How Dairy Farm will be affected by ParknShop's potential sale

Is Hong Kong's retail scene that bad?

According to CIMB, Hutchison’s potential sale of the ParknShop supermarket chain, one of Hong Kong’s leading supermarket chains, does not necessarily mean poorer prospects for the mature HK retail market.

CIMB noted that the potential sale will give some sense of valuations for Dairy Farm’s Wellcome chain. That said, it is generally accepted that Dairy Farm’s valuations are rich. 

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Newswires reported that Hutchinson is considering selling its Parknshop supermarket chain. Several sales figures have been bandied around, including US$2bn from Bloomberg. In 2012, ParknShop generated HK$21.7bn (US$2.8bn) revenue and we estimate that it yielded HK$1.5bn (US$0.2bn) EBITDA.

Hence, US$2bn values ParknShop at 10x trailing EV/EBITDA. In comparison, Big C paid 13x for Carrefour Thailand andwe estimate that Aeon bought Carrefour Malaysia for 11x.

We think that the sale does not necessarily imply poorer prospects for Hong Kong’s grocery retail market. In fact, we think that the market could even be more vibrant than its fellow Asian tiger, Singapore.

As gleaned from Hutchison’s retail, others and manufacturing segment (ParknShop contributes ~60% of turnover), thissegment reported revenue and EBITDA growth of 6% as well as SSSG of 5.6% for FY12.

This trend ties in with Dairy Farm’s strong Hong Kong’s performance. Headwinds for ParknShop stem from China (not a large part of the ParknShop business), with the banner reporting declines in revenue and EBITDA. Again, this ties in with Dairy Farm’s perspective.

China has been a difficult market to operate in and the group does not have agrocery retail presence in China. Lastly, the potential sale will give some sense of valuations for Dairy Farm’s Wellcome chain.

That said, it is generally accepted that Dairy Farm’s valuations are rich. We expect the scarcity premium to persist, and rightly so.