Parksons ... Oct09

In Oct 2009, HK listed China based New World Department Store China Ltd said it would accelerate expansion in the mainland by adding five new department stores by FY2011 ending June 30 from 33 stores now (Oct 2009). The expansion will increase its retail gross floor area.

This may interests investors as NWDS starts getting more aggressive to catch up with its bigger rivals Parkson Retail Group Ltd which churns out 80% more in terms of revenue and 54% more in terms of earnings. PRG aims to grow its retail GFA by 15% per year.

NWDS is 72.3% owned by HK property giant New World Development Co. As NWDS expands, investors could see a narrowing of the stock’s current discount, in terms of multiple, to PRG, which is seen as more aggressive. In other words, the valuation of NWDS may improve as the company delivers faster earnings growth in the next few years (2010 & Beyond)

The valuation gap between NWDS and PRG is obvious at present (Oct 2009). NWDS was trading at 19 times forward projected earnings while PRG is much more expensive at 32 times. That’s a wide gap although both operate in the same segment of the retail sector in China . That PRG, is trading at a premium to NWDS is probably due to the high growth projected for the company over the next few years (2010 & Beyond).

Looking back, both PRG and NWDS have performed at the same pave over the last three years (2006-2008). But somewhere the current (Oct 2009) projections for the companies’ future growth rates differ.

The way both companies manage their balance sheets shows that PRG has been more aggressive.

PRG, controlled by Tan Sri William and the Lion group, has its growth funded in part by gearing apart from cash flow. The company had net borrowings of HK$601 million as of June 30, 2009, which is 15% of its total equity of HK$4.15 billion. It is believed that the group may prepare to gear up further to fund expansion, should the need arise.

In comparison, NWDS has zero borrowings and held HK$2.92 billion cash as at June 30, 2009, which accounted for more than 65% of its HK4.32 billion equity. It would appear that the company has yet to touch the HK$2.56 billion cash it raised from an IPO exercise in July 2007. NWDS has been debt free since it was set up in 2004.

Theoretically, investors have only valued NWDS’ department store business at HK$8.06 billion, after deducting the HK$2.92 billion cash in the company (net current assets of HK$2.08 billion) from its market value of HK$10.98 billion. Stripping out the cash, NWDS is actually trading at 13.8 times FY2009 projected earnings of HK$582 million, which has widened its discount to PRG.

The company was being prudent by holding back expansion plan in 2008 as the global economy went into a tailspin. But now (Oct 2009), the timing seems right to put the cash to work in China , where growth is still resilient, as the global economy gradually recovers.

For companies, operating in China , preserving cash while pursuing a prudent growth strategy is hardly a practice that pleases investors. This is probably reflected in NWDS’ share price. In the retail sector of the mainland, where first mover advantage is critical, competition can only get more intense with newer outlets mushrooming in major cities while the market becomes gradually saturated. It is crucial that players speed up their expansion to gain a foothold in the market.

That being the case, NWDS’ strength is its strong balance sheet to speed up its expansion in China . The company also has an added advantage in being a unit of New World Development. The latter has a slew of residential and commercial development projects in china that it could integrate with NWDS’ department store operations.