Hour Glass Limited

Hour Glass Limited April 2014 Price target (2018) $2.64 Highlights - Hour Glass Ltd: Price, 1st Jan 2014: $1.68 Only the best for the top. It implies a 56.9% Upside: 56.9% upside potential till 2018. Hour Glass is also the largest luxury watch redistributor in Singapore. Outstanding growth level, healthy cash level, Key Information low debt, sound margin. Historical revenue compounding annual growth rate is at 6.7%. 52 week range: 1.560-2.000 Return on Equity at 16% median since 2010 Market Cap: 393.6m annually. Median EBITDA margin at 10.86% since 2010. We forecast CAPEX to be at 2.7m Shares outstanding: 235.0 or 0.4% of revenue till 2018 due to necessary yet conservative expansionary plan. 87.1 Float (m shares) Major Shareholders: Gamechanger for a champion: China’s officials are tightening measures to clamp down Dr. Henry Tay (CEO) 57% corruption of luxury goods gift giving by state Bloomberg Ticker: SSG: HG owned companies to civil servants. Luxury watches sales levels are also slowing down in Reuters: HRGS.SI Singapore. We forecast a slow declining revenue growth of -1.5%. However, that has Avg Daily Volume: 16.5 (000) been mitigated with conservative and Analysts: Zai Wei and team prospectable expansion plans in Thailand. Hour Glass Ltd 3 2.5 56.4% upside potential 2 1.5 1/18/2014 | 1 0.5 0 Hour GlassHour Limited 1 Hour Glass Limited Overview Established since 1979, The Hour Glass Limited (HG) is a leading specialist luxury watch retailer in Asia. It is the most geographically diverse, multi-brand specialist luxury watch retailer in the region, representing a stable of over 50 brands across 38 boutiques in six cities throughout Asia Pacific. The company retails and distributes watches and jewels. The products that the company offers are sold under key brands including A. Lange & Sohne, Alain Silberstein, AudemarsPiguet, Baume & Mercier, Blancpain, Breguet, Breitling, Bulgari, Hanhart, and Graham. It also invests in properties. The company is the leading cultural retailer that develops and promotes the culture in Asia. Its key operating regions include Singapore, Malaysia, Hong Kong, Japan, Australia and Thailand. The company is headquartered in Singapore. Solely in Singapore alone, it owns 17 boutiques shop where all of it are placed in prime location. In April 2013, French luxury bakery and sweets, Ladurée, opened for business in Singapore in collaboration with HG. The French bakery is known for its double-decker macaroons. The success of the two point-of-sales in Takashimaya shopping centre has prompted HG to look overseas for opportunities to open an outlet and Malaysia is a possibility. Number of Outlets Australia, 5 Thailand, 6 Singapore, 17 Malaysia, 5 Japan, 2 Hong Kong, 3 Singapore Hong Kong Japan Malaysia Thailand Australia 1/18/2014 | Figure 1 Hour GlassHour Limited 2 Industry overview Weak consumer sentiment for luxury goods Bad macroeconomic condition and slowing Asian economy have contributed to weak consumer sentiment with Singapore being 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.) Rising operating cost Rising business costs in Singapore in recent times have negatively affected one of its core customers, namely, SME owners. Higher staff costs and rental expenses have also eroded HG profit. Potential entry of new competitor (Singapore) 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 HG as they already have 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. A people business The specialty and luxury watch retail trade is an emotional business that requires a lot of trust in handling the specialised brands and products. The watch business is also a trans- generational business where credibility and reputation can be very difficult to reclaim once damaged. HG places tremendous emphasis on the building of character and credibility, a key competitive advantage that is hard to duplicate. Revenue drivers HG generate profits of $613,867 in the Asia Pacific regions. The chart below shows that most of the revenue were from South East Asia and Australia. This results evidently shows that there were high spending power and disposable income in that region. 2013 REVENUE DRIVERS ($'000) Sales to external customers Inter-segment Sales Interext Income Other Income 512,848 1/18/2014 | 89,088 5,455 5,159 851 97 765 111 SOUTH EAST ASIA AND AUSTRALIA NORTH EAST ASIA Hour GlassHour Limited Figure 2 3 Macroeconomic Overview Figure 3 Improved Luxury Goods demand in 2014. According to Euromonitor international 27/11/2013 and Bloomberg Industries analyst (Luxury Goods Team) Deborah Aitken, global luxury sales is expected to increase by 3.6% in 2014. Asia Sales is also forecasted to expand by 5.8%. It is also projected that Asia will surpass the western countries as leading world luxury goods purchaser by 2018. Figure 4 1/18/2014 | Luxury Jewellery and Timepieces to grow in 2014. According to Deborah Aitken, Jewelry and watch sales both may hit almost 5% growth in 2014, outpacing the market’s growth rate of 3.6%. There are also a wide range of brands and it is fueled further by lower entry and exit price points. Hour GlassHour Limited 4 Figure 5 Increase in Disposable Income of Chinese families. There has been a significant increase in wealth of Chinese families. In 2014, 169,000 Chinese households will move into above $200,000 disposable income category. By 2017, it is forecasted to have an increase to 2.44 million. 1/18/2014 | Figure 6 Hour GlassHour Limited 5 Increased in number of Chinese Tourist-Usual trend of Chinese to buy Luxury Watches Overseas. There has been an increased in Chinese tourist for past decade. This is fueled by the additional increase in income by the middle income group. The Chinese are expected to surpass the Germans by 2017, for the highest source of outbound travelers. Over the next 5 years, regional destinations such as Hong Kong, Macau and Thailand will benefit the most. This will benefit overseas luxury watches businesses as long as China’s consumption tax on luxury goods remain at 20%. Boost in Australia and Thailand. With a growing interest in Thai culture, more Chinese tourist has turned their vacation points to Thailand. It is reported in Euromonitor International that there has been a 62.2% growth in number of Chinese tourist visiting Thailand, making it the 4th largest destination point. In 2012, China has also became the second largest source market for Australia, with a reported 15% increase in tourist growth. Figure 7 Despite Hong Kong, China being the top forecasted destinations, we believed that HG main revenue driver comes from South East Asia. Hence it avoids unnecessary competition from other big competitors such as Hengdeli and Emperor Watch who are based in China, Hong Kong and Macau. 1/18/2014 | Hour GlassHour Limited 6 Figure 8 Yellow: HG stock price Pink: Hengdeli stock price Black: Singapore retail sales for Jewellery and Watches Green: Hong Kong retail sales for Jewellery and Watches As we can see, both Hong Kong and Singapore retail sales for jewellery and watches have taken a slower down in demand for recent months in this 2 year chart. Yet HG historical stock price has not been tumbling and it has also be fueled with optimistic macro trends in future. 1/18/2014 | Figure 9 Green: Thailand special goods and non-supermarket retail stores Blue: Thailand supermarket and departmental stores Hour GlassHour Limited 7 As Hourglass as some exposure in Thailand, we can observe that there are more openings of special goods and non-retail supermarket stores recently. This could signify increase in demand but also increase competition. SWOT Analysis Strength Strong intangibles – reputation, credibility and brand power as a retailer as well as strong partnership with existing manufactures Impeccable service – Personal touch, service and excellence Secured limited supply of prime retail space in Singapore Weakness Family-run business Concentration of risk in Singapore Most of its purchases are done in CHF and this would result in more costly purchases and bear a negative impact on gross margin in the event that the CHF appreciates against SGD Opportunities . Overseas presence, especially in China (Double-edged sword) and Thailand . Expanding and refreshing of network locally Threats . Rising rental rates could add stress to its operating margins . Global economic slowdown would affect global consumer spending and likely slowing down demand for luxury items . Risks exist in the event that brand principals terminate distribution agreement 1/18/2014 | Hour GlassHour Limited 8 Competitive Positioning Listed Competitors 1.1 SINGAPORE . CORTINA HOLDINGS (CTN SP Equity) . SINCERE WATCH LTD (SIN SP Equity) 1.2 HONG KONG . ORIENTAL WATCH HOLDINGS (398 HK Equity) . EMPEROR WATCH & JEWELLERY (887 HK Equity) . HENGDELI HOLDINGS LTD (3389 HK Equity) . DICKSON CONCEPTS INTL LTD (113 HK Equity) o Peer Group Analysis . We have chosen to conduct a peer group analysis only with companies currently and used to be listed on the Singapore Exchange (SGX), namely, Cortina Holdings Ltd and Sincere Watch Ltd. Cortina Holdings Ltd The Company is focused in the retail and distribution of luxury watches. The Company's retail customers comprise of repeat customers and referrals, tourists and walk-in customers. It markets a variety of watches, carrying over 50 different brands and over 3,000 models in its product range.

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