Baisheng Group (3368.HK/HK$1.50, holding) announced that it will buy the parent company's department stores in Southeast Asia for 1.3 billion Hong Kong dollars in cash. We think this move was beyond the market's expectations, as there were previous speculations that the parent company would privatize or sell Baisheng Group. Although it can raise the company's profits all at once, we don't think this asset portfolio can reverse the trend of Baisheng Group's declining profits. Considering that the acquisition did not affect book value, we maintained our holding rating and set the target price at HK$1.60, corresponding to 1.0 times net market ratio (excluding intangible assets).

Acquire the parent company's department store in Southeast Asia. Baisheng announced the acquisition of 67.6% of Baisheng Retail Asia (PRA.SP/SGD0.470, no rating) from parent company Baisheng Group Holdings (PKS.MK/Malaysian ringgit 1.33, unrated) for HK$1.3 billion in cash. Parkson Retail Asia operates department stores in Southeast Asia, with 77% of revenue and 103% of operating profit in fiscal year 2014 coming from the Malaysian market.

The transaction valuation is unattractive to the tradable shareholders of Baisheng Group. The purchase value was 6.2% higher than the closing price of Parkson Retail Asia before announcing the purchase. Based on a calendar year calculation, the purchase price corresponds to the expected price-earnings ratio of Baisheng Retail Asia in 2015 and 1.4 times the net price-earnings ratio in 2014, which is equivalent to 15 times the expected price-earnings ratio of Baisheng Group in 2015 and 0.6 times the net price-earnings ratio in 2014. Considering that the profit of Parkson Retail in Asia has continued to decline over the past two years and that valuations have been declining, we believe that the valuation of this transaction is unattractive to the tradable shareholders of Baisheng Group.