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Can The Hour Glass roll back the time?

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Once upon a time, there were three shining forces in Singapore stock market. Osim’s Ron Sim, Creative Technologies’ Sim Wong Hoo and The Hour Glass’ Jannie Chan used to dominate the entrepreneur scene. Together, the trio had won numerous awards for creating outstanding household brands. As a young boy, I have deep admiration for these business pioneers but Jannie Chan stood out among the three of them because of what she had done for The Hour Glass.

The Early Years

In the 80s and 90s, female entrepreneurs were almost unheard of, much less successful female entrepreneurs. The corporate and business community used to be dominated by males. Of course, there were female leaders but they were the exception rather than the norms.

Widely credited for co-founding The Hour Glass, Jannie Chan has been instrumental in building the luxury watch retailer into a SGX-listed company with international presence in Australia, Hong Kong, Japan, Thailand and Malaysia. Therefore, it pains me to read of her current plight because she had been my source of inspiration for several decades. Having achieved so much with The Hour Glass, I thought she deserved more during her twilight years.

In recent years, Jannie Chan had been involved in various legal disputes. Last year, she lost her appeal against ANZ seeking to recover $8.7 million in loan defaults by Timor Global in which she is a director and shareholder. She was also sued by former husband, Dr Henry Tay, for several times over defamatory emails. Recently, it was reported that she was given 2-week of suspended jail term for contempt of court.The Hour Glass

Those good old days must seem so surreal for Jannie Chan. From the first store at the Lucky Plaza, she grew The Hour Glass into a regional force with 40 boutiques in nine key cities in the Asia-Pacific region. Impressively, the Group has evolved to curate collection of luxury watches from more than 50 of the world’s finest watch brands such as IWC, Patek Philippe, Rolex, TAG Heuer and the likes. Under Jannie’s leadership, it has been an exciting journey for The Hour Glass.

Business Performance

Notwithstanding the family disputes, The Hour Glass appears to be in good hands. Executive Chairman, Dr Henry Tay is currently running the company with Michael Tay, Group Managing Director. Full year profit for FY2017 amounted to $49 million, a decrease of 7% year-on-year. Although father and son are running the business well, the challenging retail climate has profound impacts on The Hour Glass’s business.

Fundamentally, The Hour Glass’ products are high-end luxury goods and therefore its business is pretty much sensitive to the market conditions. This is understandable as slowing economy means retailers are less likely to spend on luxury watches. The world number one market, Hong Kong, was affected as well, with the watch market falling by 25.1%. In United States, the market contracted 9.1% while Singapore’s market shrank by 10.4%. The declining demand for luxury watches led to the third consecutive year of contraction for Swiss watch export.

Dr Henry predicted that the decline for the luxury watch is expected to continue for the next few years based on several reasons. Firstly, there is the issue of overcapacity. Watch factories are still churning out watches even though global retailers are facing outsized inventories. With decreased demand, retailers are facing challenges in turning around inventory.

To be successful in business, a company must ensure the inventory turnover is good. This is because inventory may impact a company’s cash flow. In light of the overcapacity in the industry, The Hour Glass is facing pressure in the gross margin. As a matter of fact, gross margin fell gradually from 23.9% in FY2013 to 22.7% in FY2017.

But while the luxury watch retailer in facing significant challenges brought forth by changing market forces, the balance sheet remained very strong. Cash and cash equivalents actually grew from $79.5 million in FY2013 to $124 million in FY2017. During this period, free cash flow increased from $1.5 million to $57 million. With so much cash on hand, it is likely that The Hour Glass could be adopting a wait-and-see approach before making acquisitions for growth.

Technology disruptions

There are good reasons for management to be prudent in their cash flow because of the disruptions in the market trend. Technology has created a whole new world of e-commerce platforms for luxury watches to be sold. Against this backdrop, The Hour Glass is facing competition from e-commerce players. What this means is that The Hour Glass must evolve from its current brick-and-mortar model and re-invent its way of selling.

In the olden days, The Hour Glass could spend hundreds of thousands refurbishing one watch outlet to attract customers. Nowadays, such a strategy would not work. With digital, there are many more opportunities to grow the business. For example, with online channel, there are the possibility of capturing more global customers and do cross-border selling.  With technology, companies could also price-discriminate customers or do geo-tagging – selling of products to specific customers based on their IP addresses.

Two years ago, Dr Henry had foreseen the potential disruptions and the resulting impacts of digitization. Thus, the Group has embarked on a transformation journey to respond to digitization. There were restructuring in the management structure, investment in technology, shift in customer experience management and most importantly, a change in organizational culture. The Hour Glass is embracing itself for the disruptions in the industry by entrenching itself as a “digital native” in the next three years.

Share price

Indeed, with changing market disruptions, it is not business as usual. The share price is now trading at $0.660, below its Net Asset Value (NAV) of $0.68. But based on my estimation, the actual value of the shares could be worth at least $0.70. This is because The Hour Glass owns a portfolio of investment properties and investment in associates.

For the property portfolio, rental income for FY2017 amounted to $2.4 million while the fair value gain was $3.4 million. Overall the value of investment properties was a cool $71 million. On the other hand, its investment in associates was worth $24.7 million.

At Price/Book Value of $0.972 and P/E ratio of 9.55, the shares are considered fairly valued. But due to market trend and adverse condition, there are more headwinds for the watch retailer. Dr Henry predicted that the downturn for the luxury industry could last a few more years. Although the management is prudent in its financial approach, I hope to see more growth initiatives from management before investing in this counter. In the meantime, I expect the stock price to continue to fall gradually in the coming years. Till then, enjoy the ride.

Read my previous articles on The Hour Glass:

  1. The Hour Glass Limited
  2. Is it worthwhile to invest in The Hour Glass?
  3. The explosive surge of The Hour Glass

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Updated: August 8, 2017 — 1:24 pm

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