Diving into PNJ — VietEcon

SOURCE: VIETSTOCK.COM.VN, VIETECON.COM Note this fixed FPT - I made an error in the last post.

When I wrote about consensus a few days ago (here), I was a bit surprised to find that one of the most loved stocks out there is PNJ. That shows how new I am to the market. The company has been voted one of the top 50 best listed companies in Vietnam. [I actually mis-remembered this - I thought it was the best listed company, not “in the top 50”, so…a bit less impressive. Not even sure the point still stands - suffice it to say, it is a listed company.]

Source; Vietstock.vn, chart by Vietecon.com

The company is pretty well held, and in sizeable amounts, with 12% of Vietnam Holding’s assets in PNJ. The stock has generally trended up over the past five years except for back in June 2018, when a board members was wrapped up in the Dong A corruption case, which I don’t really know anything about. And then of course, recently when it fell almost 44% from its high pre-Tet.

Plus the company just announced that it was closing some stores in Hanoi, HCMC and Danang and will do so until the government says it can reopen them.

This isn’t great for a retail store. By this I mean not retailing. But I feel strongly that it’s temporary. We can’t all stay in our homes forever. And when the economy stops hibernating, retail sales will start again.

So I thought I would look at PNJ’s results over the past few years and see how they’ve done. Now let’s get down to bullet points:

Source: PNJ, chart by Vietecon.com. Note that 2020t figures reflect company targets that were issued prior to the recent shut down.

Sales have been steadily up. They have grown 14% on average since 2012, with only a slight hiccup in 2015 and 2016 when sales weren’t so good.
Gross margin has been steadily higher. In fact, when sales slipped in 2015 and 2016, margins rose as did overall gross profit. For example, revenues were VND9.2tr in 2014, with gross profit of VND889bn. In 2015, sales fell to VND7.7tr, but gross profit rose to VND1.17tr. So it was a good trade off.

EBITDA margin has generally trended with gross margin, although not rising as quickly. The company has been working on cost control, and we saw that a bit in 2019, when EBITDA margin rose to 9.5% from 8.7% in 2018.
The company has been consistently opening new stores and stores-within-stores. It now has 348 stores (as of end February), up from 145 in 2012. The big jump happened in 2017 and 2018, when the company opened 50 and 55 stores, respectively. I don’t really have a sense of when it will reach saturation, but as the country gets richer, PNJ can go into smaller cities.
Same store revenue, since a correction in 2013 and 2014, has generally trended higher. I bet that same-store sales will start to trend up again as the company slows down on opening new stores. We saw that a bit in 2019. It would be helpful to have same-store sales in stores that have been opened 12 months or more, but I wasn’t able to find it in a cursory search.
Net profit is up 25% annually since 2012! That’s crazy. It is very impressive. They were up 24% in 2019, but the target for 2020 was just a 13% increase. That was prior to stores shutting because of COVID-19.
It is also a consistent payer of dividends, to the tune of VND343bn in 2019, up from VND268bn in 2018. That’s about a 3% dividend yield based on current prices.

Now let’s talk about some of the less exciting things.

Cash flows have been pretty dismal. By that I mean that cash from operations have been mostly negative. For example, 2019 was negative VND661bn, and 2018 was negative VND302bn.
The company’s store count has increased as well, that costs money. And it appears to be more and more expensive to open stores. For example, capex was VND87bn in 2016, and the company opened 29 stores (net). In 2019, capex was VND223bn, and PNJ opened just 22 stores (net). Of course, there is capex related to its current stores in there too, but it seems like it is more and more expensive to open stores.
So operating cash flow is negative, and so is investing (which is normal). That means it needs to be financed somehow. In this case, it is mostly debt. Total debt rose from VND1.5tr in 2016 to VND2.6tr in 2019.
The main driver of the negative operating cash is very high inventories. Look at how they have trended over the past few years. The company used to hold a fairly low level of inventory (47 days back in 2012). It has gone up to 161 days! This takes into account the higher sales and, to some extent, the stores.

But having said that, net debt to EBITDA is still relatively small at 1.5x (meaning the company could pay off all debt in just about 18 months). Debt-to-equity is pretty high at 57%, but the ability of the company to throw off cash is good. It just needs to slow down on purchasing inventory.

On Monday, I want to look at how PNJ stacks up to other companies in the luxury space. Right now, the only comparable that I can think of is Tiffany, which is being acquired by LVMH at a nice multiple. PNJ looks about a third as cheap! There used to be a Dubai-based jeweler, Damas, but it is now owned by a larger Qatari-company after some ownership-shenanigans. But I am sure I will find something. Watch for it.