The Hour Glass

[pacyfiq]

Sounds fun.
Heres mine

A: (Strength)
1. Automatic branded watch is an addiction. Its like girls buying prada/channel.
2. Good margin business (no need to invest in production capex / R&D Cost) / No lelong competition allowed
3. Selling a product that is time tested (quartz invention makes manual watch market more premium imo)

B: (Weakness/Limitation)
1. Unable to "dominate" a market even if the watch brand does. No actual "Moat"
2. Rental cost / Marketing cost
3. Sales are more discount & location based rather than brand based

C: (Opportunities)
1. Able to enjoy sales of "upcoming" new brands unlike a watch maker
2. Able to tap into growing market easily
3. Stock is not overly expensive!

D: (Threats)
1. Watch maker open their own retail store offering more discount than THG
2. Family run business
3 Trend / love for watches diminish

95% agree with you but:
Watch maker open their own retail store offering more discount than THG

This is not true, you can't have a good discount on a watch maker store, example for Omega, maximum is 5%...a good retailer like THG will offer a better discount and a better service in my opinion

[Salty]

Hi Pacyfiq,

Apologies, i wasnt clear in what i meant.
I meant it would be a potential game changer if the watch maker store decides to introduce higher discount than retail store like THG / Cortina / Sincere etc. Thus i placed it as a threats.

Logically, watch maker would have higher margin % to cut compared to THG. I suppose this could be what the chairman meant by "Fair Play"

Since i deem discount one of the main factor to select retail stores, co-existence is tough to achieve for watch maker store with less discount and retail store "undercutting" with higher discount.
Maybe in the future, watch maker store would just go back to making watches.
I hope this would be the outcome, selfishly.

[pacyfiq]

Hi Salty,

Yes ok i understand but for Luxury product it's not a good sign if a brand offer big discount...must happen only in very difficult times...in France i never see Louis Vuitton offer big discount sadly....

I want to ask other forumers what is the fair value of THG? In my opinion and with the help of one friend who's really goo on report analysis i will say around 2.50.

(Vested)

[Boon]

Sounds fun.
Heres mine

A: (Strength)
1. Automatic branded watch is an addiction. Its like girls buying prada/channel.
2. Good margin business (no need to invest in production capex / R&D Cost) / No lelong competition allowed
3. Selling a product that is time tested (quartz invention makes manual watch market more premium imo)

B: (Weakness/Limitation)
1. Unable to "dominate" a market even if the watch brand does. No actual "Moat"
2. Rental cost / Marketing cost
3. Sales are more discount & location based rather than brand based

C: (Opportunities)
1. Able to enjoy sales of "upcoming" new brands unlike a watch maker
2. Able to tap into growing market easily
3. Stock is not overly expensive!

D: (Threats)
1. Watch maker open their own retail store offering more discount than THG
2. Family run business
3 Trend / love for watches diminish

95% agree with you but:
Watch maker open their own retail store offering more discount than THG

This is not true, you can't have a good discount on a watch maker store, example for Omega, maximum is 5%...a good retailer like THG will offer a better discount and a better service in my opinion

I like your description - “branded watch is an addiction. It’s like girls buying Prada/Channel”

In a recent survey in Shanghai, a man that owns luxurious watches was asked the following question:

"What is the difference between reading time from a cell-phone and a watch?

And the answer is - “Go and ask Ladies what’s the difference between carrying their stuff in a Wal-Mart shopping bag and a Louis Vuitton purse”

“Watch makers opening up their own retail store” is certainly a threat.

Listed watch giants, Richemont and Swatch, are pushing ahead with their forward integration plans by setting up their own distribution and retail networks.

---

I want to ask other forumers what is the fair value of THG? In my opinion and with the help of one friend who's really goo on report analysis i will say around 2.50.

(Vested)

Using DCF valuation method with very optimistic inputs, 2.50 is posssible.

[psolhawk]

I disagree with threat number 3, on the possibility that the love for watches diminish. That will not happen. It's a fact of life that everyone has their own material desires.
For opportunities, I will add that the possibility of a consolidation of the watch retail industry remains. If THG succeeds in scooping up cortina (difficult but not improbable) or get their hands into Sincere, THG will be big, big time. THG has the financial muscle to do so.

[d.o.g.]

For opportunities, I will add that the possibility of a consolidation of the watch retail industry remains. If THG succeeds in scooping up cortina (difficult but not improbable) or get their hands into Sincere, THG will be big, big time. THG has the financial muscle to do so.

Given that Cortina is controlled by Anthony Lim, if he doesn't want to sell, Cortina will not be sold. Note that Henry Tay is the second largest shareholder with 12.4%, but he doesn't have a board seat. Clearly, he is not welcome there.

As for Sincere, it has just been bought by HK billionaire Pollyanna Chu. It seems unlikely she will resell it soon, unless she gets an offer she can't refuse.

Financial muscle? In my personal view, Hour Glass does not really have that much of it. Yes, the balance sheet is good, but $50m of cash doesn't buy you a very big company. Sincere was sold for $232m, which is almost equal to Hour Glass' book value on 31 Mar 2012 ($250m).

Hour Glass could not have bought Sincere at that price unless they did a big rights issue - and it is not clear the Tay family could have paid for their share of it.

Cortina's book value as of 31 Mar 2012 was $117m, and even this would be a stretch for Hour Glass - assuming that Cortina was even available for sale at book value, which I doubt.

My $0.02 is that the market in Singapore is already concentrated in the hands of 3 players: Sincere, Hour Glass and Cortina. Further consolidation would be unlikely to please the brand owners as it would put too much power in the hands of the retailer/distributors. In short, the status quo is likely to continue. For Hour Glass shareholders at least, it seems to have worked out quite well so far, the Gems TV debacle notwithstanding.

[propertyinvestor]

Cortina is so valuable that even Henry Tay wants to buy their shares! I dont understand why people like Hour Glass when their key director is buying shares in their competitors

[cyclone]

D: (Threats)
4. For some reasons, loss of distributorship rights are also possible.

[shanrui_91]

Here's some history of what happened back then with THG and Sincere and Cortina, pretty similar to what D.o.g has said

----------------------------------------------------------------------------------------------
Bid for Sincere: Luxury watch owners keep a close watch

by The Business Times

The Hour Glass’s bid for Sincere Watch could disrupt the three-way dance among the key luxury watch retailers here, namely these two players and Cortina Holdings.

For The Hour Glass, trumping the Sincere bid by the other front-runner – a consortium involving Sincere shareholders, Hong Kong-listed firm Xinyu Hengdeli and some Malaysian parties – would allow it to dominate the Singapore luxury watch retail space and raise its profile in Asia.

Besides gaining exclusive distributorships for brands such as Franck Muller, The Hour Glass will have access to the 33 Sincere outlets in the region.

This means taking over Sincere’s 12 stores in Singapore, four in Thailand and four in Hong Kong and China – key markets for The Hour Glass. The Hour Glass executive director Michael Tay said in a Reuters report in 2007 that Hong Kong, Japan and Thailand were target countries, adding then that as China was “still in its infancy”, the company would only make its entry when the market is built.

This bout of shopping for The Hour Glass – which runs 27 stores in total – comes after years of organic growth and playing second fiddle to Sincere, the largest luxury watch player here. But more critically, if it succeeds in taking over Sincere Watch, the pricing power would tip heavily in favour of The Hour Glass – a potential point of contention for watch brand owners.

Industry observers have noted that there is an “equilibrium” among Singapore watch players that brand owners are happy to maintain, since it gives them ample space to negotiate prices and develop relationships with different partners.

Should The Hour Glass win the Sincere bid, its competitive edge could unsettle brand owners who have been comfortable with this balance. One market watcher noted that this could be the reason why there have been delays in the bidding for Sincere – there needs to be certainty that whoever wins the bid would be able to hold on to long-term relationships with brand owners.

One important brand is Franck Muller, said to be the firm’s crown jewel. “They need to tie up these loose ends,” said the observer. The third player Cortina – the smallest luxury watch retailer by market value here – has been the third leg on the tripod and risks being thrown off-balance if Hour Glass seizes control of Sincere.

There was talk of a takeover of Cortina by The Hour Glass when in 2005, Hour Glass’s executive chairman Henry Tay raised his stake in a single month to then-13.6 per cent from under 5 per cent.

He told BT at that time that the watch retailing industry needed to consolidate so as to boost the stores’ bargaining power, adding that while this was not necessarily the precursor of a takeover, it was open to any form of “friendly synergy”.

In response, Cortina issued 15 million new shares soon after, which was seen as a means to dilute the shareholding. Cortina’s Lim family and a non-executive director then raised their shares by 7 per cent to then-47 per cent, increasing their control of the company – which was recently hit by a near-$8 million heist.

On the other side of the ring is the bid for Sincere by a consortium involving Sincere shareholders and China’s largest watch retailer, Xinyu. The consortium suggests that the parties are looking to split the costs of buying Sincere – valued by Peace Mark at $530 million at end-2007 – which is prudent given today’s credit situation.

Sincere shareholders should be able to cement the relationship with brand owners, while Xinyu’s expertise on the Chinese market, as well as its backing by strong European partners such as LVMH Group and Swatch Group, would be a plus point.

But Xinyu has a poorer debt position – its last recorded net debt-to-equity ratio as at June 30, 2008, was 26.4 per cent. In comparison, The Hour Glass has debt-to-equity ratio of 12 per cent as at Sept 30, 2008.

At the same time, Xinyu is facing pressures of slacking consumer demand in China as the economic situation across the world turns sour. With most of its business concentrated in China, its financial performance ahead remains to be seen, said analysts.

It is also unclear how the three parties would work together. There are little reports on any collaboration between Xinyu and Sincere, though CIMB analyst Keith Li told BT that Xinyu had once tried to buy Sincere but was put off by the steep price.

Sincere Watch, which was delisted from Singapore in August last year, was sold to Hong Kong-based Peace Mark in December 2007 for $530 million, but was put up for sale after Peace Mark was wound up as it was unable to repay multi-million dollar bank debts and was put up for liquidation.

The liquidators – who sent a representative to meet Sincere management in Singapore yesterday – said that they are still in discussions with the potential buyers.

This article was first published in The Business Times on Jan 18, 2009.

[WolfT]

D: (Threats)
-One day when China open up its own domestic mkt by taking away their luxury tax. (no china tourist)
-If u look at the trend, many watch brands are having their own boutique here recently (Blancpain, Breguet, Chopard, Frank Muller, IWC, Hublot, JLC, Patek Philippe,Richard Millie, Vacheron Constantin,Paiget etc )since MBS has been build,go take a walk there to feel for yourself. These brand were not here before the casino is build.There are also other mid range brand like RADO,Omega,U-boat,Tag heuer,Azimuth,Bell&Ross and many more have already set up their own store here in sg.
Panerai set up their boutique at ion a few month back.