PHU NHUAN JEWELRY JSC GOOD AS GOLD Equity Update I July 28, 2017 We attended PNJ s 2Q17 analyst meeting and remain optimistic about the Company s growth potential in 2017-18F. Thus, we reiterate BUY rating to PNJ with a revised 12M TP of VND 118,000 (previously VND 99,000) a 16.3% upside before dividend yield after raising our earnings estimates for 2017-18F by 14-16%. Below are key highlights from the meeting: 1H17 review: SSSG on the rise, earnings of core-businesses nearly doubled Jewelry retail continued leading revenue growth. PNJ posted revenue of VND 5,507bn (+39% YoY) in 1H17, completing 54% of company guidance. Gold jewelry retail was key growth driver whose sales was up 46.6% YoY on the back of 1) expansive store network that reached 237 locations by end of 2Q17 and 2) skyrocketing SSSG of 28%. Earnings from core-businesses nearly doubled versus 1H16. NPAT was VND 378bn (+54% YoY) in 1H17, completing 63% of company guidance. By eliminating the VND 40bn nonoperating income from the 1H16 P&L, net profit of PNJ s core-businesses soared 85% YoY as no further provision for DongA Bank is booked this year. GPM was 17.3%, down 70 bps YoY, due to higher portion of gold bar that carries low margin (1-3%) in revenue structure. 2017-18F Outlook: Future prospect is good as gold Store expansion will peak in 2017-18F to boost top-line growth. PNJ plan to have 50-60 new stores in 2017 and 300 stores in total before the 30 years ceremony in April-2018, which we think possible. We estimate 2017-18 gross revenue to be VND 10,730 (+24.5%) and VND 12,313 (+14.8%) respectively, assuming SSSG of 21.5% in 2017 and 15% in 2018. Sustainable plans to improve operating efficiency. PNJ is working on IT solutions to minimize obsolete inventories and just implements new KPI policies to push sales productivity. Combining with no major provision is forecasted, we estimate GPM to hit 17.7% in 2017 (+120 bps YoY) and 18.4% in 2018 (+70 bps YoY). Following that, we estimate 2017-18 NPAT to be VND 757bn (+68% YoY) and VND 910bn (+20% YoY) respectively. Low capex investment means more free cash flow. The current factory is running at c.65% of the designed capacity of 4 million items per annum. Thus, capex investment for additional production line is not required. We estimate FCF to achieve 30.3% CAGR over 2017-22F. Figure 1: Summary of estimate revisions All figure in VNDbn unless New estimates Old estimates % change otherwise stated 2017F 2018F 2017F 2018F 2017F 2018F Net sales 10,666 12,240 10,050 11,196 6.1% 9.3% EBITDA 1,049 1,243 943 1,104 11.3% 12.6% Net Income 757 910 661 783 14.5% 16.2% EPS (VND) 6,300 7,574 5,500 6,523 14.5% 16.1% 12M TP (VND) 118,000 99,000 19.2% Valuation: We reiterate BUY rating to PNJ with a revised 12M TP of VND 118,000 (previously VND 99,000) a 16.3% upside, derived from both DCF and other multiple valuation methods (see Figure 3). We expect 2017F dividend to be VND 3,500, implying ROI of 19.7%. Investment risks: (1) Lower-than-estimate demand in jewelry retail would drag down SSSG and new store sales, which undermines future earnings; (2) Non-fundamental factors such as unexpected events relating to DongA Bank may affect investor sentiment and stock price. BUY Potential Upside 19.7% Dong Quang Trung, Associate trungdq@tvs.vn Target Price 12-month price target: VND 118,000 Expected 12-month dividend: VND 3,500 Trading Data and Key Metrics Ticker PNJ Sector Jewelry & Luxury Goods Listed since Mar-2009 Price as of July 26 th 2017 (VND) 101,500 52-week range (VND 000) 62/106.9 Market cap (VND bn) 9,975 9,975Shares outstanding (mn) 98.3 Free Float (mn) 82.5 15-day average volume 329,239 2016 P/ BV (x) 4.9x 2016 P / E (x) 16.3x Dividend yield (%) 3.4 Net Debt to Equity (x) 0.4, Thomson Reuters Data 60.0% PNJ VNINDEX 40.0% 20.0% 0.0% -20.0% Price Performance Chart Price performance 3M 12M YTD Absolute 8.9% 47.7% 42% 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 its fully integrated value chain from manufacturing to retail, and 237 retail stores across 43 provinces in Vietnam. Major shareholders are Chairwoman and 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
2 SUMMARY FINANCIALS Earning Model (VNDbn) 2015A 2016A 2017F 2018F Balance Sheet (VNDbn) 2015A 2016A 2017F 2018F Net sales 7,706 8,565 10,666 12,240 Cash and equivalents 38 155 193 222 Cost of sales 6,538 7,153 8,774 9,992 Financial investment 0 0 0 0 Gross profit 1,168 1,411 1,893 2,249 Accounts receivable 29 34 58 67 Selling expenses 424 554 711 840 Inventory 2,135 2,839 3,125 3,326 General administration expenses 118 133 177 215 Prepaid expenses, other CA 63 74 93 106 Other operating income/(expenses) -11 43 0 0 Total current assets 2,265 3,103 3,470 3,721 EBITDA 647 802 1,049 1,243 Property and equipment Depreciation & Amortization 30 34 45 50 At cost 326 371 493 619 EBIT 616 768 1,005 1,193 Less accumulated depreciation -133-163 -207-256 Net interest income/(expenses) -429-176 -58-55 Net property and equipment 194 207 286 363 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 187 591 946 1,137 Other long - term assets 58 70 87 99 Income tax 112 140 189 227 Total Assets 2,976 3,588 4,050 4,390 Tax rate (%) 22% 20% 20% 20% Minorities 0 0 0 0 Account Payables 191 326 248 307 Net Income 76 450 757 910 Short-term debt 1,189 1,449 617 476 EPS (basic, reported) 568 4,383 6,300 7,574 Other current liabilities, CL 201 247 308 353 Weighted shares outstanding (mn) 98 98 108 108 Total Current Liabilities 1,581 2,022 1,173 1,137 Long-term debt 72 59 73 84 Common dividends declared 0 0 0 0 Other long-term liabilities 7 7 9 10 DPS (VND) 1,425 2,500 3,500 4,200 Total long-term liabilities 79 66 82 94 Dividend Payout ratio (%) 1.06 0.57 0.56 0.55 Stockholders' equity 1,315 1,500 2,796 3,159 Dividend cover (X) 0.94 1.75 1.80 1.80 Common Equity 983 983 1,081 1,081 Treasury shares 0 0 894 894 Growth and Margin Capital surplus 0 0 0 0 Sales Growth (%) -16.2% 11.1% 24.5% 14.8% Retained earnings 113 374 525 707 EBITDA Growth (%) 48.0% 24.1% 30.8% 18.5% Budget sources and other funds 220 144 295 477 EBIT Growth (%) 51.8% 24.6% 30.9% 18.7% Minority interest 0 0 0 0 Net Income Growth (%) -68.8% 496.3% 68.0% 20.2% Total liabilities and equity 2,976 3,588 4,050 4,390 EPS Growth (%) -82.3% 671.7% 43.7% 20.2% Capitalized leases 0 0 0 0 Gross Margin (%) 15.2% 16.5% 17.7% 18.4% Capital employed 1,394 1,566 2,878 3,254 EBITDA Margin (%) 8.4% 9.4% 9.8% 10.2% EBIT Margin (%) 8.0% 9.0% 9.4% 9.7% Ratios Net Income Margin (%) 1.0% 5.3% 7.1% 7.4% ROE (%) 11.3 30.0 27.1 28.8 ROA (%) 5.2 12.6 18.7 20.7 Cash flow Statements (VNDbn) 2015A 2016A 2017F 2018F ROIC (%) 10.5 28.8 26.3 28.0 Pretax profit 187 591 946 1,137 Inventory days 107 127 124 118 Adjustments for: Receivable days 2 1 2 2 Depreciation and amortization 30 34 45 50 Payable days 9 9 10 11 Change in inventories -463-703 -287-201 Cash conversion cycle (days) 100 119 116 109 Change in trade receivables 32-26 -24-9 Asset Turnover (x) 2.7x 2.4x 2.6x 2.8x Change in trade payables 76 170-78 59 Net debt/equity (x) 0.9x 1.0x 0.2x 0.2x Other operating cash flow 212-93 -226-287 Interest cover - EBIT(x) 0.1x 10.5x 28.7x 44.1x Cash flow from operations 74-27 376 750 Net Capital expenditure -70-87 -134-137 Valuation (Multiples) Acquisition 0 0 0 0 EV / EBITDA (x) 8.2x 11.4x 10.5x 8.8x Divestures 0 64 0 0 P/E (x) 31.9x 16.3x 16.1x 13.4x Other investments, net 27 169 0 0 Dividend Yield (%) 3.3 2.7 3.4 4.1 Cash flow from investing -44 146-134 -137 P/B (x) 3.0x 4.9x 3.9x 3.5x Equity issued 0 0 993 0 Net borrowings -7 244-818 -130 Dividends to shareholders -23-246 -378-455 Cash flow from financing -30-1 -203-584 Net cash flow 0 117 38 29 Opening cash 38 38 155 193 Notes: CA = current assets; CL = current liabilities Closing cash 38 155 193 222 Source: Thomson Reuters historical data, TVS model and forecast
3 INVESTMENT THESIS PNJ posted revenue of VND 5,507bn (+39% YoY) in 1H17, completing 54% of company guidance. Gold jewelry retail, accounting for 48.6% of total revenue (1H16: 46.1%), was key growth driver when its sales was up 46.6% YoY. The store network reached 237 locations by end of Jun-17. 1H17 SSSG of 28% marked a sound recovery from the low of 8% in 2016. NPAT achieved VND 378bn (+54% YoY) in 1H17, completing 63% of company guidance. Eliminating the VND 40bn non-operating income from the 1H16 P&L, net profit of PNJ s core-businesses rocketed 85% YoY. GPM was 17.3%, down 70 bps YoY, due to higher portion of gold bar that carries low margin in revenue structure. 1H17 Review: SSSG on the rise, earnings of core-businesses nearly doubled Jewelry retail continued leading revenue growth. PNJ posted revenue of VND 5,507bn (+39% YoY) in 1H17, completing 54% of company guidance, in which 2Q17 sales was VND 2,358bn (+45.8% YoY), beating our estimate by 32.5%. Gold jewelry retail, accounting for 48.6% of total revenue (1H16: 46.1%), was key growth driver when its sales was up 46.6% YoY, while that of silver jewelry retail and CAO Fine plateaued. Other businesses all saw positive growth, especially gold bar and jewelry wholesales that grew 59.3% YoY and 18.2% YoY respectively on the back of stronger demand. Our research indicates the upbeat result of retail business was attributable to aggressive store expansion and skyrocketing SSSG. Particularly, the store network reached 237 locations by end of Jun-17, with 22 newly opened and 5 closed, completing 55% of 2017 expansion plan. On the other hand, 1H17 SSSG of 28% marked a sound recovery from the low of 8% in 2016, thanks to 1) improved logistics that has reduced supply shortage at retail outlets, a factor that hindered SSSG last year, 2) the shift in buying habit of jewelry shoppers from mom-and-pop stores to branded retail chains like PNJ, and 3) the launch of several new collections that have well caught customer attention in different segments (e.g. Juice Up for teenagers, Gold Happiness for wedding, Melody and Pearl Jewelry for middle-aged women). Earnings from core-businesses nearly doubled versus 1H16. NPAT achieved VND 378bn (+54% YoY) in 1H17, completing 63% of company guidance, in which 2Q17 net earnings was VND 129bn (+7.4% YoY), beating our estimate by 15.2%. It s worth noticing that by eliminating the VND 40bn non-operating income of disposing the land in Thu Khoa Huan from the 1H16 P&L, net profit of PNJ s core-businesses soared 85% YoY as no further provision for DongA Bank is booked this year. GPM was 17.3%, down 70 bps YoY, due to higher portion of gold bar that carries low margin (1-3%) in revenue structure. Margins of other major businesses remain stable at 28.4% for gold retail (+20 bps YoY), 67.1% for silver retail (-50 bps YoY) and 3.3% for jewelry wholesales (-70 bps YoY). We particularly like how PNJ was able to translate most of top-line growth into net earnings growth by well controlling the SG&A expenses/revenue ratio, which was unchanged versus 1H16 at 8.2%. 2017-18 Outlook: Future prospect is good as gold We estimate 2017-18 revenue to be VND 10,730 (+24.5%) and VND 12,313 (+14.8%) respectively, assuming SSSG of 21.5% in 2017 and 15% in 2018. Store expansion will peak in 2017-18F to boost top-line growth. PNJ are quite confident to have 50-60 new stores in 2017 (initial plan: 40 new stores) and reach 300 stores before the 30 years ceremony in April-2018. The long-term plan is to have 360 stores by end-2020, which we think possible given PNJ s aggressive expansion in 1H17. Accordingly, we estimate 2017-18 revenue to be VND 10,730 (+24.5%) and VND 12,313 (+14.8%) respectively, assuming SSSG of 21.5% in 2017 and 15% in 2018. Feasible and sustainable plans to improve operating efficiency. PNJ is working on IT solutions to minimize obsolete inventories at year end in an attempt to smooth out
4 We estimate 2017-18 NPAT to be VND 757bn (+68% YoY) and VND 910bn (+20% YoY) thanks to no major provision is forecasted. Capex investment for addition production line is not scheduled in the next 2 years. Our estimate indicates FCF to achieve 30.3% CAGR over 2017-22F. earnings throughout the year, implying GPM in 2H17 will remain as healthy as in 1H17 instead of plumping as in 2H16 when PNJ must sell off a large amount of slow moving items at discounted price. Furthermore, the Company just implements new KPI policies focusing on Net Promotor Score and Standardization Rate to push sales productivity, which is a sustainable growth strategy in our opinion. Combining with no major provision is forecasted and PNJ s advantage of owning a fully integrated value chain, we estimate GPM to hit 17.7% in 2017 (+120 bps YoY) before expanding another 70 bps to 18.4% in 2018. Following that, we estimate 2017-18 NPAT to be VND 757bn (+68% YoY) and VND 910bn (+20% YoY) respectively, assuming SG&A expenses/revenue ratio to sustain at 8.3-8.6%. Low capex investment means more free cash flow. The current factory is running at c.65% of the designed capacity of 4 million items per annum. Thus, capex investment for additional production line is not required. Moreover, the current capex amount for a new store is VND 1.5bn on average (not including the working capital of VND 15bn/store), which is 25% lower than our old estimate of VND 2bn. In this sense, our estimate indicates FCF to achieve 30.3% CAGR over 2017-22F. Figure 2: Revenue projection for 2017-18F VNDbn 2015A 2016A 2017F 2018F Jewelry retail 3,475 4,322 5,774 6,926 PNJ Gold 3,240 4,087 5,443 6,526 SSSG 20% 8% 21.5% 15.0% No of Old stores 82 125 156 206 Average monthly sales of Old store 2.72 2.33 2.65 2.53 No of New store, net 43 31 50 35 Average monthly sales of New store 1.63 1.40 1.59 1.27 PNJ Silver 139 170 223 266 SSSG 20% 8% 21.5% 15.0% No of Existing stores 136 165 187 237 Average monthly sales of Existing store 0.10 0.08 0.09 0.09 No of New store, net 29 22 50 35 Average monthly sales of New store 0.06 0.05 0.06 0.05 CAO Fine 96 65 108 134 SSSG 20% 8% 21.5% 15.0% No of Existing stores 4 4 4 9 Average monthly sales of Existing store 1.67 2.17 1.63 1.15 No of New store, net 0 0 5 3 Average monthly sales of New store 1.00 1.30 0.98 0.57 Jewelry wholesale 2,590 2,565 2,822 3,048 Jewelry export 94 103 106 109 Gold bar 1,542 1,596 1,995 2,195 Watches & Accessories (included JEMMA) 19 10 13 15 Rendering services (included PNJ Lab) 23 19 19 20 Total gross revenue 7,744 8,615 10,730 12,313 New store location, net 26 26 50 35 Total store location 194 220 270 305 Source: Company data, TVS Research Other notes: 1) PNJ successfully issued 9.8 million shares in the recent private placement at VND 100,800 per share; 2) Mr. Le Tri Thong, the current Vice Chairman and former principal at Boston Consulting Group Vietnam, is nominated to replace Mdm. Dung as the new CEO of PNJ. Mdm. Dung will remain Chairwoman after the transition.
5 VALUATIONS and RECOMMENDATIONS We reiterate BUY rating to PNJ with a revised 12M TP of VND 118,000 (previously VND 99,000) a 16.3% upside, derived from both DCF and other multiple valuation methods (see Figure 3). We expect 2017F dividend to be VND 3,500, implying ROI of 19.7%. PNJ currently trades at 16.1x P/E forward and 10.5x EV/EBITDA forward, which are 3% and 8% discount to the global peer averages, respectively. Thus, the current valuations of PNJ is compelling even in global context, in our opinion. Figure 3: Valuation summary RP EV/EBITDA RP P/E RP EV/Sales Historical P/E DCF Target price (VND) Min point 25th Percentile Median 75th Percentile Max point Figure 4: DCF-based target price calculation for PNJ VNDbn 2017F 2018F 2019F 2020F 2021F 2022F FCFF 368 749 1,051 1,199 1,322 1,383 PV of FCFF 352 645 816 839 834 786 Beta 0.85 WACC 11.0% Terminal growth rate 3.0% PV of Terminal value 10,166 Enterprise value 14,438 Less: Net debt 1,353 Equity value 13,086 Number of shares (mn) 108.1 Equity value per share (VND) 121,000 Combining various valuation methods and parameters, we arrive at 3 scenarios as in Figure 5. We assign 60% weight to the Bull case based on the improving prospect of the Company s fundamentals as discussed above. Figure 5: Scenarios summary Scenarios Target price Implied upside Probability weight Bear case 98,000-3.4% 10% Base case 110,000 8.4% 30% Bull case 125,000 23.2% 60% Aggregate 118,000 16.3% 100%
6 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) July 26 th 2017 Update BUY 101,500 118,000 May 3 rd 2017 Update BUY 87,900 99,000 March 30 th 2017 Update BUY 75,000 91,000 December 28 th 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 My Tran (Mr.), Analyst Agribusiness myttd@tvs.vn INVESTMENT BANKING ib.hcm@tvs.vn THIEN VIET SECURITIES JOINT-STOCK COMPANY HA NOI 22 Lang Ha, Dong Da TDL Building Tel: +84 (4) 220 3228 Fax: +84 (4) 220 3227 Son Nguyen (Mr.), Senior Analyst Real Estate sonnt@tvs.vn Quang Luong (Mr.), Analyst Team Support quanglt@tvs.vn Trung Dong (Mr.), Associate Consumer Goods trungdq@tvs.vn BROKERAGE DEPARTMENT brokerage.hcm@tvs.vn brokerage.hn@tvs.vn