China Dept. Stores
Another Re-rating Coming Up
What's Changed
Industry View: China
Department Stores In-Line to Attractive
Conclusion: We upgrade our industry view from In-Line
to Attractive as we expect another sector re-rating to be
supported by: 1) a stronger macro outlook; 2) improving
industry fundamentals; and 3) a favorable technical
trend between valuation and forward SSSG.
Where We Differ: Our revised F10 forecasts are at the
high-end of consensus for all companies, except for
NWDS. We think the Street has not sufficiently captured
three industry dynamics that will differentiate the
operators in 2010: 1) regional players to lead SSS
growth; 2) concession margin recovery for Parkson and
Intime likely the strongest; and 3) better operating
leverage prospects for department stores to provide
upside support for positive earnings revision.
Stock Picks: Our top pick remains Golden Eagle and
we would buy ahead of 1H09 earnings given its likely
outperformance; although we believe 2H09 will be even
stronger. We also recommend buying Parkson as it is
likely to benefit first from the next sector re-rating given
its sector leader status and better trading liquidity. While
we have strong conviction on Intime’s 2010 Turnaround
Story, we are more cautious near-term as many of its
positives are now fully priced-in but we would buy on
dips as we see greater earnings growth in 2010. We
remain cautious on NWDS’ larger portfolio of smaller,
less competitive stores that have struggled in the recent
downturn, but believe its long-term prospect looks more
promising with a long list of managed store acquisition
opportunities.
Fundamental Framework Additions: Our SSS growth
and concession margin frameworks provide a
systematic way to identify short and long-term changes
in these two key variables. These methods attempt to
provide greater degree of certainty in our estimates
amidst a volatile macro envrionment.