANTALOON RETAIL INDIA LTD* Average

PKS MK Equity AEON MK Equity 331 HK Equity 3308 HK Equity 1833 HK Equity 2020 HK Equity 3368 HK Equity DFI SP Equity ROBINS TB Equity 031440 KS Equity 023530 KS Equity 2331 HK Equity 984 HK Equity 1212 HK Equity MAPI IJ Equity BIGC TB Equity PF IN Equity

Ratings 4 1 Not rated 2 3 1 4 Not rated Not rated Not rated Not rated 4 Not rated Not rated Not rated Not rated Not rated

Source: Company, Daiwa forecasts, *Bloomberg

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

Industry structure and trends

PKS primary geography of operations is China. In China, sustained overall retail sales growth in the 10-20% (per year) range for over a decade has created a sizeable base, very fast expansion by retailers, and some volatility in the sector. Rising inflation could hurt margins and slower retail growth in first-tier cities would increase the industrys reliance on secondary cities for growth. This is where retailers seem to be investing disproportionately.
China retail-sales growth
25% 20% 15% 10% 5% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Company, Daiwa forecasts

Overall retail market in China

Department-store unit growth has outpaced the formats sales growth We believe the underlying strength of Chinas retail market is likely to ensure that the competitive landscape will intensify. We believe the market is still in an emerging phase, and is likely to see diverging market trends. One of the key trends we note from NSBs (National Bureau of Statistics) published data is that sales growth for speciality stores was particularly strong between 2002 and 2008. This trend, in our view, continues. Department stores seem to have expanded store units ahead of all other retail formats, but sales growth for department stores lagged that for other formats.
Store unit and sales growth 2002-08
250% 200% 150% 100% 50% 0% Department Stores Super/Hypermarkets Store units growth
Source: National Bureau of Statistics

Speciality Stores

Store sales growth

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

10

New and hybrid models should emerge

We expect new retailers to crop up and try to replicate well-tested business models as well as new business models. We are also likely to see business models adapt with both increased specialisation as well as more inclusive strategies, ie, more diversification of product lines. The market may also see M&A and other strategic activities as well.

Department-store market in China

Retail landlords like PKS still hold the power The competitive landscape for department stores in China is highly fragmented with no significant market leader. Foreign players, like PKS, tend to have a wider national footprint. Domestic department-store operators mainly focus on regional markets. Despite the relatively fragmented market for retailers, retailers still have power over suppliers. Retailers like Parkson Retail have taken advantage of their strong market power and built a landlord business model. Broadly speaking, department stores in China tend to be measured as having more than one floor (which defines them against general stores), generally have a shop floor of 2,000sq m or more, and sell a wide variety of non-food products. Per-store sales declined between 2002 and 2008 we expect consolidation Shop unit growth has outpaced overall sales growth for the department stores in China, leading to negative per-sales growth between 2002 and 2008. We do not have published numbers from the National Bureau of Statistics post 2008, but the data up to 2008 suggests competition was more intense for the department stores than for other store formats. This trend is likely to lead to significant consolidation in the sector over the next five years, in our view.
Department-store sales between 2002 and 2008
80% 70% 60% 50% 40% 30% 20% 10% 0% (10%) (20%) (30%) Department stores
Source: National Bureau of Statistics

Hypermarkets

Speciality Stores

Many of the department-store operators have rented their floor space to concessionaires or tenants and typically pay little attention to differentiation and brand management. Fees and more fees Besides commissions based on sales, retailers also often have other charges, such as entrance fees, promotional charges, and listing fees for new products. Many suppliers we have spoken to complain of the high entry costs. This makes it harder for lesser-known brands to compete for shelf space.
Representative fee structure at department stores
Fee Type Advance lump sum payment Not proportional to sales Proportional to sales revenue Charges unrelated to merchandise For new products Barcode fee, listing fee Minimum income guarantee Commission Festival fee, decoration fee, contract fee For mature products Charges for better display, promotion fees Minimum income guarantee Commission Festival fee, decoration fee, contract renewal fee

Source: Li & Fung, Daiwa forecasts

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

11

Parksons competitive positioning in China

With less than a 2% share, PKS is the biggest department-store operator in China Among the China department stores on a total-sales basis (combining direct, concessionaire and rental), subsidiary Parkson Retail is the largest department store in China with about 47 stores.
Larger players

Competition is fierce and there are several department stores. The primary pure play department-store competitors are detailed in the following table:
Department-store count in China
Company Parkson retail Rainbow Department Store New World Department Store Intime Department Store Beijing Wangfujing department Store Guangzhou Grandbuy Co Golden Eagle Retail Group Beijing New Yansha Holding Nanjing Central Emporium
Source: Company, Daiwa forecasts, AC Nielsen

Number of stores (2010) 47 38 35 22 19 19 17 10 7

Encroaching on each others turf may be a matter of time

However, in some cities where Parkson operates, several of the above players might not have a presence, and in cities where some of the above competitors are present, Parkson might lack a footprint. However, we believe it is only a question of time before the leading department stores start encroaching on each others turf, which would intensify the competition. In fact, some larger department stores have been converted into shopping malls to incorporate more different elements of the shopping experience under one roof; while the original department store serves as the anchor store of the mall. Hypermarkets and supermarkets do not compete with Parkson Retail head-on in most product categories. However, since they stock overlapping products or close substitutes, they are more than just peripheral competitors. For example, according to AC Nielsen, hypermarkets and supermarkets currently account for over 20% of cosmetics sales, which is a significant percentage overall. The primary hypermarkets that compete with PKS are listed below.
Leading hypermarket and supermarket chains in China
Hypermarket Wal-Mart Carrefour Shanghai RT-Mart A.best Trust Mart Centurymart Tesco Lotus Wuhan Wushang JiaShijie Group
Source: Company websites, Daiwa forecasts, AC Nielsen

Some retailers have become mall owners

Number of stores (2010) 176 156 122 109 104 86 79 77 75 65

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

12

PKS competitive positioning in Malaysia

Has almost a 50% share in the Malaysia department- store category PKS is the largest department-store chain in Malaysia with 35 stores and almost a 50% market share within the department-store category. Its primary competitors are Isetan (Not Listed), Metrojaya, Robinsons (Not Rated), Sogo and Jusco in the area of department stores. Given that several products sold by PKS are also sold in hypermarkets and supermarkets, these forms of outlets also compete with PKS for foot traffic and sales. Some of these competitors are listed below.
Malaysia store count
Department Stores Parkson Isetan Metrojaya Sogo Robinsons Hypermarkets Giant Carrefour Sunshine Tesco Tesco Extra Supermarkets The Store Billion Sunshine Ngiu Kee Jusco Giant Cold Storage Convenience Stores
Source: Company, Daiwa forecasts, AC Nielsen

Number of stores (2010) 35 3 10 1 1 36 22 1 24 8 52 30 3 9 25 65 19

The company is planning to open its first mall concept in Malaysia around the midto-end 1Q11. Parkson expects to occupy 25% of the net lettable area with its own department stores, while the rest would be leased to other retailers. We understand that the take-up rate of the leases has been encouraging. Over 80% of the leasable area has been taken up, including Parksons own 500,000sq ft occupancy.

Competitive positioning in Vietnam

First-mover advantage PKS has first-mover advantage in Vietnam, being the first foreign-owned department store. It has the rights to open up to ten stores in Vietnam. Some of the existing foreign operators that have a requisite licence should become partial competitors of PKS. Some of the names are Wellcome Supermarket, Best Denki (Not Rated) and Lotte Mart. Saigon Paragon is the only other foreign department store in Vietnam that is a collaboration between two investors, Khaisilk Corporation (Not Listed) and Thuy Loc Corporation (Not Listed). There are, however, several hypermarkets and supermarket players that compete in certain lines of businesses with Parkson. The key players are in the table below.
Modern retail outlets in Vietnam
Chain BiG C Citimart Coop Mart Fivimart Intimex Maximark Vissan
Source: Company websites, Daiwa forecasts, AC Nielsen

Number of stores (2010) 6 16 19 14 6 2 28

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

13

Operations
Business model
Department stores generate revenue from: 1) commissions on concessionaire sales, 2) merchandise direct sales, 3) rental income from store tenants, and 4) management fees. Low inventory risk, negative working capital Concessionaire business: Under concessionaire arrangements, concessionaires are permitted to establish sales counters in designated areas with their own sales personnel and sell their branded merchandise. Department stores charge concessionaires a turnover commission, usually a percentage of their total sales proceeds. Usually there is a minimum commission based on the minimum turnover target, regardless of whether such a target is achieved. The sales amount received from concessionaire sales is first collected by the department store and later paid to the concessionaires after deducting relevant expenses, fees and commissions. The average payment settlement period for department stores is 45-60 days, while some can last for 90 days. Direct sales: Under direct-sales arrangements, department stores purchase merchandise from suppliers and resell them in stores (eg, merchandise at supermarkets and in home-appliance sections). Those items are usually standardised with higher brand recognition, which are easier for operators to manage. Rental income from store tenants: Some department stores also lease designated areas to operators of businesses that are complementary to the shopping experience at department stores, including restaurants, pharmacies and beauty salons, etc., in order to offer consumers a one-stop shopping experience. Management fees: Department-store operators usually require concessionaires to pay an average annual guarantee fee of Rmb30,000 to Rmb80,000 as the minimum entrance fee. There are many other miscellaneous fees to gain a place in department stores, which include advertising fees, promotion fees and management fees. Focus groups: Parkson primarily focuses on the middle to upper end of the consumer population. The company focuses on cities where the population is over 1m and per-capita income is at least US$3,000, with an overall retail market of over US$10bn.

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

14

Assets
Cash forms the bulk of PKS asset base. With a negative working capital business model and increasing sales, we expect this to rise. Intangibles from the acquisition of subsidiaries and fixed assets are the other two primary asset categories.
PKS: assets
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 FY07 FY08 FY09 FY10 Intangible assets FY11E FY12E FY13E

Cash and bank balances, deposits

Source: Company, Daiwa forecasts

Property, plant and equipment

Capex
For FY10 the company had capex of RM704m. Of this, about 90% was spent in China. For FY11 and FY12, we forecast PKS to spend RM335m and RM350m in capex, respectively. PKS is targeting 15-20% retail space growth annually over the next three years. In terms of store count, the company plans to add 5-6 stores in China, and two each in Malaysia and Vietnam. PKS could also be involved in mergers and acquisitions and expand into other markets within ASEAN.

Revenue
For FY2010 concessionaire sales accounted for about 50% of sales by business model type. Geographically, China accounted for 71% of sales in FY2010.
Business breakdown (2010)
Other income 9.3% Rental income 4.0% Direct sales 36.4%
Malaysia 25.6%

Mostly a China retail play (FY2010)]

Vietnam 3.6%

Commisions from commisionaires 50.3%

China 70.8%

Source: Company, Daiwa forecasts

Source: Company, Daiwa forecasts

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

15

Customers
PKS stores in Malaysia, China and Malaysia mainly target mid-to-high-end customers. In the case of smaller cities in China, the company only opens stores in cities with a minimum population of 1m and per-capita income of at least US$3,000. In the case of cities where the cost of living is higher, the company benchmarks minimum per-capita income of US$5,000. In Vietnam and Malaysia, the company is more lax with respect to population size as competition is less intense.

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

16

Forecasts
Revenue and profit forecasts
Our revenue and profit forecasts are presented in the following table.
PKS: income statement
(RM m) Year ending June Revenue Direct sales Commission from commissionaires Service fees Rental income Other income Total revenue Expenses Purchase of goods and changes in inventories Gross profit Gross margin from continuing operations Employee benefits expense Depreciation and amortisation Promotional and advertising expenses Rental expenses Other expenses Total SG&A Operating profit Finance income from continuing operations Finance costs from continuing operations Gain on disposal/dilution of interest in subsidiaries Profit/(loss) before tax Taxation Minority interests Profit/(loss) after tax from continuing operations
Source: Daiwa forecasts

FY10 2,722 1,087 1,502 12 120 278 3,001 (907) 2,093 70 (269) (133) (73) (453) (412) (1,339) 754 115 (171) 7 705 (170) (248) 286

FY11E 3,285 1,109 2,035 13 127 292 3,578 (1,141) 2,436 68 (331) (140) (82) (567) (496) (1,617) 820 118 (163) 0 775 (194) (233) 348

FY12E 3,884 1,131 2,603 14 135 304 4,188 (1,349) 2,838 68 (399) (148) (97) (709) (587) (1,940) 898 124 (163) 0 860 (215) (262) 383

FY13E 4,475 1,154 3,163 15 143 313 4,788 (1,555) 3,233 68 (459) (156) (112) (794) (676) (2,198) 1,035 132 (163) 0 1,004 (251) (310) 443

FY14E 5,126 1,177 3,782 16 151 322 5,448 (1,781) 3,667 67 (526) (164) (129) (910) (774) (2,503) 1,164 142 (163) 0 1,143 (286) (357) 500

Key assumptions
Key assumptions with respect sales growth are set out below. Our SSS growth rate assumptions for the rest of FY11 in China and Vietnam are about 2-3pp below what the company has recorded over the past 2-3 quarters.
PKS: same-store sales and retail space
FY11E SSS growth (%) China Malaysia Vietnam New effective area added (%) China Malaysia Vietnam
Source: Company, Daiwa forecasts

FY12E 11 4 13 12 2 6

FY13E 9 3 10 10 2 5

FY14E 8 3 9 10 2 5

12 4 16 15 3 10

Margins
Margins likely to trend down primarily due to China operations We expect a slight decline in margins for PKS as we believe competition and rising costs are likely to hurt margins. However, as the company slows its expansion plans, we would expect margins to rise as initial losses from new stores should not be a drag on margins.

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

17

PKS: margin trends

80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Gross margin
Source: Company, Daiwa forecasts

FY10

FY11E EBITDA margin

FY12E EBIT margin

FY13E NET margin

Returns
We expect ROE and ROA to remain steady over the next three years, while ROIC should rise on the back of rising cash.
PKS: returns
40% 35% 30% 25% 20% 15% 10% 5% 0% FY09 FY10 ROE
Source: Company, Daiwa forecasts

FY11E ROA

FY12E ROIC

FY13E

Gearing
PKS is in a net cash position. The coverage and liquidity ratios are as below.
PKS: liquidity ratios
Debt service/coverage EBITDA/net interest Net interest coverage Liquidity Cash ratio Current ratio Quick ratio
Source: Company, Daiwa forecasts

FY09 14 12 1.37 1.77 1.62

FY10 16 13 1.15 1.44 1.33

FY11E 21 18 1.22 1.50 1.40

FY12E 27 23 1.31 1.58 1.48

FY13E 38 33 1.42 1.69 1.59

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

18

Company background
PKS is an investment-holding company based in Malaysia. The company, along with its diversified subsidiaries, could be regarded as one of the leading retail players in the region, currently controlling 47 Parkson department store retail outlets in China, and 35 stores in Malaysia, as well as another six stores in Vietnam. PKS China operations remain the key driver of the groups results. China contributed 71% of the groups revenue and 91% of the groups operating profits for year ended June 2010. Y.Bhg.Tan Sri William H.J. Cheng is the chairman of the company. He is a wellknown businessman in the region. He serves as the president of the Associated Chinese Chambers of Commerce and Industry of Malaysia, and the Chinese Chamber of Commerce and Industry of Kuala Lumpur and Selangor.
PKS: key shareholders (%)
Cheng and Family Lion Industries
Source: Company

31.50 17.40

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

19

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DISCLAIMER
This publication is produced by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Capital Markets Co. Ltd. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Capital Markets Co. Ltd. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Capital Markets Co. Ltd., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Capital Markets Co. Ltd., its parent, holding, subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures. Japan Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group Daiwa Securities Capital Markets Co. Ltd and Daiwa Securities Group: Daiwa Securities Capital Markets Co. Ltd is a subsidiary of Daiwa Securities Group. Investment Banking Relationship Within the preceding 12 months, The Affiliates of Daiwa Securities Capital Markets Co. Ltd.* has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: China Zhongwang Holdings Ltd (1333 HK); Sundart International Holdings (2288 HK); China Automation Group (569 HK); China Kangda Food Co Ltd (834 HK); Glorious Property (845 HK); Tong Yang Life (082640 KS); China Kangda Food Co Ltd (CKANG SP); Great Group Co., Ltd (GGH SP); Patel Engineering (PEC IN); Greens Holdings Ltd (1318 HK); China High Precision Automation Group (591 HK); Mingfa Group (846 HK); Fantasia Holding Group (1777 HK); Hontex International Holding (946 HK); Sijia Group Company Limited (1863 HK); International Taifeng Holdings Limited (873 HK); Agricultural Bank of China Limited (1288 HK); Guotai Junan International Holdings Limited (1788 HK); West China Cement Limited (2233 HK); AIA Group Limited (1299 HK); Sihuan Pharmaceutical Holdings Group Limited (460 HK); Strides Arcolab Limited (STR IN); China Metal Resources Holding Limited (8071 HK). *Affiliates of Daiwa Securities Capital Markets Co. Ltd. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited Daiwa Capital Markets Singapore Limited Daiwa Capital Markets Australia Limited Daiwa Capital Markets India Private Limited Daiwa-Cathay Capital Markets Co., Ltd. Daiwa Securities Capital Markets Co. Ltd., Seoul Branch Hong Kong This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (DHK) which is regulated by the Hong Kong Securities and Futures Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html. Investment Banking Relationship For Investment Banking Relationship, please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html. Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. DHK market making DHK may from time to time make a market in securities covered by this research. Singapore This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limiteds interest and/or its representatives interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research. Australia This research is distributed in Australia by Daiwa Capital Markets Stockbroking Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research. Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html. India This research is distributed by Daiwa Capital Markets India Private Limited (DAIWA) which is an intermediary registered with Securities & Exchange Board of India. This report is not to be considered as an offer or solicitation for any dealings in securities. While the information in this report has been compiled by DAIWA in good faith from sources believed to be reliable, no representation or warranty, express of implied, is made or given as to its accuracy, completeness or correctness. DAIWA its officers, employees, representatives and agents accept no liability whatsoever for any loss or damage whether direct, indirect, consequential or otherwise howsoever arising (whether in negligence or otherwise) out of or in connection with or from any use of or reliance on the contents of and/or omissions from this document. Consequently DAIWA expressly disclaims any and all liability for, or based on or relating to any such information contained in or errors in or omissions in this report. Accordingly, you are recommended to seek your own legal, tax or other advice and should rely solely on your own judgment, review and analysis, in evaluating the information in this document. The data contained in this document is subject to change without any prior notice DAIWA reserves its right to modify this report as maybe required from time to time. DAIWA is committed to providing independent recommendations to its Clients and would be happy to provide any information in response to any query from its Clients. This report is strictly confidential and is being furnished to you solely for your information. The information contained in this document should not be reproduced (in whole or in part) or redistributed in any form to any other person. We and our group companies, affiliates, officers, directors and employees may from time to time, have long or short positions, in and buy sell the securities thereof, of company(ies) mentioned herein or be engaged in any other transactions involving such securities and earn brokerage or other compensation or act as advisor or have the potential conflict of interest with respect to any recommendation and related information or opinion. DAIWA prohibits its analyst and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analyst cover. This report is not intended or directed for distribution to, or use by any person, citizen or entity which is resident or located in any state or country or jurisdiction where such publication, distribution or use would be contrary to any statutory legislation, or regulation which would require DAIWA and its affiliates/ group companies to any registration or licensing requirements. The views expressed in the report accurately reflect the analysts personal views about the securities and issuers that are subject of the Report, and that no part of the analysts compensation was, is or will be directly or indirectly, related to the recommendations or views expressed in the Report. This report does not recommend to US recipients the use of Daiwa Capital Markets India Private Limited or any of its non US affiliates to effect trades in any securities and is not supplied with any understanding that US recipients will direct commission business to Daiwa Capital Markets India Private Limited. Taiwan This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

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United Kingdom This research report is produced by Daiwa Securities Capital Markets Co., Ltd and/or its affiliates and is distributed by Daiwa Capital Markets Europe Limited in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Services Authority (FSA) and is a member of the London Stock Exchange, Chi-X, Eurex and NYSE Liffe. Daiwa Capital Markets Europe Limited and its affiliates may, from time to time, to the extent permitted by law, participate or invest in other financing transactions with the issuers of the securities referred to herein (the Securities), perform services for or solicit business from such issuers, and/or have a position or effect transactions in the Securities or options thereof and/or may have acted as an underwriter during the past twelve months for the issuer of such securities. In addition, employees of Daiwa Capital Markets Europe Limited and its affiliates may have positions and effect transactions in such securities or options and may serve as Directors of such issuers. Daiwa Capital Markets Europe Limited may, to the extent permitted by applicable UK law and other applicable law or regulation, effect transactions in the Securities before this material is published to recipients. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FSA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europes affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available. Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-and-regulatory. Regulatory disclosures of investment banking relationships are available at www2.us.daiwacm.com/report_disclosure.html. Germany This document has been approved by Daiwa Capital Markets Europe Limited and is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany. Dubai This document has been distributed by Daiwa Capital Markets Europe Limited, Dubai Branch. Related financial products or services are intended only for professional clients and no other person should act upon it. Daiwa Capital Markets Europe Limited is duly licensed and regulated by the Dubai Financial Services Authority. United States This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparers views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMAs views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMAs nonU.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (telephone 212-612-7000). Ownership of Securities For Ownership of Securities information please visit BlueMatrix disclosure Link at http://www2.us.daiwacm.com/report_disclosure.html. Investment Banking Relationships For Investment Banking Relationships please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. DCMA Market Making For DCMA Market Making please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. Research Analyst Conflicts For updates on Research Analyst Conflicts please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions. Research Analyst Certification For updates on Research Analyst Certification and Rating System please visit BlueMatrix disclosure link at http://www2.us.daiwacm.com/report_disclosure.html. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report. The following explains the rating system in the report as compared to relevant local indices, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next six months. "2": the security is expected to outperform the local index by 5-15% over the next six months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next six months. "4": the security is expected to underperform the local index by 5-15% over the next six months. "5": the security could underperform the local index by more than 15% over the next six months. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Capital Markets Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. * The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Capital Markets Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.109 Memberships: Japan Securities Dealers Association, Financial Futures Association of Japan Japan Securities Investment Advisers Association

Pyari Menon (65) 6499 6566

Parkson Holdings Bhd

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