The Hour Glass

[shanrui_91]

I will prefer the company to stay conservative in finance as there is not a need for them to gear up unless they are seeking to expand aggressively. The best opportunity always occur during the worst time and that will be where money will be most needed. In 2008, the group took advantage of the recession to spend $25m in capex to open up 8 new stores

For the inventory turnover, it is the 2nd lowest ratio recorded since 2000 with the lowest record being 1.87 in 2003. The highest ratio was recorded in 2008 with 2.57 as the management starts to pull back orders in early 2008 in anticipation of the headwind. I supposed that they have learnt a lesson in the 2nd half of the 2011 as CHF strengthened tremendously and end up hurting the margin for Q4 2012

How much an impact will luxury watch retailer suffer during a recession? By looking at the 12 years revenue results, a maximum of 10% decrease is noted in 2001 and 2009.

In all matter, I will still say this is one of the best chairman's statement I have seen as it is full of insider knowledge. To quote an example:

Our business strategy for this market sees us closing the loop on what we define as the Orchard Road Quadrangle. The Orchard Road quad is a one square kilometer area of shopping malls anchored by ION Orchard, Tang Plaza, Ngee Ann City and Paragon that on aggregate account for 80% of all luxury goods sales in Singapore.

I don't supposed that anyone will know of that there is such a Quadrangle that can account for 80% of all luxury goods sales. Wodner how much are contributed by tourist and how much by Singapore?

This is reflected in our Group staff turnover rate where the average tenure of employment is 9 years.

I read in a 2008 Edge interview of Michael tay where he stated that their staffs are one of the highest paid in the industry. Staff retention is very important as this is a relationship-based business and intimate knowledge of watches are not acquired easily.

It is also heartening that the management uses profit margin and roce to assess their operation. Another positive point is that they have finally opened a 2nd shops in Hong Kong which is not only the largest but one of the fast-growing market.

as for the dealership wise, it seemed like it is only those listed firms who are aggressively pursuing a retail strategy. Mono-brand retailer often requires a higher inventory requirement than a multibrand point-of-sale as well as significant capex start-up cost. Only listed firm can have sufficient firepower to do so. For privately owned brands like Patek Phillipe which produces less than 50,000 watches a year, it is really hard for them to try to pursue their retail expansion in Asia without the help of a distributor like THG.

My greatest disappointment is still in the wages of the top management which accounted for 14% of net profit and 1.2% of revenue. I am not sure what is the benchmark but I am sure this is quite a high amount for the family.

(vested)

[freedom]

the package for the family is definitely not low. actually, I don't know why Henry Tay and Jannie Chan are still executive directors. they could well be non-executive directors. That would sweeten the deal for shareholder a lot. Anyway, the package is still bearable.

As for the inventory, essentially, The Hour Glass is a trading company in luxury goods. Trading luxury goods definitely will not be as liquid as trading groceries. Thus, it also has a better margin than supermarkets. As long as it is still within a safe range, it is not alarming. So far, The Hour Glass can maintain inventory turnover ratio of 2, so it would not be difficult to clear its inventory. on average, half year later, the whole inventory will be gone.

[Boon]

the ar2012 is out.

it seems that the company is building inventory in anticipation of higher price in the future. the chairman also explained the principal-agent problem between The Hour Glass and its brand owners.

in its receivable, I noticed that they received compensation from dropping dealership with one brandin certain territories. So the principal has been taking some distribution right back from the Hour Glass.

"in anticipation of higher price in the future" sure sounds nice

Somehow inventory seen as a ratio to current assets - 0.76 for the latest fy and 0.74 and 0.68 going back to fy11 and fy10 - makes one feel uneasy. I know I am

The ratios to equity reading - 0.79 - 0.76 - 0.73 just adds on to the concern

The compensation received for dropping dealership being treated so casually in the receivables just seems not right, the amount piffling notwithstanding

(vested interest but thinking of jumping ship)

On inventory, another useful indicatior is the Stock Turn Ratio:

Stock Turn Ratio :
FY 2008 : 2.6
FY 2009 : 2.4
FY 2010 : 2.4
FY 2011 : 2.1
FY 2012 : 2.0

A low turnover rate may indicates an inefficient management of inventory : overstocking or over-investment in inventory; accumulation of obsolete and slow moving goods; dull business etc.

In some instances a low rate may be appropriate, such as where higher inventory levels occur in anticipation of rapidly rising prices or shortages. This seems to be the case as explained by the Chairman.

Overall the turnover rate has been trending lower but was for good reason. What impressed me most is net profit margin has been trending upwards from the low of 6.3% (2009) to 9.4% (2012).

Net margin :
FY 2008 : 6.5%
FY 2009 : 6.3%
FY 2010 : 6.9%
FY 2011 : 8.3%
FY 2012 : 9.4%

(Not Vested)

I am not used to looking at numbers this way. They are bright numbers.

However I did look at the inventory/revenue ratio as follow:
FY 2010 32.9
FY 2011 36.9
FY 2012 38.0
and they look dull

Ok maybe you are looking at Fuji apples and I am looking at Australian apples. Still apples right?

The chairman draws .....I do not the figure but collectively the four executive directors draw $7.8m in remuneration for the latest FY2012 and like all top honchos have to justify their keep.

As an investor I have to watch my own "backside" so have to watch where I put my dollar.

The chairman says corporate networth has increased by $43.6m to $293m which is the equity.

I see inventory tracking equity increasing by $40m to $231m. It is not a one-off thing. What is of more concern is the three-quarters of the net worth of the entity is in the stocks.

It is more of an inherent concern.

Inventory/Revenue Ratio:
FY 2002 : 0.40
FY 2003 : 0.45
FY 2004 : 0.36
FY 2005 : 0.34
FY 2006 : 0.36
FY 2007 : 0.35
FY 2008 : 0.31
FY 2009 : 0.33
FY 2010 : 0.33
FY 2011 : 0.37
FY 2012 : 0.38

I understand your concern on the trending up of inventory/revenue ratio of late. However, as explained by HT, the inventory was intentionally built up of late. Note that the ratio was as high as 0.45 back in 2003, not sure what was the reason then.

I do share your concern on the pays of the top execitive.

However, I am not concern that three-quaters of net worth of the entity is in the stocks (inventory). With a yearly revenue of 607 million (Cost of goods sold = 460 million) and a stock turnover ratio of 2.0 , an inventory of 231 million looks just right. Business expansion requires working capital.

[shanrui_91]

the best ratio to use is COGS/inventory since inventory will be transferred to COGS directly. Though if you look at note 21, 70% of inventory are stated at cost(COGS) while 30% are stated at net realisable value (revenue). By using revenue, the gross margin is involved as well.

2000 2.28
2001 2.40
2002 2.11
2003 1.87
2004 2.40
2005 2.46
2006 2.34
2007 2.37
2008 2.57
2009 2.37
2010 2.43
2011 2.10
2012 1.99

Here's the 12 years inventory turnover based on COGS/inventory

[orang]

even HG saves the 11 million from debt repayment, I doubt, it would go to shareholders. Historically, I don't view HG as a generous dividends giver. 2007-2008 is a bit different, maybe they were trying to utilize their S44 tax credit(my guess only).

---

in its receivable, I noticed that they received compensation from dropping dealership with one brand in certain territories. So the principal has been taking some distribution right back from the Hour Glass.

This was an agreement dating back to annual report FY 2004:

"The Company has exclusive distribution agreements in respect of a principal in the Asia Pacific region.

During the year, the exclusive distributorship rights were revised to exclude certain territories countries in the Asia Pacific region. As a goodwill compensation for removing these countries from the originally defined territories, the principal agreed to pay the Company, an amount of CHF2 million ($2.7 million). The Company received CHF 250,000 ($337,000) during the year, with the balance amount of CHF1.75 million ($2,363,000) being recorded as a net receivable as at 31 March 2004 "

my point is that brands are taking back their dealership and of course, The Hour Glass is also dropping some brands.

I share your concern here.

Were you expecting the chairman to address this as a concern? In other words as a negative

I think he did but not in so many words

[Boon]

Quote from Chairman's statement:

"A New Roadmap : Since 2009, we have re-invested $111.0 million in retail capex and inventory and continue to produce a growing cash surplus. Our biggest management challenge today is not to lose discipline in how we execute on our time tested approach of fundamental business management. Knowingly holding back from growing at breakneck speed during times of expansionary markets, and maintaining high profitability during times of crisis. When we think about doing things for the longer term, we end up deliberating more, we do things slower but we make sure we do them right. We will fire one bullet, calibrate, fire again, recalibrate. Once we have a close enough grouping, off goes the cannonball. Today, we are in confident position to fire off cannonballs and if FY2012 can be considered a year of operational stabilization for the Group, then FY2013 will mark the beginning of a new expansionary phase. In light of this, we have initiated a business development road map for the coming twelve months. ............"

Since FY2013 will mark the beginning of a new expansionary phase, therefore, more capex and working capital would be needed. Hopefully, all these could be funded internally from FCF generated from its operation. The Company could take on more debt if needed. If the Company intends to grow its revenue, inevitably more of its equity (asset) would be "tied-up" in the form "inventory" as working capital, if stock turnover rate remains at 2.0

For example,

FY 2013:
Revenue = 700 million (607 million for FY 2012)
Gross Profit Margin = 24.1% (Assume same as FY2012)
Implies COGS = 531 million
Stock Turnover rate = 2.0 (Assume same as FY2012)
Implies Inventory = 265 million ( 35 million more than FY 2012 of 230 million)

[orang]

Quote from Chairman's statement:

"A New Roadmap : Since 2009, we have re-invested $111.0 million in retail capex and inventory and continue to produce a growing cash surplus. Our biggest management challenge today is not to lose discipline in how we execute on our time tested approach of fundamental business management. Knowingly holding back from growing at breakneck speed during times of expansionary markets, and maintaining high profitability during times of crisis. When we think about doing things for the longer term, we end up deliberating more, we do things slower but we make sure we do them right. We will fire one bullet, calibrate, fire again, recalibrate. Once we have a close enough grouping, off goes the cannonball. Today, we are in confident position to fire off cannonballs and if FY2012 can be considered a year of operational stabilization for the Group, then FY2013 will mark the beginning of a new expansionary phase. In light of this, we have initiated a business development road map for the coming twelve months. ............"

Since FY2013 will mark the beginning of a new expansionary phase, therefore, more capex and working capital would be needed. Hopefully, all these could be funded internally from FCF generated from its operation. The Company could take on more debt if needed. If the Company intends to grow its revenue, inevitably more of its equity (asset) would be "tied-up" in the form "inventory" as working capital, if stock turnover rate remains at 2.0

For example,

FY 2013:
Revenue = 700 million (607 million for FY 2012)
Gross Profit Margin = 24.1% (Assume same as FY2012)
Implies COGS = 531 million
Stock Turnover rate = 2.0 (Assume same as FY2012)
Implies Inventory = 265 million ( 35 million more than FY 2012 of 230 million)

I suppose the first cannonball is Malmaison at Knightsbridge followed by that $5 million Hublot watch. Impressive! Very impressive indeed!

You got a pretty good feel of the business as your metrics you put forth suggest some effort in digging on your part. And you are so positive about HG. Yet you are not vested.

This is interesting and is tickling that kaypoh fella that is residing in me. I am itching to know why you have not vested.

I am allowed to ask one question.

But I have two questions viz:
a) what may be holding you back
b) what catalyst will push to cross that line

Which question is better?

Oh, btw I may not jump ship but stay around to see where that new roadmap will take me

[Boon]

Quote from Chairman's statement:

"A New Roadmap : Since 2009, we have re-invested $111.0 million in retail capex and inventory and continue to produce a growing cash surplus. Our biggest management challenge today is not to lose discipline in how we execute on our time tested approach of fundamental business management. Knowingly holding back from growing at breakneck speed during times of expansionary markets, and maintaining high profitability during times of crisis. When we think about doing things for the longer term, we end up deliberating more, we do things slower but we make sure we do them right. We will fire one bullet, calibrate, fire again, recalibrate. Once we have a close enough grouping, off goes the cannonball. Today, we are in confident position to fire off cannonballs and if FY2012 can be considered a year of operational stabilization for the Group, then FY2013 will mark the beginning of a new expansionary phase. In light of this, we have initiated a business development road map for the coming twelve months. ............"

Since FY2013 will mark the beginning of a new expansionary phase, therefore, more capex and working capital would be needed. Hopefully, all these could be funded internally from FCF generated from its operation. The Company could take on more debt if needed. If the Company intends to grow its revenue, inevitably more of its equity (asset) would be "tied-up" in the form "inventory" as working capital, if stock turnover rate remains at 2.0

For example,

FY 2013:
Revenue = 700 million (607 million for FY 2012)
Gross Profit Margin = 24.1% (Assume same as FY2012)
Implies COGS = 531 million
Stock Turnover rate = 2.0 (Assume same as FY2012)
Implies Inventory = 265 million ( 35 million more than FY 2012 of 230 million)

I suppose the first cannonball is Malmaison at Knightsbridge followed by that $5 million Hublot watch. Impressive! Very impressive indeed!

You got a pretty good feel of the business as your metrics you put forth suggest some effort in digging on your part. And you are so positive about HG. Yet you are not vested.

This is interesting and is tickling that kaypoh fella that is residing in me. I am itching to know why you have not vested.

I am allowed to ask one question.

But I have two questions viz:
a) what may be holding you back
b) what catalyst will push to cross that line

Which question is better?

Oh, btw I may not jump ship but stay around to see where that new roadmap will take me

THG has retail outlets in 6 countries namely Singapore, Malaysia, Thailand, Hong Kong, Australia and Japan. I had the opportunities to visit its only outlet in Hong Kong at Nathan Road, its outlet in Sydney at King Street and most outlets in both Singapore and Malaysia, when I was working and/or living in those countries.

I used to own shares in both THG and Sincere Watch back in the 90’s when I was working in Singapore.

Having left Singapore and relocated to China, and due to work commitment, I had not been able to devote sufficient time in “looking for alpha” in the SGX market until recent months when work commitment has reduced substantially.

Honestly, I am glad that I have found this platform on value investing from which I have learnt a great deal. It is a good platform for exchanging views and learning from each other. However, one should not rely on someone else on this platform to make investing decision for him/her. I remain strongly subscribe to the view that one should do one’s own research and form his/her own conclusion on what to invest and what not to invest.

The Hour Glass I used to know back in the 90s had transformed itself to what it is today and I have to dig deep, as you said, to keep myself up to speed with its current fundamentals. I think your statement “You got a pretty feel of the business……..” should go to “dydx” and “Shanrui_91”, both of whom seem to have a better feel of the business and have contributed so much to this tread. I am just playing catch up.

THG is trading near its NAV of around 1.25 and I am prepared to get in at this level. All my SGD fund in Singapore is fully invested and I am in the process of remitting some RMB to SGD which is going to take a few more days. If the price shoots up by then, I may deploy my money to other stocks instead. Otherwise I should be vested by then.

Lastly, each of us has his/her own investment objectives. You should be responsible for making your own investment decision on whether to jump ship or not. Whatever decision you take, I wish it would be a profitable one. Good Luck !

[orang]

Quote from Chairman's statement:

"A New Roadmap : Since 2009, we have re-invested $111.0 million in retail capex and inventory and continue to produce a growing cash surplus. Our biggest management challenge today is not to lose discipline in how we execute on our time tested approach of fundamental business management. Knowingly holding back from growing at breakneck speed during times of expansionary markets, and maintaining high profitability during times of crisis. When we think about doing things for the longer term, we end up deliberating more, we do things slower but we make sure we do them right. We will fire one bullet, calibrate, fire again, recalibrate. Once we have a close enough grouping, off goes the cannonball. Today, we are in confident position to fire off cannonballs and if FY2012 can be considered a year of operational stabilization for the Group, then FY2013 will mark the beginning of a new expansionary phase. In light of this, we have initiated a business development road map for the coming twelve months. ............"

Since FY2013 will mark the beginning of a new expansionary phase, therefore, more capex and working capital would be needed. Hopefully, all these could be funded internally from FCF generated from its operation. The Company could take on more debt if needed. If the Company intends to grow its revenue, inevitably more of its equity (asset) would be "tied-up" in the form "inventory" as working capital, if stock turnover rate remains at 2.0

For example,

FY 2013:
Revenue = 700 million (607 million for FY 2012)
Gross Profit Margin = 24.1% (Assume same as FY2012)
Implies COGS = 531 million
Stock Turnover rate = 2.0 (Assume same as FY2012)
Implies Inventory = 265 million ( 35 million more than FY 2012 of 230 million)

I suppose the first cannonball is Malmaison at Knightsbridge followed by that $5 million Hublot watch. Impressive! Very impressive indeed!

You got a pretty good feel of the business as your metrics you put forth suggest some effort in digging on your part. And you are so positive about HG. Yet you are not vested.

This is interesting and is tickling that kaypoh fella that is residing in me. I am itching to know why you have not vested.

I am allowed to ask one question.

But I have two questions viz:
a) what may be holding you back
b) what catalyst will push to cross that line

Which question is better?

Oh, btw I may not jump ship but stay around to see where that new roadmap will take me

THG has retail outlets in 6 countries namely Singapore, Malaysia, Thailand, Hong Kong, Australia and Japan. I had the opportunities to visit its only outlet in Hong Kong at Nathan Road, its outlet in Sydney at King Street and most outlets in both Singapore and Malaysia, when I was working and/or living in those countries.

I used to own shares in both THG and Sincere Watch back in the 90’s when I was working in Singapore.

Having left Singapore and relocated to China, and due to work commitment, I had not been able to devote sufficient time in “looking for alpha” in the SGX market until recent months when work commitment has reduced substantially.

Honestly, I am glad that I have found this platform on value investing from which I have learnt a great deal. It is a good platform for exchanging views and learning from each other. However, one should not rely on someone else on this platform to make investing decision for him/her. I remain strongly subscribe to the view that one should do one’s own research and form his/her own conclusion on what to invest and what not to invest.

The Hour Glass I used to know back in the 90s had transformed itself to what it is today and I have to dig deep, as you said, to keep myself up to speed with its current fundamentals. I think your statement “You got a pretty feel of the business……..” should go to “dydx” and “Shanrui_91”, both of whom seem to have a better feel of the business and have contributed so much to this tread. I am just playing catch up.

THG is trading near its NAV of around 1.25 and I am prepared to get in at this level. All my SGD fund in Singapore is fully invested and I am in the process of remitting some RMB to SGD which is going to take a few more days. If the price shoots up by then, I may deploy my money to other stocks instead. Otherwise I should be vested by then.

Lastly, each of us has his/her own investment objectives. You should be responsible for making your own investment decision on whether to jump ship or not. Whatever decision you take, I wish it would be a profitable one. Good Luck !

It was really a tongue-in-cheek question on a lazy Sunday afternoon. If it was offensive or appears to be confrontational please accept my apology.

Thanks for responding. It serves to vindicate my gut feel that you know something about the business and you are modest. Very modest and very experienced.

The takeway from this is your opinion counts. Ultimately it is my decision. My money

[pacyfiq]

Hi everybody, i just register on the forum and want to say thank you as i follow the discussion on Hour Glass and learn many things, very impressive research, high quality comments and analysis....so it's time to say thank you.

I am french but live and work in Thailand and i have a passion for watches, Hublot is one of my favorite brand and i discover in 2010 The Hour Glass as they are an exclusive partner. During a trip to Singapore i visit "L'atelier at Ion and Hublot at Marina Bay and was very impress by the service so i try to do some research on the company and find out that it' a listed company on SGX. I have decided to invest in "The Hour Glass" not only for the "numbers" but for the passion, it's great business so when the price is right i buy this stock regularly. Now it represent 52 % of my portfolio, i know many of you gonna tell me that it's risky...but i have 36 years old and it's time or never to take risk.

I must say also that "Malmaison" is a very impressive concept for a french like me, choices are impressive like "Corthay" for the shoes. It will be too long to explain all my passion for watches and for this company but i am in the ship for a very long time.

Thanks again to everybody,

Best regards,