UPDATE REPORT 31-Oct-18. Phu Nhuan Jewellery JSC (HOSE: PNJ) Outstanding business PNJ (HOSE)

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1 UPDATE REPORT 31-Oct-18 Rating PNJ (HOSE) NEUTRAL Gold/Silver Jewelries Market price (VND) 97,000 Target price (VND) 97,700 Annualized price return (%) 0.7% Expected dividend yield (%) 2.1% Expected total return (%) 2.8% VND '000 Price - Volume /17 01/18 04/18 07/18 Stock performance (%) YTD 1M 3M 12M Absolute 7% -8% 2% 38% Relative 13% 2% 5% 26% Source: Bloomberg, compare to VNIndex Stock Statistics 52-week range (VND) 31-Oct k-135.7k Shares o/s (m) 162 Mkt cap (VND bn.) 15,727 Mkt cap ($m) 674 Foreign % owned 49% Est. free float (ml. shares) 104 3m avg. daily vol. (shares) 529,308 VND/USD 23,344 Index: VN-Index/HNX 915/105 Source: Bloomberg, KISVN Ownership 31-Oct-18 Mrs. Dung Cao & family 15.8% Dragon Capital Group 9.0% Vinacapital Group 8.9% Management & Union 8.3% Others 58.0% Source: StoxPlus, KISVN (Mr.) Hoang Ha Nguyen (+84 28) Ext: 1463 ha.nh@kisvn.vn '000 shares Phu Nhuan Jewellery JSC (HOSE: PNJ) Outstanding business Pros - PNJ is Vietnam's No.1 gold jewelry manufacturer & retailer with approximately 6% market share thanks to 243 gold jewelry stores nationwide and more than 1,000 top-notch jewelers and designers team in Vietnam. - The proportion of gold jewelry consumption is increasingly outpacing gold bars since Decree 24, The market share of mom-and-pop jewelry shops, c.80%, will narrow soon thanks to the Circular 22/2013. PNJ management plans to reach 320 gold stores by the end of A management team with outstanding ability, long-term vision and an awareness of continuous innovation. - Outperformance in domestic jewelry market with ROE higher than 30% consistently, SSSG over 20%, low debt and inventory turnover approximately 3 times/year. - 9M2018: PNJ sales increased 35.5% YoY, NPAT up 37.8% YoY, SSSG at 23% and consolidated gross margin improved from 17.5% to 18.6%. EPS trailing at VND5.09k. - In 2019, we conservatively project that PNJ sales and NPAT will reach VND16,103bn and VND1,205bn - up 17.9% and 21.2% YoY. EPS forward 2019 reached VND6.5k. Cons: - Luxury industries are often highly dependent on the economic cycle. - Long-term threat comes from the inevitable change in the consumption pattern of the Millennials. Global leading jewelry firms such as Tiffany, Richemont and Chow Tai Fook have been running flat for many years despite efforts to transform into digital channels. - PNJ's new wrist-watches retailing segment is still slow in progress, focusing on local female customers while their consumption habits can not be changed quickly. - Foreign ownership is full at 49%, which is hard to be lifted. - Investors' anxiety due to the prosecution of a person related to PNJ management in Dong A Commercial Bank major case. - P/E trailing 12 months at 19 times, higher than the average Asian leading jewelry firms (15x), and the VNIndex average (16x). Valuation - Using adjusted historical 5Y average P/E of PNJ and EPS forward 2019, we arrive at PNJ target price of VND97.7k per share ending The total upside was 2.8%, including VND2k cash dividend. NEUTRAL recommendation. VND bn E 2019E 2020E Net revenue (VND bn.) 8,565 10,977 13,663 16,103 18,063 Growth (%) 11.1% 28.2% 24.5% 17.9% 12.2% Operating profit (VND bn.) ,277 1,543 1,752 Margin (%) 8.5% 8.6% 9.3% 9.6% 9.7% Net profit (VND bn.) ,205 1,376 Margin (%) 5.3% 6.6% 7.3% 7.5% 7.6% Outstanding shares (mil) EPS (bonus-adj, VND) 2,503 4,027 5,525 6,500 7,206 Growth (%) 496.3% 60.9% 37.2% 17.6% 10.9% ROE (%) (excl. minority) 32.0% 32.6% 30.7% 30.9% 29.2% Net debt/equity (%) 90% 19% 20% 7% -7% PER (x) PBR (x) EV/EBITDA (x) DPS (VND, as reported) 2,500 1,700 2,000 2,000 2,000 Dividend yield (%) 2.8% 1.9% 2.2% 2.2% 2.2% Page 1

2 1. PNJ 9M2018 business performance & financial condition: Unit: VND bn 9M M-2018 yoy PNJ's revenue structure 3Q2018 Net revenue 7,755 10, % Gold jewelries 6,025 8, % Silver jewelries % Gold bars & others 1,576 1, % Gross profit 1,347 1, % Gold jewelries 1,166 1, % % Gross margin 19.4% 21.4% Silver jewelries % % Gross margin 69.5% 62.8% Gold bars & others % % Gross margin 4.7% 1.8% Selling expenses % G&A expenses % % SG&A/sales 8.8% 10.0% EBIT % Financial profit (41) (39) Other profit 6 1 PBT % Tax expenses (127) (175) NPAT % % completion of plan % Trailing 12-month EPS (adjusted) 5,090 Source: PNJ, KISV research PNJ 9M2018 business performance updated: 2% 20% 78% PNJ's gross profit structure 3Q2018 Gold jewelries Silver jewelries Gold bars & others 9M2018, both PNJ's net revenue and net profit increased by +35% and +38% over the same period, reaching VND10,500bn and VND700bn, respectively. In particular, PNJ's largest growth momentum has been and will continue to be gold jewelries segment - accounting for 92% of PNJ total gross profit and nearly 100% of its profit growth. According to PNJ CEO, a sharp increase of sales and profit in the first 9 months of 2018 could be explained by 3 reasons: (1) Same store sales growth - "SSSG" - still maintained at a high rate of +23% YoY. The combination of ticket size, which increased 15% YoY and reached VND17mn per average order, new customer growth of +50% YoY and the return of loyal customers, which increased +58% YoY, have generated superior sales for existing gold stores. 6% 2% Gold jewelries Silver jewelries (2) Opening 41 new retail outlets, helping its network to now reach 243 PNJ Gold stores. Half of them is located in the commercial centers, catching the trend of the youth and modern families. The management plans to open more stores in good locations, spreading in large urban areas such as Ho Chi Minh City, Dong Nai, Binh Duong, tier-2 cities and the unpenetrated Northern region. 92% Gold bars & others (3) Launching more collections of gemstone jewelries and feng shui items with beautiful designs improved gross margins of jewelry segment to 21.4%, the highest in the last 3 years. 31-Oct-18 Page 2

3 Regarding to the remaining segments, the silver jewelries segment, after the product recall and restructuring in 1H2018, has now brought gross profit of VND127bn, up 18% YoY, contributing around 6%-7% of the company total gross profit. PNJ management has not planned to open new PNJ Silver stores (currently 63 stores) as the average sales per silver store is relatively low. Gold bars trading segment will continue to shrink as the overall market narrows and management board has set their focus on jewelries since Wrist-watches retailing, inspection and trading services still account for a small proportion and does not significantly affect gross profit in at least 5-7 years ahead in our view. In 9M2018, PNJ's SG&A increased sharply +54% YoY to over VND1,000bn due to new stores opening cost as well as the depreciation of the ERP/Digital system worth USD8.3mn, which has been deployed since the first half of However, the cost is still under control closely with profitability. SG&A/sales ratio was 10.0%, up 1.2% points from 8.8% of last year. Thus, PNJ has completed nearly 80% of its NPAT target in 2018, EPS trailing 12M is currently at VND5,090. In 4Q2018, we believe the company could easily exceed its 2018 profit target due to a seasonal factor (wedding season) and the contribution of new stores opened early this year. 13% 24% Asset structure of PNJ 3Q2018 2% 3% 7% 0% 75% Capital structure of PNJ 3Q2018 4% 10% 62% Cash & equivalents Receivables Inventory Fixed asset Other asset Payables to suppliers Other payables Shareholders' equity Short-term loan Long-term loan PNJ 3Q2018 financial condition analysis: According to PNJ's 3Q2018 financial report, the asset structure of PNJ is quite unique with only a small amount of cash, only VND120bn - accounting for 2% of total assets. Instead, up to 75% of the company's assets (more than VND4,100bn) are in inventory (mostly jewelry products and gold materials). The rest, more than 20% of PNJ's assets are in factory and land use rights worth VND700bn, plus receivables and long-term prepayments. At the first glance, high concentration of assets in inventory that leads to low cash reserves relative to debt is quite risky. However, when compared with peers in the world, we believe that the inventory level of PNJ is not that risky because (1) 90% of PNJ's jewelry inventory has high liquidity, stable value and can be re-processed to create new gold jewelries products with limited loss in value (2) Inventory turnover of PNJ is times/year, much higher than the top jewelry firms in the world such as Tiffany, Chow Tai Fook, Luk Fook, which has only times turnover/year: 100% 75% 50% 25% % Inventory management efficiency of PNJ and leading global jewelry firms FY % Inventory/Total assets 41% 61% Inventory Turnover 65% 55% % PNJ Richemont SA Tiffany & Co. C.T.Fook Luk Fook C.Sang Sang - Source: Bloomberg, KISVN 31-Oct-18 Page 3

4 In terms of capital structure, PNJ increased its short-term debt significantly from the beginning of 2018 to finance working capital, from approximately VND850bn to nearly VND1,300bn as of the end of 3Q2018. However, because PNJ's short-term debt is only 40% of its equity, PNJ's short-term interest rates are only around 5% and more than 70% of its outstanding loans are secured by inventory, we believe that PNJ shortterm debt financial risk is not significant. PNJ's equity reached nearly VND3,400bn, equivalent to book value of VND21k/share. ROE is always higher than 30% consistently. 2. Main business segments prospect & KIS projection 2.1 Gold jewelry: Potential luxury industry despite long-term threat Ever since the Decree 24-NDCP/2012 on tightening the trading of gold bars plus the growing income of Vietnam middle class in the post-crisis , the demand for gold jewelries in Vietnam has steadily grown 9.5% CAGR to 16.5 tonnes by the end of accounting for 30% of total gold consumption compared to the small proportion (12%) of the previous five years. Furthermore, with the culture of giving gold wedding gifts, the need to preserve antiinflationary jewelry as well as the tendency to express oneself in Asia countries, we think that Vietnam will soon fill the gap in gold jewelry consumption per capita compared to developed countries with long tradition such as China, Hong Kong, Taiwan, Malaysia, Singapore, v.v Gold jewelries and gold bars consumption in Vietnam (tonnes) Gold jewelries Gold bars Vietnam gold jewelries consumption per capita compared to Asian countries FY2017 Gold jewelries consumption/capita (USD/year) Gold jewelries consumption/total market (%) 31% % % % % 80% 60% 40% 20% Vietnam Malaysia Taiwan China 0% Source: World Gold Council Given such prospects, inside the gold jewelry industry, opportunities for PNJ are still very large as 80% of the market is still occupied by 12,000 local, mom & pop retail jewelry shops. Since the Circular 22/2013 has been tightening the management of gold content in these small shops as well as consumers are increasingly focusing on prestigious brands, we believe PNJ s market share capturing from this group is just a matter of time - taking into account the PNJ durable competitive edge of the top-notch creative design team, 1,000 resourceful jewelers and a widespread distribution network of over 300 stores. Yet, it is undeniable that a long-term threat for Vietnamese jewelry industry in general and PNJ in particular is the global downtrend of Millenials luxurious consumption. According to Deloitte's 2017 study of luxury consumption trends for the global Millenials, this Y generation is changing their consumption behavior rather rapidly: for 31-Oct-18 Page 4

5 luxurious items, they no longer care about the brand and the endorsement influence by celebrities as their previous generation. Product quality, the unique in design and reasonable price are the factors which are given more priority. Long-established leading global luxury and jewelry firms such as Richemont, Tiffany, and Chow Tai Fook have struggled to transform themselves into digital channel. However, too high product prices (due to high spending on endorsements) as well as little change in unique design elements have led to overall sales and operating profit of these firms almost flat or decline in the past 5 years: 4,500 3,600 2,700 1, % 0 Tiffany & Co. business performance FY14-18E (USD millions) 4, Sales Net profit ROE 17.0% 4, % 4,105 4, % 11.4% 4, E 30.0% 20.0% 10.0% 0.0% 12,000 9,000 6,000 3, % 0 Chow Tai Fook business performance FY14-18E (USD millions) 9, % 8, Sales Net profit ROE 8.2% 7, % 6, % 7, E 30.0% 20.0% 10.0% 0.0% Source: Bloomberg, KISVN In our discussion with PNJ's management about how the world's downtrend as shown above will threaten PNJ, they believe that the potential for double-digit growth of PNJ can be guaranteed for at least five years ahead. The PNJ's leaders explained that geopolitical factors in China and the global oil price slump (affecting the Middle East consumer group) have been one of the reason for reduced global jewelries demand in short term. Yet, management agrees that after some time ahead, the trend of reducing the luxury consumption of the Millenials is inevitable - thus the mission of sustaining growth entirely depends on continuous product innovation and penetration into other product lines of PNJ team PNJ stores breakdown by cities & regions 2Q HCM city South (excl HCMC) North (excl Ha Noi) Central Highlands Ha Noi PNJ actions: - Expand the retailing network: Given the favorable market potentials in the short-mid term, PNJ continues to expand its retail chain with +41 new stores from the beginning of We believe in PNJ management strategy of opening new stores at potential locations: (1) Expanding into large commercial centers to reach new young customers and modern families (2) Penetrating into the North market, which has a growth rate 1.5x higher than the South, and the tier-2 provinces, which are still untapped. By the end of 2Q2018, nearly 200 PNJ stores are located in Ho Chi Minh City (120 stores) and neighboring southeastern provinces - accounting for 70% of the total number of stores while leaving huge markets in the North as well as the remaining tier-2 provinces. PNJ leaders set the expansion target to reach 400 gold and silver jewelry stores at the end of Oct-18 Page 5

6 - Improve SSSG further: CEO PNJ is proud of the ERP/Digital Transformation project, which helps to analyse customer better through large data sets collected from in-store behavioral tracking cameras to predict future purchase. In addition, the company continues to invest in the designer and jeweler team to create new collections and product lines - which has been the main differentiation of PNJ in more than the past 20 years E 2019E 2020E Gold Jewelries (*) Gold Jewelries sales 6,571 8,233 11,289 13,527 15,267 Growth (%) 9.7% 25.3% 37.1% 19.8% 12.9% Beginning Existing stores New stores Ending Existing stores Average sale/store/month (VND bn) Growth (%) 8.4% 7.5% 0.0% 0.0% Gold Jewelries GP 1,115 1,702 2,417 2,896 3,269 Gross margin (%) 17.0% 20.7% 21.4% 21.4% 21.4% We highly appreciate the foresight and ability of the PNJ management with the practical and directive solutions. With the above analysis, because of the short-term macro-economic uncertainties, we project that average sales/store/month and gross margins of PNJ jewelery shops will be flat in the next two years as new stores are unlikely to perform well as well as the prosperous period and the peak SSSG will slow down together. PNJ Gold stores will reach 320 stores by the end of 2021 as planned but the opening speed will tend to slow down gradually due to huge competition in retailing rental properties market: 2.2 Silver jewelries, gold bars & wrist-watches: Maintain stability Silver jewelries: Due to the nature of low selling price and target customers of mostly teenagers with low income (Z generation), the average sales/store/month of this chain is relatively low compared to the gold jewelry store, approximately only VND mn (only onetenth of PNJ Gold). However, the gross profit margin of this segment is quite high, steadily over 70%. After a period of product recall and restructuring of silver jewelries collection in the first half of 2018 leading to poor business results, after 9 months of 2018, gross profit of PNJ Silver has picked up and contributed nearly 7% of total profit of PNJ. Management intentionally keeps the number of silver stores unchanged at stores without new opening to maintain the access to the mass Z-generation customers. We project sales of silver jewelries segment to grow at a stable CAGR of 14% in the coming years, with average revenue per store/month just increasing slightly at 6.4% while gross margins will remain at 73% -74%. Gold bars: As our analysis above, since the issuance of Decree 24 in 2012, we believe that both gold bar market in general and PNJ gold bars trading segment in particular will continue to narrow down. Gold bars now only occupies 3% of PNJ total inventory. 31-Oct-18 Page 6

7 Due to global political and macroeconomics instability, the customers demand for gold bars may increase in the upcoming time, but the gross profit of this segment will be quite tiny overally (only approximately 1%-2% of total gross profit). We expect that this segment will grow only 7% CAGR, while gross margin remains stable at 2.1%. Wrist-watches retailing: According to PNJ management sharing, the flagship watches store opening project is still slow due to the difficulties in finding rental properties. Currently, the company has completed renting a location at the corner of Dien Bien Phu, Hai Ba Trung, District 1, HCMC and will launch its first store in 4Q2018. According to the company's published catalogue on its website, we estimate that there are about 560 women watch models and about 360 men watch models, equals to the product gender ratio 60:40 which shows the focus on loyal female customers of PNJ. Meanwhile, according to Euromonitor research about global luxury watches market in 2015, women & men watches market sales was USD10.5bn and USD17.5bn, respectively - meaning the watches gender ratio was 38:62. In Vietnam, subjectively, we observe that the percentage of local women who use jewelry watches may even be lower. Consumers in wrist-watches segment in Vietnam are mostly men while PNJ's product portfolio for this group is not really different and unique compared to other watch retailing chains. Therefore, we believe that PNJ's new wrist-watch retailing segment will need more time for trials and errors and demonstrating a significant impact on overall gross profit before we can analyze and give further forecasts. 2.3 PNJ gross profit structure forecast We believe gold jewelry segment will continue to be a major profit contributor and a key growth driver for PNJ for at least five years ahead. Silver jewelry and gold bars segments will maintain steady. The new watch retail segment is in a pilot phase and a little bit slow in progress, so we did not reflect it in the projection. 4,000 3,500 3,000 2,500 2,000 1,500 1, Gold jewelries Silver jewelries Gold bars & other segments ,115 PNJ gross profit structure forecast (unit: VND bn) , , , , E 2019E 2020E 31-Oct-18 Page 7

8 By 2020, we project that the main gold jewelry segment will account for 92% of gross profit. The remaining 6% of gross profit will be contributed by silver jewelry segment, gold bars trading & other segments. 3. Valuation After adjusting for PNJ provisions for Dong A Bank investment in 2015 & 2016, we have come up with an average 5-year historical P/E of PNJ at 15.0 times, which is quite reasonable and in accordance with the Asian jewelry peers current average P/E at 15.1 times as below: 35.0 PNJ historical 5Y P/E (DAB provisions adjusted) Average: 15.0x 5.0-1/1/2014 1/1/2015 1/1/2016 1/1/2017 1/1/2018 Ticker Country Company Name Market Capitalization P/E ratio ROE (%) 1929 HK Equity HONG KONG Chow Tai Fook Jewellery Group Ltd 8, CH Equity CHINA Lao Feng Xiang Co Ltd 2, HK Equity HONG KONG Luk Fook Holdings International Ltd 1, HK Equity HONG KONG Chow Sang Sang Holdings Internatio 1, CH Equity CHINA Zhejiang Ming Jewelry Co Ltd PCJL IN Equity INDIA PC Jeweller Ltd JP Equity JAPAN Renown Inc Weighted market cap average 15.1 Source: Bloomberg, KISVN For that reason, we decided to use the 5-year historical P/E of PNJ at 15.0 times and 2019 foreward EPS of PNJ at VND6.5k to arrive at PNJ target price of VND97.7k per share by Total return was 2.8% compared to closing price of VND97k at the end of trading on 31-Oct-2018, including VND2k cash dividend. Although PNJ has an excellent business in a potential market with sustainable competitive edges and exceptional management team, the 19x P/E trailing 12M valuation has reflected a lot of expectation for the company growth in 2-3 years ahead while unexpected risks have not been discounted. We will update the projections further if PNJ continues its superior growth in the coming quarters. NEUTRAL recommendation. 31-Oct-18 Page 8

9 PNJ FINANCIAL MODEL Mkt cap: VND15,700bn Unit: VND bn E 2019E Net Revenue 8,565 10,977 13,663 16,103 Sales growth (%) 11.1% 28.2% 24.5% 17.9% COGS 7,153 9,065 11,025 12,958 Gross margin (%) 16.5% 17.4% 19.3% 19.5% SG&A ,360 1,603 EBITDA ,348 1,620 EBITDA margin (%) 8.9% 9.0% 9.9% 10.1% Depr n & Amort n Operating profit ,277 1,543 Operating margin (%) 8.5% 8.6% 9.3% 9.6% Net interest expense As % of avg. net debt 5.3% 4.8% 5.9% 7.7% Interest cover (x) Other profit/loss Tax Effective tax rate (%) 23.7% 20.1% 20.1% 20.1% Net profit ,205 Net margin (%) 5.3% 6.6% 7.3% 7.5% Net attributable profit ,205 Number of shares (m) EPS (VND, bonusadjusted) 2,503 4,027 5,525 6,500 EPS growth (%) 496.3% 60.9% 37.2% 17.6% DPS (VND) 2,500 1,700 2,000 2,000 EBITDA = Net revenue (COGs -Depr n&amort n) SG&A expenses EBIT = EBITDA Depr n&amort n Net interest expenses = interest expenses interest income Other profit/loss consists of other financial income/expenses, profit share from JVs/associates and other income/loss Payout ratio = Dividend paid / Net attributable profit CASH FLOWS AND BS ITEMS (VND bn.) E 2019E Increase in WC Capex Other cash flow items Free cash flow Share issues Dividends paid Increase in net debt Net debt, end of year 1, Enterprise value 13,244 14,039 13,903 14,289 Total equity 1,500 2,950 3,521 4,271 Minority interests Shareholder s equity 1,500 2,950 3,521 4,271 BVPS (VND) 15,267 27,285 21,732 25,599 Net debt / equity (%) 90% 19% 20% 7% Net debt / EBITDA (x) Total assets 3,588 4,492 5,163 5,648 Net debt = debts cash & equivalent KEY RETURN AND VALUATION RATIOS ROE (%) (excl. minority interest) E 2019E 32% 33% 31% 31% ROA (%) 13% 16% 19% 21% ROIC (%) 19% 24% 27% 28% WACC (%) 10% 13% 13% 14% PER (x) PBR (x) PSR (x) EV/EBITDA (x) Oct-18 Page 9

10 Contacts HCM City Head Office Level 3, Maritime Bank Tower Nguyen Cong Tru St., District 1, HCM City Tel: (+84 28) Fax: (+84 28) Hanoi Branch Level 6, CTM Tower 299 Cau Giay, Cau Giay District, Hanoi Tel: (+84 4) Fax: (+84 4) Institutional Sales Ms. Uyen Lam Head of Institutional Sales (+84 28) (x1444)

11 Our Recommendation System OVERWEIGHT: where we believe prospective 12 months VND total return (including dividends) will be 15% or more. NEUTRAL: where we believe it will be -5% to 15%. UNDERWEIGHT: where we believe it will be -5% or less. Disclaimer This report has been issued by the KIS VN Securities Corporation ( KIS ) with the instructional contributions of KIS VN Securities Corporation whose employees are specified in the publication. This report is for information of its institutional and professional customers. This report is and should not be construed as an offer to sell or a solicitation of an offer to purchase or subscribe for any investment. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Investors are advised make their own financial decisions based on their independent financial advisors as they believe necessary and based on their particular circumstances such as their financial situation, investment objectives and other considerations. In preparing this report, we have relied upon and assumed the accuracy and completeness of all information available from public and other sources which we believe to be reliable, but which we have not independently verified. KIS makes no express or implied guarantee, representation or warranty and accepts no responsibility or liability as to the accuracy or completeness of such information. Opinions, estimates, and projections expressed are current opinions of the authors as of the original publication date appearing on this report only and the information, including the opinions contained herein, and are subject to change without notice. KIS and its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, companies mentioned herein. Further, KIS and its affiliates, and/or their officers, directors and employees involved in the preparation or issuance of this report may, from time to time, have long or short positions in, and buy or sell, the securities, or derivatives (including options) thereof, of companies mentioned herein, or related securities or derivatives in a manner that may be consistent or inconsistent with this report and opinions expressed therein. As a result, investors should be aware that KIS and its affiliates and/or their officers, directors and employees may have a conflict of interest that could affect this report. This report shall not be copied, reproduced, distributed (in whole or in part) or disclosed by recipients to any other person without the express permission of KIS in writing.