Parkson sell-down raises $82.5 million

The controlling shareholder of Parkson Retail Group, a company that runs department stores across China, raised HK$644 million ($82.5 million) by selling part of its stake through a placement last night.

The deal consisted of 55 million shares, which were offered at a price between HK$11.71 and HK$12.07, representing a 2% to 5% discount to yesterday's closing price of HK$12.32. The price was fixed at the bottom, at HK$11.71, for the maximum 5% discount.

The seller is PRG Corporation, which is an indirect wholly owned subsidiary of Malaysia-based investment holding company Parkson Holdings Berhad. The deal represented 1.96% of the company's outstanding share capital, and will reduce Parkson Holdings' stake in Parkson to 51.6% from 53.58%.

The deal was covered within half an hour of the launch, with the final book made up of a mix of long-only and hedge funds. Although the book was filled with mostly Asian accounts, the deal was not priced until the US markets opened since there was one investor there that was keen to participate.

Parkson's share price has performed extremely well in the past couple of months: yesterday it was trading at double the February low of HK$6.12. In fact, yesterday's closing price is only half a dollar shy of the 52-week high of HK$12.79 from June 2 last year. The trading has been strong in the run up to the placement. Last Wednesday the shares gained 8.54%, followed by a further 5.94% on Friday. The Hong Kong stockmarket was closed last Thursday for the traditional dragon boat festival.

Although the share price has already risen steeply, one source said that investors still wanted to get involved because the sell-down was a good opportunity to get hold of a large chunk of a relatively illiquid stock. Only about 7 million to 8 million shares are traded every day, which is a small number for a $4.5 billion market-cap company.

Not everyone agrees that Parkson's shares are a good buy at the current price, however. A Citi research note released on May 21 has a "sell" recommendation on the stock. The bank raised its target price to HK$8, from HK$6, which is still 35% below yesterday's closing price.

"While we recognise Parkson's ability to tap into growing demand for fashion products among China's growing mid- to high-income consumers given its extensive national store network, we expect the slowdown in China's urban consumer spending for discretionary items to result in lower same store sale growth and margin pressure caused by the need for aggressive promotions," said the Citi analysts behind the note.

As a result, Citi said the next six to nine months will prove a tough environment for the stock, suggesting that its streak of outperformance is unsustainable.

The Citi note came out just after Parkson posted its first-quarter results, which showed a 14.9% improvement in net profit year-on-year to Rmb259 million ($38 million). The growth was primarily driven by a 9% rise in same store sales; new stores in Shanghai and Guizhou that were opened in 2008; and store acquisitions. Gross profit margins were "worse than expected", said the report. "Due to aggressive promotions at the store level to drive sales, overall [gross profit] margins on merchandise sales fell about 130bp [year-on-year]."
 
The company is one of China's only department store operators that has a truly national footprint with 32 directly owned stores in 26 cities.

More generally, the Hang Seng Index was up 3.95% yesterday to 18,888 points -- a level not seen since October last year. The market was buoyed by good economic news out of China relating to the manufacturing sector. The purchasing managers' index (PMI) recorded its third consecutive month of growth with a reading of 53.1 in May. The pace of growth was down ever so slightly from April's 53.5, but the most significant result of yesterday's PMI was that the prolonged drop in new export orders may have bottomed out. If export orders start to grow next month, it could signal the start of a recovery in international trade.

UBS was the sole bookrunner on the deal.