Third-quarter results were lower than expected

In the third quarter of 2015, total sales fell by 9.4%, with a net loss of 61 million yuan, lower than we expected.

Same-store sales remained weak in the third quarter, falling 9.9% (down 4.6% in the first half of 2015), reflecting the current difficult situation in the department store industry. The old store is a further drag on Parkson's sales performance. This trend is expected to continue into the fourth quarter of 2015.

Operating margin fell 7.3 percentage points in the third quarter, mainly due to reduced leverage and new store losses. This year, Parkson opened three new stores and closed three existing stores.

Trend of development

Twenty-five of the 59 stores are losing money. Parkson is expected to continue to close stores with underperforming sales.

The opening of two stores was postponed to 2016 and no new stores opened in the fourth quarter of 2015.

In the context of a difficult environment, focus on Parkson's new strategy: 1) increase lifestyle products and services: Parkson opened its first restaurant in the third quarter, which is expected to continue in the future; 2) Private brand: more than 90 private brand counters have been set up with a view to improving direct sales profit margins in the long run.

Valuation and suggestion

The 16-year net profit forecast for 2015 will be reduced from 57 million yuan and 164 million yuan to-142 million yuan and 77 million yuan. Maintain the avoidance rating. Lower the target price by 6% to HK $0.72 (0.4 times the 2016 price-to-sales ratio).

Risk

Potential integration.