The Hour Glass

[brattzz]

Clearly circumstances have changed, THG no longer needs a stock-split to enhance market value and liquidity further.

yeah, agreed, there is sufficient liquidity, as FMC fund has taken on  some +10% to 8% position since for mid-long terms holdings....

[dydx]

Mr Market now values THG enterprise at a near record high of $1.35b (703.98m shares at last done $1.92), and it has been a great ride for those who believe in this sophisticated regional watch marketing/retail distribution business run on old-school conservative business principles. Further more upside? What do fellow ValueBuddies think? 1H results should be out soon.

[wj1984]

Mr Market now values THG enterprise at a near record high of $1.35b (703.98m shares at last done $1.92), and it has been a great ride for those who believe in this sophisticated regional watch marketing/retail distribution business run on old-school conservative business principles. Further more upside? What do fellow ValueBuddies think? 1H results should be out soon.

I have been following THG and at its current price and book value over 1 there is little 'value' left per se.

If we just look at THG without the investment properties (and their yield & appreciation). THG can only earn as much as how much inventory (i mean watches here) they can hold x RRP. They are an authorized dealer not a grey seller (where they can price at market)

So unless they get more inventory (I think they are but cant put a number to it; based on chairman statement during last AR and looking at inventory numbers - again these numbers are not indicative as it could have some not 'hot' models, these models may have a long CCC).

From here on fellow VBs need to pay more attention on their numbers!

[brattzz]

I am confused by FMR's actions for THG,

FMR : They hold about 10% initially, then they sold down to 8%, then now they are buying back at highest price at $1.95/share!!!

THG's company : buy back at maximum $1.57++/share

With FMR's latest actions of buying at $1.95/share!, i am very positive for THG's 1st Half YR2022!!!

[dydx]

Perhaps the health, future, and value of THG's business can be in the answers of this question : Why do more and more people - especially man - collect mechanical watches as a hobby or investment?

Another related question : When mainland Chinese also catch the bug of collecting mechanical watches, how long will the growing interest and demand momentum sustain?

[Wildreamz]

Why do more and more people - especially man - collect mechanical watches as a hobby or investment?

Is this premise really true? Price of watches indeed risen over the years (as with many assets, such as Bitcoin, Pokemon cards, and Magic: The Gathering cards etc.) but does not necessarily mean that is a secular trend in which more and more people are collecting them.

Another related question : When mainland Chinese also catch the bug of collecting mechanical watches, how long will the growing interest and demand momentum sustain?

Perhaps a way for rich mainland Chinese to convert RMB to a more durable, non-traceable, appreciating asset?

[dydx]

1H results out during lunchtime today..
https://links.sgx.com/FileOpen/THGL_1H_F...eID=690513

Superb!

[Choon]

My analysis on Cortina and HourGlass

https://alanyeoinvest.com/2021/06/07/sin...sitioning/

In my view:

- your valuation seems to have missed out the net cash on THG's balance sheet;

- discount rate of 10% is too high (I don't think that THG's business faces a higher risk than the large companies on SGX e.g. ComfortDelgro, SATS, SIA, SIAEC, Singtel, Sembcorp, Keppel. In fact I think THG has executed better in the past 10 years, in part due to it being family-owned and being more focused on the long-term. So unless you also discount these other companies by 10%, otherwise I think 10% discount rate for THG is too high.

- terminal growth rate of 5% is too high (if THG is worthy of a terminal growth rate of 5%, then what high rates need to be ascribed to the likes of Apple, Tencent, Alibaba).

I use a simple valuation model to value THG:

1. FY2021 underlying earnings = S$92M (with adding back of S$10M fair value loss on investment properties);
   
2. But investing/valuation should be about one's belief about where the company will be in the future;
   
3. So assuming 3% earnings growth per year, Year10 net profit would be S$124M, average net profit over 10 years would be ~S$110M (for a round number);
   
4. As an owner, THG would earn me on average S$110M per year for next 10 years;
   
5. Ascribing 15X PE to S$110M = the business has a value of = S$1,650M;
   
6. Why 15X? I don feel that one should use 15X when one is considering to BUY (margin of safety considerations). But I don think that one should sell unless it reaches at least 15X (let a good business/investment compound and enjoy the ride considerations);
   
7. Adding net cash of ~S$140M (as at Mar2021) to S$1,650M = the company is worth = S$1,800 (for a round number);
   
8. I do not add the value of THG's investment properties because THG does not have a intention to realise their value through selling them, rather THG would likely covert them into boutiques for its core business.
   
9. S$1,800M divide by 704M shares = $2.50 per share.
   

Comparing $2.50 with the share price now and 6 months ago, $2.50 looks aggressive.

But does the valuation assumptions above look aggressive? From a value investing perspective, I truly don't think so.

FY2022H1 - Half Year ended 30Sep2021
THG delivered a remarkable performance for the half-year ended 30Sep2021 (1H2022).

Revenue increased by 63% yoy driving operating profit growth (106%) and net profit growth (110%).

Continued expansion in GPM to an incredibly high 29.3% also contributed to profit growth.

While there is a slight low-base effect (due to 1H2021 being a slightly depressed period), the yoy improvement in financial performance is nonethelessss remarkable.

Interim dividend of 2cts/share is an indication of business confidence and a pleasant surprise given that:
(i)  the interim dividend in FY2021H1 was intended as the postponed special dividend for FY2020; and
(i) THG had spent a considerable amout on share buybacks in FY2022H1.

Valuation
By a very simple valuation approach, I thought early this year that the fair value for THG is about $2.50/share based on 15X PE.

Assuming PATMI of $120M for FY22 and assuming that this would be an enduring earnings level, and still assuming 15X PE, fair value would be about $2.80.

Most importantly is that liquidity (even after excluding share buybacks) seems to have finally come to the stock after so many years of waiting.

[dydx]

Perhaps it is too simplistic to use 15x PER to value THG. Apart from earnings, THG now has close to $300m (BV) worth of investment and other properties, which should be worth more in CMV. There is also the large net cash reserve, which stood at over $125m as at 30Sep21. The business still has good growth potential in the Asia regional markets, and "The Hour Glass" brand and proven management team are so well established now to support further growth. 

With 1H's NP already at $62.6m, and bearing in mind that traditionally the business is much stronger in 2H (Oct to Mar), it is conceivable that FY22's (ending Mar22) NP would hit or even exceed $135m.

Based on last done at $2.01, and the latest o/s issued shares of 687.3m (after accounting for the 17.7m shares the company has bought back till 11Oct21), market cap now stands at $1.381b. If someone goes ask Dr Henry Tay whether he would sell his family's controlling interest based on the current market valuation, I doubt he would do it. So the fair price for this super high-quality business really depends on whether Dr Tay wishes to sell, and how attractive an offer from a good party that would move him. Until that happens, the business looks set to continue doing very well, so all shareholders can enjoy a good ride.

[weijian]

At this juncture it is extremely difficult to value THG. The pandemic has enabled THG to do brisk sales and allowed it to clear old stock. When will the surge in interest wane, no one knows. Or will it be sustained for longer just like the pandemic? Hobbies and pets did well while travel and f&b did very badly.

What will the landscape look like in the longer term is uncertain for a number of businesses including THG, my best guess it will continue to do well when activities are limited and when the viruses no longer remain a threat, it will do so so.

My guess is that it will probably be somewhere in between. We hope that the memories of the last crash in 2015 are still fresh enough for the luxury brands. Personally, I would think that observing the inventory turnover would be good evidence of a permanent change in landscape. The curse of a value investor is that he/she seldom extrapolate things to the sky (hence lack the imagination for trees that may grow to the sky).

One of the reasons why equity investing could be (net) profitable, is because there is difficulty and uncertainty that the investor has to bear and overcome. It certainly helps that the Operator has a track record over the long term.

1H22 inventory turnover is at 138days (2H21 was at 150days). Before Covid-19 and post crash 2015, turnover was slowly recovering from ~210days to 195days. It is hard to believe that something about big watch spending has not changed.

Chairman Tay in AR21 espoused a change in the Consumer moving forward:

Bain's luxury spending report seem to suggest something similar:
"Brands are attracting a new customer base with strong marketing and online campaigns, while existing customers are buying more" said Bain partner Federica Levato, who co-authored the study. Shoppers under 40 are expected to account for more than 60 per cent of luxury purchases this year and more than 70 per cent by 2025.
https://www.businesstimes.com.sg/consume...-bain-says

And when a big watch is able to give a 28year old his swagger (a rm110k watch purchased last year is now worth rm200k):
https://youtu.be/r5EJ-MJJ6v8?t=188