Can we hope for a V-shaped recovery? The case of PNJ

Everyone is hoping for a V-shaped recovery. Economic activity goes down but then pops right back up. That means this is just a small interregnum from the solid growth on each side. That’s what Vietnam is looking for too.

Source: Pantheon Macroeconomics via Business Insider

We are starting to see some mixed messages from China as it has now come out of quarantine (until the northeast was put back into quarantine).

Pantheon Macroeconomics has a report out that looks at industrial production and retail sales volume in China (here’s an article about the report). As you can see in the chart to the right, it sure looks like a V-shape to me.

The research shop points to a few reasons for the recovery:

State-owned enterprises that were pushed to reopen at normal capacity.
There was a catch-up in production, potentially to fill unmet demand.
There was an inventory build-up in order to facilitate this production and to restock stores.

But that lower consumer spending plus lower exports (as demand falters elsewhere) will make it hard to keep activity up. The catch up will only last so long. This article from the New Yorker goes into more detail for the reasons that economic growth will be hard to sustain. For example, Disney Shanghai can only open at 30% capacity. Having as high as a 70% decline in revenue is going to be hard to sustain.

But what we can take from this is that there will be a catch up period that may provide some employment and sales for people and companies. If the government steps in and replaces some of that lost consumer income, we may avoid a W-shaped recovery.

Now let’s look at Vietnam. What can we see so far? Looking at PNJ, we can start to estimate the total loss. By April 1, 100% of the jewelry chain’s stores were closed in the HCMC and the North. Only in the Southeast were more than 50% its stores open, and it was barely above 50%. However, in the second half of April, stores started to re-open.

It’s not just April that was hurt. The company had already seen a decline in sales growth in March (see charts below), and lots of that growth was from sales of gold bars, which were up a lot — they made 29% of March 2020 sales, compared to 18% in March 2019. That combined with sales of more gold jewelry reduced gross margin by 90bps in March and net income fell 34%.

But the real impact was felt in April, when revenues fell 46% (still better than expected, probably because people really do stock up on gold in crises - gold bars were 38% of sales). The company lost VND89bn in the month. April is usually a weak month (net income was just VND59bn in April 2019), so it actually wasn’t the worst time for the store to be closed.

The company says sales started to pick up in late April and early May. One reason is that PNJ is ‘capturing additional market share while many companies in the jewelry industry are shrinking and "hibernating"."‘

My concern is that lower consumer income will start to hurt sales, particularly of highly discretionary items like jewelry. Sales of gold could still be good with continued pandemic elsewhere, but I am worried about declining sales of the higher margin products.

Having said that, I really do think that PNJ’s management team is one of the best. Very transparent, good crisis management. If you aren’t too scared of discretionary retail, the company seems like a good place to put your money.

VietEcon

Can we hope for a V-shaped recovery? The case of PNJ

VietEcon