The Hour Glass

[shadow_walker]

It is very normal for customers to give good reviews. Sales associates will ask customers to give reviews and customers will give 5 stars as they hope to get their allocation to the sport watches.

As a buyer of watches, I am confident that THG's margin will continue to expand. In the past, ADs have to give discounts for Rolex watches. Today, the resale value of Rolex is much higher than the RSP, especially for the sport watches. A Daytona is worth 20-30k premium in the resale market compared to the price that customers will purchase from the AD.

In order to have a chance to apply for these sport watches, you have to buy the unwanted watches from the AD. The unwanted watches used to be the Rolex datejust and oyster perpetual, but today it is no longer possible to buy these watches. Therefore, you have to buy from other non-Rolex brands to be deemed a loyal customer. Non-Rolex brands have much higher margin than Rolex, which is why ADs margin will only expand. If you are not Rolex, Patek, Richard Mille, AP, you can only rely on the ADs. Revenue growth might not be very impressive, but the margin expansion is huge from the change in mix. Recently, I have observed that non-Rolex shelf is getting empty too and this is a sign of the demand.

https://www.rolex.com/rolex-dealers/sing...#mode=list THG is the biggest distributor of Rolex in SG. The shortage in Rolex has benefitted Rolex, ADs, 2nd hand dealer and customers. Everybody wins other than people who are new to Rolex. Will secondary prices for Rolex ever fall? Nobody knows unless perhaps in a global economic crisis. But certainly not in an environment where many got very rich from the markets, properties and crypto.

"If you are not Rolex, Patek, Richard Mille, AP, you can only rely on the ADs."


Even if it is a brand with some legacy, class and poise, and retailing in the 5 digits (say F.P. Journe, Ulysse Nardin) - these brands by just themselves are not viable commercially?

Certainly some overgeneralisation on my part, niche brands like F.P. Journe won't have issue selling by themselves. Omega has also been improving on its strategy and market positioning. However, there are a number of brands in which you can purchase brand new watches on the secondary market at more than 40% discounts.  

Prices of watches are transparent and you can easily do a quick search on Carousell or Chrono24. When you can buy a brand new watches at more than 40% discount on the secondary market, most people won't buy it from the ADs.

Why Rolex sports watches such as the Rolex Oyster Perpetual are so hard to find and pre-owned models cost twice as much as new ones | South China Morning Post (scmp.com)
The great Rolex watch shortage (yahoo.com)

Rolex can increase its production to meet the shortage, but they understand the value of scarcity. Scarcity creates demand in luxury and allows them to raise prices. Yet, Rolex still requires the ADs as a scapegoat. Rolex: "Finally, it should be noted that Rolex watches are available exclusively from official retailers, who independently manage the allocation of watches to customers."

https://www.rolexforums.com/showthread.php?t=804563
Rolex has been reducing the number of ADs, so that they can ensure adequate supply for the bigger ADs.

As long as Rolex remains in shortage, THG will have higher ROE through higher margin and higher inventory turnover. Walk in to THG stores and you will see how empty the shelf is. Even the non-Rolex shelf is no longer fully stocked.

[dydx]

Today THG goes XD on the $0.02/share interim dividend. If the counter falls $0.02 or more, it would mean there are still some jittery shareholders who tend to sell on or after XD date, or some short-term investors bought recently just for the dividend. If the counter doesn't fall much, it would mean those who bought recently are looking beyond the dividend. If buying continues and the counter goes up further, it would be an even more positive sign. THG has been great - regular/rising dividends plus a steadily increasing price from Mar20 - for those who invest for the long term.

[Choon]

At current price (SGD 2.05), THG trades at ~10X FY2022 earnings, while Watches of Switzerland ("WOS") trades at ~36X FY2022 earnings.

My simple conclusion is that WOS stock is overhyped while THG stock is underhyped. Not a matter of fundamentals but a matter of liquidity. 

Looking at the financial performance of both companies, while WOS is bigger in terms of revenue but THG business is more cost-efficient and has higher profitability. Operating profit margin of 15% vs 10% - a significant/meaningful difference.  

THG at ~10X FY2022 earnings. When even SATS (in an industry with much uncertainty ahead and still receiving govt COVID-19 $ support) is trading at ~20X pre-pandemic earnings. 

Dunno how to end this tirade....haizzzzzz.

[Choon]

It is very normal for customers to give good reviews. Sales associates will ask customers to give reviews and customers will give 5 stars as they hope to get their allocation to the sport watches.

As a buyer of watches, I am confident that THG's margin will continue to expand. In the past, ADs have to give discounts for Rolex watches. Today, the resale value of Rolex is much higher than the RSP, especially for the sport watches. A Daytona is worth 20-30k premium in the resale market compared to the price that customers will purchase from the AD.

In order to have a chance to apply for these sport watches, you have to buy the unwanted watches from the AD. The unwanted watches used to be the Rolex datejust and oyster perpetual, but today it is no longer possible to buy these watches. Therefore, you have to buy from other non-Rolex brands to be deemed a loyal customer. Non-Rolex brands have much higher margin than Rolex, which is why ADs margin will only expand. If you are not Rolex, Patek, Richard Mille, AP, you can only rely on the ADs. Revenue growth might not be very impressive, but the margin expansion is huge from the change in mix. Recently, I have observed that non-Rolex shelf is getting empty too and this is a sign of the demand.

https://www.rolex.com/rolex-dealers/sing...#mode=list THG is the biggest distributor of Rolex in SG. The shortage in Rolex has benefitted Rolex, ADs, 2nd hand dealer and customers. Everybody wins other than people who are new to Rolex. Will secondary prices for Rolex ever fall? Nobody knows unless perhaps in a global economic crisis. But certainly not in an environment where many got very rich from the markets, properties and crypto.

"If you are not Rolex, Patek, Richard Mille, AP, you can only rely on the ADs."


Even if it is a brand with some legacy, class and poise, and retailing in the 5 digits (say F.P. Journe, Ulysse Nardin) - these brands by just themselves are not viable commercially?

Certainly some overgeneralisation on my part, niche brands like F.P. Journe won't have issue selling by themselves. Omega has also been improving on its strategy and market positioning. However, there are a number of brands in which you can purchase brand new watches on the secondary market at more than 40% discounts.  

Prices of watches are transparent and you can easily do a quick search on Carousell or Chrono24. When you can buy a brand new watches at more than 40% discount on the secondary market, most people won't buy it from the ADs.

Why Rolex sports watches such as the Rolex Oyster Perpetual are so hard to find and pre-owned models cost twice as much as new ones | South China Morning Post (scmp.com)
The great Rolex watch shortage (yahoo.com)

Rolex can increase its production to meet the shortage, but they understand the value of scarcity. Scarcity creates demand in luxury and allows them to raise prices. Yet, Rolex still requires the ADs as a scapegoat. Rolex: "Finally, it should be noted that Rolex watches are available exclusively from official retailers, who independently manage the allocation of watches to customers."

https://www.rolexforums.com/showthread.php?t=804563
Rolex has been reducing the number of ADs, so that they can ensure adequate supply for the bigger ADs.

As long as Rolex remains in shortage, THG will have higher ROE through higher margin and higher inventory turnover. Walk in to THG stores and you will see how empty the shelf is. Even the non-Rolex shelf is no longer fully stocked.

Thks for sharing.

[dydx]

When global demand for certain brands - Rolex, Patek and others - is so strong now, leading official distributors/retailers like THG will benefit from preferential supply allocations, and those with strong finances will also prevail over those weaker ones. Those retailers with strong market positions in different geographical markets and a regular pool of customers, and the ability to sell effectively and provide good customer service, will be able to sell faster and better seize market opportunities.

[dydx]

THG now at $2.18 and hit $2.23 earlier this morning. It looks like Mr Market is working quite hard to price THG towards its true intrinsic value.

[weijian]

The share buyback has been the most interesting feature for the OPMI in the last 1 year. At 1.3-1.5x of NAV purchases, the company is demonstrating that it values the intangible know-how/business relationships to be worth more than 0.3-0.5x of what is tangible.

Whether this is value or not, it will be for the future to judge. Generally, share buybacks are at their peak during peak prices and vice versa, and THG shareholders would hope that this isn't true over here.

MINUTES OF THE 42ND ANNUAL GENERAL MEETING OF THE HOUR GLASS LIMITED HELD BY WAY OF ELECTRONIC MEANS ON WEDNESDAY, 28 JULY 2021 AT 10.00 A.M

With regard to the question on the motivation behind the Company’s share buybacks, especially since February 2021, Mr Tay stated that from the Board’s and Management’s perspective, they saw value in the Company and its business, and believed in the long term sustainability of the Group’s financial performance. By way of elaboration:
(i) the Group’s strategic business units had performed well through the last 12 months, 
(ii) there was a strong alignment on values and goals with principal brand partners, from which the Group had received encouraging support,
(iii) the Board and Management were confident that certain structural and operational shifts in the industry, business and markets were here to stay even when the world reverts back to its pre-COVID form,
(iv) the Board and Management had confidence in the current and future crop of general managers in place, and 
(v) whilst the COVID-19 Delta variant may cause disruptions from time to time, the Group had learnt to operate within the confines of the respective trading restrictions and had been able to continue to manage its business well in that regard. 

Hence, as a management group, the Company and the Board, being value oriented operators and investors, believed in deploying capital in the right way.

https://links.sgx.com/FileOpen/Minutes%2...eID=681790

THG just spent 1.6mil to buy back shares at close ~2.00sgd. At this price, this would been close to 2x NAV!

Based on what has been espoused in the AGM just 5 months ago, it seems like the Tay family believes that beyond the brick and mortar and inventories, their relationships and business know-hows are also worth as much!

https://links.sgx.com/1.0.0/corporate-an...410be55083

[brattzz]

yeah! :O

THG limit seems to be below SGD2.00, so SGD1.999... from their previous SGD1.5X range... what seems to be the booster here?

1) THG is expecting the biz to continue it's strong revenue & possible expansion throughout 2022 and beyond?
2) or upwards re-valuation of their owned properties?

Good to see more strong share buybacks anyhow!!

THG also state : and action upon by the strong share buybacks, and hopefully increased dividends in May 2022 onwards!!!

2.15 On the question as to whether increased dividends or share buybacks were the preferred method to return value to shareholders,
Mr Tay stated that from the Company’s actions it was clear that the Company’s approach was to pursue both dividend payouts and share buybacks.

The Company had recognised the earnings and cash generative capabilities of the business had been altered and, as such, had decided that it was in the collective interests of the Company and of shareholders to increase the dividends and to engage in a share buyback programme.

[Choon]

The share buyback has been the most interesting feature for the OPMI in the last 1 year. At 1.3-1.5x of NAV purchases, the company is demonstrating that it values the intangible know-how/business relationships to be worth more than 0.3-0.5x of what is tangible.

Whether this is value or not, it will be for the future to judge. Generally, share buybacks are at their peak during peak prices and vice versa, and THG shareholders would hope that this isn't true over here.

MINUTES OF THE 42ND ANNUAL GENERAL MEETING OF THE HOUR GLASS LIMITED HELD BY WAY OF ELECTRONIC MEANS ON WEDNESDAY, 28 JULY 2021 AT 10.00 A.M

With regard to the question on the motivation behind the Company’s share buybacks, especially since February 2021, Mr Tay stated that from the Board’s and Management’s perspective, they saw value in the Company and its business, and believed in the long term sustainability of the Group’s financial performance. By way of elaboration:
(i) the Group’s strategic business units had performed well through the last 12 months, 
(ii) there was a strong alignment on values and goals with principal brand partners, from which the Group had received encouraging support,
(iii) the Board and Management were confident that certain structural and operational shifts in the industry, business and markets were here to stay even when the world reverts back to its pre-COVID form,
(iv) the Board and Management had confidence in the current and future crop of general managers in place, and 
(v) whilst the COVID-19 Delta variant may cause disruptions from time to time, the Group had learnt to operate within the confines of the respective trading restrictions and had been able to continue to manage its business well in that regard. 

Hence, as a management group, the Company and the Board, being value oriented operators and investors, believed in deploying capital in the right way.

https://links.sgx.com/FileOpen/Minutes%2...eID=681790

THG just spent 1.6mil to buy back shares at close ~2.00sgd. At this price, this would been close to 2x NAV!

Based on what has been espoused in the AGM just 5 months ago, it seems like the Tay family believes that beyond the brick and mortar and inventories, their relationships and business know-hows are also worth as much!

https://links.sgx.com/1.0.0/corporate-an...410be55083

In my view, NAV is not a suitable valuation metric for THG. Say today's NAV is $100 and say THG has demonstrated a durable ROE of 10% - that means that in 3 years time, THG's NAV would be about $120 (assume pay out some dividends during the 3 years). Historically THG has always been profitable. 

So if there is a high probability that THG would have a NAV of $120 in 3 years time, would one still be willing to pay only 1xNAV or $100 today? Or would one come to the realisation that depending on the quality and growth prospects of the company, the fair P/NAV could be 1.2X or 1.5X or 4X? Then since it is going to be a subjective multiple, then why not use PE? At least the PE valuation metric is closer and can be compared to opportunity cost and it is also more sensitive (E being smaller than NAV).  

By a simple annualising of the recent half year results, net profit for FY22 would be $126M (wow !!!). At $2.10, I estimate that would be about 11xPE. Not exactly distressed or very cheap. But I think fairly cheap.

I estimate Watches of Switzerland is about 36xPE. Overhyped in my view.

SIA and SATS are 20X and 18X respectively (based on pre-COVID earnings level, even though there is no certainty when earnings would ever recover to those levels). In my view, an irrational trust and confidence in Temasek companies.

[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!!!

FORM 3 (sgx.com)

even more confusing now...  

FMR sells 132,400 (disposed), SGD 277,988 (received), medium sell price, SGD 2.09!

Buy to 8.01% shares, sell to 7.99%... to test liquidity of THG?    

THG share buy-back up to SGD 1.999X per share.