The Hour Glass

[dydx]

As THG's core retail of luxury branded watches is essentially a cash-based business, and as the group earns a very exemplary average GP Margin of 24.1% (in the lastest FY ended 31Mar12), I think it is perfectly fine for the management to continue to increase stocks (or inventory) holding at a certain measured pace to support the targetted customers' demand for certain brands or goods, and the increase in business volume and sales. Based on the latest FY12 numbers, THG run its regional retail/distribution business with an average stocks holding of 6.02 months (computed based on COGS) - i.e THG's group stocks holding turned over approx. every 6 months, or approx. 2x a year.

I think it is also important to note that based on the latest B/S numbers as at 31Mar12.....
http://info.sgx.com/webcoranncatth.nsf/V...80019FD01/$file/THGL_4Q_FY2012_for_SGX.pdf?openelement
, THG's large $231.0m stocks holding is substantially financed by its own equity of $302.3m, as the group had very little loans/borrowings ($3.1m), and trade and other payables amounted to a total of $42.0m. On top of that, there was a $53.7m cash balance, before counting the investment properties/PPE assets totalling another $42.8m. This is a very comfortable and conservative position, and I guess the fact that THG under the Tay's and Chan's is willing to commit a big portion of its own equity into stocks holding also reflects the management's confidence in the business.

We should also compare with competitor Cortina Holdings' latest FY12 (ended 1Mar12) numbers....
http://info.sgx.com/webcoranncatth.nsf/V...90032BF4F/$file/CHLFY2012.pdf?openelement
which show, among others, an own equity of $127.6m and a total borrowings balance of $70.3m, and a higher average stocks holding of 8.33 months (computed based on COGS).

[dzwm87]

Hour Glass is the largest position in my portfolio, so for the past year I have thought a lot about its poor share price performance despite excellent profit growth.

I guess the reason why its PE is so low is because its dividend payout is low, about 25% payout ratio. And one big contributing reason it's dividend payout is low is because a lot of profit is locked up in inventory (see the increase in inventory on cash flow statement).

Per Buffet's "owner earnings" concept, he will deduct this increase in inventory from net income.

So I guess unless Hour Glass sells it's inventory faster and have more cash to pay out more dividend, PE ratio could always be low. It does make a significant difference (I feel it acutely) to a shareholder between receiving 25% profit and 75% profit as dividend say for a period of 5 years.

IMO, 25% dividend payout model is fine. Some stock doesn't pay dividend and yet strong performance still warrants stock price hike.

As a watch retailer, I suppose holding inventory is fine - just have to ensure they do not hold too excessively.

I reckon it is just due to the industry. Apart from Sincere Watch's privatisation of 11x P/E, the rest of the watch distributor or retailer are ranging around from 5 to 6x. Even Cortina is valued at 4.3x P/E. The only exception is Emperor Watch (887.HK), valuing at 9.3x P/E.

Perhaps, the key is to track back to Hour Glass's P/E performance for the past 5 years and determine where the average P/E was. Else, there might be a potential that HrGlass has already been fair valued by the market.

[shanrui_91]

Hour Glass is the largest position in my portfolio, so for the past year I have thought a lot about its poor share price performance despite excellent profit growth.

I guess the reason why its PE is so low is because its dividend payout is low, about 25% payout ratio. And one big contributing reason it's dividend payout is low is because a lot of profit is locked up in inventory (see the increase in inventory on cash flow statement).

Per Buffet's "owner earnings" concept, he will deduct this increase in inventory from net income.

So I guess unless Hour Glass sells it's inventory faster and have more cash to pay out more dividend, PE ratio could always be low. It does make a significant difference (I feel it acutely) to a shareholder between receiving 25% profit and 75% profit as dividend say for a period of 5 years.

you are right to point out about the high working capital requirement as this is a norm in the jewellery and luxury watch business. It will be hard for them to sell inventory faster since they need to have a huge range of products ready for sales each time to ensure client satisfaction. However, its high ROA and ROE shows that its asset turnover is pretty good.

A good management is crucial here as inventory management will always be depended on their sales forecast and economic outlook.

As for PE, it is really up to the market to price the business, there is nothing much that we can do about it. I don't see a case of value trap here though the concern of a peak earning is understandable

[Thriftville]

Hi buddies, Hour Glass's business model seems easy to replicate. What will happen if the brands that it manages decided to open their own store? Just like Mercedes not renewing dealership with C&C.

Hope to hear your views!

[dydx]

Hi buddies, Hour Glass's business model seems easy to replicate. What will happen if the brands that it manages decided to open their own store? Just like Mercedes not renewing dealership with C&C.

Hope to hear your views!

I believe the answers to your questions can be obtained from THG's recently revamped website (more work being done).....
http://www.thehourglass.com/?page_id=12&lang=
by firstly looking into the store directory to understand/appreciate the locations and quality aspects of THG's retail outlets, especially the newer stores.

Secondly, you can take a close look into THG's huge portfolio of brands represented.....
http://www.thehourglass.com/?page_id=2
and try to understand/appreciate/imagine the ways THG manages their brand principals with a view to develop long-term mutually beneficial business relationships, especially with those very strong brands (e.g. Rolex) and promising ones. Do note that while most of the brands represented are not exclusive to THG (i.e. other watch retailers carry them too), some (e.g. Hublot, etc.) have appointed THG as their exclusive distributors/retailers for the region.

[Choon]

Hour Glass is the largest position in my portfolio, so for the past year I have thought a lot about its poor share price performance despite excellent profit growth.

I guess the reason why its PE is so low is because its dividend payout is low, about 25% payout ratio. And one big contributing reason it's dividend payout is low is because a lot of profit is locked up in inventory (see the increase in inventory on cash flow statement).

Per Buffet's "owner earnings" concept, he will deduct this increase in inventory from net income.

So I guess unless Hour Glass sells it's inventory faster and have more cash to pay out more dividend, PE ratio could always be low. It does make a significant difference (I feel it acutely) to a shareholder between receiving 25% profit and 75% profit as dividend say for a period of 5 years.

you are right to point out about the high working capital requirement as this is a norm in the jewellery and luxury watch business. It will be hard for them to sell inventory faster since they need to have a huge range of products ready for sales each time to ensure client satisfaction. However, its high ROA and ROE shows that its asset turnover is pretty good.

A good management is crucial here as inventory management will always be depended on their sales forecast and economic outlook.

As for PE, it is really up to the market to price the business, there is nothing much that we can do about it. I don't see a case of value trap here though the concern of a peak earning is understandable

Thanks Shanrui, I think you just helped me crystallise my thinking of Hour Glass - that an inherent weakness in the watch distribution business is that you need a huge stock of inventory for standby for custoemr satisfaction.

Buffett like to quote the exaple of Sees Candies. Every year Sees Candies just produce higher earnings by raising selling price without an increase in fixed capital and working capital. I guess Hour Glass is quite different from Sees Candies.

Ultimately, a cow for its milk, a stock for its dividend. Imagine if Hour Glass can distribute ~80% profit as dividend, like SIAEC, I think its PE would be significantly higher.

[shanrui_91]

Hi buddies, Hour Glass's business model seems easy to replicate. What will happen if the brands that it manages decided to open their own store? Just like Mercedes not renewing dealership with C&C.

Hope to hear your views!

Since 1979, THG has working relationship with brands like Rolex, Patek Phillipe and Cartier. Relationship is very important especially among the Swiss manufacturer given that many of them are family-owned business and are not listed public company. Many of the luxury watches are not mass-produced by factory which is why Swiss watch has such a good brandname. Compare this to Sincere, where the CEO sold the company twice in a span of 5 years.

Customer service is of utmost importance. There is a story that a salesman from THG made 6 phone calls, 2 faxes, 3 trips in order to get a watch model that their shop does not have. As for whether it is really true, I have no idea but I am sure you can try their customer service by entering one of their shops.

Another of their busines strategy is that they regularly organise high-class events like Tempus which attracted 50,000 people in its first introduction in 2005. They are also one of the first to promote hourlogy education among its customers, sharing with them how watches are made and how to appreciate a watch.

Their executive director, Micahel Tay, used to be an investment banker. However, he decided to come back to help his parent to manage the business. He went to emerge himself in Swiss for a year or so where he learnt about the whole watch manufacturing process. When he came back, one of the thing that he did is to close down Bulgari as well as THG USA.

In the Singapore scene, the 2 largest players are Sincere and THG, followed by Cortina and Dickson Watch. While anyone may be able to open a shop, customer and manufacturer relationship takes time to build. Especially for tourist, they will usually choose the branded shop to avoid buying counterfeits. This is more applicable in Thailand and Malaysia.

One last thing - you will be surprised to learn that HENRY TAY YUN CHWAN actually owns 12.40% of Cortina, being the 2nd largest shareholder

(vested)

[WolfT]

More and more watch maker brand are setting up their shop here instead of going through distributor. Last mth I wanted to buy a JLC but HG don carry them anymore!
Same thing for IWC, some of the model HG don carry...
The discount are getting lesser too.
No doubt HG still gives e most discount in e mkt.(also depend on relationship with Saleman)
I bought most of my watches from HG so i think they can still make money ba.
Most of the feedback from my friends and forum indicate HG still give the best service and pricing.

(not vested)

[Salty]

Hey guys,

i have shared a screenshot of the average P/E ratio over the past few years of hourglass.
Please see link

Orange line

http://tinypic.com/r/161gx03/6

[thefarside]

Hi buddies, Hour Glass's business model seems easy to replicate. What will happen if the brands that it manages decided to open their own store? Just like Mercedes not renewing dealership with C&C.

Hope to hear your views!

You are right in the sense that there is no real barrier to entry in the form of setting up new shop etc, and for a new entrant to wrest the dealership of existing brands from the incumbent. The reality however, is somewhat more challenging.

1. Switching dealerships is a major undertaking and represents major commercial risk to the manufacturer. Unless there is a compelling reason to do so, such as gross underperformance/mis-management by the main dealer for a particular country, they are unlikely to do it. In addition, operating retail centres themselves is quite demanding - what will happen is they might cancel the right to retail their watches for that dealer, and switch to someone else

2. In the cases of less well-known mid-tier brands, Hour Glass do have some bargaining power over the watch brands in terms of the market access that it offers to these manufacturers. High end brands like Patek have a controlled price everywhere and they do allow retailers to earn a decent margin. The higher the sales, generally the better the bargaining power of the retailers. Do remember that Singapore has one of the highest sales of luxury watches in Asia. People buy here because of the reputation of the country and shops here (i.e. genuine etc).

3. They can also offer to operate exclusive boutiques showcasing a particular brand, as part of branding efforts so no reason for the watch manufacturer to try and come in to collect on the retail margin.

In terms of product offerings THG has virtually everything that's worth sitting in the store - the only major in-thing brand they don't currently have in Franck Muller which is of course exclusive to Sincere. From that point on its customer service, company reputation and cost/inventory management. And good relationship with manufacturers to secure popular, high-in-demand timepieces.