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Vietnam

Phu Nhuan Jewelry: Q3 19 review: Promising recovery; reiterate Buy

    Son Tran
    Son Tran

    Market Strat, Retail, Consumer 

    Rong Viet
    24 October 2019
    Published by

    The recovery in Q3, especially in September, looks promising. Demand for jewellery is picking up and the ERP issue was also completely solved. We expect PNJ to have a good Q4 even though it will be challenging to match the 23% net profit target growth. The stock is trading at a trailing PE of 17x, which is not cheap given our forecast EPS growth for this year of c20%. That being said, potential upside would come from expected earnings growth in the following years, which we believe will be plentiful considering the current extremely fragmented jewellery market and PNJ being the undisputed market leader. Potential inclusion in the VN diamond-index could also be a catalyst for the stock. Hence, we keep our Buy recommendation on PNJ, with a target price for the next 12 months of VND105,000/share, indicating 30% upside from current market price.

    Net sales and gross profit increased c25% yoy. The figures were good enough for a recovery, partly helped by the fact that this year’s Lunar new year came around two weeks earlier than last year. PNJ enjoyed a 31% sales growth in September. Even though gross margin remained at 19%, it was mostly because gold bar sales surged in Q3 as a result of an increase in gold prices. Since gold bar sales have a very low margin compared with gold jewellery, it means PNJ’s margin in gold is improving.

    Net profit growth was 18%, indicating a decrease in net margin for two reasons: (1) Financial expenses rose 90% as there was an increase in short-term borrowing to finance working capital, and (2) earning tax rose by 38%. We believe it was caused by an increasing loss from one of the subsidiaries PNJ Watch. Note that loss from subsidiaries are not deductible from consolidated results, thus PNJ’s taxable income was higher than its reported profit before tax.

    Only six stores opened in Q3, making up for 25 in 9 months. PNJ will have to speed up store expansion in Q4 to fulfill this year’s target of 40 new stores. Same stores sale growth (SSSG) recovered to 10% in October, from 0% in July.