PNJ: 2Q19 Results — The fat hits the fire

Target price: 86,200

Upside: 13%

Event catalyst:

• 2Q19 sales declined by 8% YoY.
• PNJ managed to keep its gross profits (+9% YoY) afloat.
• But the bottom-line still saw a 6% decline on higher SG&A.

2Q19 sales declined by 8% YoY which management attributed to two issues. 1) Problems with ERP system implementation. Employees who lacked familiarity with the new system failed to input data properly, causing company-wide operational problems. 2) Surprisingly to us, PNJ also reported a 13% YoY decline in gold jewelry sales during 2Q19. In response, PNJ de-emphasized its jewelry wholesale business (3% GMs, -23% YoY sales decline) in favor of the retail segment (30% GMs, -9% YoY drop in sales), where it opened additional jewelry stores and launched new collections. As a result, PNJ managed to drive gross profit growth of 7.4% YoY in gold jewelry and company-wide gross profit growth of 9.1%.

Solutions? PNJ said that the ERP problems are almost solved now, as evidenced by rebounding sales in June and July. The system should help optimize PNJ’s operations and improve cost efficiencies, but it may take 12-18 months for this to occur. Management adopts a cautious view on demand weakness but still expects much better 2H19 results.

Opex growth pressuring the bottom line. Despite the 9.1% YoY increase in gross profit, 2Q19 PAT still declined by 6% YOY due to a 17.6% YoY increase in SG&A expenses. Higher costs were driven by new store openings in the gold jewelry and watch segments. PNJ remains in the expansion phase, and management guides for double-digit growth of such expenses going forward.

Our view: A possible slowdown in jewelry demand is clearly more of a concern than the ERP system problems. However, the magnitude of demand weakness is unclear given that the poor 2Q19 sales performance was a product of blended factors. Additionally, a single 3-month period is perhaps too short to call the weak demand a trend. We thus retain our assumptions on PNJ for now, and continue to recommend BUY on the shares.

Please access the link for our complete report: PNJ_2Q19 results — The fat hits the fire

Analyst: Quang Vo, quang.vo@yuanta.com.vn