[Update] PNJ — Recovery from ERP trouble

Hold-Outperform

Target price: VND 86,200

Upside: 4.6%

Event

PNJ released its 3Q19 results yesterday with a 25% YoY increase in sales and 17% Y0Y increase in PAT. This is a notable improvement compared to the YoY declines of -8% YoY in sales and -6% in PAT seen in 2Q19. The positive growth in 3Q19 indicates an operational recovery from the ERP problem and weak jewelry demand in the previous quarter.

Our take

The strong 25% YoY growth in 3Q19 revenues boosted YTD revenue increase by 11%, reaching 65% FY19 of guidance. 3Q19 sales were supported by the addition of 29 new stores, a rebound in jewelry demand, and success in its new jewelry offerings.

Net income in 9M19 (+16% YoY) has reached 68% of FY19 guidance. Gross margin increased slightly by 10bps YoY in 3Q19 to reach 19.1%, which management attributed to a more favorable product mix (i.e., a higher contribution from high-value jewelry). In addition, PNJ managed its operating costs effectively.

Management also attributed the recovery to increased effectiveness of its enterprise resource planning (ERP) system. Management noted that its employees have become more familiar with the new system and its operations are close to “normal” conditions now, which is a contrast from 2Q19.

As we said in our most recent note titled “PNJ: The Fat Hits the Fire”, a slowdown in jewelry demand is much more of a concern than the ERP system problems. Thus the quarterly rebound in sales, while welcome, is insufficient to conclude that Vietnamese jewelry demand is returning to high-single-digit growth rates, in our view. Having said that, we see the rebound as a meaningfully positive signal. We expect a continued recovery in 4Q19, and we thus make no changes to our 2019 revenue and PAT forecasts.

We have a HOLD-Outperform rating but note that our expected 12-month total return is now just 6.4% (including the 2% dividend yield). Our target price is unchanged at VND 86,200 or 15x FY20E forward P/E.

Please access the link for our complete report: 20191018 PNJ 9M19_Edited

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