Phu Nhuan Jewelry JSC (Hose: PNJ) keeps an impressive growth

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1 c 25 August 2017 Rating OVERWEIGHT HOSE: PNJ Jewelry Market price (VND) Target price (VND) Annualized price return (%) 18% Expected dividend yield (%) 2% Expected annualized total return (%) 120VND1, Price - volume % 1,200 1, Stock performance (%) YTD 1m 3m 12m Absolute 59% 8% 9% 57% Relative 43% 8% 6% 40% Source: StoxPlus, relative to VNI Stock Statistics 25- Aug week range (VND) 64k-104k Shares o/s (mn) 108 Mkt cap (VNDbn) 11,242 Mkt cap ($m) 501 Foreign % owned 49.0% Est. free float (mnshrs) m avg daily vol (shrs) 125mn VND/USD 22,442 Index: VN-Index/HNX 771/101 Source: StoxPlus Ownership 25- Aug -17 Cao Thi Ngoc Dung 10.14% LGM Investments 4.98% Limited VOF Investment 3.97% Limited Vietnam Investment 3.80% Limited Route One Investment 3.72% Company Source: StoxPlus 0 1,000 shares Phu Nhuan Jewelry JSC (Hose: PNJ) keeps an impressive growth Pros: - Phu Nhuan continues to expand its store network as scheduled. The company increases its network to 237 stores in 1H2017, 4.4 times bigger than the second player. - Same-store sales growth (SSSG) reached 28% for gold jewelry stores and 34% for silver ones. We believe that its SSSG will stay high in the coming time. - In 1H2017, Phu Nhuan recorded VND5,476bn revenue and VND377bn profit Cons: after tax, growing 39% YoY and 54% YoY respectively. Phu Nhuan fulfilled 53% of its revenue target and 63% of its profit target for Government ban on importing gold for manufacturing jewelry limits Phu Nhuan from controlling input material risk. Recommendation: Compared to our latest PNJ report, we adjust upward our estimate for 2017 net income of PNJ by 10% to VND686bn, thanks to the high SSSG EPS is estimated at VND6,158. At the current market price of VND103k per share, PNJ is trading at 16.7 times its 2017 earnings. Based on PER multiple comparison with other jewelry companies in Asian and Australia markets, we value PNJ share at VND123k at the end of Including 2% dividend yield, total return is 20%. So OVERWEIGHT E 2018E Net revenue (VNDbn) 9,199 7,706 8,565 10,982 13,608 Growth (%) 3% -16% 11% 28% 24% Operating profit (VNDbn) ,154 Margin (%) 4% 8% 8% 8% 8% Other profit Net profit (VNDbn) Margin (%) 3% 1% 5% 6% 7% Outstanding shares (million) EPS (bonus-adjusted, VND) 2, ,381 6,158 8,137 Growth (%) 49% -79% 675% 41% 32% ROE (%) (excl minority) 20% 6% 32% 31% 27% Net debt/equity (%) 95% 93% 90% 21% 20% PER (x) PBR (x) EV/EBITDA (x) DPS (VND, as reported) 3, ,500 1,800 2,000 Dividend yield (%) 3% 0% 2% 2% 2% Mr. Trung Hoang, CPA (+84 28) Ext: 1457 trung.ht@kisvn.vn Page 1

2 PNJ OVERWEIGHT The largest jewelry store network In 1H2017, Phu Nhuan continued to push up its retail network in order to gain more market share. They opened 22 new stores and closed 4 inefficient stores, increasing its network to 237 stores. Phu Nhuan s size is 4.4 times bigger than the 2 nd company Saigon Jewelry Ltd. Phu Nhuan has planned to continue the expansion up to 300 stores in April The average cost of a new store is around VND17bn, including VND1.5bn for CAPEX and VND15.5bn for working capital. With its financial resources and experiences, we believe that Phu Nhuan can fulfill its plan to expand its retail store network and maintain its dominating position in Vietnam jewelry industry. Location of PNJ 237 stores retail Northern, 41 HCM, Jewelry store numbers of top companies Source: KISVN estimate Central, Highland, 13 Southeast, 30 Southwest, PNJ SJC DOJI NgocTham Stores 1H2017 Stores 2016 LTD Same-store sales growth (SSSG) tops estimate In the previous report, we estimated SSSG of Phu Nhuan at around 10%/year. In 1H2017, Phu Nhuan announced SSSG (stores have opened for more than 1 year) was 28% for gold jewelry stores and 34% for silver jewelry ones. The impressive growth came from gaining market share in Vietnam jewelry industry and improving its internal logistic system. Accordingly, Phu Nhuan estimated 70% market share of jewelry industry belongs to mom and pop stores (down from 80% of its previous estimate late last year), which provides big opportunities for large chain companies like as Phu Nhuan. Moreover, Phu Nhuan is improving its logistic system in order to avoid sale loss. We believe that its SSSG will remain high in the coming time. Page 2

3 PNJ OVERWEIGHT SSSG of PNJ in 4 years 140% 132% 134% 130% 120% 117% 112% 128% 110% 100% 90% 112% 99% 108% 80% 2014/ / / /2016 (6M) Gold jewelry Silver jewelry Business results Gold jewelry is still the largest contributor to Phu Nhuan s business results with 76% of revenue and 87% of gross profit. Gross profit margin of gold jewelry was 19.6% in 1H2017. Meanwhile, silver jewelry made a very high gross profit margin at 70% and contributed 8% of total gross profit of Phu Nhuan. Revenue structure in 1H2017 2% 1% 21% Gross profit struture in 1H2017 8% 1% 4% 76% 87% Gold bar Gold jewelry Silver jewelry Other Gold bar Gold jewelry Silver jewelry Other Phu Nhuan recorded VND5,476bn revenue and VND377bn profit after tax, fulfilling 53% of its revenue target and 63% of its profit target for Items (VND bn) 1H2016 1H2017 +/- (%) Revenue 3,938 5,476 39% Gross profit % Financial expenses 124 (*) 36-71% Operating expenses % Profit before tax % Profit after tax % (*) Including VND80bn provision for the investment into Dong A Bank Page 3

4 PNJ OVERWEIGHT Valuation Phu Nhuan has just issued a private placement successfully at the price of VND101k per share, received VND975bn for expanding retail network. Compared to our previous PNJ report, we adjust upward our estimate for 2017 net income of PNJ by 10% to VND686bn, thanks to the high SSSG EPS is estimated at VND6,158. At the current market price of VND103k per share, PNJ is trading at 16.7 times its 2017 earnings. Based on PER multiple comparison with other jewelry companies in Asian markets, we value PNJ share at VND123k at the end of Including 2% dividend yield, total return is 20%. So OVERWEIGHT. Ticker Name Country Mkt Cap (USDmn) P/E 590 HK Equity LUK FOOK HOLDINGS INTL LTD HongKong 16, HK Equity CHOW SANG SANG HLDG HongKong 13, PCJL IN Equity PC JEWELLER LTD India 15, PAD MK Equity PADINI HOLDINGS BERHAD Malaysia 2, LOV AU Equity LOVISA HOLDINGS LTD Australia MHJ AU Equity MICHAEL HILL INTERNATIONAL L Australia RJEX IN Equity RAJESH EXPORTS LTD India 3, Average P/E 20 EPS 2017 of PNJ 6,158 Valued price at the end ,000 Source: Bloomberg, 23/08/2017 Page 4

5 PNJ OVERWEIGHT PNJ FINANCIALS MODEL Price: VND103k Target: VND123k Mkt cap: VND11.2trn Unit: VNDbn E 2018E Net Revenue 7,706 8,565 10,982 13,608 Sales growth (%) -16% 11% 28% 24% COGS 6,538 7,153 9,163 11,330 Gross margin (%) 15% 16% 17% 17% SG&A ,125 EBITDA ,194 EBITDA margin (%) 9% 9% 9% 9% Depr n & Amort n Operating profit ,154 Operating margin (%) 8% 8% 8% 8% Net interest expense Interest rate (%) 7% 6% 6% 6% Interest cover (x) Other profit/loss Tax Effective tax rate (%) 60% 24% 20% 20% Net profit Net margin (%) 1% 5% 6% 7% Minorities Net attributable profit Number of shares (m) EPS (VND, bonus-adjusted) 565 4,381 6,158 8,137 EPS growth (%) -79% 675% 41% 32% DPS (VND) 300 2,500 1,800 2,000 Payout ratio (%) 53% 57% 29% 25% - 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 CASHFLOW AND BS ITEMS (VNDbn) E 2018E Receivable turnover (x) Inventory turnover (x) Payable turnover (x) Increase in WC Capex Other cashflow items Free cash flow Share issues (*) - Dividends paid Increase in net debt Net debt, end of year 1,224 1, Enterprise value 11,346 11,475 10,734 10,865 Total equity 1,315 1,500 2,966 3,650 Minority interests Shareholder s equity 1,315 1,500 2,966 3,650 BVPS (VND) 13,383 15,267 27,441 33,763 Net debt / equity (%) 93% 90% 21% 20% Net debt / EBITDA (x) Total assets 2,976 3,588 4,314 5,128 - Net debt = debts cash & equivalent - (*) Phu Nhuan issues 9.8 million new shares at VND101k per share. KEY RETURN AND VALUATION RATIOS E 2018E ROE (%) (excl minority interest) 6% 32% 31% 27% ROA (%) 3% 14% 17% 19% ROIC (%) 4.78% 15.49% 18.89% 19.64% WACC (%) (*) 9.05% 9.92% 13.20% 13.22% PER (x) PBR (x) PSR (x) EV/EBITDA (x) EV/Sales (x) Dividend yield (%) (bonus-adjusted) 0% 2% 2% 2% Page 5

6 PNJ OVERWEIGHT 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) Equity Research Head of Equity Research Mr. Huy Hoang (+84 28) (x1450) Senior Associate Property-related Mr. Trung Hoang, CPA (+84 28) (x1457) Associate Energy & Utilities Mr. Danh Nguyen (+84 28) (x1459) Associate Commodity and Logistics Mr. Bao Vo (+84 28) (x1460) Associate Pharma & Retail Mr. Ha Nguyen (+84 28) (x1459) Associate F&B Ms. An Nguyen (+84 28) (x1459) Macro Research Head of Macro Research Mr. Vien Bach (+84 28) (x1449) Institutional Sales Director, Sales Ms. Uyen Lam (+84 28) (x1444) Page 6

7 PNJ OVERWEIGHT Our Recommendation System OVERWEIGHT: where we believe prospective 12 month 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. Page 7