Business model of Parkson Retail Group

PRG operates the Lion group's department store business in China.

The Hong Kong-listed PRG is sitting on cash reserves of RMB 3 billion (RM 1.49 billion).  The retailer is a 51.6% owned subsidiary of Parkson Holdings Bhd, in which Lion group boss Tan Sri William Cheng holds a 21.9% direct equity stake and 32.5% indirect stake.

After stripping out debts of RMB 2.3 billion, PRG is in a net cash position of RMB 667.5 million.

The retail giant is in a cash-generating business and its department stores are ringing up good sales.

Business model of Parkson Retail Group

PRG's growing cash pile is also due to its asset-light strategy.  It does not own many properties while its business model of letting out space to branded names does not tie up its cash with unsold inventories.

For instance, if John Master or Bonia has an outlet in Parkson, the inventory is held by the manufacturers themselves.  Parkson lets out the space and gets a commission from sales.  This way, it keeps its balance sheet light. 

Lingering Concerns

Local fund managers do buy into PRG's growth story.  It certainly does not take rocket science to figure out that China's robust growth augurs well for retailers such as PRG.  However, there is always a lingering concern because of the state of other companies within the Lion group. 

The concerns of investors are not entirely unjustified, going by the track record of other companies within the Lion group stable.  For instance, Lion Corp Bhd and Lion Industries are in net debt positions.  Further, Amsteel Corp Bhd, once the flagship of the Lion group, and Silverstone Corp Bhd were removed from Bursa Malaysia for failing to regularise their financial positions due to debt problems.

That explains why Parkson Holdings' share price on Bursa Malaysia has been lagging that of PRG's in Hong Kong.  The stock does not command the premium it deserves despite its exposure to the sizeable consumer market in China plus Vietnam - another booming emerging economy. 

PRG does not have a dividend policy

According to its managing director Alfred Cheng, PRG doesn't have a dividend policy.  However, the group has been paying out almost half of its earnings as dividends since it was listed in November 2005.  In the last financial year ended Dec 31, 2008, PRG paid out total dividends of RMB 405 million versus RMB 332.5 million in FY2207.

Paying regular dividends isn't a norm among the companies in the Lion group; PRG is probably the first to do so.  And PRG needs to keep it up to maintain its status as the group's cash-generating jewel.

Ref:  The Edge