The Hour Glass

[psslo]

Will outlook for Cortina be just as rosy?

[crabcrab]

Will outlook for Cortina be just as rosy?

Cortina shares still very illiquid currently, not vested....

[singshepherdman]

Thanks very much for your consistently helpful analysis on this and other companies. I have been looking at the numbers for hour glass and I was wondering why their revenue over the last few years does not seem to show a consistent upward trend. The revenue numbers go up and down in line with the economic conditions but there doesn't seem to be significant independent long term growth.

I would be very interested on your analysis of this and whether there business model has a growth driver different from the other watch retailers and distributors. thanks.

The just released Q2-FY10 results make interesting reading.....
http://info.sgx.com/webcoranncatth.nsf/V...8001702DE/$file/2QFY2011_Results.pdf?openelement [Results announcement]
http://info.sgx.com/webcoranncatth.nsf/V...8001702DE/$file/Press_Release_1HFY2011.pdf?openelement [Press release]
It is indeed another quarter of solid performance by a rock-solid business!

With H1's EPS at $0.0667 already much ahead of the corresponding last FY10's $0.0489, I think full-year EPS is poised to exceed FY10's $0.1408 by a good margin. This is entirely possible, as historically 2H (Oct to Mar)'s business volume and profits benefit from X'mas shopping and CNY spending. A quick review of last FY10's results announcment will confirm this pattern.....
http://info.sgx.com/webcoranncatth.nsf/V...E001951B5/$file/THGL_FY2010.pdf?openelement

[dydx]

Thanks very much for your consistently helpful analysis on this and other companies. I have been looking at the numbers for hour glass and I was wondering why their revenue over the last few years does not seem to show a consistent upward trend. The revenue numbers go up and down in line with the economic conditions but there doesn't seem to be significant independent long term growth.

I would be very interested on your analysis of this and whether there business model has a growth driver different from the other watch retailers and distributors. thanks.

The growth/evolution of any business - even for a well-managed one like THG - rarely follows a straight line, as demand/market conditions do change/fluctuate with time, even though most established trades/businesses do grow over time.

I believe you can find your answers in THG's last 2 ARs.....
http://info.sgx.com/listprosp.nsf/07aed3...800240892/$FILE/THG_AR2009.pdf [FY09 AR]
http://info.sgx.com/listprosp.nsf/07aed3...3002b1ea4/$FILE/THG_AR2010_For%20web.pdf [FY10 AR]
I encourage you to go through them, as well as the latest Q2-FY11 result announcement, carefully - and do bear in mind the demand/market conditions during and after the last global financial crisis which started to affect THG's business probably from Q3-08 onwards till Q3-09 - if you wish to invest seriously into THG for the longer term. There is simply no short cut!

From THG's solid/increasing Operating Profit and OP Margin since FY07, it is very clear that the management has been doing a great job in running a profitable business - and efficiently! The fact that profit margins from the operating business have been up more than revenue increase simply means that THG management has been deliberately pursuing business growth with a strong and greater focus in raising profitability and profit margins. Very few companies can achieve such a fine performance!

[yogi]

Chairman's statement extract from AR2010: " We
are not in the business of generating short term market
excitement and don’t have ambitions to present ourselves
as the biggest watch retailer in the world. We don’t want
to be the company that carries the widest selection of
brands nor do we have the desire to hold the title as an
operator with the most number of stores. We plan to be
in this business for the long haul and believe in the merits
of long range planning, ensuring that our business and
financial goals reflect this creed. We aspire to be the
best in class. To deliver the highest degree of customer
service and to do so in the most consistent manner. To
be regarded as a model employer and a dependable
business partner. Financially, this translates into our
goal of building an enduring and profitable business that
assumes a moderate risk profile generating constant,
sustainable long term returns and cashflows through the
careful allocation of capital investments back into our
business. "
I do believe that the abvoe business principles described in Chairmain's Statement in AR2010 is management's own. This is because if you look at last few years annual reports, you will find consistent theme of building strong business for long term rather than short term excitement. Also you will notice that in none of those annual reports, company has ever given and emphasize on number of outlets, or number of wath brands that they sell.

Above belief also comes from following observation of management's behaviour of honesty and integrity:
- In FY2009, company confesed that reduction in inventory was not satisfactory compare to drop in sales. This again demonstrates the honesty of management to be accountable for problems. Very few CEOs/Chairman confense that they have problem in business.
- Very prudent in impairment loss/gain recognization. In 2007, significant increase in investment security value was recognized in equity but not in income statement. However in 2009, significant decrease in investment security value was recognized in income statement.
- company has been indeed very selective in merchandising brands, opening retail outlets (though everyone rushing in China market, company kept away from it)

Following some of facts reinforce my belief on the company's managements focus on running business very efficiently.
- In FY2010,though revenue increased by 10% with opening of new stores, admin expenses reduced by 33% and employee salaries increased by only 3.3%, drectors fees reduced etc. This is not only this year, but some of previous years also had similar fantastic focus on cost control
- Duringn peak times (2005 to 2007) when others were increasing inventory, company were destocking and generate cash. Stock turn over ratio has been improving from 2004 to 2008 which is double of industry average. From 2006 to 2008 while turn over increased by 37% but inventory increased only 18%. This demonstrates institutional behaviour that Warren Buffet emphasize on.

Other most important ingredient of sucessfull business or infract for any success is "Passionate". Chairman and management is very passionate about watch business. YOu can see from Chairman's statement.

Hence I give THG four stars.... Overall I see less risk in this company as compare to more potential of company growing annually 15-25% in next decade. So if you are long term investor, its reasonably safe bet on THG.

[wee]

Hour Glass seems like a decent company, and I do agree with many points highlighted on their investment merits. But I do also have a few concerns:-

1) The management do not appear to place in high priority returns on invested capital. They have been building up cash over the years and as far as I can tell, the working capital is not as well managed as say Sincere Watch. Conservative management of working capital is fine.. but excessive conservatism affects returns unnecessarily.

2) Founders are well paid. Between the mum, pop and son (and who knows who else) they draw a lot of salaries. They appear to take a disproportionately big share of the economic returns compared to shareholders.

[MrValue]

Sincere watch relied primarily on principals like Frank Muller to finance its inventory, Cortina relied on a lot of bank financing, and HrGlass relied mainly on its own shareholders equity!

I agree that Hrglass is most conservatively managed among the 3, but I wouldn't say that it is excessive conservatism, as paying for its inventory on cash/short credit terms could mean HrGlass has stronger bargaining power w the watch principals.

HrGlass's ROE has certainly improved considerably in the recent few years since 2006/07 (if we strip away the impact of its volatile investm in GemsTV), and its GPM is now quite decent. The uncle-newphew executive team in Kenny Chan & Michael Tay seem to be doing a better job than when Henry and Jannie Tay were running the company.

I do agree that the Tays pay themselves handsomely, and feel that having 4 family members drawing the high executive directors' remuneration is a rather heavy burden for the co. Perhaps Jannie Tay shd switch herself to become a non-executive director since I guess she probably don't spend much time at the co anymore.

[yogi]

As a shareholder I wouldn't mind paying executives extra for running company better than industry average and generating return for the shareholders above industry average.

Moreover if you notice, during 2006 to 2009 director's compensation has almost doubled while operating profit inceased 2.5 fold. This shows that its compensation is not favourable increasing out of proporation relative to profit. However directors compensation growth from 2008-2009 was slight though revenue DECLINED slightly and significant impairment loss of investment security. I would expect directors to be accountable for their bad decision of making investment in Gems TV which resulted in significant impairment loss.

W.r.t conservative working capital management, its expected to have such high cash balance typically when economy has just started recovering. During credit crisis, everybody wants to be convervative especially by slashing the dividend payout. e.g in 2007 & 2008, company has given dividend of around 10cents/share. WHile in 2009 & 2010 it was reduced to 2.5c and 3.5c respectively. This shows that company doesn't seat on cash unncessary but returns back to shareholders as did in 2007/2008. So I am looking forward for big dividend payout in current or next year.

However I have concern of Mgmt attitude of investing in something that is not core of its business. e.g investment in Gems TV. I would prefer them to return cash to Shareholders instead of them investing in business that is not accetive and non-synergetic to its core business and let shareholders to decide where they want to invest returned cash.

[crabcrab]

Swiss watchmaking in November 2010
Growth picks up

Despite a less favourable base effect than previous months, watch exports rose very sharply in November. Their value amounted to 1.8 billion francs, an increase of 29.7% compared to November 2009. In eleven months, the sector exported the equivalent of 14.6 billion francs, i.e. 21.8% more than in 2009 and marginally higher than in 2007.
Swiss watch exports in November 2010

Watch exports were up across the board in terms of materials. Bimetallic products recorded a particularly strong increase. The number of pieces leaving Switzerland also rose sharply compared to November 2009. In one month, more than 500,000 additional timepieces were exported, making a total of 2.9 million units.

Growth was very strong for watches priced at more than 3,000 francs (export price), which showed rates of variation in excess of 40%. The 200-500 francs category also did better than average, with rates above 30%. Other segments showed more moderate growth but nonetheless continued their gradually recovery.

Far ahead of other markets, Hong Kong produced an excellent result in November, absorbing more than 20% of Swiss watch exports. The United States failed to match this performance but continued to show a positive trend. France remained one of Europe’s most dynamic markets, thanks in particular to tourism. Singapore recorded growth on a par with that of Hong Kong, while China held firm with an excellent +39.3%. Meanwhile Italy recorded an increase identical to the global average.

SOURCE: FHS

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As a shareholder I wouldn't mind paying executives extra for running company better than industry average and generating return for the shareholders above industry average.

Moreover if you notice, during 2006 to 2009 director's compensation has almost doubled while operating profit inceased 2.5 fold. This shows that its compensation is not favourable increasing out of proporation relative to profit. However directors compensation growth from 2008-2009 was slight though revenue DECLINED slightly and significant impairment loss of investment security. I would expect directors to be accountable for their bad decision of making investment in Gems TV which resulted in significant impairment loss.

W.r.t conservative working capital management, its expected to have such high cash balance typically when economy has just started recovering. During credit crisis, everybody wants to be convervative especially by slashing the dividend payout. e.g in 2007 & 2008, company has given dividend of around 10cents/share. WHile in 2009 & 2010 it was reduced to 2.5c and 3.5c respectively. This shows that company doesn't seat on cash unncessary but returns back to shareholders as did in 2007/2008. So I am looking forward for big dividend payout in current or next year.

However I have concern of Mgmt attitude of investing in something that is not core of its business. e.g investment in Gems TV. I would prefer them to return cash to Shareholders instead of them investing in business that is not accetive and non-synergetic to its core business and let shareholders to decide where they want to invest returned cash.

In an AGM 2 years back, Crabcrab asked Chairman Tay if he would be considering distributing out GEM TV shares to its shareholders in proportion so as to let the individual shareholders to make decision on the GEMs TV shares.

He replied that it would be too expensive to have this distribution exercise.....

[d.o.g.]

In an AGM 2 years back, Crabcrab asked Chairman Tay if he would be considering distributing out GEM TV shares to its shareholders in proportion so as to let the individual shareholders to make decision on the GEMs TV shares.

He replied that it would be too expensive to have this distribution exercise.....

Too expensive? What rubbish. It would simply be a dividend in specie. It would be trivial to just divide the number of Gems TV shares held by the number of Hour Glass shares to determine each shareholder's entitlement. Pay out a quantity representing round lots, then keep or sell off the balance.

SIA did this with SATS. Chuan Hup did it with CH Offshore. Pan United did this with Pan United Marine. MPH did it with AV Jennings. These spinoffs were of large subsidiaries so they had to go through EGMs too.

For Hour Glass, Gems TV was a passive investment and divestment would have had no effect on operations. Even if it still required an EGM, the Tay family owns a controlling stake so the vote would have been a done deal. "Too expensive" is a lame excuse.

Because the Tays refused to offload the Gems TV shares when they could, the stake which was valued at $72m in the 2007 annual report became just $2.3m in the 2010 annual report. This "too expensive" excuse cost shareholders nearly $70m. Now THAT is expensive.