Based on our previous estimates, we had forecast double-digit declines in both revenue and profit in Q2 and Q3 2023. However, Q2 2023 delivered a relatively positive surprise, with revenue declining 17% year on year and net profit falling only 8% year on year.
In July, the pace of revenue decline narrowed to just 4% year on year, while net profit increased 10% year on year, supported by: (1) faster-than-expected new store openings and (2) a better-than-expected gross margin following changes in the product mix. In light of these recent developments, we raise our 2023 and 2024 net profit forecasts to VND1.84 trillion, up 2% year on year from VND1.74 trillion, and VND2.04 trillion, up 11% year on year from VND1.96 trillion, respectively. As a result, second-half 2023 profit could return to year-on-year growth, rising 4%. With higher EPS estimates, we raise our target price for PNJ shares to VND90,200 per share, from VND86,000 per share, implying 13.5% upside potential. We maintain our OUTPERFORM recommendation on PNJ shares.
Short-Term View: We expect PNJ’s net profit to recover on a year-on-year basis from Q3 2023. While market corrections may put pressure on PNJ’s share price, they will also create opportunities to accumulate the stock.
Long-Term View: PNJ can continue gaining market share from the unbranded jewellery market, which accounts for 40%–50% of demand, enabling the company to maintain solid long-term profit growth, with a CAGR of approximately 15%–20%.
In Q2 2023, PNJ recorded net revenue and net profit of VND6.67 trillion, down 17% year on year, and VND338 billion, down 8% year on year, respectively. In the first half of 2023, net revenue and net profit reached VND16.5 trillion, down 10% year on year, and VND1.09 trillion, flat year on year, respectively, fulfilling 46% and 56% of the full-year plan.
Retail revenue declined 21% year on year, while wholesale revenue decreased 41% year on year in Q2 2023. Revenue growth in both retail and wholesale weakened in Q2 2023 compared with Q1 2023, when retail revenue declined 1% year on year and wholesale revenue fell 19% year on year, in line with weak consumer spending in Q2 2023. In the first half of 2023, PNJ’s retail revenue declined 10% year on year, less than the 18% decline in jewellery consumption reported by the World Gold Council. This indicates that PNJ continued to gain market share. The sharper decline in wholesale revenue than retail revenue also supports this view. However, market-share gains occurred mainly in Q1 2023, while PNJ’s Q2 2023 retail revenue declined faster, down 21% year on year, than industry demand, down 18% year on year.
Gold-bar revenue achieved 2% year-on-year growth in Q2 2023, improving from a 3% year-on-year decline in Q1 2023. Demand for PNJ gold bars remained stable despite weaker overall demand for gold bars. In the first half of 2023, domestic gold-bar revenue declined 8% from the high base of the previous year, when domestic gold prices trended higher. Although gold bars accounted for a larger share of the revenue mix, gross margin remained comparable with Q2 2022, as retail gross margins improved due to a shift in product mix: consumers purchased more silver and fewer loose diamonds as disposable income declined.
July Results: Net revenue and net profit reached VND2.4 trillion, down 4% year on year, and VND87 billion, up 10% year on year, respectively. Retail revenue still declined year on year, but at a slower pace, down 8% in July compared with a 21% decline in Q2 2023. As of July 2023, PNJ operated 371 gold stores, up 21 stores from the beginning of the year. The pace of new store openings was faster than our forecast of 20 stores for 2023. During an economic downturn, many well-located commercial properties become available for lease. With a strong financial position, reflected in a debt-to-equity ratio of 0.2x at the end of Q2 2023, PNJ is well positioned to secure prime locations for new stores and gain further market share.
2023–2024 Profit Forecasts
We continue to believe that challenging macroeconomic conditions may affect PNJ less than other retailers because: (1) gold is viewed as a store of value and an inflation hedge; (2) PNJ focuses on the mid- to high-end jewellery segment rather than the mass market; and (3) PNJ customers are less dependent on financing to purchase jewellery and are therefore less affected by tighter consumer credit in 2023. PNJ continues to pursue strategies to create new demand. Specifically, the company introduced the Hello Kitty Gold Coin, a gift for newborns in 2023, the Year of the Cat. According to the company, 90% of Vietnamese women marry without receiving an engagement ring. However, PNJ pioneered the proposal tradition in Vietnam in early 2023, aiming to create demand among both engaged and married couples. If successfully implemented, this strategy could generate long-term demand. Given the narrowing decline in retail revenue in July, faster-than-expected store openings since the beginning of the year and better-than-expected retail margins, we raise our 2023 and 2024 estimates as detailed in the table below. Although gross margin was relatively positive in the first half of 2023, we believe it is unlikely to improve further, as PNJ may focus more on tier-2 and tier-3 cities, where consumers prefer higher-gold-content jewellery with lower margins.
Source: PNJ, SSI Research
