22 July 2013 | Corporate Update

Padini Holdings Berhad Maintain NEUTRAL

Pushing ahead while strategically tackling the competition Unchanged Target Price: RM1.80

INVESTMENT HIGHLIGHTS

• Building on 1HFY14’s openings, 2HFY14 may see one (1) RETURN STATS additional Padini Concept Store and four (4) more Brands Outlets. Price (19 July 2013) RM1.87

• The first of 1HFY14’s openings will be in Gurney Paragon. Target Price RM1.80 Given the very close proximity of the mall to , we Expected Share Price believe that the outlets in the latter will be withdrawn. -3.7% Return • Aside from rental cost savings, the likely main reason for the Expected Dividend Yield +4.3% move is in response to the opening of H&M is Gurney Paragon. The move will allow the Group to draw on its competitor’s Expected Total Return +0.6% strength rather than going against it.

• On a separate note, Vincci+ is in the process of being removed STOCK INFO from the market. In its stead, look forward to the Group’s newly launched Tizio. KLCI 1,797.7

7052 / We met with the management of Padini Holdings Berhad (Padini or the Bursa / Bloomberg PAD MK Group) to expand on our Initiate Coverage report dated 9 July 2013 with Main / Consumer some updates on the Group. Here are the key takeways-: Board / Sector Products Sneak peek into potential 2HFY14 store openings. In our last report, Yes we shared on the management’s intention to open three (3) new Padini Syariah Compliant Concept Stores (PCS), and four (4) new Brands Outlets (BO). Building Issued shares (mil) 657.9 on that, the management shared that 2HFY14 could see one (1) additional PCS and four (4) additional BO. We expect capital Par Value (RM) 0.10 expenditure for 2HFY14’s expansion to be between RM10-15m, funded by internally generated cash. As at 31 March 2013, net cash stood at Market cap. (RM’m) 1,230.3 RM166.3m. Further details on location as per Table 1 below:- Price over NA 3.3x TABLE 1: Expected FY14 Store Openings 52-wk price Range RM1.72 – RM2.36 Expected Location of Stores Store Beta (against KLCI) 1.0 Openings 1HFY14 2HFY14 1. Gurney Paragon, 1. Empire Damansara, 3-mth Avg Daily Vol 1.3m (Expected 23 July 2013) Damansara Perdana PCS 2. Seremban 3-mth Avg Daily Value RM2.6m 3. Miri, Major Shareholder 1. Gurney Paragon, Penang 1. Sunway Velocity, Cheras (Expected 23 July 2013) Pang Chaun Yong 44.0%

2. , PWTC 2. Seremban BO (post-refurbishment) 3. Miri, Sarawak 3. The Main Place, USJ 4. Langkawi 4. Imperial City Mall, Miri Tizio 1. Pavilion Mall,

Source: the Group

KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES

MIDF EQUITY BEAT Monday, 22 July 2013

TABLE 2: Investment Statistics

FYE June FY11 FY12 FY13F FY14F FY15F (RM’m, unless otherwise stated)

Revenue 568.5 723.4 782.7 845.3 912.9 Profit from operations 106.6 133.0 124.1 137.9 146.2 Profit from operations margin (%) 18.8 18.4 15.9 16.3 16.0 Pre-tax profit 105.1 130.6 121.5 135.4 143.7

Net profit 75.7 96.0 87.9 97.9 103.9

Net profit margin (%) 13.3 13.3 11.2 11.6 11.4 Basic EPS (sen) 11.5 14.6 13.4 14.9 15.8 Basic EPS growth (%) 24.2 26.8 -8.4 11.4 6.1

PER (x) 16.2 12.8 14.0 12.6 11.8

Net DPS (sen) 4.0 6.0 8.0 8.0 8.0

Net dividend yield (%) @ RM1.87 2.1 3.2 4.3 4.3 4.3

Source: Group, Forecast by MIDF Research

We expect that the Group’s new PCS and BO, slated to be opened together with the opening of Gurney Paragon on 23 July 2013, will likely replace the outlets in Gurney Plaza. Our expectation is based on the proximity of the two malls, which are located almost right beside each other, with only G Hotel and Regency Hotel separating the two. Diagram 1 below provides an aerial view of this:-

DIAGRAM 1: Location of Gurney Paragon and Gurney Plaza

Source: MIDF Research, Google Maps Note: For illustrative purposes only and does not reflect actual dimension or placement.

Rental cost savings may result from the move as we understand from the management that rental in Gurney Paragon could potentially be cheaper in a bid to attract suitable tenants.

2 MIDF EQUITY BEAT Monday, 22 July 2013

Stiffer competition with two (2) more H&M outlets in close proximity with Padini. According to various media reports, Swedish retail giant H&M may be opening two (2) additional outlets. The outlets will likely be in Kuala Lumpur’s Avenue K as well as in Penang’s Gurney Paragon where Padini will also set up shop (as discussed above). This comes without surprise as both locations target the urban mid- to higher- income population which is H&M’s target market. “If you can’t beat ‘em, join ‘em”. This development leads us to believe that the move by Padini to Gurney Paragon is mainly in reaction to the opening of H&M there. The latter is expected to be a crowd puller given that it is the company’s first store in Penang. We are positive on the move by Padini as having its outlets in Gurney Paragon will place them directly in the line of traffic, thereby drawing on its competitor’s strength rather than going against it in the mall next door. Vincci+ to make way... On a separate note, the management shared of its intention to withdraw Vincci+ from the market given that the brand has not been performing well. Only two (2) Vincci+ outlets currently remain and they are located in Kuala Lumpur’s Pavilion Mall and Gurney Plaza in Penang. A possible reason may be the identification of the premium brand with that of Vincci, its affordable sister brand. Existing Vincci customers may not be willing to pay the premium for Vincci+, while new potential customers who are willing to pay may not be drawn to the close association with the more affordable Vincci. …for Tizio. In its stead, expect the Group’s latest introduction, Tizio. There are currently two (2) Tizio outlets, one each in and Paradigm Mall. The next likely Tizio opening could be in Pavilion Mall, and it could be as soon as in FY14 at about the time that Vincci+ is expected to be withdrawn there. While Tizio does not target the same market as Vincci+, its offerings are complementary to Vincci’s offerings as Tizio somewhat fills in for what Vincci does not offer. Maintain NEUTRAL. We continue to recommend a NEUTRAL stance on Padini with a Target Price (TP) of RM1.80. The TP implies a Price Earnings Ratio (PER) of 12.2x, representing the Group’s historical 9-year PER from the date it first announced its transfer to the Main Board (now known as the Main Market) of Bursa. We like that the Group continues to be active in identifying with its customer, managing costs and expanding its presence, all while simultaneously reacting to its competitor’s moves. Having said that, competition is heating up and Padini would still have to brace for the impact.

DIAGRAM 2: Daily Price Chart

Kelly Tan [email protected] 03-2173 8392

3 MIDF EQUITY BEAT Monday, 22 July 2013

MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Securities Berhad)

DISCLOSURES AND DISCLAIMER

This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose.

MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS

STOCK RECOMMENDATIONS

BUY Total return is expected to be >15% over the next 12 months.

Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been TRADING BUY assigned due to positive newsflow.

NEUTRAL Total return is expected to be between -15% and +15% over the next 12 months.

SELL Negative total return is expected to be -15% over the next 12 months.

Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been TRADING SELL assigned due to negative newsflow.

SECTOR RECOMMENDATIONS

POSITIVE The sector is expected to outperform the overall market over the next 12 months.

NEUTRAL The sector is to perform in line with the overall market over the next 12 months.

NEGATIVE The sector is expected to underperform the overall market over the next 12 months.

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