Clockwork Ticking Down As Demand Slows

Luxury watch retailer and a sweetener on the side. We recently met the management of The Hour Glass for an insight into the company and the watch industry. Over the past 34 years, Hour Glass has cemented itself as a luxury watch retailer in Singapore and has been growing its presence in Asia. It also secured the main franchise of Ladurée in SE Asia, a French luxury bakery renowned for its macaroons.

Rising headwinds, rising costs in core market. The management stated rising business costs in Singapore in recent times have negatively affected one of its core customers, namely, SME owners. It views Singapore’s consumer sentiment as the weakest among the ASEAN countries. In the region, the luxury sector is facing increasing challenges. For example, China’s efforts to weed out official corruption has resulted in a drop in Swiss watch export levels to Asia (Singapore’s -2.6%, Hong Kong’s -11.1% and China’s -18.7% in 1H13.)

Potential entry of new competitor. There is also talk of new competitors entering Singapore, eg, Emperor Watches & Jewellery. But we think newcomers would find it difficult to take market share with Hour Glass already firmly entrenched in prime retail spaces on Orchard Road. Management pointed out that once the company secures a retail space, it is usually there for good.

Exploring untapped markets to mitigate slowdown at home. To break into Thailand’s watch retailing industry, Hour Glass teamed up with Blue River Corporation, a local luxury jewellery manufacturer, in 2008 and opened three stores in Bangkok. Its foray into Phuket last year turned out to be a positive surprise as the store became a popular tourist destination, attracting a minimum of 1,500 visitors a day during the low season and as many as 4,000 visitors during the high season.

Valuation on high side. In the short term, Hour Glass has to contend with weak consumer sentiment in Singapore. It recently cut its dividend payout, bringing its yield of 3.1% in line with peers. Valuation appears on the high side at 7.8x hist. P/E vs. its mean of 6.3x. But its resilient balance sheet (net cash position of SGD38.3m, five-year ROE average of 15%) still makes the stock attractive for the long haul.