Annual Report

Annual reports and statements




Chairman's Statement


DEAR FELLOW SHAREHOLDERS,

I am pleased to report that the Group achieved another record performance for the financial year ended 31st March 2011. For the first time in our corporate history, sales surpassed the half-a-billion dollar mark growing 7% to $517.6 million, whilst net profit after tax improved 29% to $43.2 million from the year before.

During the financial year, we continued to expand The Hour Glass brand into our highest growth markets, investing $43.2 million in store refurbishments and inventory. Despite this, the Group continued to generate a respectable level of free cash flow of $8.5 million for the year whilst cash and its equivalents maintained at $50.7 million and the Group’s debt-to-equity was further reduced to 5.7%.

The resultant opening of new stores eventuated in inventory growth for FY2011 outpacing our sales by nearly 2.9 times. This led to a nominally depressed stock turn ratio of 2.1 times, underperforming our 5 year mean of 2.4 times. Though not alarming, this is clearly an area that management will be looking to reign in in the current financial year. On a consolidated net asset basis, we increased our corporate net worth by $33.0 million to $249.6 million or $1.07 per share.

In light of this highly positive financial and operating performance of the Group, the Board of Directors recommend a first and final dividend of 5.0 cents per ordinary share amounting to $11.7 million.

BUSINESS REVIEW

In 2010, the Swiss watch industry experienced a dramatic upturn in sentiment registering a 22% increase in year-on-year exports to CHF 16.2 billion. This measured close to the industry peak of 2008 when Swiss watch exports reached CHF 17.0 billion. Exports to Asia accounted for 52% for this sector and it is likely that Asians represented up to 60% of all watch purchases worldwide. It is on the back of this buoyant demand from Asian consumers, and in particular the mainland Chinese, that bailed the Swiss watch industry out of their recent woes.

The first time the Chinese encountered mechanical timekeepers was in 1582 when Portuguese missionaries paid tribute to the Imperial Court with a set of chiming clocks. This sparked a 400 year long fascination with European horology resulting in successive dynasties and their emperors from Wanli to Puyi, government officials to wealthy merchants accumulating what would have been considered in that period to be the world’s most important collection of timepieces. This obsession ended only at the turn of the 20th century as war threatened the world and China along with it. It therefore comes as little surprise that a century later, China and its million millionaires have once again claimed the title as the world’s largest buyers of luxury watches.

The rapidity and magnitude in which new wealth is exploding in the middle kingdom means that the Chinese as a nationality have the highest propensity to spend on luxury goods. 80% of affluent Chinese are below the age of 45 and more often than not are male entrepreneurs who assert their importance in the global watch market by using their economic power to express their societal, cultural and intellectual aspirations. According to China’s Hurun report, these high net worths “…own an average of three cars and 4.4 watches”. The cultivation of guanxi is also very much alive with 30% of all luxury purchases thought to be bought as gifts for family, friends and business associates. We estimate that for 2010, the Chinese luxury watch buyer accounted for as much as CHF 7 billion in global net retail purchases or approximately 23% of global demand. This demand will certainly continue to strengthen over time and the prime beneficiaries of this are the Hong Kong watch and jewellery retailers where over a million mainland visitors descend on the city every month.

Retail prices for watches in China are set 15% to 35% higher than in Hong Kong due to the duties and taxes levied on such objects. Even then, China continues to register high double digit compounded annual growth rates and by the end of 2011, is poised to overtake the United States as the world’s second biggest market for Swiss watches. Just under a decade ago, China did not even make the top 15. It is plausible that with the conclusion of their free trade agreements with Switzerland, the Chinese could jettison themselves to becoming the number one market for Swiss watches within the next five years.

This meteoric rise of the Chinese market has made it the watch world’s new battle ground. It would be naive to believe that we can compete with our mainland Chinese peers on their soil and on their terms. To provide a sense of scale, the two largest specialty watch retailers in China opened an aggregate of 130 stores in the last twelve months. It has taken The Hour Glass three decades to open 24 standalone boutiques!

Though our exposure to mainland Chinese clients presently account for no more than 10% of our total Group revenue, we are very conscious about the strategic implications of these developments and how it will shape the specialty luxury watch retail industry in this region. For instance, this rapidity in new store openings is placing considerable strain on an already tight supply of product to non-Chinese retail channels in Asia, potentially hampering growth. This is further exacerbated by the trend of standalone monobrand boutiques mushrooming in cities throughout China and Hong Kong where the minimum inventory requirements are much higher than those of a multi-brand point-of-sale. It must be noted that in no other country do brands have the confidence in building such an extensive monobrand boutique network.

All this however, did not stop us from continuing to sharpen our focus on our core activity of multi-brand watch retailing, divesting both our Montblanc distribution and franchised stores in Australia and the A. Lange & Sohne boutique in Tokyo. We anticipate that all that will remain in our existing monobrand boutique line-up will be those of Rolex, Chopard and Hublot.

OUTLOOK

At the height of the global financial crisis in 2009, I had articulated in my Chairman’s statement that “Whatever the outcome will be and whatever the evolving paradigms and operating environments that The Hour Glass will exist in, one thing is clear. The Hour Glass will survive this episode and will emerge a far stronger company and organisation.” Two years have since passed and I am most delighted that our organisation’s resolve to overcome, the unwavering commitment of our core management team and the adeptness of our business strategies have not disappointed.

We have achieved this because we are absolutely focused on our Group’s shared mission, driven by an overwhelming desire to excel in what we do, to be the best in class. We recognise that what got us to the top is not what keeps us there and we strive to maintain our qualitative, global market leadership in the area of specialty and luxury watch retailing. The essence of this market leadership requires us to continue propelling ourselves forward even when the path ahead lies bare, reinventing ourselves and our markets, transforming our cultures and processes and altering the rules of engagement the moment our competition catches up. We are constantly learning from our failures as well as our successes. Our creed: “Never be complacent, never rest on our laurels. We can always do better.”

We have developed a highly collaborative, owner oriented culture within the organisation because we believe this is the best strategy to create long term business and economic value. We lever off our limited resources by building the collective intelligence of our organisation through transparent dialogue and the sharing of knowledge and experiences with our teams. We mitigate risks by always managing our downside, planning for the worst and in execution, battling to create the best outcomes. And finally, we continue to develop innovative retail marketing approaches to enlarge our markets whilst staying resolute to our core merchandising ideal – the acquisition, promotion and sale of authentic works of horology, timekeepers that will leave an indelible mark in watchmaking history and which reflect our conviction and passion for contemporary horological art.

Notwithstanding our attempts to smooth out the multiple road bumps that are part and parcel of all businesses, we are faced with several environmental, societal and cultural challenges.

We anticipate that The Hour Glass Japan will be facing difficult trading conditions as the Japanese curb luxury spending after the crippling tsunamis, earthquakes and nuclear reactor disasters that occurred. To this effect, we have put in place initiatives with our brand partners to roll out a series of events for the remainder of the year aimed at stimulating desire and sales.

We have noticed an inescapable trend amongst the generation ‘Y’ members of our team throughout all business units in the region. If younger workers have displayed anything as employees, it is that they prize mobility more than they do fidelity to their employers. We are currently reviewing our recruitment policies where we place a greater emphasis on cultural fit with the organisation and our values over and above our need for paper qualifications. Only time can be the judge of our success in this area.

Our balance sheet remains pristine and since the conclusion of this major investment phase of our business, we will be concerning ourselves with the task of generating a return with the free cash flows that will be generated in the coming years.

ACKNOWLEDGEMENTS

I would like to begin by firstly paying our respects to the passing of three giants of the Swiss watch industry this past year. Dr Nicolas Hayek, Chairman of The Swatch Group Ltd., Mr Rolf Schnyder, CEO of Ulysse Nardin S.A. and Dr Luigi Macaluso, Chairman of the Sowind Group S.A. These farsighted men were all visionary entrepreneurs who dedicated their lives to the resurrection of the Swiss watch industry in the post quartz era. Their boldness, unique business savvy combined with their creativity and passion for horology enabled them to shape the modern industrial fabric of contemporary watchmaking as we know it today. We will always remember their contributions and celebrate their legacies.

A resounding “thank you” to my fellow directors for their encouragement and counsel this past year. My deepest gratitude goes to Owen Price, who served on the Board for the past seventeen years. At the ripe “young” age of eighty five, Owen has decided not to seek re-election at this year’s Annual General Meeting. I am also delighted to have had the pleasure of working with Jason Choo, who after having contributed to improving the standards of corporate governance of The Hour Glass is also retiring from the Board.

In their place, I welcome Kuah Boon Wee and Pascal Demierre. Boon Wee is the Group CEO of MTQ Corporation Limited, a company in the offshore oil and gas sector. Prior to his joining of MTQ Corporation, Boon Wee had served as CEO for South East Asia and Singapore Terminals as well as Chief Financial Officer of PSA International Pte Ltd. Pascal, a trained lawyer who has cycled through different areas of the legal department within the Kuok Group of companies, is the Chief Corporate Officer of Halcyon Group, an investment holding company. I am certain both gentlemen will add younger, and fresher perspectives to our business.

And finally, I wish to thank our clients, business partners and our highly dedicated management and sales teams for continuing to support The Hour Glass in its efforts to remain as the watch world’s leading cultural retail enterprise.

Henry Tay Yun Chwan
Executive Chairman
31 May 2011


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