9 February 2009
China Dept Stores Sector
Update on Jan and CNY SSS

Strong Jan SSS, but not sustainable
China's department stores posted strong SSS growth in Jan, mainly due to a shift
in timing of the New Year and Chinese New Year (CNY) holidays. For CNY Golden
Week alone, some companies noted only modest positive to negative SSS
growth. We reiterate our cautious stance on department stores, for which outlook
is becoming murky as unemployment rate should rise after CNY and Mar/Apr is a
traditionally slack shopping season. Parkson Retail is our top Sell in the sector.

Strong SSS in Jan, but distorted by timing of New Year and CNY
Most HK-listed PRC department stores reported strong same store sales (SSS)
growth in Jan 2009 vs. Dec 2008. We believe that this is not indicative of an
improving consumption climate, but rather that sales were distorted by a late New
Year and early CNY in 2009, and that underlying consumption is still weak. CNY
Golden Week sales on a like-to-like basis showed modest positive to negative
growth for some companies. An earlier launch of sales promotions in mid-Jan by
department stores, along with a cutback in luxury goods spending amid economic
downturn, resulted in modest sales growth during CNY Golden Week.
􀂄 Parkson Retail: management indicated Jan SSS growth was very strong (no
figure provided), but said the combined Jan/Feb SSS should offer a more
meaningful consumption picture. They will provide more details on SSS trend
and outlook at the upcoming results meeting on 20 Feb.
􀂄 NWDS: due early CNY this year, management said January SSS was strong
(did not disclose actual figures), but expects February SSS to be negative.
􀂄 Golden Eagle: management indicated Jan SSS was robust at 50%, fulfilling
the company’s internal target. SSS growth for the 20 days before CNY and
CNY Golden Week (i.e., 5-31 Jan) was 13-14%; SSS was close to 10% for
mature stores, and at >50% for young stores.
􀂄 Intime: management stated that Jan SSS was at 34-35%, but posted a drop
of 10% in SSS for the CNY Golden Week.
􀂄 Lifestlye (Shanghai): SSS reached over 10% for Jan, according to our channel
check, but was at a low single-digit for the CNY Golden Week.
No silver lining in the near term – more and bigger-scale promotions to come
Outlook for department stores is gloomy after CNY. Unemployment rate is likely to
rise as we expect more closures of factories and companies. This loss of
consumers’ spending power coupled with a traditionally slack shopping season in
Mar/April mean department stores must continue doing promotions and at a
bigger scale (e.g. Valentine’s Day, Spring Clearance etc) to woo customers. This
would impact dept stores’ commission rate on concessionaire sales.
Underweight China department stores
We remain cautious on China’s department stores. Parkson Retail (3368.HK, Sell,
HK$6.7) is our top Sell. We use DCF as the main valuation methodology and crosscheck
with PE/G. Sector upside risks: 1) effect of government policies in
stimulating domestic consumption, and 2) better-than-expected operating expense
control by department stores.