Company Update: Phu Nhuan Jewelry (PNJ: HSX)

Equities | Vietnam | Consumer Discretionary - Durables & Apparel
Phu Nhuan Jewelry (PNJ : HSX)

Company Update 31 August 2020
Add (from Buy) FY20 profit cut by 6.1%; downgrade to Add

Target price: VND65,000 (from VND67,700)
Up/downside: 8.3%
▪ We are downgrading PNJ to Add (from Buy), and lowering our target price
Stock data, as of 31 August 2020 by 4.0% to VND65,000. 7M20 results suggest that only 48% of our
Price (VND) 60,000 previous forecast for FY20 had been met.
52 week high / low (VND) 90,040 / 45,901
Px. perf: (3 / 6 / 12 months) (%) -6.9/ -24.9/ -15.0
▪ We have cut our FY20 earnings forecast by 6.1% and now expect to see a
Shares outstanding (mn) 223
Free float shares (mn) 180 19% y/y decline, while for FY21 we cut earnings by 5.1% and are
Trading value (5D avg) (VND mn) 73,854 forecasting a 14.5% recovery y/y in FY21.
Market Cap (VNDbn) 13,507
Market Cap (USDmn) 586 ▪ Despite risks and challenges, the outlook for the rest of 2H20 will be
Total FOL shares room (mn) 110
Current FOL shares room (mn) 0.000 characterised by market share gains. FY21 will see positive earnings
Foreign owned ratio 49.0% momentum which will accelerate into FY22. Trading at an FY20 P/E of
Foreign ownership limit 49.0% 15.1x, PNJ is still cheap compared to its historic P/E of 16.7x.
Price chart
PNJ Common (PNJ)
Event: Further analysis of 7M results
Closing price Relative To VNIndex (RHS)
105,700 639 PNJ announced its July results, which while showing continued recovery,
95,700 579
85,700 519
remained below our expectations. Net sales increased by 10% y/y to
75,700 459 VND1,307bn while net profit only rose by 2.3% y/y to VND55.4bn.
65,700 399
55,700 339
45,700 279
Cumulative 7M20 net sales came to VND9.053bn, up 3.7% y/y but net profit
35,700 219 has fallen by 24% y/y to VND495bn. To date, net profit reported equated to
25,700 159
15,700 99 only 48.1% of our previous full year forecast of VND1,029bn.
5,700 39
10
Impact: Lowering our FY20 and FY21 forecasts

Vol mn
5
11/19
9/15
7/16
5/17
3/18
1/19
We have revised down our FY20 net profit forecast by 6.1% to VND967bn,
(19% decrease y/y). However, we are revising up sales forecasts by 3.7% due
to stronger expectations for gold jewelry retail and gold bar sales.
Rolling P/E chart
Gross profit margin is cut to 19.3% from 19.5% due to the higher contribution
33.0
from gold and gold related products. Increased financial and SG&A expenses
28.0
are expected given higher debt and rising promotion & marketing expenses.
23.0
18.0
We also revise down our FY21 net profit forecast by 5.1% to VND1,107bn,
13.0
implying a moderate 14.5% recovery in earnings; further acceleration in
earnings growth is expected in FY22.
8.0
01-20F
07-20F
07-17A
01-18A
07-18A
01-17A
01-19A
07-19A
Valuation and recommendation

Using a DCF methodology and following the downward revision in our
forecasts, we have revised down our target price by 4.0% to VND65,000.
Given our expectations of weaker earnings in FY20 and a modest recovery in
FY21 we downgrade PNJ to Add from Buy.
Our target price suggests a forward P/E of 16.4x for FY20 and 14.3x for FY21,
lower than its historical forward P/E of 16.7x. On a regional basis, PNJ is
trading at discount to its peer group P/E of 20x for FY20 and 15.9x for FY21.
Financial summary 12-19A 12-20F 12-21F 12-22F

Net sales (VNDbn) 17,001 16,177 17,772 19,973
Net sales growth 16.7% (4.8%) 9.9% 12.4%
Gross profit (VNDbn) 3,461 3,116 3,523 4,126
Gross profit growth 24.5% (10.0%) 13.1% 17.1%
EBITDA (VNDbn) 1,679 1,430 1,619 1,958
EBITDA growth 28.7% (14.9%) 13.3% 20.9%
Net profit (VNDbn) 1,194 967 1,107 1,366
Net profit growth 24.4% (19.0%) 14.5% 23.4%
EPS (VND) 4,896 3,965 4,540 5,602
Analysts EPS diluted (VND) 4,896 3,965 4,540 5,602
Bui Nguyen Cam Giang, CFA EPS diluted growth 6.2% (19.0%) 14.5% 23.4%
giang.bnc@hsc.com.vn BVPS (VND) 20,179 22,535 25,330 29,200
+84 28 3823 3299 Ext. 369 DPS (VND) 1,516 1,800 1,800 1,800
EV/EBITDA (x) 9.5 11.1 9.9 8.2
Tran Huong My P/E (x) 12.3 15.1 13.2 10.7
my.th@hsc.com.vn P/E diluted (x) 12.3 15.1 13.2 10.7
+84 28 3823 3299 Ext. 362 P/B (x) 2.97 2.66 2.37 2.05
Dividend yield 2.5% 3.0% 3.0% 3.0%
Institutional research team
Source: Company data, (F): HSC forecasts
www.hsc.com.vn Powered by the EFA Platform Page 1
Please refer to the disclosures of potential conflict of interest and the disclaimer at the end of this report
A tough FY20; but long-term prospects remain intact

PNJ announced its July results which showed continued recovery. However, results
were below our expectations - cumulative 7M20 net profit only completed 48% of
our previous full year forecast and, annualised, would have missed our old full year
expectations by 33%.
To partially adjust for weaker than expected 7M20 earnings, we have revised down
our FY20 profit by 6.1% to VND967bn, which implies a 19% y/y decrease in net
profit.
While PNJ has been gaining market share in a period of exceedingly weak jewelry
industry demand, lots of challenges remain. Nevertheles we are still expecting that
2H20 earnings will be stronger than the reported 1H20 net profit of VND440bn, not
least because of the 4Q wedding season.
We have also revised down our FY21 forecasts by 5.1% to VND1,107bn, which
suggests a moderate recovery (driven by increasing demand and a low base effect)
of 14.5% y/y. For FY22, we expect to see a further accleration in earnings and
expect to see y/y growth of 23.4%,
We cut our target price by 4.0% to VND65,000/share following the downward
revision in our forecasts. As such we downgrade PNJ to Add from Buy.
Profit recovery has so far been weaker than expectated

July results continued to show a post-lockdown recovery. Net sales increased by 10%
y/y to VND1,307bn. Net profit however only rose by 2.3% y/y to VND55.4bn as gross
profit margin was squeezed to 17.6% vs. 19.5% in July FY19. This was due to a
higher contribution of gold bar sales and high gold content jewelry.
Cumulative 7M20 net sales came to VND9.053bn, up 3.7% y/y, while net profit fell by
24% y/y to VND495bn. This profit decline reflects a loss in April (of VND91bn) which
resulted from the store closures implemented during the nationwide lockdown. As
with the month of July, gross margins have been evident throughout the period due
to higher contributions of gold bar sales and high gold content jewelry; overall
profitability was eroded as a result, despite an increase in sales.
As a result, earnings for 7M20 have met only 48% of our previous forecast for the
whole year, indicating that earnings will be short by 33% for the full year.
Based on our new forecast of VN967bn (which reflects a cut of 6.1%) for FY20, the
company has met 51% of our updated earnings expectations. Thus, we continue to
expect an acceleration of earnings in the last few months of the year, but not quite as
strongly as in our previous forecast. The key driver here will be seasonal factors, and
the 4Q wedding season in particular.
Figure 1: Monthy net sales Figure 2: Monthly net profits

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Source: Company data Source: Company data
www.hsc.com.vn Page 2
Gross profit margins are under pressure

Gross profit fell by 0.8% y/y to VND230bn in July, implying a GPM of 17.6%, down
from 19.5% in July FY19. For 7M20, gross profit fell by 8.5% y/y to VND1,753bn, and
margins narrowed to 19.4% from 21.5% in 7M19. This was because of a shift in
product mix towards lower margin products.
The COVID-19 pandemic has certainly led to changes in consumer behavior. We
have seen higher demand for gold bars and high gold content jewelry as investors
search for safe havens. These changes were reflected in PNJ’s sales mix as we saw
a higher sales contribution from these products when compared to same period last
year. As gold bar sales and high gold content jewelry result in lower gross margins
vs. other jewelry products, the company’s overall GPM has been negatively
impacted. In detail:
(1) Gold bar sales contributed 27.4% to Jul20 sales vs. 19% in Jul19; and 23.7% in
7M20 vs. 19.8% in 7M19. Normally gold bars carry very thin gross profit margins,
usually in range of 1-3%, while jewelry achieves margins of 30%.
(2) In Jul20, gross profit margins of jewelry declined to less than 30%, from 32.5%
in Jul19. For the whole of 7M20, gross profit margins declined to 30.5% from
32.3% in 7M19 – this reflected increased sales of high gold content jewelry,
which achieves lower gross margin than other types of jewelry. However,
detailed breakdowns have not yet been made available.
(3) Under our assumptions, the sales mix for FY20 would be 54.2% for retail, 26.3%
for gold bar, and 16.6% for wholesales. This is a change from a mix of 56% for
retail, 20.4% for gold bars and 21.2% for wholesale in FY19.
For FY21 our sales mix would be 56.9% for retail, 24.4% for gold bars and
15.8% for wholesale. From FY21 we also anticipate a return of the
premiumization trend as, in-line with economic recovery, disposable income will
continue to rise once again.
Figure 3: Monthly sales contribution
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul
Retail sales Wholesales Gold bar Others
Source: PNJ
Market share gains in a time of weakness

The jewelry industry has been hard hit by the pandemic, both during and post social
distancing. According to World Gold Council, in 2Q20, Vietnam’s jewelry sales
volume dropped by 65% y/y. On a quarterly basis, industry jewelry volumes fell to
1.6 tons, from 4.5 tons in 2Q19, and was at 4.5 tons in 1Q20. For the whole of 1H20,
volumes declined by 38.4% y/y to 6.1 tons from 9.9 tons in 1H19.
Mom & pop jewelry shops, who are the principal customers of PNJ’s wholesale
business, have been particularly negatively impact by declining demand, and many
have have ceased operations entirely. With massive closures of mom & pop shops,
PNJ’s wholesale sales have fallen significantly by 33% y/y in June, 36% y/y in July
and 22.2% y/y in 7M20.
Going forward, we would expect a slow recovery in wholesale demand because
mom & pop shops will take time to recover. We asume that PNJ’s wholesale
revenues will slowly recover by 5% in FY21, and then 7% in FY22, in-line with the
recovery of the whole market. We are forecasting substantially higher growth for the
retail business, at 15.2% and 18% in FY21 and FY22, respectively.
The demise of mom & pop shops has meant that PNJ is gaining market share
Although PNJ’s wholesale business has seen a collapse in sales, PNJ’s retail sales
have recovered well post lockdown. The company’s retail sales started to recover in
May, with 19.6% growth y/y. Sales accelerated in June, rising 25.5% y/y, while July
saw a 16% y/y increase.
For the whole of 7M20, jewelry retail sales have grown slightly by 3.7% y/y to
VND5,216bn; while wholesale sales have dropped by 22.2% y/y. On the other hand,
retail’s contribution to total sales was slightly up to 57.6% in 7M20 vs. 56.3% in 7M19;
wholesale contribution declined sharply to 16.4% in 7M20 vs. 21.4% in 7M19
We estimate that by the end of 2Q20, PNJ’s market share had increased to around
50% from 38% at the end of FY19 and 42% at the end of 1Q20. We expect that PNJ
will continue to gain market share in FY21 and FY22. We assume that PNJ’s market
share will increase to 55% in FY21; and then 60% in FY22, from 50% at the end of
2Q20.
We expect that the contribution of wholesale will drop to 16.6% in FY20 from 21.2%
in FY19; then will further decline to 15.8% in FY21 and 15.1% in FY22. Retail will
also see a slower decline in its contribution to 54.2% in FY20 from 56% in FY19, but
then recover to 56.9% in FY21 and 59.7% in FY22.
Figure 4: Monthly y/y sales growth by segment

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Total sales Retail Wholesales Gold bar
Source: PNJ
Challenges ahead in 2H20; FY20 profit forecast cut by 6.1%

Although PNJ’s retail sales have been recovering and market share has increased,
difficulties will still persisting as we go into the last five months of FY20. With the
return of COVID-19 in Da Nang and some other provinces, PNJ has temporarily shut
operations of all 15 stores in Da Nang since late July.
Futhermore, 2H19 earnings represent a very high base thanks to strong market
demand seen at that time. It is therefore likely that 2H20 earnings will see a y/y
decline. We forecast 3Q20 net profit to decrease by 6.0% y/y to VND196bn and
4Q20 net profit will decline by 14.0% y/y to VND331bn. Accordingly, 2H20 net profit
is forecast to be VND527bn, down 11% y/y.
However, this is still stronger than reported 1H20 net profit of VND440bn and reflects
accelerating earnings momentum (albeit subdued), market share gains and the 4Q
wedding season.
For the whole of FY20, we have revised down net profit forecasts by 6.1% and are
now forecastng a decline of 19% to VND967bn. However, we have raised our net
sales forecast by 3.7% y/y to VND16,177bn, with higher expectations for gold bar
and gold jewelry retail. We have also reduced our expectations for gross margins to
19.3% from 19.5% in order to reflect higher gold content in the overall product mix.
We are also forecasting increased financial expense to VND153bn from VND119bn
due to rising debt (net debt to equity ratio is now 47%) and greater SG&A expenses;
the company will continue to spend on marketing and promotions in order to push
sales.
Long-term outlook remains intact

Although FY20 will be a tough year, we still believe the outlook is positive for PNJ
over the medium and long-term. Once the economy fully recovers, we should see
more high and middle-income shoppers and the comeback of the ‘premiumization’
trend. PNJ, as a luxury product retailer, will be a direct beneficiary.
In addition, the on-going customer-centric strategy should support robust long-term
growth. PNJ has just announced a new focus on improving the customer experience.
Accordingly the retail department will now be the “Customer & Retail” - the old retail
department was only in charge of retail operations but the new “Customer & Retail”
division will now include customer service, retail marketing, new sales formats and
new partnership development. This new department now will be directly under the
management of Mr. Le Tri Thong, the CEO.
We expect FY21 net profit will recover by 14.5% y/y from a low base in FY20 to
VND1,107bn. However, this new forecast is 5.1% below our previous forecast and
reflects the downgrade in FY20 earnings.
For the next five years, from FY21 to FY25, we forecast that PNJ’s net profit will
grow at a CAGR of 19%.
Our target price is revised down by 4.0%; downgrade to Add

We have revised down our target price by 4.0% to VND65,000, implying an upside of
8.3% from the current market price. Accordingly, we are downgrading our rating to
Add.
Our new target price implies a FY20 P/E of 16.4x and FY21 P/E of 14.3x. These
valuations are lower than the historical P/E of 16.7x. On a regional basis PNJ is
trading at discount to the peer average P/E of 20x for FY20 and 15.9x for FY21.
The upside risk to our target price would be greater than expected strengthening of
the jewelry industry in FY21 / FY22. This would result from a stronger economic
recovery in the economy, reduced under employment, and an increase in disposable
income. Of course, the key downside risk is a weaker FY21/FY22.
Revising down our FY20 and FY21 forecasts

We revise down our forecast for FY20 net profit by 6.1% to VND967bn, down 19%
y/y. We are now forecasting higher sales, but this is offset by higher financial &
SG&A expenses. We also expect to see lower gross margins given a greater
contribution of lower margin gold bars and gold jewelry in the sales mix.
For FY21 we also cut our profit forecast by 5.1% to VND1,107bn, up 14.5% y/y.
Assuming that COVID-19 will be completely contained in FY20, we expect moderate
growth for PNJ in FY21 and an acceleration in earnings in FY22.
Figure 5: FY20 & FY21 forecasts revision

VNDbn Old forecasts New forecasts % change % y/y
FY20
Net sales 15,605 16,177 3.7% -4.8%
Net profit 1,029 967 -6.1% -19.0%
FY21
Net sales 16,846 17,772 5.5% 9.9%
Net profit 1,167 1,107 -5.1% 14.5%
Source: HSC
FY20: Cut profit by 6.1%

We revise up FY20 net sales forecast by 3.7% y/y to VND16,177bn but revise down
net profit forecast by 6.1% and now expect a 19% decline in earnings to VND967bn.
Our new forecasts suggest that in 2H20, net sales will come down by 8.9% y/y to
VND8,431bn and net profit will decline by 11.1% y/y to VND527bn from a high base
in 2H19; while in our previous forecast we had expected 2H20 net sales and net
profit to decline by 15.1% and 0.5%, respectively. Recall that in 2H19, net sales and
net profit grew very strongly by 28.3% and 33.7% y/y, respectively, thanks to strong
demand for retail jewelry at the time and the smooth introduction of the newly-
launched ERP (enterprise resource planning).
We are expecting higher financial expense following an increase in debt. SG&A
expenses will also increase as we think that the company will continue to spend on
marketing and promotion in order to push sales. Additionally, we also lower our GPM
forecast given the increase in sales of lower margin gold jewelry and a higher sales
contribution from gold bars.
Figure 6: FY20 forecast revision

Net sales 15,605 16,177 3.7% -4.8%
Gross profit 3,047 3,116 2.3% -10.0%
Net financial expense 119 153 28.8% 31.1%
SG&A 1,625 1,754 7.9% -4.6%
Net profit 1,029 967 -6.1% -19.0%
GPM 19.5% 19.3%
SG&A/sales 10.4% 10.8%
Net profit 6.6% 6.0%
Source: HSC
Figure 7: FY20 net sales breakdown

Gold jewelry retail 8,088 8,525 5.4% -7.2%
Siliver jewelry 225 246 9.4% -7.0%
Wholesales 3,035 2,678 -11.8% -25.0%
Gold bars 3,893 4,247 9.1% 20.0%
Others 364 481 32.1% 8.8%
Source: HSC
Figure 8: 2H20 estimates

2H20F - Old 2H20F - New
VNDbn 2H19 %y/y % y/y % change % y/y
forecast forecast
Net sales 9,255 28.3% 7,859 -15.1% 8,431 7.3% -8.9%
Net profit 593 33.7% 590 -0.5% 527 -10.6% -11.1%
Our key assumptions are set out as below.

• Store count at year end will be 343 stores, slightly lower than the 348 stores in
our previous forecast. We forecast that the company will close 33 stores,
including 20 gold stores and 10 silver stores; and open 31 new gold stores. The
average store count in the year would be 319 stores vs. 322 stores in previous
forecast.
• We now assume a 3.0% decline in the same store sales growth (SSSG), which
is more positive than our old forecast, a decline of 12%. In 1H20, actual SSSG
was negative 5% and we expect that the SSSG will still be slightly negative at
around 2% in 2H20, given the high base in 2H19.
• Total sales are revised up by 3.7% to VND16,177bn, for a decline of 4.8% y/y.
Of which we expect higher gold jewelry and silver jewelry sales, higher gold bar
sales but lower wholesale sales.
✓ Gold jewelry retail will make sales of VND8,525bn, down 7.2% y/y, but 5.4%
above the previous forecasts of VND8,088bn.
✓ Silver jewelry retail will make sales of VND246bn, down 7.0% y/y, and 9.4%
lower than our previous forecast of VND225bn.
✓ Gold jewelry wholesale sales were revised down by 11.8% to VND2.678bn,
down 25% y/y, following weak demand from mom & pop shops during the
pandemic.
✓ Gold bar sales will be VND4,247bn, up 20% y/y, reflecting an upward
revision of 9.1% thanks to rising demand for gold bars as a way of saving in
the pandemic.
• We lower our overall gross margin forecast by 20bps to 19.3% (vs. 19.5% in last
update) as we increase our forecast sales contribution of gold bars to 52.9%
(from 51.8% previously). We also reduce our forecast on gold jewelry retail GPM
by 170bps to 30.8% as demand for high-gold content products has been rising in
the pandemic and these products normally have lower margins.
• We revise up SG&A expenses by 7.9% to VND1,754bn, for a decline of 4.6% y/y.
The company will continue to spend on marketing and promotion to push sales.
• Net financial expense is forecast at VND153bn, up 28% y/y and 28.8% higher
than our previous forecast; this follows on from our increased forecast for debt.
We expect that the company will intentionally keep inventories of raw gold at a
high level to meet the high demand for gold bars and high-gold-content jewelry.
Hence, we forecast average inventory levels at VND6,107bn, up 16% y/y. For
that reason, average debt is forecast to increase strongly to VND2,610bn, up 40%
y/y and 11% higher than our previous forecast.
FY21: Cut profit by 5.1%

We revise up our sales forecast by 5.5% to VND17,772bn, up 9.9% y/y and revise
down our net profit forecast by 5.1%; this implies a 14.5% y/y increase in earnings to
VND1,107bn. We expect a moderate recovery in FY21, based on the assumption
that we see a partial recovery in disposable income and consequently jewelry
demand.
Our key assumptions are as set out below:
Figure 9: FY21 forecast revision

Net sales 16,846 17,772 5.5% 9.9%
Gross profit 3,384 3,523 4.1% 13.1%
Net financial expense 127 157 23.7% 2.3%
SG&A 1,799 1,983 10.2% 13.1%
Net profit 1,167 1,107 -5.1% 14.5%
GPM 20.1% 19.8%
SG&A/sales 10.7% 11.2%
Net profit 6.9% 6.2%
Source: HSC
Figure 10: FY21 net sales breakdown

Gold jewelry retail 9,071 9,846 8.5% 15.5%
Siliver jewelry 236 258 9.4% 5.0%
Wholesales 3,187 2,812 -11.8% 5.0%
Gold bars 3,971 4,332 9.1% 2.0%
Others 382 524 37.1% 8.9%
Source: HSC
• PNJ will open 30 new stores to bring store count at the year end to 373 stores
(up 1.4% from 368 stores in previous forecast).
• SSSG is forecast at 5% (compared to -5% in FY20) which assumes higher store
traffic and higher bill values thanks to a partial recovery in disposable income
and jewelry demand.
• Total sales are revised up by 5.5% to VND17,772bn, for a growth of 9.9% y/y. In
detail:
✓ Gold jewelry retail will generate sales of VND9,846bn, up 15.5% y/y. This
means an upward revision of 8.5% from previous forecasts of VND9,071n.
✓ Silver jewelry retail will achieve sales of VND258bn, up 5.0% y/y. This
means a revision upwards of 9.4% from our previous forecast of VND236bn.
✓ Gold jewelry wholesale will achieve revenues of VND2,812bn, up 5% y/y,
but down 11.8% from our previous forecast. We expect industry demand will
recover moderately, at around 5%, which is slower than our forecast for
PNJ’s retail sales growth of 15.5%.
✓ Gold bars will achieve sales of VND4,332bn, up 2% y/y. This means a
revision upwards of 9.1% from our previous forecast of VND3,971bn.
• Gross margin is expected to be 19.8% in FY21, which is lower than our previous
forecast of 20.1%; we assume lower GPM for gold jewelry retail, at 31% vs. 32.5%
in our previous forecast.
• We revise up SG&A expenses by 10.2% to VND1,983bn, for an increase of 13.1%
y/y due to store expansion and continuous investment in digital transformation.
• Net financial expense comes to VND157bn, up 23.7% from our previous
forecast and up 2.3% y/y.
For FY22 we expect an acceleration of 23.4% in net profit. We forecast FY22 net
sales at VND19,973bn, up 12.4% y/y and a net profit of VND1,366bn, up 23.4% y/y.
This assumes SSSG of 7%, 30 new store opening and gross margin improvements
to 20.7% (from 19.8% in FY21).
While the recovery in FY21 is expected to be sedate due to only a moderate

recovery in disposable income, we are expecting that the economy will be recovering
much more strongly in FY22. We anticpate seeing more high and middle-income
shoppers, was well as the comeback of the ‘premiumization’ trend.
Valuation and recommendation

We have revised down our target price by 4.0% to VND65,000/share following
downward revisions in our forecast. We also downgrade our rating for PNJ to Add
from Buy with an upside of 8.3%. Our new target price gives us a FY20 forward P/E
of 16.4x and a FY21 forward P/E of 14.3x.
Our DCF valuation uses a risk-free rate of 4.5% (from 3.4% previously), an equity
risk premium of 7.0% (from 8.8% previously), a beta of 1.2 (from 1.0 previously, as
updated by Bloomberg) and a terminal growth rate of 3.0% (from 4.0% previously)
We note that this year the company is increasing debt in order to maintain a high
level of inventory for raw gold. This is in order to meet the high demand for gold bars
and high-gold-content jewelry. We expect that this strategy of maintaining high
inventories will be in place for at least two years, which implies that debt will also
remain high.
We keep our expectation for a cash dividend of VND1,800/share/year in the coming
years; this implies a dividend yield of 3% (at the current share price). The cashflows
generated will be enough to support this cash dividend.
Our assumptions derive an intrinsic value of VND65,000, which is 4.0% lower than
our previous target price of VND67,700. This gives us an FY20 forward P/E of 16.4x
and FY21 forward P/E of 14.3x.
At its current market price, PNJ is trading at an FY20 P/E of 15.1x, which falls
between its 5-year-mean of 16.7x and one standard deviation below the mean of
12.6x. On a regional basis, PNJ is trading at a discount to its peers average P/E of
20x for FY20 and 15.9x for FY21
We downgrade our rating for PNJ to Add from Buy, with a new target price of
VND65,000 per share. The new target price represents an 8.3% upside from the
current market price.
Figure 11: DCF Valuation

VNDbn FY21F FY22F FY23F FY24F FY25F
Net income 1,107 1,366 1,647 1,937 2,220
+ Depreciation and amortization 79 87 97 107 118
+ Interest expense * (1-Tax rate) 125 132 151 155 170
- Changes in Working Capital (544) (728) (546) (751) (833)
- Capex (259) (221) (250) (219) (241)
FCFF 508 637 1,099 1,229 1,434
Terminal growth 3.0%
FY2025 Terminal value 19,769
Undiscounted cash flow 508 637 1,099 1,229 21,203
Discount factor 1.00 0.91 0.82 0.74 0.67
Firm value (PV of FCFF) 508 577 901 911 14,237
Sum of PV 17,133
Debt (at the end of FY21) 2,843
Cash (at the end of FY21) 349
Equity value 14,639
Number of shares (mn shares) 225
Fair price (VND) 65,026
Source: HSC
Figure 12: WACC assumptions

Equity weight 70.0% Target weight
Beta 1.2 Bloomberg
Risk free rate 4.5% VGB 10-year bond rate - 3yr average
Equity risk premium 7.0% Standard assumption
Cost of Equity 12.9%
Debt weight 30% Target weight

Cost of Debt 6.0% Assumption
Tax rate 20.0% Assumption
After-tax cost of debt 4.8%
WACC 10.5%
Source: HSC, Bloomberg
Figure 13: Historical forward P/E

34
32
30
28
26
24
Mean + 1sd
22
20
18 Mean
16
14
12
Mean - 1sd
10
8
6
4
2
0
01/04/2016
03/04/2016
05/04/2016
07/04/2016
09/04/2016
11/04/2016
01/04/2017
03/04/2017
05/04/2017
07/04/2017
09/04/2017
11/04/2017
01/04/2018
03/04/2018
05/04/2018
07/04/2018
09/04/2018
11/04/2018
01/04/2019
03/04/2019
05/04/2019
07/04/2019
09/04/2019
11/04/2019
01/04/2020
03/04/2020
05/04/2020
07/04/2020
Source: HSC, Bloomberg
Figure 14: PNJ - Regional peers

Market cap EV/EBITDA EV/EBIDA
Ticker P/E FY20 P/E FY21 Company name
(USDmn) FY20 FY21
1929:HK CHOW TAI FOOK JEWELLERY GROUP LTD 11,225 20.2 13.6 15.9 10.7
600612:CH LAO FENG XIANG CO. LTD - A 3,112 19.8 8.5 16.7 7.2
002867:CH CHOW TAI SENG JEWELLERY CO LTD 2,686 17.8 13.3 14.7 11.0
RJEX:IN RAJESH EXPORT 1,877 12.9 11.6 11.4 N/A
VGM:IN VAIBHAV GLOBAL LTD 780 23.3 8.9 N/A N/A
UHR:SW SWATCH GROUP 10,846 175.5 15.8 22.3 8.2
TIF:US TIFFANY & CO 15,035 68.8 28.3 33.0 17.6
8050:JP SEIKO HOLDINGS CORP 586 9.8 10.5 8.6 8.1
Median 2,899 20.0 12.5 15.9 9.5
Source: Bloomberg
Financial statements and key data

Income statement (VNDbn) 12-19A 12-20F 12-21F 12-22F Cashflow statement (VNDbn) 12-19A 12-20F 12-21F 12-22F
Net sales 17,001 16,177 17,772 19,973 Operating cashflow (673) 837 641 777
COGS (13,540) (13,061) (14,248) (15,847) Investing cashflow (206) (243) (259) (221)
Gross profit 3,461 3,116 3,523 4,126 Financing cashflow 771 (324) (402) (416)
Net financial income (117) (153) (157) (163) Net cashflow (107) 270 (20) 140
SG&A (1,838) (1,754) (1,983) (2,255)
Operating profit 1,506 1,209 1,384 1,708 Cash & equivalents at period start 207 95 369 349
EBITDA 1,679 1,430 1,619 1,958 Forex effects (0) 0 0 0
PBT 1,507 1,209 1,384 1,708 Cash & equivalents at period end 99 365 349 489
NPAT 1,194 967 1,107 1,366
Net profit 1,194 967 1,107 1,366 Free cash flow 0 0 0 0
Balance sheet (VNDbn) 12-19A 12-20F 12-21F 12-22F Key ratios 12-19A 12-20F 12-21F 12-22F
Assets Basic Financials and Valuation

Current assets 7,333 7,432 8,056 9,063 EPS (VND) 4,896 3,965 4,540 5,602
Cash & cash equivalents 95 369 349 489 EPS diluted (VND) 4,896 3,965 4,540 5,602
Short-term investments 0 0 0 0 EBITDA (VNDbn) 1,679 1,430 1,619 1,958
Receivables 130 202 222 250 BVPS (VND) 20,179 22,535 25,330 29,200
Inventories 7,030 6,792 7,409 8,241 DPS (VND) 1,516 1,800 1,800 1,800
Other current assets 78 69 75 84 P/E (x) 12.3 15.1 13.2 10.7
P/E diluted (x) 12.3 15.1 13.2 10.7
Long-term assets 1,270 1,447 1,653 1,818 EV/EBITDA (x) 9.5 11.1 9.9 8.2
Long-term receivables 71 78 86 94 P/B (x) 2.97 2.66 2.37 2.05
Fixed assets 924 1,099 1,280 1,413 Dividend yield 2.5% 3.0% 3.0% 3.0%
Investment properties 0 0 0 0 Profitability
Long-term investments 0 0 0 0 Gross margin 20.4% 19.3% 19.8% 20.7%
Other long-term assets 247 242 259 283 EBITDA margin 9.9% 8.8% 9.1% 9.8%
Goodwill 0 0 0 0 Pretax margin 8.9% 7.5% 7.8% 8.6%
Total assets 8,603 8,879 9,709 10,882 Net margin 7.0% 6.0% 6.2% 6.8%
SG&A/sales 10.8% 10.8% 11.2% 11.3%
Liabilities and equity ROAE 28.7% 20.0% 20.5% 22.2%
Liabilities 4,026 3,802 4,003 4,303 ROAA 15.9% 11.1% 11.9% 13.3%
Current Liabilities 4,018 3,791 3,991 4,292 Liquidity
Long-term Liabilities 8 11 11 11 Current ratio 1.83 1.96 2.02 2.11
Quick ratio 0.08 0.17 0.16 0.19
Owners' equity 4,577 5,077 5,707 6,579 Leverage
Share capital 2,253 2,253 2,253 2,253 Total debt/equity 57.1% 54.2% 49.9% 45.6%
Retained earnings 1,045 1,496 2,070 2,873 Total debt ratio 46.8% 42.8% 41.2% 39.5%
Funds and other capital 1,279 1,328 1,384 1,452 EBIT interest coverage ratio 14.1 9.0 9.8 11.3
Minority interest 0 0 0 0 Efficiency
Days sales outstanding 3.06 3.75 4.36 4.31
Total liabilities and equity 8,603 8,879 9,709 10,882 Days in inventories 162 194 182 180
Days payables outstanding 13.9 14.3 8.7 8.7
Net debt 2,519 2,385 2,498 2,510 Cash conversion cycle (days) 151 183 178 176
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Company Update: Phu Nhuan Jewelry (PNJ: HSX)

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Equities | Vietnam | Consumer Discretionary - Durables & Apparel

Phu Nhuan Jewelry (PNJ : HSX)

Add (from Buy) FY20 profit cut by 6.1%; downgrade to Add

Impact: Lowering our FY20 and FY21 forecasts

Valuation and recommendation

Financial summary 12-19A 12-20F 12-21F 12-22F

www.hsc.com.vn Powered by the EFA Platform Page 1

A tough FY20; but long-term prospects remain intact

Profit recovery has so far been weaker than expectated

Figure 1: Monthy net sales Figure 2: Monthly net profits

Source: Company data Source: Company data

Gross profit margins are under pressure

Figure 3: Monthly sales contribution

Retail sales Wholesales Gold bar Others

Market share gains in a time of weakness

Figure 4: Monthly y/y sales growth by segment

Total sales Retail Wholesales Gold bar

Challenges ahead in 2H20; FY20 profit forecast cut by 6.1%

Long-term outlook remains intact

Our target price is revised down by 4.0%; downgrade to Add

Revising down our FY20 and FY21 forecasts

Figure 5: FY20 & FY21 forecasts revision

FY20: Cut profit by 6.1%

Figure 6: FY20 forecast revision

Figure 7: FY20 net sales breakdown

Figure 8: 2H20 estimates

Source: Company data, (F): HSC forecasts

Our key assumptions are set out as below.

FY21: Cut profit by 5.1%

Figure 9: FY21 forecast revision

Figure 10: FY21 net sales breakdown

While the recovery in FY21 is expected to be sedate due to only a moderate

Valuation and recommendation

Figure 11: DCF Valuation

Figure 12: WACC assumptions

Debt weight 30% Target weight

Source: HSC, Bloomberg

Figure 13: Historical forward P/E

Figure 14: PNJ - Regional peers

Financial statements and key data

Assets Basic Financials and Valuation

Explanation of Institutional Equity Research Ratings

HEAD OFFICE HANOI OFFICE

Financial Institutions Consumer Industrials

Pham Lien Ha Tran Huong My Vo Thi Ngoc Han

Bui Nguyen Cam Giang

Real Estate Fixed Income Energy and Utilities

Ho Thi Kieu Trang Luu Cong Thanh Truong Thu My

Pham Anh Thu Vu Hoai Linh

Nguyen Duy Nam

Economics/Macro Corporate Access Market Data

Pham Vu Thang Long Vu Thi Dung Vo Thi Nhat Minh

Huynh Thi Kim Khue

Sales Trading Research

Stephen McKeever Tran Tan Dat Chris Hunt

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