PNJ recorded 5% yoy sales growth and -4% PAT in Q1 20. There was a slowdown in retail and wholesale in the context of Covid-19 – in March, retail sales went down 10% yoy due to social distancing and temporary shutdown of stores. Although gold bar sales surged 75% yoy in the month, it has very little profit margin compared to other segments and therefore, PAT still went down 34% yoy in March.
Following the Government’s decision to shut down non-essential goods retail stores from the last week of March, PNJ temporarily closed 85% of its total stores, with stores in HCMC and Hanoi (which contribute up to 55% of total sales) all closed. The impact of this on profit is extreme, considering that 90% of gross profit for PNJ comes from the retail jewellery segment.
In Q1 20, gross margin decreased 20bps yoy and net margin was down 80bps yoy. This was caused by poor numbers in March as retail sales, the profit driver, suddenly plunged. When (or if) the Covid-19 crisis ends, we expect PNJ’s margin to recover through increasing contribution from retail sales.
PNJ’s reaction to Covid-19:
- Cut expenses: (1) Management’s income down by 50%, the rest of staff will have an unpaid two days per week. (2) Negotiating rent – so far 40% of landlords have agreed to decrease rents by 15-100%; the process is still ongoing. Since profit from retail jewellery is heavily impacted, cost cutting is the main factor on PNJ’s bottom line. So far, how much the company can cut is still unclear.
- Inventory management: Shift to a structure of more gold bar and jewelleries with high karat of gold to ensure liquidity. PNJ’s current cash amount has increased four times since 2019 to VND40 bn. The company is also temporarily suspending new purchasing orders. Due to the high liquidity of gold bars, it will help a lot in terms of cash flow. Gold bar is tradeable through both B2C and B2B channel. Therefore, the store closures are not too worrisome.
- Restructure loan terms and interest rates: PNJ depends mostly on short-term debt to finance working capital, with interest rate from 6% to 7%.
- Promote online channel: In Q1 20 online sales surged 137% yoy and 164% yoy in March. However, online sales accounts for just c1% of total sales. We don’t think it will make a big difference to compensate the loss in offline sales.
- Focus on R&D: Time to upgrade production capabilities. The company is developing more added-value products to launch after the pandemic ends. PNJ is launching two new product lines: Italian gold jewellery and platinum jewellery; these are currently imported. We expect PNJ’s margin from retail jewellery to continue going up.
2020 guidance: PNJ initially set the target of 12% growth in revenue, 13% growth in PAT and 31 new stores in 2020. However, given the current situation, that guidance is not relevant. PNJ is reconsidering its target for this year as well as the ESOP plan to be announces at the upcoming AGM. The company will try to maintain the current level of cash dividend (18%).
PNJ’s core business is taking a hit from Covid-19 as its main profit driver – retail jewellery – faces store shutdowns. In 2019 gold retail jewellery contributed nearly 90% of gross profit. Even after the pandemic ends, the negative impact on consumers’ disposal income will continue to affect jewellery sales. Despite that, we’re still bullish on PNJ’s prospect in the long term: the company is still the undisputed leader in the Vietnam’s jewellery industry and the potential for consumers from the rising middle class is abundant. We maintain our Buy recommendation on PNJ with a target price of VND77,500/share (previously VND78500). The target price has been revised down 30% from our previous one at the start of the year to reflect the Covid-19 crisis.