The Hour Glass

[opmi]

HG has proven to be conservative in their approach but with the stock at fair value now, it's difficult for me to pay for growth.

Is Mr Market pricing THG at fair value now? If so, there should be more willing sellers at the current $1.80 price level than willing buyers, leading to possibly more short-term range-bound price fluctuations. But the fact is that THG has remained very lightly traded within a very narrow price range in most days, and this is indicative of the THG shares remaining very tightly held even at the current rather high price level. All these also indicate that the current share price level is likely still at a normal discount of 15 to 20% from its fair intrinsic value, usually realised in a privatisation GO offer situation.

I am quite certain that that if a serious buyer puts up a 1,000,000-share BUY order at $1.80 next Monday, he would be considered lucky if he manages to collect 50,000 shares for a day's work. I am also quite certain that if a serious suitor through his investment banker were to make an offer at say $1.90/share for Dr Henry Tay's controlling block in THG next week - which, if accepted, will trigger a GO for all THG shares - Dr Tay would likely ask his CFO to show the banker the door.

Instead of asking Henry, isn't it easier JV with Jennie to break up the holding company?


Sent from my iPad using Tapatalk

[dydx]

Instead of asking Henry, isn't it easier JV with Jennie to break up the holding company?


Sent from my iPad using Tapatalk

Even though Henry and Jennie are no longer husband and wife, and likely they may not see eye-to-eye in many things, it doesn't mean that they are at loggerheads on policies and matters concerning THG and its business operation. In fact, I believe the two will continue to work together quite well in THG, bearing in mind that their son Michael Tay (ED) and Jennie's brother Kenny Chan (Group MD) are actively involved in building the business towards greater height.

[Boon]

Laduree is small and won't move the needle (of which the math has been covered above) so I am not surprised when management said they are still in the retailing and distribution of watches.

What matters will be their strategy ahead and the other luxury products they have in their pipelines. Naturally, I think this is the best way forward. Luxury watch retailing is a slow growth business as you need external capital to grow. Among the other HK retailers, it takes around 8 years for revenue to double. There are exceptions in the case of Hengdeli and Emperor Watch but look at how their balance sheet's leverage and equity base and you get a sense of the capital demand in this business.

HG has proven to be conservative in their approach but with the stock at fair value now, it's difficult for me to pay for growth. Essentially, they can grow through 3 ways: (1) expand more in existing markets; (2) expand into new markets & (3) leverage existing network and expand into new products. (1) is tough since most of the markets are essentially saturated. Places like Singapore & HK carries more risk with operating leverage (i.e. rental) biting them back if their expansion fails. (2) is also not easy as we discussed above. Thailand looks like the natural choice as a tourist destination but even so, you need a lot of trust to engage someone doing business overseas and handling inventories worth millions. Indonesia is out of the question due to import & luxury tax hassle. China is competitive and has a structural disadvantage given their higher consumption tax rate. And we are left with (3) which looks appropriate given management already knows how these market functions which reduces their learning curve. The main hurdle is what kind of products are they planning to launch? In the long term, can they become a luxury brand player like Malaysia's Valiram Group? This is a black box and there is a slight discomfort knowing that their track records do not favor them (i.e. Gems TV).

Hi dzwm87,

No one is questioning whether THG is STILL in the business of retailing and distribution of watches and jewellery – the answer is obvious.

Laduree was launched in April 2013 – so it had been nearly a year to the end of FY reporting period at 31-March-2014, and yet the Management is still claiming that:

“The Group comprises ONLY one business segment which is the retailing and distribution of watches and jewellery.” – page 84 of AR

Is this true? To me, the answer is obvious.

The fact of the matter is THG had ventured into a new business for nearly a year to the end of FY reporting period and there was no report card given (quantitatively or qualitatively) to its shareholders on this new business venture.

Quantitatively, losing money or making money, Laduree may be too small to have any significant (positive or negative) impact to the overall bottom line of the group as you have concluded – but that does not justify exempting the Management from giving a report card on this new business segment to shareholders - Whether or not this new business venture had been able to move the needle of the overall bottom line - that is beside the point.

Qualitatively, it would be different - there is a big ddifference between a potentially money loosing and money making new business.

It could be losing money, breakeven, or profitable – but until a report card is given, it would remain a guessing game as to the viability and potential of this new business venture.

And I couldn’t agree more – the new business venture “ is a black box and there is a slight discomfort knowing that their track records do not favor them (i.e. Gems TV).” as you have nicely put it.

The fact that no reporting has been given on it could only serve to make it a “blacker” box and also add to the level of discomfort.

In FY2014 (ending March 31) , THG has managed to grow its overall topline (revenue) – but Gross and Net Margin seemed to be on a gradual decline from their peaks in FY2012 - bottom line (NPAT) had grown slightly compared to FY2013 but it stayed almost flat if compared to FY2012 - how much of it was due to non-watch related new business?

Without segmental breakdown between watch and non-watch related business, it would be impossible to make meaningful comparisons/analysis on different business segments.

It used to be a big white box but now it has become a big grey box with a little black box in it.

(not vested)

[nervesofsteel]

Hi folks, any idea whether the two new shops opened in bangkok recently are wholly owned by hour glass or will be through its associates and if so what percentage?Abit confused about the percentage ownership of its thai shops. thks.

[Boon]

Hi folks, any idea whether the two new shops opened in bangkok recently are wholly owned by hour glass or will be through its associates and if so what percentage?Abit confused about the percentage ownership of its thai shops. thks.

Information on its associates in Thailand could be found on page 71 of AR2014.

(not vested)

[zerobeta]

what was the reason for a surge in FCF in 2014?

SGD 53 mln of FCF in 2014 was not just a record high, it was 35x more than 2013 level, double than the previous record of SGD 25 mln in 2012, and much higher than the 2005-2013 average of SGD 13 mln.

the current stock price implied a perpetual FCF of SGD 21 mln annually with a 9% discount rate.
looking at their track record in which they generated about the same FCF (excluding the years in which they invested a lot for expansion), I think the current price is fair...

so if they can repeat what they did in 2014, or at least generate in excess of SGD 20 mln for FCF, then there's still a lot of upside for the counter...

[zerobeta]

can someone answer to my question? how come this thread becomes so quite all of sudden

[dzwm87]

Well, you can trace it back and see what happens to working capital changes. There was an improvement to inventory days but is this a one-off improvement? What is their business model? On a longer term, is it reasonable to assume this business to generate excellent earnings quality (i.e. Net operating CF of at least 1x of net profit)?

[propertyinvestor]

I have no idea why people would purchase watches from Hour Glass or from any authorised dealers in Singapore. The price difference between a rolex of the same model and specifications is almost 10k between here and Hong Kong.

[dydx]

I have no idea why people would purchase watches from Hour Glass or from any authorised dealers in Singapore. The price difference between a rolex of the same model and specifications is almost 10k between here and Hong Kong.

The many reasons people will continue to buy their branded watches - including the high-price, exclusive ones - from THG and other well-established watch retailers include:
(1) Most people have a natural preference to buy branded watches from authorised reputable retailers operating nice shops - like those of THG.
(2) Not many local people would deliberately travel to a tax-free overseas location to save on local sales taxes - in Singapore's case, the 7% GST - unless the taxes (including import duties and luxury tax) are very high. Most people still prefer local conveniences including good services.
(3) Most of THG shops are located in cities where there exists a strong or growing demand for branded watches from the local population, and where there is a large and on-going inflow of foreign tourists. This strategy assures the shops will enjoy higher business volume from these 2 customer segments when well-established over time.