Parkson Holdings (Capital Intensive Expansion)

Tan Sri William Cheng;s planned comeback in mall ownership and management seems to be gaining traction, with its flagship Parkson Holdings announcing the acquisition of three companies for rm59 million. This would expand the group’s retail portfolio.

The largest of the three acquisitions made was 60% of AUM Hospitality Sdn Bhd at rm48 million. The company’s 12 retail brands include American Burger joint Johnny Rocketsm sandwich retailer Auiznos and Indonesian restaurant Bumbu Desa.

Parkson paid rm8 million for 60% of Giftmate Sdn Bhd which produces premium gift related products, and rm3 million for 50% of menswear fashion apparel company Valino Intl Apparel Sdn Bhd. In Jan 2014, it paid rm15 million for watch retailer Wawatime Group of companies.

The purchases are in line with Cheng’s strategy of moving towards a mega mall owner/operator model.

These acquisitions are unlikely to contribute substantially to Parkson’s bottom line anytime soon. In addition, most remain wary of how the group is using its cash, given that the transition to a mega mall owner/operator will take time to bear fruit.

The long gestation period and the sharp fall in profit contribution from its China units have sent its share price to its lowest level (July 2014).

However Parkson has been buying back its shares on the open market and reward shareholders with share distribution.

The near term outlook for the retail group is bleak as its main operations in China are facing a stiff challenge. Currently (July 2014) 60% of the group’s revenue is derived from its China operations.

Although SSSG of China department stores is slowing, they are still posting flat to slightly positive SSSG. For Parkson, it is still posting negative to flat SSSG.

Observers opine China business is unlikely to recover as the demographics there is very different from what they have been and is not confident their mall ownership project there is going to take off as well.

Parkson’s expansion trail, which is capital intensive, could shrink the cash rich company’s bank account. As at March 31 2014 the company’s cash balance stood at rm2.83 billion while total borrowings amounted to rm1.7 billion. However its payables were high at rm2.16 billion.

Cheng aims to have at least 10 self managed malls in 10 years.

Parkson owns the KL Festival City Mall. The group is building a sea fronting mall on reclaimed land in Melaka and a mall in Qingdao, China.