DEAR FELLOW SHAREHOLDERS,

It is with immense satisfaction that I report another set of stellar financial results for the year ended 31 March 2012. For a second year running, we established new benchmarks in our operating performance with sales increasing 17% to $607.0 million, and profit-after-tax rising by 30% to $56.2 million.

In my decades as a retailer, I observed that successful, sustainable retail businesses typically produced EBITDA to Sales ratios of ≥ 10%, and Returns on Capital Employed (ROCE) in excess of 15%. On both fronts, The Hour Glass did not disappoint, registering a very healthy EBITDA to Sales ratio of 12.2% and a ROCE of 18.4%. We find these productivity indicators highly useful in assessing and benchmarking our performance, giving a sense of how we measure up to our desire of being best-in-class. Obsessed about maintaining an ultra conservative debt profile, we prefer to use metrics such as Return on Capital Employed over the more commonly touted measure of profitability – Return on Equity, which does not account for the employment of debt in funding a company’s business. Maintaining a debt-light balance sheet meant that we repaid $11.2 million in bank borrowings and consequently, drove our debt-to-equity ratio down to 1%. Cash and its equivalents ended marginally higher than the year before at $53.7 million.

What I find more fascinating with the economics of our business is that we were able to achieve this in spite of our inventory growing by $40.2 million and our free cash flows tripling from the year before to $25.0 million. On a consolidated basis, our corporate net worth increased by $43.6 million to close at $293.2 million.

In light of this continuously improving operating performance, the Board of Directors is pleased to recommend a first and final dividend of 6.0 cents per ordinary share amounting to $14.1 million.

BUSINESS REVIEW

Tempus fugit…It is unbelievable how time flies when you are having fun. And in the case of The Hour Glass, we were having a ball! There were several noteworthy highlights this past year.

Watch Industry Growth
In 2011, global exports of finished watches from Switzerland advanced at a precipitous pace of 19.3% reaching an aggregate value of CHF18.1 billion. This rate of growth was breathtaking and its result, record breaking. It comes as little surprise that Asia contributed to the lion’s share of this absorbing 55% of the total value of watch exports and recording the highest yearon-year growth rate for any region of 25.6%, passing the CHF10 billion mark for the first time. The mainland Chinese watch buyers continued to assert their importance in shaping the luxury and specialty watch scene. We estimate that in 2011, their aggregate spend on Swiss watches accounted for CHF8.5 billion in net retail sales, up 21% from the year before. Having expressed in the past that our exposure to this nationality group was only 10% of Group revenue, I am pleased that management had extended that to 16% for the financial year just ended. This, I have to admit, was not entirely difficult because of the overarching societal trends developing in China itself. Our industry thrives in situations where there are high levels of income disparity. The bigger the wealth divide, the steeper the social gradient. The steeper the social gradient, the greater the status competition and in markets where the status competition is high, the demand for objects of prestige takes off. With the exception of Singapore, few other places in the world today can match China’s inequity in income levels.

Our Operating Performance
Chinese clients were not our only focus this past year. The performance of all our divisions from Australia to Japan also reflected this very positive upswing in business with most divisions registering high double digit sales growth. Financial year 2012 was also the first full year of operation for several of our boutiques, namely Malmaison by The Hour Glass at Knightsbridge, The Hour Glass at Raffles Place and the Hublot boutique in Singapore. It is evident that we are harvesting the fruits of our labour of the past two years and at the same token, establishing an excellent track record for the consistency in our approach and execution.

Our income grew faster than our sales. This is the direct result of how we have structured operating leverage into our business model, thereby dramatically improving the contribution margins to our businesses. It is a complex equation that our executive management team devotes an enormous amount of time to fine-tuning each year so don’t ask me for an explanation how we do this, it is a secret we guard with our lives.

Investing In Our Inventory Pool
As early as the second quarter of the financial year, we made a conscious decision to deploy additional capital into inventory. This was done after much analysis of both the macro drivers of the global economy and prevailing watch industry dynamics. Central banks around the world had been increasing overall money supply to their economies either through expansionary monetary policies or in some instances, pump priming. At the watch manufacturing level, input costs for each unit of production was trending higher due to capacity constraints, a shortage of skilled labour, increasing precious material prices and higher capital expenditure in manufacturing assets. During this time, there was a significant tightening in the supply of watches delivered to the multi-brand retail channels in the markets we operate in. Coupled with a strengthening Swiss Franc against all our reference currencies, we concluded that price increases were inevitable. Hence, we determined that our best defense against product price inflation as well as future monetary depreciation was to invest our funds into enlarging our inventory pool. This is to us a low risk asset class and exercise that, in the short to medium term, can be unlocked to benefit our core businesses. How long more we hold this view remains to be seen. We are hyper-vigilant to factors of demand and supply and will ensure that we adjust our business and financial strategies to protect and profit from the situation.

OUTLOOK

Multi-Brand Watch Retailing
The future of the multi-brand retailer has been repeatedly called into question over the past few years. Much has been written about it. It is clear that the two listed watch giants of Richemont and Swatch are pushing ahead with their verticalization agenda, incorporating a higher degree of industrial and retail assets within their respective groups. In the case of Richemont, they reported an excellent set of results for FY2012 where their retail push over the past several years has begun paying handsome dividends. Contributions from their group retail division grew 50% faster than their wholesale distribution unit. In Asia ex-Japan, where growth was highest, their turnover increased 43% year-on-year, much of which has been credited to the expansion of their mono-brand boutiques. Drawing from their published statistics, one can postulate that over the past two years, Richemont’s retail capital expenditure in Asia ex-Japan was in excess of €230.0 million. The majority of which was invested in Greater China. In the same corresponding period, the capital expenditure for all nine listed multi-brand watch retailers in Asia only rang in at €120.0 million.

Many watch brands, whether they are group-owned or independent, continue to insist on increasing their in-store visibility and failure to find a meeting of minds may result in the termination of that specific dealership; often regardless of the tenure of pre-existing business partnerships. In many cases, these brands are also actively reducing the number of points of sales globally as they redefine their wholesale distribution strategy to match the slowing capacity growth of their factories and ambitions of their directly owned stores. Incidentally, the openings of Richemont’s direct owned stores versus the mono-brand boutiques they assign to be managed by a third party vendor grew at a rate of 4 to 1.

The prognosis from market observers is that our days as multi-brand operators are numbered and from the above analysis, I can understand why many of our peers may be worried by this. But for now at least, The Hour Glass remains a contrarian as this development is certainly not new to us.

We had identified this present pathway as a strategic reality more than a decade ago. The logos behind our thinking then was simple enough and holds true till today. At the beginning of the new millennium, when the ownership of the brands and manufacturing assets began consolidating, we determined that once that cycle was completed, the first initiative of these principal brand owners would be to establish their own wholesale distribution offices in key markets. When that was done, they would then strive to fulfill their last mile delivery to the end consumer in the form of direct retail penetration. This has been an objective that most major international brands have been pursuing for over a decade, the only difference is that it has now become more visible over the past several years as they accelerated execution. But this is the retail paradox. Our growth in revenue and profitability over this same period with these same brand partners have been in the multiples. So judging from our experience, and with a caveat that as long as the brands themselves engage in fair retail practices, I opine that parallel tracks towards luxury watch retail development can harmoniously exist between multi-brand retailers and brands directly operating their own stores.

A New Roadmap
Since 2009, we have re-invested $111.0 million in retail capex and inventory and continue to produce a growing cash surplus. Our biggest management challenge today is not to lose discipline in how we execute on our time tested approach of fundamental business management. Knowingly holding back from growing at breakneck speed during times of expansionary markets, and maintaining high profitability during times of crisis. When we think about doing things for the longer term, we end up deliberating more, we do things slower but we make sure we do them right. We will fire one bullet, calibrate, fire again, recalibrate. Once we have a close enough grouping, off goes the cannonball. Today, we are in confident position to fire off cannonballs and if FY2012 can be considered a year of operational stabilization for the Group, then FY2013 will mark the beginning of a new expansionary phase. In light of this, we have initiated a business development road map for the coming twelve months.

We continue to push ourselves to think hard about the future and to be strategically on top of the most relevant long term trends even before they become conventional wisdom. Our view is that the secular trends for Asia are so strong that regardless of the short term gyrations in the global financial markets, our economies are on a gradual and positive trajectory. Our developmental road map builds off this. It entails a two-pronged strategy of bulking up on our presence in key markets of Singapore and Hong Kong as well as a push into a new, largely untapped market such as Brisbane, Australia.

Singapore is poising itself for take-off. The country continues to augment its positioning as an attractive private wealth management centre and a luxury travel destination. The two integrated resorts have positivelyadded to this perception and we need only to look to Macau for inspiration of what the luxury retail sector could grow to become. As an Asian city, luxury watch sales in Macau is second to that of Hong Kong. This was a development that had unfolded gradually over the past decade but arguably, was a trend one could have identified early on. The keys to their growth is their geography and the gaming industry. Macau has China at its doorstep and generated US$33.5 billion in gaming revenue from its 33 casinos in 2011. Singapore, like Macau, has a natural hinterland of 500 million people in ASEAN. With 2 integrated resorts, Singapore produced US$5.7 billion in gaming revenue and we are only just getting started. The possibilities of what could be are truly staggering. Our business strategy for this market sees us closing the loop on what we define as the Orchard Road Quadrangle. The Orchard Road quad is a one square kilometer area of shopping malls anchored by ION Orchard, Tang Plaza, Ngee Ann City and Paragon that on aggregate account for 80% of all luxury goods sales in Singapore. In September 2012, “More Passion” by The Hour Glass will throw open its doors at Paragon ensuring that we have the most diverse multi-brand watch retail platform in the Orchard road belt.

Hong Kong, whose watch market is three times the size of Singapore, is another territory we have been desirous of expanding our presence in. After a decade and a half of operating out of a single store, we are proud to announce that by November 2012, we will be opening a second point of sale in the Landmark in Central, Hong Kong. We are absolutely delighted in securing a location in what can only be considered as Hong Kong’s most prestigious shopping centre and we will be doing so with our deeply valued long-term partner, Patek Philippe.

After two decades of being present in the Gold Coast, Australia, we have finally decided to relocate our business to the prime retail centre of Brisbane, Edward Street. The local market is now finally ready for a retailer of our quality and positioning and we anticipate that this move will reap significant returns in the decades to come.

Building a Great Company
We have spent the past 32 years building a trusted and reputable brand, a good franchise and a fantastic business. Now that we have achieved a strong and stable base, our aim is to devote the next decade to constructing a great company. We have all the primary ingredients in place to accomplish this. The right people in leadership positions, enduring corporate values with an emphasis on the development of both individual and institutional character and credibility, a strong culture of familial care and, a commitment to our long term goal of being the best-in-class.

I am particularly grateful for the team that we have in place. A group of loyal, enterprising and committed leaders and I have not seen our management, frontline and support teams operating more efficiently and more cohesively as a unit as I have now.

In terms of organisational development, I have placed tremendous emphasis on the building of character and credibility. These two cannot be understated in the workings of our industry. The specialty and luxury watch retail trade is an emotional business. It is a business that requires a lot of trust in handling the type of specialized brands and products that we do. The watch business is also a trans-generational business where our credibility and reputation means everything and once it is damaged, will be very difficult to claim back. That is why the foundations of trust we build with each other within the company, amongst our brand partners and with our customers are of long term importance.

The executive committee and I spend many hours debating the compensation and welfare of our team members, especially ensuring that those at entry level positions in the company can take home enough to comfortably support themselves and their families. I was surprised but happy to hear from our Managing Director for Singapore, that the head of an international luxury brand had commented to her that they could not afford to hire The Hour Glass retail staff because they were amongst the best rewarded in the industry. This is reflected in our Group staff turnover rate where the average tenure of employment is 9 years. We believe in the ideals of a corporate family, in the value of human relationships and we will stick with our trusted team members through the good times and bad.

At The Hour Glass, our corporate actions are not governed by the short term ebs and flows of the capital markets, of quick one time returns whose benefits are not shared. We are not willing to trade in and out of the foundations of goodwill we have established over the past 32 years. We fundamentally do not believe this is how great companies behave, nor how they are built.

ACKNOWLEDGEMENTS

It has been brought to my attention that from time to time, it is appropriate to embellish the Chairman’s statement with accolades we receive as a company and for 2011, The Hour Glass was conferred two very important ones. Malmaison by The Hour Glass at Knightsbridge won the Singapore Retail Association’s Best Retail Concept award whilst L’Atelier at ION Orchard won the Most Innovative Retail Concept award from FAPRA, the Federation of Asia Pacific Retailers Associations. These two projects have been lauded by clients and business partners as two of the most unique watch retail stores in the world.

I wish to thank the Board of Directors for their guidance and business insight, our principal business partners and clients for their unyielding support and most importantly, The Hour Glass team, who for 365 days of the year, strive to make this an incredible organisation to belong to.

In closing, I want to reinforce this message to fellow shareholders: I have never been more confident about the future of The Hour Glass. We have the right people in place, a strong organisational culture and a commitment to being the best-in-class. We remain focused and resolute in the pursuit of our organisation’s purpose with passion. Our objectives are set, our sights are trained and we are rearing to go.

Henry Tay Yun Chwan
Executive Chairman
31 May 2012