As of today, July 7, 2016, PNJ shares have risen to the highest level since listing to date at a price of VND 82,000 /share, an increase of 110% in the past 6 months. However, with the current price, the specialists of securities firms think that reasonable price of PNJ shares should be approximately VND 101,000 /share. We are pleased to quote the Analysis report of PNJ shares by Viet Dragon Securities Corporation dated July 4, 2016.
Opinion and valuation
Consumer goods market for individuals and families in Vietnam, especially the jewelry sector, has positive outlook thanks to (1) a large-scale population with the increasing proportion of high and medium income people and (2) the ascending tendency to use high-quality, branded goods. The large and rapidly expanding retail system is critical in expanding market share. Currently, PNJ holds over 25% shares of jewelry market, outstripping its adjacent competitors Doji and SJC. Large market coverage and “familiar” brand with many consumers is the unique advantages of PNJ, helping the system expansion remain effective. Investments outside the industry do not expect the negative impact to general earnings of PNJ from 2017. We estimate that 2016 revenue could rise approximately 9% and profit after tax is estimated at approximately VND 517 billion, 239% higher than 2015. Except unusual items, profit after tax may reach VND 569 billion, respective increase by approximately 36% compared with the results of operating activities in the previous year.
We think that the reasonable price of PNJ is around VND 101,000 /share, 32% higher than the closing price on July 4, 2016. Therefore, we recommend to BUY PNJ shares in a LONG-TERM. The main risks to PNJ operating activities is gold price volatility, although the Company has the ability to transfer a portion of raw materials price fluctuations in selling price but the demand may slow as the price of jewelry gets rise.
Important financial indicators
End of year-December (billion VND)
Profit after tax
Percentage of profit after tax (%)
Book value (VND)
Cash dividend (VND)
Financial statement of PNJ, RongViet Research ‘s collection and analysis, *As per share price on July 4, 2016
Sales prospects good growth expectations thanks to golden demographic structure and the shifting of consumer trends
Phu Nhuan Jewelry Joint Stock Company (Manufacturer of PNJ) is an enterprise of manufacturing and trading of jewelries made of gold, silver, precious stones, gold bar trading and other types of fashion accessories. PNJ has 03 sales channels including retail, wholesale and export. Of which, the retail segment via the store system has the most important role, accounting for 55% of total revenue and 80-85% gross profit of PNJ. At the same time, this is also the distribution channel to give PNJ the highest profit margin, approximately 27% compared to the rest of the wholesale segment (3-5%), exports (10-12%).
With the retail market in general and jewelry industry in particular, the size, population growth, income and consumption trends are factors that play a decisive role. According to data from the United Nations Economic and Social Council, Vietnam’s population increased by an average 2.02% in the period 1955-2015 and now stands at about 94 million people. Among them, the proportion of the population aged 15 and over accounted for approximately 75%. Also according to this Council, Vietnam’s population is expected to reach about 105 million people in 2030, an increase of approximately 12.6% compared to 2015. Particularly in Ho Chi Minh City, the largest market of PNJ accounted for nearly 9% of the national population, estimated to increase around 4% per year until 2020. The rate of urbanization has increased over the years as well as has been an important factor to help increase the number of potential customers for PNJ.
In addition, Vietnam’s economy being on a good growth rate has been accompanied by a per capita income which is also increased over the years. According to data from the General Statistics Office, the growth rate of per capita income in the period 2011-2015 is positive, reaching 12.9%. In particular, Ho Chi Minh City’s average income is USD 5,538/person, 2.6 times higher than the national average. According to the Ministry of Planning and Investment, by 2020, per capita income is expected to be half higher compared with the current; Ho Chi Minh City aims the income of USD 9,800 /person, an increase of nearly 80% compared to 2015. Together with the proportion of the population with medium and gradually high income level (higher median age), PNJ’s target customers (population) are expected to increase in the coming period.
Figure 1: Per capita income (unit: USD) and GDP growth (%) of Vietnam and Ho Chi Minh City
Change in consumer behavior, including the tendency to use high-quality, branded goods, is also increased with per capita income and has a positive impact on demand for jewelry items. According to Nielsen’s market research, Vietnam consumers now has (1) the higher need to shop for themselves and (2) prefers high quality , convenient products.
Grasping this trend, PNJ has quickly taken the lead in developing stores in commercial centers and promoting online marketing activities. PNJ has several stores in largest commercial centers such as Vincom Dong Khoi, Big C Mien Dong, Maximark Cong Hoa, AEON Tan Phu, Pearl Plaza etc. In addition to investment in sales sites, PNJ also has close link with many restaurants, wedding centers such as Windsor, Melisa Center, Queen Plaza, Adora and regularly attends events such as the Queen Day, Marry Wedding Day wedding exhibition etc. However, the above sales forms have initial meaning to promote and position PNJ brand more than revenue generation.
There are risks to the growth of individual and family items, especially the high-end consumer segment such as PNJ jewelry segment, this industry is influenced greatly by the health of economy in which retail data is an important demonstration. According to The Economist (EIU), Vietnam ranked the second (just following China) in Asia regarding the growth of the retail segment. The organization also forecasts that Vietnam’s retail market will continue positively in the years 2016-2018. However, recent developments in the world events such as Brexit event which could cause new concerns about instability in the world and Vietnam’s economy will be more or less affected.
Figure 1: Growth rate of retail sector in some Asian countries (Unit: %)
PNJ studies carefully before deciding the position to open a new store based on criteria such as average income, population density, vehicle density, the level of competition … According to our observation, most of PNJ stores are in quite favorable locations, located on the major roads, near major markets or in the busy commercial center, with a large number of passersby. Convenient location plays an important role in attracting customers and promotes PNJ brand image.
Figure 4: Image of opening a new PNJ store in Quang Binh
The expansion of the distribution system actively supports for sales growth and profitability of PNJ. Time to reach the breakeven point of the store is about 1.5 years, therefore, the stores beginning to operate in years prior to 2015 will start to contribute to profits of PNJ. We estimate that the new stores (under 12 months) can contribute around 21% of revenue in 2016. With the old stores, the growth rate of annual revenue is relatively stable, averaging approximately 10-12 %. Normally, the more longtime the stores are, the higher sales is and gross profit margin is relatively positive compared with new stores because the consumers have a habit to select familiar brands or shopping locations. In addition, the trend of using branded is also a positive thing supporting PNJ to increase market share in the long term.
Comparison with other competitors, PNJ has a significant advantage in the market coverage. PNJ has 204 stores, nearly 3 times of the total number of stores of Doji and SJC. The jewelry products of PNJ are tested more closely than in traditional stores and the Company commits to repurchase with the price up to approximately 70% of the purchase price. For diamond products, this proportion rises to approximately 95%.
Overally, the rate of acquisition of PNJ is equivalent to the large competitors in the sector, however, extensive and high professional level distribution system is one of the key competitive advantages of PNJ compared with domestic and foreign competitors. According to our observations, although SJC is also a long-standing brand as PNJ, but the strength of the SJC is still mainly gold bar and SJC seems to have not invested heavily in jewelry segment. For Doji, it has focused on enhancing brand image, however, Doji is relatively new established, so Doji’s products design are a bit less diverse than PNJ. In addition, we believe that consumer habit is the most important factors causing the continuous expansion of the retail system of PNJ to be still highly effective, which PNJ’s competitors have not really done well.
Bao Tin Minh Chau
The number of stores
Popular repurchase rate (% invoice value)
Source: Synthesized by Rong Viet Research
Figure 5: Policy of buying/bartering of some typical jewelry enterprises
The door to improve profit margin widely thanks to pushing up gold jewelry segment
In terms of product structure, the segment of gold jewelry accounted for the largest proportion with the contribution up to 77.7% to revenue and 88% to gross profit of PNJ. This is also a business segment with great higher growth rate compared to the rest segment. Specifically, despite accounting for only 21% of the revenue structure in 2011, but only after 04 years, the proportion of gold jewelry segment has risen to 77.70%, equivalent to Compound Annual Growth Rate (CAGR) of 20, 9% every year. In quarter 1/2016, revenue of gold jewelry segment continued to grow 19% while the silver segment fell slightly 1% and gold bar continued to decline 7% over the same period. Reducing the proportion of gold bar and increasing gold jewelry segment has many meanings: (1) increasing in gross profit margin of PNJ due to the gross margin of gold bar segment is very low (~ 0.5%) compared to gold jewelry one (~ 17.2%); PNJ only maintains this business line to meet the diverse needs of consumers rather than focusing on development and (2) reducing the risk of fluctuations in the price of gold. Not only PNJ but also gold bar consumption trend in Vietnam has declined and replaced by the rise in demand for gold jewelry.
PNJ gold material resources mainly come from wholesale partners, which are mostly private retail stores gold with gold resources from current customers. With reserves of gold in the large population, up to 500 tons of gold (Vietnam Gold Business Association) while PNJ’s gold consumption is only about 10 tons / year, raw material supply of PNJ is relatively abundant. Although gold material accounts for ~ 90% of raw materials cost of gold jewelry segment, gold price fluctuation has a certain impact to the profit margins of the Company.
PNJ products are items of high added value jewelry. Good profit margin allows the Company to absorb minor fluctuations in prices of raw materials (mainly gold) and maintain overall earnings. However, in case of fluctuation in raw material prices is more than 10%, PNJ can adjust sale prices to guarantee a minimum profit. Comparing with some family jewelry stores and stores at the market with the same brand as PNJ. We believe that profit margins in the gold jewelry segment will continue to improve economic efficiency through scale and promote consumption of products with high added value.
The divestment outside the sector is a motivation to support core business line of PNJ
As analyzed above, the core business activities of PNJ are on track to grow well. However, in addition to inefficient investments outside the sector have significantly affected to the company’s overall earnings.
In particular, financial investments with book value up to VND 395.3 billion in DongA Joint Stock Commercial Bank (DongA Bank) had a major impact on overall earnings in 2015 of PNJ. Provisioning VND 300.3 billion for this investment with losses of VND 39.2 billion from the divestment from SaiGon M&C Real Estate Joint Stock Company made financial expenses of PNJ jump 4.8 times and profit after tax of PNJ decreased 40.4% compared to 2014. However, if we exclude extraordinary expenses above, the previous year’s profit after tax of PNJ increased by 72%.
Figure 10: Gross and net profit margin of PNJ over the years
In quarter 1/2016, the value of the remaining amount of 84.7 billion for investments in DongA Bank was fully appropriated by PNJ. Thus, PNJ only has investments outside the sector in Dong A Real Estate Corporation (DAL) with a book value of about 82 billion. According to the share at the General Meeting of Shareholders in 2016, the Company plans to divest from DAL in this year and will not be affected negatively by inefficient investments from 2017.
In addition, we do not exclude the possibility that PNJ will be reversal of provision in part with investments in DongA Bank because this bank’s activities are initially improved. In particular, representatives of Phat Dat Real Estate Development Corporation (PDR) said it would prioritize the use of revenues (~ 500-1,000 billion) from Everich 2 project to repay to DongA Bank this year. However, the time for reversal of provision is “a long-winded story” for PNJ. The more important thing which is a healthy business model with a focus on developing the core business line (gold jewelry) will be an important element to support sustainable growth for PNJ.
Positive expected business result growth in the long term
The continuous expansion of the distribution system and focusing on developing the product segments with high added value have contributed positively to help to increase market share and to be a driving force for growth in business result of in 2016 and the next year. Particularly in quarter 1/2016, if we exclude the large provision for financial investments in DAF, PAT from main business activity of PNJ increased ~ 61% over the same period.
Table 2: Q1-FY16 business results and Accumulation 3T2016
Table 3: Analyze operating activities of Q1-FY16
According to a recent announcement of PNJ, the 6-month business result of PNJ continued to grow good with gross profit increasing to 30%, much higher than the growth rate of revenue (4%). We believe that the good increasing of gold jewelry segment (revenue + 15%) is the main reason actively supporting the business result of PNJ. In the first half year, profit before tax of the Company reached 304.5 billion, increasing 116% over the same period and 66% of the yearly plan.
We assume PNJ will complete divestment from Dong A Real Estate (DAL) this year and may have to record losses of about 31 billion. Meanwhile, PNJ’s revenue may rise about 9% and the Profit after tax can reach 517 billion, 239% higher than the previous year. If excluding extraordinary items, Profit after tax of PNJ may reach 569 billion, 36% higher than year 2015. In which, gold jewelry segment is estimated to increase by 17% and improve gross margin of 60 percentage. To 2017, the stores opened since 2015 are expected to contribute more significantly to the revenue and profit of PNJ. Therefore, revenue may grow approximately 17.5% over the year. At the same time, with no negative impacts from outside the sector investments, Profit after tax in 2017 may reach ~ 746 billion, higher than forecast in 2016 about 44%.
Table 4: PNJ’s business results in the period 2011-2017
Regarding financial aspects, as well as other manufacturing and distribution enterprises, PNJ uses plenty of debt, especially short-term borrows to finance current capital. However, these borrows of PNJ are guaranteed by large inventory or real estate with better position. Especially, the inventory of PNJ (about 2,261 billion) mostly is raw gold and jewelry products with high liquidity and capacity to store the equivalent value in cash. As a result, the Company may borrow short-term at a higher rate and low cost. Short-term borrowing interest rate of PNJ is only approximately 5.0 – 7.5 %. This is a great advantage which allows the Company to increase capital efficiency and amplify Return on Equity (ROE).
Table 5: Some payment indicators of PNJ
To determine a reasonable price for PNJ’s shares, we use a combination of method of Free Cash Flow For The Firm (FCFF) and method of comparing P / E with ratio of 50:50 respectively. For method of Free Cash Flow For The Firm FCFF, the discount rate used for the period 2016-2020 is 12.3% and from 12.8% in 2020 onwards. Long-term growth rate of FCFF is estimated to be 6.6%.
P / E method uses references from a number of typical enterprises around the world. P / E ratio of these enterprises is ~ 18.5 times. However, discounting Vietnam market risks, we use P / E by 15,0x to determine the price of PNJ’s shares.
Table 6: P / E target of some typical jewelry enterprise all over the world
Combine the above valuation methods, the fair value of the shares is determined at the level of VND 101,000 / share, 32% higher than the closing price on 04/07/2016. Therefore, we recommend to BUY in LONG-TERM PNJ’s shares.
Consumer good market for individual and households in Vietnam, especially the jewelry segment, has a positive outlook thanks to (1) the large population size with proportion of people having ascending average and high income and (2) the tendency to use high-quality, branded good has increased. Large retail systems and having been expanding rapidly are critical in expanding market share. Currently, PNJ holds over 25% jewelry market, outstripping Doji and SJC, who are the adjacent competitors. Large market coverage and brand that has already been “familiar” with many consumers are the unique advantages of the PNJ, helping the system expanding to remain effective.
Investments outside the sector are expected not to impact negatively to general business result of PNJ from 2017. We estimate that 2016’s revenue could rise ~ 9% and Profit after tax is estimated at ~ 517 billion, higher than 239% compared to 2015. Excluding extraordinary items, Profit after tax may reach 569 billion, respectively increase by ~ 36% compared with the results of operating activities in the previous year.
We think that the reasonable price of PNJ is about 101,000 / share, 32% higher than the closing price on 04/07/2016. Therefore, we recommend to BUY in LONG-TERM PNJ’s shares. The risk with the main operating activities of PNJ is gold price volatility, although the company has the ability to transfer a portion of raw materials price fluctuations in sale prices but the demand may slow when the price of jewelry rises.