Annual Report

Annual reports and statements




Chairman’s Statement


DEAR FELLOW SHAREHOLDERS,

I am delighted to report that for the financial year ended 31 March 2010, the Group delivered its most profitable set of results since its incorporation. Sales grew by a credible 10% to $483.7 million whilst net profit after tax leapt by 149% to a record $33.5 million from the year before.

The Group’s cash generating capabilities remained positive by producing an additional $15.0 million in free cash flow despite having re-invested $18.7 million back into our business. Our balance sheet remained robust with cash and cash equivalents growing to $50.5 million and, in keeping with tradition, continued to maintain an ultra conservative capital structure by further reducing our leverage profile, ending the year in a net cash position of $36.3 million and a debt-to-equity ratio of 6.6%. Yearend inventory levels grew in tandem with sales by 9% to $159.0 million and inventory turnover maintained at 2.4 times, our 5 year mean. On a consolidated net asset basis, we increased our corporate net worth by $33.6 million to $216.5 million or 92.56 cents per ordinary share. All this was achieved on the back of the worst global economic environment of our generation.

In light of the Group’s sterling financial and operating performance, the Board of Directors recommends a first and final dividend of 3.50 cents per ordinary share amounting to $8.2 million.

BUSINESS REVIEW

In 2009, Swiss watch manufacturers reported exports of CHF13.2 billion registering its steepest ever decline of 22% from the historical peak of CHF17.0 billion in 2008, in a year that has to be viewed and analysed as two distinctly contrasting halves.

The first six months of 2009 saw the world’s watch industry consumed in a cycle of global de-stocking, where fear and uncertainty preyed over the future of the Swiss watch industry rendering it to a virtual state of paralysis. At the height of the watchmaking crisis, manufacturers had acted by slashing their production output, some by as much as fifty percent, trimming payrolls and on aggregate, placing a fifth of the manufacturing sector’s 40,000 workers on temporary employment. Many distributors also stopped pushing third party retailers to accept their outstanding orders even though they themselves were beginning to amass a stockpile of product out of concern over the credit worthiness of these retail partners. In markets such as the United States, the stronger brands cleaned up their distribution, reducing their wholesale network by as much as thirty percent. It was during this period that every luxury brand CEO expressed a similar emotion on their business performance – one of suffering.

But almost as quickly as world stock markets dove into a coordinated freefall, governments throughout reacted by pump priming their economies, swiftly injecting liquidity into the global financial markets and reflating assets. As fear gradually dissipated and doomsday prophesies were laid by the wayside, market and consumer sentiment turned for the better and thus began this spectacular second-half recovery rush. Consumers, particularly in Asia, were all too eager to shed their cloaks of austerity and promptly sprinted to retail stores to do what they intuitively do best – shop. Inventories in channel retailers were replenished and almost as if it never even happened, business reverted back to pre-crisis levels.

To say that this dramatic V shaped rebound was nothing short of unimaginable would belie the severity of the crisis on the luxury goods market and in particular, the Swiss watch industry. The effects of which continue to haunt its traditional large consumer markets of the United States, Europe and Japan in addition to the 400 plus businesses operating in its component and movement manufacturing sector. Many of these producers still have capital equipment sitting idle and they remain hopeful that their excess capacity will be filled by Christmas of 2010.

Our financial prudence meant that throughout this highly volatile period, The Hour Glass operated in a state of total calm and were one of the few companies in the sector still able to deploy capital. In this regard, two new boutiques were opened in Singapore, three stores were relocated to even more prime retail locations and an additional three boutiques were refurbished. All these stores have already contributed positively to our cashflows and profitability.

OUTLOOK

This is the fourth financial crisis our Group has faced in a little over a decade – the 1997 Asian Financial Crisis, the bursting of the tech bubble in 2001, SARS in 2003 and the Great Global Recession of 2008. And just when the bulls began burnishing their horns, we are once more confronted with further market volatility that threatens to derail the pace of global growth. This has undoubtedly been exacerbated by the impending implementation of austerity measures by governments worldwide, European sovereign debt fears, a politically unstable and stagnating Japanese economy, civil unrest in Thailand, the pricking of the Chinese asset bubble and a protracted US economic recovery. Therefore, it comes as no surprise that consumer confidence is eroding and sentiment continues to remain fragile in Switzerland’s watch sector.

Despite all these macro-environmental challenges, we are fortunate that The Hour Glass is anchored in the world’s most dynamic and prosperous region. What is evident is that there has been a seismic shift in market emphasis towards Asia and more importantly, its cohort of luxury hungry Chinese consumers. A recent blue paper on China’s commercial development by the Chinese Academy of Social Sciences stated that luxury spending in China would grow from USD $9.4 billion in 2009 to USD $14.6 billion by 2014 to become the world’s leading luxury market. The Chinese have contributed richly to the global luxury sector by purchasing items not only within their own borders but also when they travel overseas. Luxury watch retailers from Dubai to Switzerland have benefited enormously, as do we in the markets of Australia, Singapore and Hong Kong. Newly rich by distinction, these Mainland consumers are happy to flaunt their wealth. They are characterised by their desire to have the best that life can offer and they all want it now. If this is the present generation’s attitude, we cannot wait for their offspring to come of age. This clearly bodes well for the future of our business.

With all this in mind, it begs the question of where The Hour Glass’ destiny lies in servicing the Chinese luxury watch buyer. We opine that for the next decade, the majority of the Mainland Chinese will continue shopping for luxury watches outside of China. This is due to a combination of factors such as the higher duties and taxes imposed on luxury goods in China itself and the prestige of bringing home a premium holiday souvenir. We are cognizant that this propensity to purchase out of country will diminish over time. Hence, we have set ourselves a target of entering China when market conditions are ripe for a group like ours to effectively apply our business model and extract a reasonable rate of return on capital employed.

In the 30 year history of The Hour Glass, the one thing we have tried to avoid at all costs is retail and marketing monotony. The past decade had thrown up several moments of horological rupture – the global watch exposition Tempus and more recently, L’Atelier, our new specialty watch boutique concept: both examples heralded by the world watch community as industry defining ideas. The next milestone challenge for The Hour Glass as a multi-brand, multi-category luxury retailer is to differentiate ourselves by dramatically out-behaving and out-conceptualising our competition rather than merely outperforming them in terms of offering consumers more products at better prices. We recognise that a key driver of our success is our passion. We are passionate about product and passionate about how we go about promoting it. Passionate in proposing works of art, design and craft that are seamlessly interwoven into objects that can withstand the turbulence of time; Desirous of changing the way people appreciate luxury products and changing the manner in which they consider watches. Passionate about the development of retail environments soaked in an atmosphere flavoured by coffee, culture and conversation and which are then layered by the creation of extraordinary customer experiences. With this, we introduce Malmaison by The Hour Glass. Located at the new luxury retail podium – Knightsbridge on Orchard Road in Singapore, Malmaison is set to be The Hour Glass’ most distinctive project to date and will be positioned as Asia’s premier luxury emporium. We will be revealing more on this unique retail opportunity towards the end of 2010.

I would like to conclude by highlighting some key organisational values and operating tenets that The Hour Glass’ management team adheres to. Some principles that are not so obvious and some that may be. It is invariably easier to start with the things we won’t do. We are not in the business of generating short term market excitement and don’t have ambitions to present ourselves as the biggest watch retailer in the world. We don’t want to be the company that carries the widest selection of brands nor do we have the desire to hold the title as an operator with the most number of stores. We plan to be in this business for the long haul and believe in the merits of long range planning, ensuring that our business and financial goals reflect this creed. We aspire to be the best in class. To deliver the highest degree of customer service and to do so in the most consistent manner. To be regarded as a model employer and a dependable business partner. Financially, this translates into our goal of building an enduring and profitable business that assumes a moderate risk profile generating constant, sustainable long term returns and cashflows through the careful allocation of capital investments back into our business. By sticking to these time honoured guiding principles, we are certain that good things will follow.

Acknowledgements

I would like to welcome Mr Philip Eng, who joined the Board on 1 October 2009. Philip brings with him an in-depth understanding of the luxury industry as well as a wealth of business experience, including 23 years as Group Managing Director of Jardine Cycle & Carriage. I am certain that he will provide us with valuable insights and counsel in the years to come.

On behalf of the Board of Directors, I would also like to express our gratitude to our clients, business partners and shareholders for their overwhelming show of support during the course of the year. Our associates and management team led by our Group Managing Director Kenny have also stayed focused during these challenging times, continuing to create long-term value in a deliberate and logical fashion. And if ever they are put to the test once again, I am confident that this battle hardened team will stand and deliver.

Henry Tay Yun Chwan
Executive Chairman
31 May 2010

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