The Hour Glass

It has been a while since I last pen out my thoughts about companies as I have been busy with my coaching work.

Today, I will like to put out my 2 cents thoughts on “The Hour Glass”

Financials aside (I am sure there are bloggers who provide deep insights into the numbers), I will like to concentre on the advantages and risks of The Hour Glass. Things have changed after their horrendous investment in Gems TV Holdings that results in impairment loss of $14.1 million (FY2009, the Group posted a 57% drop in NPAT)

Please note that below is my personal observation only.

First of all, allow me to introduce the business of The Hour Glass:

Extracted from their corporate website – “Established since 1979, The Hour Glass is the most geographically diverse, multi-brand specialist luxury watch retailer in the region, representing a stable of over 50 brands across 23 boutiques in eight cities throughout the Asia Pacific.”

You can refer to further details on the brand of watches such as Cartier, Rolex, Omega, Patek Philippe, Longines, Tudor, Raymond Weil, TAG Heuer, Bvlgari.

Next, let me point out the 6 key criteria in The Hour Glass:

1. The intangibles – reputation, credibility and brand power as a retailer

The watch industry is a trans-generational business, so once the above is broken, it is very difficult to repair and claim back. The Hour Glass, knowing that the luxury watch industry builds on trust and credibility, has fostered long-term professional relationship with their existing clientele. Where business rapport is concerned, this will translate to repeat watch sales and referrals, thus reducing the need to depend on walk-in customers. Therefore, The Hour Glass commands a brand premium based on the intangibles.

2. Value Chain

In the value chain, to name a few, The Hour Glass owns exclusive distributorship rights to Hublot in Singapore and is a long term carrier for Patek Philippe and Rolex. It signifies how their suppliers value them due to The Hour Glass focus on product integrity and for customers, strong emphasis on service delivery that will be explained in my following point.

So, The Hour Glass has managed both sides well at the moment in the value chain. Of course, one can argue that other stores like Emperor Watch in Hong Kong holds similar watch brands and that there is no “moat” in The Hour Glass since exclusive distributorship lies in geographic splits. There is also the fear of mono-brand boutiques and exclusive outlets launched by the watch manufacturers.

According to Henry, he sees it as “harmoniously co-existed” as The Hour Glass had been approached by several international brands to manage their stand-alone boutiques in key Asian cities (e.g. Hublot boutique in Singapore). It seems to me that the watch manufacturers prefer to tap into their expertise as far as cost and local market knowledge are concerned – not just Singapore only.

It goes back to my original point of suppliers’ trust in The Hour Glass. That said, the trend of standalone mono-brand boutiques mushrooming in Hong Kong poses a threat where the minimum inventory requirements are much higher than those multi POS. What The Hour Glass did is to concentrate their strengths back in multi-brand watch retailing, for instance divest both their Montblanc distribution and franchised stores in Australia and solely deviate their time to take control and grow their market positioning as a dependable Luxury Watch distributor – Hong Kong has one shop only and not multiple POS (point of sales), so there is exclusivity provided to the mainland Chinese and they simply love it!

Yes, the prestige and status.

On the contrary, I am curious to know the future financial development of Richemont direct owned stores as part of their wholesale distribution strategy than The Hour Glass multi-brand retailing against brands directly opening up their own stores. I take this something as competitive risk for The Hour Glass – point taken. There is always a certain degree of risk in investment isn’t it?

However, in my opinion, the retail penetration for direct owned stores could be costly (rentals, A&P etc.) and may not yield excellent financial results than leveraging one like The Hour Glass who intimately knows the Asian consumers. Their past 5 years NPAT (net profit after tax) justifies this and hence probably explains why The Hour Glass is also ultra conservative in debt (gearing is 1x as of FY2012), so as to manage the cash flow and achieve superior earnings over a period of time.

3. Impeccable service

I know this is hard to measure. However, I noted the management has invested in their people to deliver top notch service. I believe in observation, so I did my site visit to “Malmaison”, The Hour Glass latest upscale boutique located at Knightsbridge, Orchard. For instance, when you walk in, the staff greets you and ensure your needs are well taken care of (for example, at their fingertips, they know the edition of Cartier, why the watch features are unique) till you bade goodbye to them.

In no means you will feel diminished by their attitude, perception and knowledge of watches. I did the same round in Cortina – I will not mention much but sadly, the personal touch, service excellence is missing. It is important in this industry to achieve recurring income through robust client networks and referrals.

4. People

Need I say more?

In 2012 Chairman Statement, Mr. Henry Tay mentions that the average tenure of staff employment is 9 years. They aim to be a “Model Employer”. Till today, I have yet to read a similar Annual Report that dares to put out their turnover rate straight off the mark.

To validate this point, he states that one of the Managing Director for Singapore (head of an international luxury brand) could not afford to hire The Hour Glass retail staff; primarily they are amongst the best rewarded in the industry. If the internal manpower is recognized and treasured by the leaders, assuming their career is in retail, why would they leave?

On the management, they are

(a) Not interested in the short term ebs and flows of the capital market

(b) Not in the business of generating short term market excitement

(c) Not keen to take the position as the biggest watch retailer in the world

(d) Not keen to hold the title with the most number of stores POS

(e) Not known to produce champion sales people but championship team

But they believe in the long haul of long term planning and aspire to be the best in class, quality and service standard. So, that takes time to unlock the business value and by then “Mr. Market” to price it. (share price has shot up already!)

I would imagine that the earnings will grow since the folks managing The Hour Glass duly concentrates on 2 things – happy employees and intangibles in point 1, supported by watch collectors who knows that the price of premium watches will appreciate over time. So the loyal buyers are always on the lookout for special edition in The Hour Glass. Also, the management has handled the last financial crisis well – de-stock and manage their inventory level while increasing their current cash holdings.

This aside, I am also wondering why Henry has 13% stake in Cortina, considering it is their direct competitor and could potentially have conflict of interest.

Anyway, if you are buying the shares for 12 months target, I would say “don’t try to think about it as there will not be any share price excitement."

5. Overseas presence

Talking about their nearest neighbour China, the management of The Hour Glass admits it will be na├»ve for them to enter and take incoherent risk, especially on scalability – the two largest specialty watch retailers in China opened an aggregate of 130 stores in the last twelve months in 2011 whereas it will take The Hour Glass three decades to open up 24 standalone boutiques!

Despite their acknowledgement on China that accounts for 16% of their Group revenue in FY2012, up 6% from FY2011. To my understanding, China is a no-no for them and they prefer to tap into outbound Chinese tourists who willing to splurge on luxury travel items, for instance Hong Kong, Singapore and Australia.

To me, I see this like a double-edge sword.

First of all, I applaud the strategic move in not committing to China, maintaining a lower gearing and offering attractive ROE back to shareholders (otherwise store closure when business turns bad!)

But not to penetrate deeply into Greater China where the wealth of middle income Group is rising, it can probably jeopardize the chances of maximizing current opportunities in the luxury segment. For a parallel comparison, look at the results of Pernod Ricard and Moet Hennessy, luxury fine wines, champagne and spirits industry players. They did their calculated risk assessment and understanding China is the world largest consumption of luxury goods, they went in to cement their market presence. Can The Hour Glass, having acknowledged “income disparity” is a driver to their revenue, not having a strategic foothold in China where there is a huge gap between the rich and the poor? How about indirect investments to mitigate risks?

I also discovered that South Korea, in terms of retail sales of luxury timepieces, is expanding stronger against Singapore for the past 10 years; yet The Hour Glass main revenue generator remains in the local market as the management deems fit.

No doubt high net worth individuals are increasing in Singapore, making Singapore their next home as we aim to be the world’s leading asset management hub in 2020 – there needs to be a cushion for income diversification once the footprint is strongly entrenched. In addition, Japan is poised for decreasing growth because the Japanese curbs luxury spending due to natural disasters like tsunamis and earthquakes.

The Hour Glass has an outlet in Ginza, Tokyo the expensive belt of shopping and I am not sure how this will equate to lower earnings – wouldn’t it be better off to deploy better cost-based resources to China and South Korea?

I am debating this decision. (reason why I hold back previously in buying The Hour Glass shares) because there has to be a fine balance of over-expansion and under-expansion. I must say, as of late, the latest results of The Hour Glass surprise me, coming from a luxury watch retailer.

On the positive side, I am happy to hear the relocation of their outlet in Gold Coast to Edward Street in Brisbane. I lived in Brisbane for 1.5 years, thus I would say this is a great move to tap into the affluent Professionals in the central area, near Brisbane Central and Roma stations. At least the demographics are larger than Gold Coast, tapping into locals and foreigners - it is where premium hotels are located too.

Yes, we are talking about exclusivity again.

In short, hoarding too much cash in the long run and remain idle is not going to be helpful for capital gains, unless they plan, which I think they will, focuses on yield only and hopefully return the excesses (plus special div) to the shareholders.

6. Family-run business

I am a little concerned about the sensitive nature of a family run business, considering the publicity known marriage dispute. More information is found online.

Conclusion

To summarize, I foresee their earnings to expand in their current markets due to the Asia spending power on luxury products. In my past article on “top 5 trends”, I talk about “luxury goods” as a key focus to watch out.

If I include the considerations, I would probably say the advantages outweigh the disadvantages which makes it an interesting option to invest in The Hour Glass.

Comments

  1. Hi KT,

    Nice write-up! I learnt a lot from your post. Thanks.

    ReplyDelete
  2. Thanks FF :) Keep in touch and take care!

    ReplyDelete
  3. Hi, glad to hear about the excellent service at Malmaison.

    Just some points to take note of:

    With regard to the stake in cortina, it was an expression of interest by Henry Tay to acquire Cortina back in 2005 as he felt that the industry should consolidate to raise bargaining power. Of course, he suffered a "poison pill" as the Lim issued new shares and raise their shareholding to 47%. Personally, I think status quo is the best option as the brand owner will feel uncomfortable with the watch retailer holding stronger buying power.

    As for China, they feel that only brand owner should penetrate the market as the margin is very low and competition is high. They will also be competing with big Hong Kong watch retailer with Emperor and Xinyu Hendeli.

    Contrary to the belief that Japan has been affected by the crisis, they noticed that the Japanese market has experienced very strong growth after the disaster. There is a complete change in mentality towards life and this has helped to spur growth. http://www.fhs.ch/script/getstat.php?file=mt3_120106_a.pdf

    Not being able to find suitable human resource has been one of the key reason why they have not expanded further in Japan or other countries like Macau and Korea. The CEO of their Japanese division has been with THG for more than 20 years.

    ReplyDelete
  4. Thanks for the comments and points raised :)

    Accidentally, I clicked on the wrong button "reply" at the bottom - did my response went to your email?

    Possible to help publish my comments?

    Many thanks!



    ReplyDelete
    Replies
    1. The data in the PDF file is interesting - if the Swiss watch exports to Japan is increasing and ranked on top of Taiwan and South Korea, we would probably expect end retail demand to rise as well.

      However, at the end of the chain, statistics show that the retail consumption by volume and value of luxury timepieces (men & women) is dropping so I am not sure the Japanese market has experienced strong growth. From a B2B point of view, will it be a case of the luxury watches re-exported out from Japan to several countries; hence the increase in value terms (by distribution)?

      Am vested in THG and took into account the pros and cons like any other business :)

      Delete
  5. Appreciate your analysis, but hesitate to buy at these levels due 3 questions:
    -Strategy focus: why buy into non core travel business? Another Gems?
    -do they face "squeeze" by Retail REITS on their non-owned outlets?
    -do higher Inventory levels mean higher risk due to newer models?PGL

    ReplyDelete
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