PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
23 March 2010
MARKET DATELINE

Recom : Neutral
Consumer Sector - Retail (Maintained)
Marginal Impact From IFRIC 13

Table 1 Consumer Valuations

Fair EPS EPS growth PER P/NTA P/CF GDY
FYE Price Value (sen) (%) (x) (x) (x) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Amway Dec 7.36 8.45 54.5 56.5 23.6 3.5 13.5 13.0 4.9 7.3 6.8 OP
Carlsberg Dec 4.97 5.90 41.3 42.2 70.1 2.3 12.0 11.8 2.8 137.3 5.0 OP
KPJ Health Dec 2.61 3.20 21.9 23.2 17.3 6.0 11.9 11.2 1.2 10.6 5.4 OP
Hai-O^ Apr 4.65 5.20 48.3 57.7 24.7 19.4 9.6 8.1 1.5 5.0 6.9 OP
Bonia Jun 1.00 1.33 14.8 17.9 26.1 21.5 6.8 5.6 1.1 3.3 8.0 OP
Faber Dec 2.00 3.30 24.5 29.8 7.5 21.6 8.2 6.7 1.7 4.9 3.5 OP
QL Resources Mar 3.41 3.93 31.3 36.9 16.2 17.7 10.9 9.2 2.3 11.6 3.1 OP
Daibochi Dec 3.70 4.40 36.7 39.9 22.4 8.8 10.1 9.3 4.2 8.6 6.4 OP
AEON Dec 4.92 5.85 41.7 46.6 9.6 11.8 11.8 10.6 1.6 9.5 2.4 OP
KFC Dec 7.75 8.84 70.7 79.7 7.5 12.8 11.0 9.7 1.9 7.4 3.6 MP
Parkson Jun 5.73 6.40 29.2 36.3 15.0 24.3 19.6 15.8 3.0 7.8 1.2 MP
BAT Dec 42.86 38.95 243.5 233.2 -6.9 -4.2 17.6 18.4 n.m 13.1 5.1 UP
Sector Avg 8.4 11.3 14.6 13.5
^ FY10-11 valuations refer to those of FY11-FY12

Table 2: Basis For Fair Value Estimates

♦ IFRIC 13 – Customer Loyalty Programmes, which was effective from Jan Company Valuation Basis
10 onwards, was issued to address the issue on customer loyalty programmes KFC Target PER of 12.5x CY10
i.e. to regulate these programmes to adhere to the rules of FRS 118 discount to the sector
paragraph 13. Prior to IFRIC 13, companies with customer loyalty benchmark.
programmes can choose to adhere to the rules of FRS 118 following either Amway DCF based on WACC of 8.1%.
paragraph 13 or paragraph 19 (further details in page 2). Companies under Carlsberg DCF based on WACC of 9.2%.
our coverage which would be affected by this accounting standard include KPJ Target PER of 14.5x CY10 in
AEON and Parkson. Healthcare line with the sector
benchmark.
♦ Impact to retailers marginal. While we reckon that the impact to retailers Hai-O Target PER of 11.5x CY10
would be marginal, we illustrate the following changes to retailers profit and discount to the sector
loss: benchmark.
Parkson SOP based on: 1) target PER
1) Own customer loyalty programme. In the case of a retailer supplying the of 24x CY10 for PRG; 2)
award credits itself (such as AEON), there would be an initial reduction in the target PER of 11.5x CY10 EPS
stated revenue i.e. part of the revenue from award credits would now be for Vietnam; 3) target PER of
14x CY10 for Malaysia; 4) 6
recognised as deferred revenue. Impact to AEON’s topline and bottomline
excluded stores in China at
would be minimal. 10x PE; and 5) net cash
(debt) balance.
2) Third party customer loyalty programme. In the case of a retailer with
Bonia Target PER of 9x CY10
third party customer loyalty programmes (such as Parkson Malaysia), the discount to retail benchmark.
retailer is treated as an agent and is merely collecting the award credits on Faber SOP based on: 1) DFC on its
behalf of a third party and as such, would have to allocate part of its revenue concession IFM; 2) 14x CY10
payable to the third party. No impact to Parkson’s topline and bottomline. on non-concession IFM; 3) 4x
CY10 on property; and 4) net
♦ Forecasts. Maintain earnings forecasts for now as there are no details given
QL
cash (debt) balance.
Target PER of 13x CY10
by the retailers in the calculation of award credits and the redemption rate of Resources discount to the sector
the award credits. benchmark.
AEON Target PER of 14x CY10, the
♦ Risks. 1) Further drop in consumers’ disposable income; and 2) Rising costs average PER for the retail
of goods and services, hence reducing consumers’ spending power. sector.
Daibochi Target PER of 12x CY10
♦ Parkson is now a Market Perform, maintain Neutral on sector. Given discount to the sector
benchmark.
the limited upside for Parkson to our fair value of RM6.40 of only 8% vs. FBM
BAT DCF based on WACC of 7.9%.
KLCI’s 8%, we have downgraded our recommendation on Parkson to a Market
Perform (from Outperform) based on unchanged SOP valuation. No changes
to our Outperform recommendation on AEON and Bonia, and target prices of Hoe Lee Leng
RM5.85 and RM1.33 based on unchanged 14x FY10 EPS and 9x CY10 EPS, (603) 92802239
respectively. hoe.lee.leng@rhb.com.my

Please read important disclosures at the end of this report. Page 1 of 5

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♦ Background. IFRIC 13 – Customer Loyalty Programmes, which was effective from Jan 10 onwards, was issued to
address the issue on customer loyalty programmes i.e. to regulate these programmes so that they can be
accounted for in an equal manner. Prior to IFRIC 13, companies with customer loyalty programmes can choose to
adhere to the rules of FRS 118 following either paragraph 13 or paragraph 19 (explained below), and therefore,
the practice is varying and the different companies’ accounting have not been comparable. Companies under our
coverage which would be affected by this accounting standard include AEON and Parkson.

♦ Paragraph 13 or 19? Applying paragraph 13 (p.13) would result in a sales transaction to a loyalty cardholder
being accounted for in two different categories - sales revenue and deferred sales revenue (for the value of the
award credits/points). For example, if a retailer sells a product for RM100 and the customer collects 100 points
from the transaction, which would entitle him/her to purchase RM1 worth of products, the amount of RM99 would
be accounted as revenue and RM1 would be recorded as deferred revenue (to be recognised once the points are
redeemed) (see Chart 1-1). On the other hand, applying paragraph 19 (p.19) would result in the recognition of full
sales consideration on the product sold, and the recognition on the cost of meeting the award credits granted i.e.
the cost of the product or discount to be redeemed. For example, if a retailer sells a good for RM100, it would
recognise RM100 of revenue while the redemption of points would be recognised as cost when the points are
redeemed (see Chart 1-2). Currently, retailers such as AEON and Padini are already applying p.19, while Parkson’s
China and Malaysia operations are applying p.13 (see Table 3). Adhering to IFRIC 13 would standardize the rule of
customer loyalty programmes and as such, retailers who initially adopted p.19 would have to switch to p.13 in
their revenue recognition. The amount of revenue deferred would be measured by reference to the fair value of
the award credits i.e. the amount for which the award credits could be sold separately to the customer (and not at
its cost to the retailer).

Chart 1: Application of paragraph 13 vs. 19

Source: RHBRI

Table 3: Impact of IFRIC 13 to Listed Retailers

Loyalty
IFRIC 13 compliance programme Impact
Insignificant to P&L and
AEON No Own balance sheet.
Insignificant to P&L and
Parkson Only for China and Malaysia Third party balance sheet.
Insignificant to P&L and
Padini No Own balance sheet.
Bonia N/A N/A N/A

Source: Company
N/A: Not applicable as the company does not have a meaningful loyalty programme

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♦ Impact to retailers marginal. While we reckon that the impact to retailers would be marginal, we illustrate the
following changes to retailers’ profit and loss statements:

1) Own customer loyalty programme. In the case of a retailer supplying the award credits itself (such as
AEON and Padini), there would be an initial reduction in the stated revenue i.e. part of the revenue from
award credits would now be recognised as deferred revenue. For example for AEON, based on p.19, AEON
recorded retail revenue of RM3,362.3m in FY09. J-Card members account for approximately 60% of the total
retail revenue and AEON allocates 1 award credit to every RM1 spent. We estimate the fair value of 1 award
credit = 0.7 sen and each credit has an expiration period of 3 years. This would mean that AEON would have
to defer RM14.1m of its revenue over the next three years. In our illustration below, we assume this is
recognised on a 40%: 30%: 30% basis (see Table 4). The revenue from award credits would only be realised
once the award credits are redeemed and when AEON fulfils its obligation to supply awards/credits, or when
the award credits expire. While we believe that impact is minimal, there would be a one-off transfer of “sales
revenue” to deferred revenue in the balance sheet for all loyalty points awarded-to-date which has yet to
expire. Based on our illustration below, the impact to AEON’s bottomline is marginal. We note however that
the higher the “fair value” of the award credit, the greater the impact to revenue and bottomline.

Table 4: Illustration for AEON *

FYE Dec (RM m) FY09 FY10f FY11f FY12f
Before IFRIC 13
Revenue 3,362.3 3,556.0 3,905.3 4,491.6

After IFRIC 13
Sales transacted 3,362.3 3,556.0 3,905.3 4,491.6
J-Card sales @ 60% 2,017.4 2,133.6 2,343.2 2,695.0
- Deferred revenue (award credits conversion rate of
RM1 = 0.7 sen) (14.1) (14.9) (16.4) (18.9)
Revenue 3,348.1 3,541.1 3,888.9 4,472.8
Recognition of deferred revenue from: FY09 + 5.6 + 4.2 + 4.5
FY10 + 6.0 + 4.5
FY11 + 6.6
Net revenue 3,348.1 3,546.7 3,899.1 4,488.3

Impact to revenue -0.4% -0.3% -0.2% -0.1%

Impact to net profit -0.2% -0.2% -0.1% -0.1%

Source: RHBRI
* Assuming 40% award points are redeemed in year 1 and 30% award points are redeemed in year 2 and 3.

2) Third party customer loyalty programme. In the case of retailers with third party customer loyalty
programmes, the retailer is only recognised as an agent and is merely collecting the award credits allocated on
behalf of a third party. For example, Parkson Malaysia has a tie-up with third party loyalty programme i.e.
Bonuslink. For every RM1 spent in Parkson, 1 award credit (or point) is rewarded, and the fair value of 1
award credit = 1 sen. Having granted the points, Parkson would already have fulfilled its obligation to the
customer. Bonuslink would now be obliged to supply the awards and is entitled to receive consideration for
doing so. Therefore, Parkson would recognise the effect of the award points as and when it performs a sales
transaction. As an illustration, if Parkson has RM100 transaction, it would allocate RM99 to its revenue and
RM1 payable to Bonuslink as an expense. Bonuslink would now have the obligation to fulfil any award to the
customer and relieve Parkson of any further obligation. In this instance, any future redemption of Bonuslink
points via Parkson vouchers would have to be purchased by Bonuslink via a normal sales transaction and is
accounted for in the normal straightforward manner. As such, the new IFRS would have no impact to
Parkson’s top and bottomline.

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Forecasts

♦ Earnings forecasts. We maintain our earnings forecasts for now as there are no details given by the retailers of:
1) the fair value being used in the calculation of award credits; and 2) the redemption rate of the award credits. In
any case, while we expect this to result in part of the profit being recognised in different periods (the total profit
will in the end be the same) and different amount of liabilities being recognised in the balance sheet, we believe
impact to the earnings and fair value of AEON and Parkson would be minimal. However, we note that adopting
IFRIC 13 could result in a one-off cost for compliance and some incremental ongoing costs for preparers, which we
believe to be insignificant.

Risk

♦ The key risks are: 1) further drop in consumers’ disposable income; and 2) rising costs of goods and services,
hence reducing consumers’ spending power.

Valuations and Recommendation

♦ Parkson is now a Market Perform, maintain Neutral on consumer sector. Given the limited upside for
Parkson to our fair value of RM6.40 of only 8% vs. FBM KLCI’s 8%, we have downgraded our recommendation on
Parkson to a Market Perform (from Outperform) based on unchanged SOP valuation based on: 1) a 20% holding
company discount to its 51.6% stake in PRG (indicative fair value for PRG of HK$11.95 based on target PER of 24x
CY10 EPS); 2) an unchanged target PER of 11.5x CY10 EPS for Parkson Vietnam; 3) an unchanged target PER of
14x CY10 EPS for Parkson Malaysia; 4) 6 excluded stores in China; and 5) holding company net cash position. No
changes to our Outperform recommendation on AEON and Bonia, and target prices of RM5.85 and RM1.33 based
on unchanged 14x FY10 EPS and 9x CY10 EPS, respectively. However, we note that for AEON, our target price
could be reduced to RM5.55 if we were to factor in the loss of the entire property management income from 1U.
We maintain our Neutral recommendation on the consumer sector.

Chart 2: AEON Technical View Point

♦ The share price of AEON has been trending along
its long-term UTL since 2001.

♦ In a steep correction in May 2008, the stock

plunged from a high near RM5.80 but survived at
above the UTL near a low of RM3.50 in Feb 2009.

♦ Thereafter, it trended upward and reached an

intraday high of RM5.50 in Jan 2010.

♦ The stock experienced some technical pullback and

fell below the RM5.04 support level lately.

♦ Given the weak momentum readings and a

downtick on the 40-day SMA, the stock is likely to
see some short-term weakness in the near term.

♦ However, its longer-term view will remain positive

as long as it can sustain at above the UTL. A solid
support region is seen near RM4.18 – RM4.55
region.

♦ A clear resistance going forward is the RM5.50

tough level.

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions
and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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