Parkson Holdings Target Price Raised To RM 6.30

Riding on the China boost

1. PHB’s TP is raised to RM6.30 after PRG’s TP raise to HK$13.51.
2. On better retail sales prospects in China, we have lifted PHB’s FY10-11F earnings by 0.8-4.3%.
3. Upgrade PHB to Buy with our TP implying a 22% upside potential.

Upgrading PHB to BUY. We have raised our RNAV-based TP for Parkson Holdings (PHB) to RM6.30 (from RM5.40) implying upside potential of 22%, prompting our upgrade to Buy (from Hold). The higher valuation is to capture the upward revision in its 51.6%-owned HK-listed subsidiary Parkson Retail Group (PRG) by DBSV HK to Hold (from Fully Valued) with new TP of HK$13.51 (from HK$11.31), which is derived from a target FY10 P/E of 27x (22x previously).

Earnings raised on better sales prospect. PRG’s FY10-11 net profit forecasts have also been raised by 2% and 6% respectively premised on stronger Same-Store-Sales (SSS) growth assumption of 10% (from 9%) for FY10F and 12% (from 10%) for FY11F. As highlighted in our 28 Sep report, PRG’s sales could surprise on the upside with China’s swift economy recovery. Following PRG’s earnings upgrades, we have revised PHB’s FY10-11F earnings by 0.8% and 4.3%, respectively. Meanwhile, PHB’s 1QFY10 results (due 16 Nov) should see little surprise as 1Q is normally a quiet quarter in the absence of major festivities in China. We estimate 1QFY10 net profit of c.RM70m (+17% y-o-y growth).

Price correlation pattern favours PHB now. The difference between PHB’s total market cap and its share of PRG’s market cap has widened to 32% currently, versus a 1-year average of
29% (see Figure 2). Given their historical relative share price performance pattern, we believe PHB could catch up by outperforming PRG going forward, thus narrowing the valuation gap. International portfolio managers may also want to diversify their currency risks as the Ringgit is expected to strengthen against the HKD (which is pegged to US$), rising 3.9% by end-10 based on our estimates.

Steel Sector Report By HWangDBS

Stronger steel demand ahead

• Steel demand is currently being supported by restocking activities. And in FY10-11, steel producers will benefit from pump-priming activities kicking off and USD weakening.
• Expect 3Q09 earnings to improve q-o-q.
• Upgrade Southern Steel (TP RM2.40) and Kinsteel (TP RM1.30) to Buy.

Demand recovering. Steel demand has improved recently due to re-stocking activities. Utilization at most steel mills has risen since Jun09 - Kinsteel's upstream utilization jumped to 100% from 50%, while Southern Steel’s overall utilization has risen from a low of 50%. Mega projects arising from government pump priming should deliver meaningful new demand in FY10-11F. In addition, the sector should benefit from a weaker USD vs RM. 60-70% of domestic scrap requirement (mainly denominated in USD) and all iron ore are imported.

Re-stocking activities supporting steel prices. Steel bars and rods are trading at RM2,200- M2,300/MT, while international prices of iron ore and scrap averaged USD103/MT and USD250/MT, respectively. Iron ore prices have been relatively stable for the past ten months, which is good for steel producers as it reduces price volatility.





















Operating parameters improved. We expect 3Q09 to show positive operating earnings compared to losses in 1H09, driven by margin improvement as a result of

1. recovering steel prices, and
2. higher capacity utilization.

Inventory holding period has also improved to 3 months from 4-6 months at the start of the year. Following that, both Southern Steel and Kinsteel have stronger cashflow positions.

Upgrade to Buy. We upgrade Southern Steel (TP: RM2.40) and Kinsteel (TP: RM1.30) to Buy from Hold. Our target prices are based on 1.3x NTA, consistent with +1SD of the respective historical means. We expect government pump-priming to help drive profitability over FY10-11F. At our target prices for Southern and Kinsteel imply they should be trading at 12.1x and 13.7x CY10F earnings.