China: Retail: Department Stores
Growth outlook a little cloudier; initiate on three more companies
Industry context - Changing coverage view to Neutral
We are changing our China retail coverage view from Attractive to Neutral.
Given the negative effect on wealth and potentially slower income growth
as a result of the credit crunch, risks to the retailers’ 2009 earnings outlook
have increased, in our view. At the same time, we are wary of being too
bearish, as valuation multiples have already compressed sharply due to
macro concerns. For a P/E multiple not much higher than that of mature
retailers in mature markets, investors can now buy a Chinese retail stock
that has a considerably better growth outlook.
Expanding our coverage
We initiate coverage on Lifestyle International (1212.HK, Neutral), Intime
Department Store (1833.HK, Sell), and New World Department Store
(NWDS, 0825.HK, Sell). Our Sell ratings are driven as much by macro
factors as by our belief that there is significant downside risk to near-term
earnings (in the case of Intime) or to our concerns over earnings quality (in
the case of NWDS).
Catalysts
A strong set of retail numbers from this October golden week could lift
sentiment and drive share prices higher. However, we suspect the market
will ultimately remain unconvinced – the real litmus test will likely be the
sales trend during Jan-Feb 2009 Chinese New Year period. M&As continue
to provide potential for earnings upside, and in this regard Parkson stands
out because of its strong balance sheet.
Industry risks
Sharper-than-expected consumer spending slowdown in China.
Best buy ideas: Parkson and Maoye
Parkson (3368.HK, Buy) remains our top pick given its superior track record,
near-term earnings visibility, and potential earnings boost from M&A. We like
Maoye (0848.HK, Buy) for its attractive valuations, the lowest among peers.
Best sell ideas: Intime and NWDS
We believe Intime has the highest earnings risk; and that current valuation for
NWDS does not price in any likelihood for potential corporate actions in the
next 1-2 years, which we think may have little positive impact on earnings.

Table of contents
Overview: Growth outlook cloudier, but many factors at play 2
Intime: Low earnings visibility; downside risk to 2009E earnings 5
New World Department: Management fee from parent is a concern 12
Lifestyle: Weak earnings momentum, but asset-based valuation 17
Parkson: Still our top pick 22
Maoye: 3Q08 comps trail expectations; Buy on attractive valuation 24
Golden Eagle (3308.HK, Neutral): Maintain Neutral on full valuation 26
Disclosures 29
The prices in the body of this report are based on the market close of September 29, 2008.