Time is money
• The Hour Glass Limited is a specialty luxury watch retail group with multi-brand and standalone boutiques in the Asia Pacific Region. The group also owns Watches of Switzerland, a watch retail chain in Singapore that deals in mid-tier to high-end Swiss timepieces.
• Power in luxury goods. Bain & Company estimates that luxury goods spending will hit record levels in 2022, while price hikes for luxury products will continue to occur, with some hitting double-digit increases.
• Asia’s consumers to spearhead global consumption growth. Offering a US$10 trillion opportunity, Asian consumers are expected to account for half of global consumption growth in the next decade, according to estimates by McKinsey.
• Quick recovery from Covid-19. Swiss watch exports hit a 5- year high in 2021, representing a gain of 31.4% YoY. On the consumption side, Singapore’s retail sales recorded a blockbuster growth in 2021, snapping a 3-year losing streak. Meanwhile, retail sales in both Malaysia and Thailand are on a path of recovery and are almost back to pre-pandemic levels.
• Initiate with Outperform and S$2.32 target price.
Company background. The Hour Glass is one of the world’s leading specialist watch retailers with an established presence of 50 boutiques in twelve key cities in the Asia Pacific region. The company’s network of multi-brand and standalone brand boutiques are strategically located in key luxury retail
corridors of Singapore, Hong Kong, Tokyo, Sydney, Melbourne, Brisbane, Auckland, Kuala Lumpur, Bangkok, Phuket, Hanoi and Ho Chi Minh.
1H22 Financials: A strong start. Revenue rose 63% YoY to S$472mn for the half year ended 30 September 2021 (YE 31 March 2022) while net profit after tax surged 110% YoY to S$63.5mn in 1H22. This was mainly due to improved gross margins at 29.3% in 1H22 compared to the previous period at 26.2%. Bottom-line was boosted by an increase in share of results of associates which doubled to S$6.6mn in 1H22. As a results, basic and diluted EPS for 1H22 more than doubled to 8.95 Sing Cents compared to 4.22 Sing Cents in 1H21.
The pure desire for luxury goods. With travel and social gatherings still limited in many parts of the world, the shift from spending on experiences to goods is likely to stick around for another year. After growing 4% between 2019 and 2021, Bain & Company estimates luxury goods sales will increase from €283 billion (S$428 billion) in 2021 to between €300 billion (S$454 billion) and €310 billion (S$469 billion) in 2022.
Asia’s road to recovery. Geographically, Southeast Asia and Oceania (Australia and New Zealand) contributes over 80% to the company’s total revenue. Singapore registered strong growth in consumer spending power despite the ongoing pandemic, evident from the retail sales index for watches and jewellery reaching a 5-year high in December 2021. Thailand and Malaysia on the other hand, are expected to catch up in 2022 with the reopening of foreign borders.
Resilient industry shielded from inflation. The Hour Glass’s retail trade business has largely been resilient in the face of inflation running the hottest in almost 40 years. Rising costs are easily passed down to consumers as demand for luxury items continues to remain strong.
Valuation & Action: We initiate The Hour Glass with an Outperform recommendation and a TP of S$2.32. Our TP is based on a discounted cash flow, taking into account a WACC rate of 10.5% and terminal growth rate of 2%.
Risks: Exchange rate risks due to overseas operations; Supply-chain woes might persist moving forward into 2022; Covid-19 uncertainties may lead to worsening of state or border restrictions.