PHU NHUAN JEWELRY JSC Ample Room For Market Share Expansion Equity Research I March 30, 2017 We reiterate BUY rating to PNJ with a revised 12M TP of VND 91,000 (previously VND 85,000) after adjusting earning forecast by 90bps and lowering WACC from 10.8% to 9.7% (see Figure 1 as below). Key investment themes for PNJ in 2017-18F are: Ample room for market share expansion. We believe PNJ can push top-line growth through (1) gaining more market share from unbranded retailers who are now controlling a massive c.60% of Vietnam s jewelry sector and (2) expanding its retail network with 70 new stores in 2017-18F. Assuming SSSG to recover to 9-10% (2016: 8%) and Vietnamese jewelry demand to remain stable, we estimate 2017F revenue of 9,443bn (+9.6% YoY) and 2018F revenue of VND 10,145bn (+7.4% YoY). According to PNJ, gold jewelry sales grew 44% and SSSG achieved 27% in 2M17. Margin upswing and earnings recovery. We expect margin and earnings growth to be boosted by (1) larger contribution of jewelry retail that contains rich margin in total revenue and (2) no further provision for investments in non-core business that hindered earnings in the last 2 years. Following that, we estimate GPM to expand 190 bps in the next 2 years. NPAT would see double-digit growth, reaching VND 649bn (+44% YoY) in 2017F and 760bn in 2018F (+17.2% YoY). Lower WACC results in higher DCF-based TP of VND 91,000; attractive valuations in regional context. Though we only tweaked our earning forecasts by 90bps, we have lowered WACC from 10.8% to 9.7% after reviewing PNJ s capital structure that is utilizing more debt than estimate. Accordingly, the DCF-based 12M TP is VND 91,000 a 21.3% upside. We estimate 2017F dividend of VND 3,000, implying 25.3% return. PNJ currently trades at EV/EBITDA forward and P/E forward of 8.5x and 13.8x, which are ~20% discount to regional peers comparable valuations. In our opinion, PNJ s valuations are attractive given its EBITDA margin is 26% higher than the regional mean. Figure 1: Summary of estimate revisions All figure in VNDbn New estimates Old estimates % change unless otherwise stated 2017F 2018F 2017F 2018F 2017F 2018F Net sales 9,387 10,085 9,180 9,842 2.3% 2.5% EBITDA 945 1,090 924 1,100 2.3% -0.9% Net Income 649 760 643 773 0.9% -1.6% EPS (VND) 5,402 6,329 5,352 6,439 0.9% -1.7% WACC 9.7% 10.8% -9.8% 12M TP (VND) 91,000 85,000 7.1% Source: TVS Research Key investment risks: (1) Lower-than-estimate demand in jewelry retail would drag down SSSG and new store sales, which consequently undermines future revenue and earnings; (2) Non-fundamental factors such as unexpected issues relating to DongA Bank may affect investor sentiment and stock price. BUY Potential Upside 25.3% Dong Quang Trung, Associate trungdq@tvs.vn Target Price 12-month price target: VND 91,000 Expected 12-month dividend: VND 3,000 Trading Data and Key Metrics Ticker PNJ Sector Jewelry Listed since Mar-2009 Price as of 30-Mar-2017 75,000 52-week range (VND 000) 47/85 Market cap (VND bn) 7,331 Shares outstanding (mn) 98.3 Free Float (mn) 82.5 15-day average volume 104,776 2016 P/ BV (x) 4.9x 2016 P / E (x) 17.0x Dividend yield (%) 3.4 Net Debt to Equity (x) 1.0x Source: TVS Research, Thomson Reuters Data 40% 20% 0% -20% Price Performance Chart 60% PNJ VNINDEX Price performance (%) 3M 12M YTD Absolute 10% 41% 11% Source: Bloomberg Company Description Phu Nhuan Jewelry Joint Stock Company is the No.1 jewelry and watch specialist retailer in Vietnam with 26.5% market share by end-2016. The Company manufactures and markets jewelry pieces, stamped gold bars, and jewelry products made of gold and silver. It also trades gemstones and precious metals as materials for jewelry manufacturing. The Company operates jewelry stores under various brand names, such as PNJ Gold, PNJ Silver, CAO Fine Jewelry, and is involved in wholesale trade of stamped gold bars branded Phuong Hoang PNJ - DongA Bank. In addition, the Company provides jewelry evaluation and testing services. The Company s competitive advantages lie in 800 skillful goldsmiths and 223 retail stores across 43 provinces in Vietnam. Major shareholders are Chairwoman & Related parties (17.4%). Thien Viet Securities JSC (TVS) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see more important disclosures in the last pages.
2 SUMMARY FINANCIALS Earning Model (VNDbn) 2015A 2016A 2017F 2018F Balance Sheet (VNDbn) 2015A 2016A 2017F 2018F Net sales 7,706 8,565 9,387 10,085 Cash and equivalents 38 155 464 472 Cost of sales 6,538 7,153 7,732 8,234 Financial investment 0 0 0 0 Gross profit 1,168 1,411 1,655 1,851 Accounts receivable 29 34 35 37 Selling expenses 424 554 607 652 Inventory 2,135 2,839 3,199 3,469 General administration expenses 118 133 146 157 Prepaid expenses, other CA 63 74 82 88 Other operating income/(expenses) -11 43 0 0 Total current assets 2,265 3,103 3,779 4,066 EBITDA 647 802 945 1,090 Property and equipment Depreciation & Amortization 30 34 44 48 At cost 326 371 482 575 EBIT 616 768 902 1,042 Less accumulated depreciation -133-163 -206-252 Net interest income/(expenses) -429-176 -90-91 Net property and equipment 194 207 276 322 Net investment income 1-1 -1-1 Net intangibles 292 209 207 206 Others (recurring) 0 0 0 0 Total investment 167 0 0 0 Pretax Profit 187 591 811 950 Other long - term assets 58 70 76 82 Income tax 112 140 162 190 Total Assets 2,976 3,588 4,339 4,677 Tax rate (%) 22% 20% 20% 20% Minorities 0 0 0 0 Account Payables 191 326 222 233 Net Income 76 450 649 760 Short-term debt 1,189 1,449 1,314 1,311 EPS (basic, reported) 568 4,383 5,402 6,329 Other current liabilities, CL 201 247 271 291 Weighted shares outstanding (mn) 98 98 108 108 Total Current Liabilities 1,581 2,022 1,807 1,835 Long-term debt 72 59 65 69 Common dividends declared 0 0 0 0 Other long-term liabilities 7 7 8 8 DPS (VND) 1,425 2,500 3,000 3,500 Total long-term liabilities 79 66 72 78 Dividend Payout ratio (%) 1.06 0.57 0.56 0.55 Stockholders' equity 1,315 1,500 2,460 2,764 Dividend cover (X) 0.94 1.75 1.80 1.81 Common Equity 983 983 1,081 1,081 Treasury shares 0 0 602 602 Growth and Margin (%) Capital surplus 0 0 0 0 Sales Growth (%) -16.2% 11.1% 9.6% 7.4% Retained earnings 113 374 503 655 EBITDA Growth (%) 48.0% 24.1% 17.8% 15.3% Budget sources and other funds 220 144 274 426 EBIT Growth (%) 51.8% 24.6% 17.4% 15.6% Minority interest 0 0 0 0 Net Income Growth (%) -68.8% 496.3% 44.0% 17.2% Total liabilities and equity 2,976 3,588 4,339 4,677 EPS Growth (%) -82.3% 671.7% 23.2% 17.2% Capitalized leases 0 0 0 0 Gross Margin (%) 15.2% 16.5% 17.6% 18.4% Capital employed 1,394 1,566 2,532 2,842 EBITDA Margin (%) 8.4% 9.4% 10.1% 10.8% EBIT Margin (%) 8.0% 9.0% 9.6% 10.3% Ratios Net Income Margin (%) 1.0% 5.3% 6.9% 7.5% ROE (%) 11.3 30.0 26.4 27.5 ROA (%) 5.2 12.6 15.0 16.3 Cash flow Statements (VNDbn) 2015A 2016A 2017F 2018F ROIC (%) 10.5 28.8 25.6 26.8 Pretax profit 187 591 811 950 Inventory days 107 127 142 148 Adjustments for: Receivable days 2 1 1 1 Depreciation and amortization 30 34 44 48 Payable days 9 9 10 10 Change in inventories -463-703 -360-270 Cash conversion cycle 100 119 134 139 Change in trade receivables 32-26 -1-3 Asset Turnover (x) 2.7x 2.4x 2.2x 2.2x Change in trade payables 76 170-104 11 Net debt/equity (x) 0.9x 1.0x 0.6x 0.5x Other operating cash flow 212-93 -206-244 Interest cover - EBIT(x) 0.1x 10.5x 12.1x 14.0x Cash flow from operations 74-27 184 493 Net Capital expenditure -70-87 -122-106 Valuation (Multiples) Acquisition 0 0 0 0 EV / EBITDA (x) 8.2x 11.4x 8.5x 7.4x Divestures 0 64 0 0 P/E (x) 31.9x 16.3x 13.8x 11.8x Other investments, net 27 169 0 0 Dividend Yield (%) 3.3 2.7 4.0 4.7 Cash flow from investing -44 146-122 -106 P/B (x) 3.0x 4.9x 3.3x 2.9x Equity issued 0 0 700 0 Net borrowings -7 244-129 2 Dividends to shareholders -23-246 -324-380 Cash flow from financing -30-1 246-378 Net cash flow 0 117 309 8 Opening cash 38 38 155 464 Notes: CA = current assets; CL = current liabilities Closing cash 38 155 464 472 Source: Thomson Reuters historical data, TVS model and forecast
3 INVESTMENT THESIS 2016 Revenue and Earnings Review PNJ ended 2016 with VND 8,615bn revenue (+10.7% YoY) and 26.5% market share in gold jewelry retail (+1.5% vs. 2015); GPM hit the all-time high of 16.5% (+130 bps vs. 2015) PNJ reported 2016 revenue of VND 8,615bn (+10.7% YoY), which is inline with our expectation but 2% below the company guidance. In our opinion, this sales performance should be viewed as positive amid falling demand for gold bar and jewelry in Vietnam last year (-8.4% YoY, World Gold Council). SSSG dropped to 8% (2015: 20%) to reflect already-large base and unfavorable market condition. GPM reached the all-time-high of 16.5% (+130 bps vs. 2015) thanks to PNJ s strategic move to raise the proportion of jewelry retail in revenue structure, which has much higher margin compared to jewelry wholesale and gold bar (27% vs. 4.4% and 1%). By end- 2016, PNJ is still the No.1 gold jewelry retailer in Vietnam with 26.5% market share, up 1.5% versus 2015. Figure 2: Revenue structure by sales channel 100% 0.3% 0.5% 0.5% 0.6% 0.3% 27.7% 19.0% 17.8% 80% 40.3% 42.9% 1.2% 1.2% 1.3% 34.7% 28.9% 60% 1.4% 1.3% 37.5% 40% 31.3% 32.2% 20% 44.5% 51.8% 26.6% 33.1% 23.1% 0% 2012A 2013A 2014A 2015A 2016A Jewelry retail Jewelry wholesale Jewelry export Gold bar Other Source: Company data, TVS Research Figure 3: Revenue structure by product segment 100% 0.8% 0.9% 0.8% 1.0% 0.9% 80% 40.3% 42.9% 19.0% 17.8% 27.7% 1.9% 2.2% 1.9% 60% 2.2% 1.6% 40% 78.2% 79.1% 69.6% 56.7% 54.7% 20% 0% 2012A 2013A 2014A 2015A 2016A PNJ Gold PNJ Silver Gold bar Other Source: Company data, TVS Research
4 2016 NPAT of VND 450bn missed our forecast by 6.6% due to higher-than-estimate CIT expenses; 2015 NPAT was restated from VND 152bn to VND 74bn Though the NPAT of VND 450bn exceeds the company guidance by 24%, it missed our forecast by 6.6%. PNJ comments that the provision for investment in DongA Bank was eventually rejected as deductible expenses by tax authorities, which led to higher CIT expenses and dragged down NPAT. The same practice was applied for the provision made in 2015, requiring PNJ to restate its 2015 earnings from VND 152bn to VND 74bn and pay an extra CIT expense of VND 68bn in Dec-2016 (VND 310bn provision x 22% CIT rate). Regarding this matter, we think 2016 is the refreshing year when PNJ writes off its bad investment in DongA Bank and gets itself ready for a new growth phase. See our note, All Bad Things Come To End, for further details on our thesis. 2017-18 Outlook: Ample room for market share expansion Store and market share expansion would propel top-line growth, while bottom-line growth would be boosted by stronger jewelry retail and no further financial provision We estimate 2017F revenue of 9,443bn (+9.6% YoY) and NPAT of VND 649bn (+44% YoY); SSSG to recover to 9-10% while margins to see healthy expansion We tweaked our estimates by 1-2% (see Figure 1) and maintain our view that revenue and earnings would continue the uptrend in 2017-18F despite the on-going demand downturn. We believe PNJ can push revenue growth through (1) gaining more market share from unbranded retailers who are now controlling a massive c.60% of Vietnam s jewelry sector and (2) expanding its retail network with 70 new stores in 2017-18F. On the other hand, margin and earnings growth would be boosted by (1) larger contribution of jewelry retail that contains rich margin in total revenue and (2) no further provision for investments in non-core business that hindered earnings in the last 2 years. For 2017F, we estimate revenue of 9,443bn (+9.6% YoY, see details in Figure 4) and NPAT of VND 649bn (+44% YoY). According to PNJ, gold jewelry sales grew 44% YoY in 2M17, while other jewelry segments all saw strong growth. We expect SSSG would recover to 9-10% in 2017-18F based on the Company guidance of 12% for 2017 and the actual 2M17 SSSG of 27% (PNJ s comment). Margins would continue expanding this year, with GPM of 17.6% (+120 bps vs. 2016) and NPM of 6.9% (+170 bps vs. 2016). For 2018F, we estimate revenue of VND 10,145bn (+7.4% YoY) and NPAT of VND 760bn (+17.2% YoY) with additional 60-70 bps margin expansions.
5 Figure 4: Revenue projection for 2017-18F VNDbn 2015A 2016A 2017F 2018F Jewelry retail 3,449 4,465 5,285 5,979 PNJ Gold 3,270 4,221 5,000 5,659 SSSG 20% 8% 10% 9% No of Old stores 82 125 156 196 Average monthly sales of Old store 2.73 2.35 2.48 2.32 No of New store, net 43 31 40 30 Average monthly sales of New store 1.64 1.41 1.49 1.16 PNJ Silver 147 192 223 250 SSSG 20% 8% 10% 9% No of Existing stores 136 165 187 222 Average monthly sales of Existing store 0.10 0.08 0.09 0.09 No of New store, net 29 22 35 25 Average monthly sales of New store 0.06 0.05 0.06 0.05 CAO Fine 33 51 61 70 SSSG 20% 8% 10% 9% No of Existing stores 4 4 4 5 Average monthly sales of Existing store 0.56 0.74 1.18 1.10 No of New store, net 0 0 1 1 Average monthly sales of New store 0.34 0.44 0.71 0.55 Jewelry wholesale 2,687 2,490 2,490 2,490 Jewelry export 95 101 108 114 Gold bar 1,469 1,530 1,530 1,530 Watches & Accessories (included JEMMA) 19 10 12 13 Rendering services (included PNJ Lab) 23 19 19 19 Total gross revenue 7,744 8,615 9,443 10,145 New unique store 26 26 40 30 Total unique store 194 220 260 290 Source: Company data, TVS Research Key investment risks: (1) Lower-than-estimate demand in jewelry retail would drag down SSSG and new store sales, which consequently undermines future revenue and earnings; (2) Non-fundamental factors such as unexpected issues relating to DongA Bank may affect investor sentiment and stock price.
6 VALUATIONS and RECOMMENDATIONS Revised DCF-based TP of VND 91,000; attractive valuations in regional context We reiterate BUY rating to PNJ with a revised 12M DCF-based TP of VND 91,000, a 22% upside, and 2017F dividend of VND 3,000, implying 25.3% return PNJ currently trades at ~20% discount to regional peers EV/EBITDA and P/E; TP derived from P/E method is VND 92,000 We reiterate BUY rating to PNJ with a revised 12M DCF-based TP of VND 91,000, a 22% upside (previously VND 85,000), on the back of improved fundamentals. Though we only tweaked our P&L forecasts by 1-2%, we have lowered WACC from 10.8% to 9.7% after reviewing PNJ s capital structure that is utilizing more debt than estimate (Net debt/equity ratio is 1.0x in 2016 vs. 0.9x in 2015). The valuation result implies 2017F EV/EBITDA of 11.8x. We expect 2017F dividend of VND 3,000, implying 25.3% return. PNJ currently trades at ~20% discount to regional peers EV/EBITDA and P/E while its EBITDA margin is 26% higher, which is attractive in our opinion. Particularly, PNJ s EV/EBITDA forward and P/E forward are estimated at 8.5x and 13.8x respectively, versus the regional means of 11x and 17x. TP derived from P/E method using the regional P/E of 17x and PNJ s 2017F EPS of VND 5,402 is VND 92,000. Figure 5: Regional & Global jewelry retail comparable valuations Identifier Company Name EV/EBITDA (x) EBITDA margin P/E (x) Country of HQ PNJ.HM Phu Nhuan Jewelry JSC 8.5 10.1% 13.8 Vietnam Regional mean (including HK & India) 11.0 8.0% 17.0 Global mean (all) 10.9 16.7% 17.9 0116.HK Chow Sang Sang International Ltd 9.8 6.8% 13.4 Hong Kong 0590.HK Luk Fook Holdings International Ltd 7.8 10.6% 14.6 Hong Kong 1929.HK Chow Tai Fook Jewellery Ltd 10.0 9.4% 21.5 Hong Kong VAIB.BO Vaibhav Global Ltd 10.6 5.2% 18.4 India LVMH.PA LVMH Moet Hennessy Louis Vuitton SE 11.0 22.8% 21.7 French TIF Tiffany & Co 11.8 23.1% 23.7 USA PNDORA.CO Pandora A/S 9.7 38.8% 12.2 Denmark Source: TVS Research for PNJ, Thomson Reuters for other companies Figure 6: DCF-based target price calculation for PNJ VNDbn 2016F 2017F 2018F 2019F 2020F 2021F EBIT 902 1,042 1,182 1,299 1,409 1,510 EBIT (1-tax) 721 834 946 1,039 1,127 1,208 D&A expenses 44 48 55 62 68 74 Change in working capital (448) (247) (216) (219) (184) (250) Capex (122) (106) (91) (94) (98) (102) FCFF 195 528 694 788 913 930 PV of FCFF 182 448 536 555 586 544 Beta 0.76 WACC 9.7% Terminal growth rate 3.0% PV of Terminal value 8,310 Enterprise value 11,161 Less: Net debt 1,353 Equity value 9,808 Number of shares (mn)* 108.1 Equity value per share (VND) 91,000 Source: TVS Research Note: Number of share has included 10% new issuance in 2017
7 ANALYST CERTIFICATION I, Trung Dong, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies or its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. RATING and VIEWS Buy (B), Neutral (N), Sell (S) Analysts recommend stocks as Buys or Sell based on his own views. Being assigned a Buy or Sell is determined by as total stock s return (TSR) potential that represents the price differentials between the current share price and the price target expected during the time horizon plus expected dividend yield. Any stock not assigned as Buy or Sell is deemed Neutral. TVS Investment Research: Equity Rating Definitions 12-month rating Definition Buy Total Stock s Return Potential > 15% Neutral Total Stock s Return Potential between (-15%) and 15% Sell Total Stock s Return Potential < (-15%) Short-term rating Definition Buy Stock price expected to rise within three-month because of a specific catalyst or event Sell Stock price expected to fall within three-month because of a specific catalyst or event Not-rated The investment rating and target price, if any, suspended as there is not a sufficient fundamental basis for determining an investment rating or target. RATING HISTORY and TARGET PRICE Issued Date Research Recommendation Market Price (VND) 01-year target price (VND) 30-Mar-2017 Update BUY 75,000 91,000 28-Dec-2016 Update BUY 66,600 85,000 DISCLAIMER Copyright 2017 Thien Viet Securities JSC (TVS). ALL RIGHT RESERVED. This research report is prepared for the use of TVS clients and may not be redistributed, retransmitted or disclosed as a whole or partially in any form or manner without the prior written consent of TVS. The information herein is obtained from various sources and TVS does not guarantee its accuracy. Neither the information nor any opinions expressed in this publication constitutes a buy or sell recommendation on any securities or investment. TVS therefore does not take any responsibilities for any investor s decisions. HO CHI MINH 63A Vo Van Tan St, District 3 Floor 9, Bitexco Nam Long Building Tel: +84 (8) 299 2099 Fax: +84 (8) 299 2088 RESEARCH DEPARTMENT Duy Nguyen (Mr.), Manager Equity Capital Market duynh@tvs.vn Bach Nguyen (Mr.), Analyst Oil & Gas bachnkv@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn THIEN VIET SECURITIES JOINT-STOCK COMPANY Son Nguyen (Mr.), Senior Analyst Real Estate sonnt@tvs.vn Quang Luong (Mr.), Analyst Team Support quanglt@tvs.vn HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) 220 3228 Fax: +84 (4) 220 3227 Trung Dong (Mr.), Associate Consumer Goods trungdq@tvs.vn BROKERAGE DEPARTMENT brokerage.hcm@tvs.vn brokerage.hn@tvs.vn