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Boom Times for China's Department Stores

Don't tell PCD Stores chairman Alfred Chan that nobody shops in department stores anymore. Big chains may be struggling in the U.S., where established players such as Saks (SKS), J.C. Penney (JCP) and Macy's (M) reported weak sales last month. U.S. department stores are also locked in competition with online retailers such as Amazon (AMZN) and big-box chains such as Wal-Mart (WMT).

The story is different in China, where PCD operates 16 department stores and one outlet mall. Investor enthusiasm about Chinese department stores helped fuel PCD's Hong Kong trading debut on December 15, with shares soaring 30%. The stock settled a bit on its second day of trading, with the price dropping 1.5%.

The impressive launch has suddenly put little-known PCD in the industry's big leagues. The company, which opened its first store in 1998, raised $377 million in the IPO and now has a market capitalization of $1.3 billion. That's larger than some of the top names in the business. "It took us about 10 years to build a department-store chain with a market cap 30% more valuable than Saks, which took maybe 100 years," boasts Chan. In China, he says, "the opportunity is huge if you know how to do it."

Operators of other local chains see the same opportunities. As the Chinese economy rebounds from its post-Lehman slump, shoppers are returning to the country's stores and investors are driving up the stock prices of Chinese department store chains. Beijing-based Parkson Retail Group hit a 52-week high on Dec. 16, with the stock price now up 62% since the start of the year. New World Department Store China's Hong Kong-traded shares are up 71%. The Hong Kong-traded shares of Intime Department Store Group, which owns a chain of stores in China, are up 254% for 2009. On Dec. 16, Tan Teng Boo, managing director of Capital Dynamics, told Bloomberg TV that Parkson Holdings and New World Department Stores, both of which operate department stores in China, are among his favorite Asian stock picks for the New Year.

China nears double-digit GDP growth

Another Chinese retail stock in favor is Golden Eagle Retail Group, which has enjoyed a 188% increase in its Hong Kong-traded stock price this year. Same-store sales are likely to increase 18% to 19% in the second half of 2009, up from 15% in the first half of the year, CIMB analyst Keith Li writes in a Dec. 16 report, escalating to 21% in the next two years. With Golden Eagle growing beyond its base in eastern Jiangsu province, Li is impressed by the retailer's "aggressive expansion into second- and third-tier cities where there is strong potential for luxury goods." Sales next year should grow 28%, to 2.3 billion RMB, and profits ought to gain 78%, to 944 million RMB.

Morgan Stanley is bullish on China's retail sector too. On Dec. 15, strategists Jerry Lou, Allen Gui, and James Cao added Golden Eagle to their recommended China portfolio, writing that it and some other consumption plays "should benefit from recovery in the broader economy next year."

Regions : Asia

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