The Hour Glass is a listed luxury watch retail group in Asia with headquarter in Singapore. Founded in 1979 by the husband and wife team, Dr. Henry Tay and Dato’ Jannie Tay, the company started operation in Lucky Plaza through a partnership with Metro Holdings. In recent years, the company’s share price has surged from $0.30 in 2009 to almost $2.00 in 2014. Post stock-split of a one-into-three exercise in 2014, the current share price is now trading at $0.74.
What sets apart The Hour Glass from other luxury watch competitors is that it also has a substantial property portfolio. According to its 3Q2016 financial report, the group is holding on to $64 million worth of investment properties. In 2015, it acquired two Australian properties, namely an 11,000 square feet heritage listed retail and commercial property in Sydney and an 8,000 square feet retail property in Brisbane’s prime luxury retail precinct for $6.3 million. Such property investments reflect the listed company’s strategy for growth in the future.
Besides laying the groundwork for future growth, it is also making the effort to grow its core business. Amid the global economy uncertainties, The Hour Glass acquired the Watches of Switzerland in 2015 for $13.3 million. These investments caused its cash flow to go into negative territory, to the tune of -$16.1 million. However, cash and cash equivalents are still solid at $69 million and profits for 9 months is at a healthy level of $35.5 million. Short-term borrowing is at $46.2 million while long-term debt is $24.2 million. Thus, the company should have no liquidity issues in the short-term as its cash holdings can meet its short-term debts more than sufficiently.
The company’s Net Current Asset Value Per Share (NCAVPS) is $0.43 per share. However, given that it has some hidden asset in the form of property investments, its actual true value should be $0.52 per share. Based on The Hour Glass’ current trading price of $0.74, it is only 30% overvalued. So is The Hour Glass a value buy or value trap? To have a holistic view, it is important to examine the market trends and extrapolate its future growth.
For the past decade, The Hour Glass’ share price has a fine run but going forward, such explosive performances may not be realistic. This is because the past performances had been anchored on the spending power of PRC customers. Over the years, as China’s economy mature and as the PRC spending habits changed, The Hour Glass’ earning performance have been inevitably impacted. Nowadays, the PRC buyers are more sophisticated and they are not willing to spend a premium for luxury watches. Against this challenging backdrop, The Hour Glass needs to adjust its business strategies in order to stay ahead. Whilst the brick and mortar business model will still be relevant in the near future, the company needs to build up its presence in the online community in order to reach out to its international customers.
Even though The Hour Glass is only a luxury watch retailer and not a watch manufacturer per se, the company can consider re-branding itself in the online world through sharing its extensive knowledge on luxury watches that it sells. In doing so, the company will be seen as an authority in the field of luxury watches and thus, will be able to forge a long-term relationships with buyers. To reach out to targeted segments of the market, The Hour Glass may also consider working with Singapore wealth blogs to create awareness on luxury watches.
What is the trend for the retail market in the near future? One thing for sure is that Singapore’s market is too small to influence global markets. In this regard, the US market is still the leader.
At this juncture, it is still to premature for wealth builders to classify The Hour Glass as a value buy as its potential to price upside will hinge heavily on how it executes the business transformation during this transition period. I am not vested in this counter but nevertheless is keeping a close eye on The Hour Glass. Probably if I have the funds, I would park some money in this counter. However, most of my money are not reserved for Executive Condominium purchase. Otherwise, I would probably invest in this local company which has exciting growth potential.
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SG Wealth Builder