Annual Report

Annual reports and statements




Chairman’s Statement


DEAR FELLOW SHAREHOLDERS,

It is with distinct delight that I report record revenues and profits for the financial year ended 31 March 2014; achieving one of the best overall performances in the Asian specialty luxury watch retail industry. This is especially meaningful because this set of results also marks the Group’s 35th year in business.

Our sales grew by a convincing 13% to $682.8 million with net profit after-tax rising 4% to $56.4 million. Despite a subdued business environment, these increases reflect that The Hour Glass’ fundamental strategies continue to remain relevant as organic growth from our investments in key markets began to flow through. We remain satisfied with our rate of advancement, making gains in our watch retail market share with the execution of intensive sales activation campaigns throughout the year. This translated into a positive 5% increase in unit terms whilst we continued to upsell our offer by lifting average unit retail prices 8%. Of greater importance is that we captured this market share profitably.

On the back of significant upward pressure on domestic wages and rentals that account for close to 65% of our total increase in expenses this past year, management were extremely conscious of capping the ratio of our total operating expenses to sales below 14%. These actions contributed to the stability in our operating profit of $67.8 million. Combined with an enhanced discipline towards working capital management and a relentless effort to improve inventory productivity, raising rotation rates from 1.7 times to 2.0 times while driving inventory values marginally lower, we tripled our cash flow from operations to $77.6 million. Consequently, we enjoyed the strongest increase in free cash flows amounting to $53.1 million for the year, allowing the Group to accumulate cash on hand on a consolidated basis to $116.4 million.

In my statement last year, I had promised we would do three things – improve our stock turn, reduce our inventories and generate more free cash. We delivered. The state of our financial strength – large cash surpluses and low levels of recurring short term obligations is a position our Group chooses to maintain, especially as we anticipate that we will be facing a progressively testing market.

On a consolidated net asset basis, the Group increased its corporate net worth by $35.2 million to $365.9 million or $1.56 per share. Considering our good overall 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.

GENERAL COMMENTARY

The past year threw up many unexpected events making an already difficult business environment even more operose. They range in scope and geography. From the introduction of Smart watches and its prospective impact on the Swiss watch industry, Abenomics and its role on lifting the veil on consumption in Japan, the Chinese malaise in part attributable to President Xi Jin Ping’s anti-graft, anti-extravagance campaign, the spending behaviour of the Chinese when they travel overseas, and finally, the near term effects of the recent political storms blowing through Thailand. All of which have a direct influence on the Group’s businesses.

CREATIVE DESTRUCTION

2013 will be remembered as the year of the “Smart watch” panic. For those unfamiliar with the product, a Smart watch is a wrist worn device that is meant to provide the wearer with a host of personalised information from whether your heart is continuing to beat, the number of steps you take in a day to the number of hours you have slept. It is estimated that Smart watches will be a US$ 2.5 billion industry before this year is out. Nearly every specialist trade publication has equated the impending introduction of Smart watches to the Japanese quartz watch revolution that decimated the Swiss watch industry in the 1970s.

By 1980, following the launch of these highly accurate quartz watches, demand for Swiss pin lever watches had plummeted. As a result, Swiss watch employment declined by two-thirds from 90,000 to 28,000 as 60% of all watch companies shuttered their businesses. The remaining manufacturers disposed their tools and equipment required for the manufacture of mechanical timekeepers, replacing them with machinery to produce quartz watches. At that moment, the field of high horology existed only in the memories of a few. Why make a mechanical chronograph to record units of time when a quartz version by Seiko was infinitely more accurate? What was the need for a minute repeater to chime the time of day when its functional other in quartz is 1,500 times cheaper to buy? In short, the Swiss watch industry simply gave up.

It took the industry close to a decade to react and find a solution to the Japanese incursion and thankfully, there were a few good men in the industry who held onto the belief that the battle was all but lost. Believing that the beauty of mechanical timekeepers lay not solely in their functional utility, in their instrumentation, but in the patrimony of a four hundred year culture and tradition. Believing that the soul of the human being injected into the craft of a timekeeper inspires emotions that an entirely mass produced, machine assembled object could not.

In the commotion of the Swiss watchmaking crisis, industrialists the likes of the late Nicolas Hayek directly confronted the Japanese watch companies with the creation of Swatch. Andre Heiniger, the late CEO of Rolex remained resolute that the quartz craze was temporal and never once deviated from their developmental path. And Philippe Stern, the Honorary President of Patek Philippe, who too held a similar contrarian conviction began in the mid-70s laying the foundations for the resurrection of the high grade mechanical watch. In that era, Patek Philippe was already regarded as a maker of watches of the highest quality. But it was not until 1989, on Patek Philippe’s 150th anniversary, that Philippe was able to reveal his vision for mechanical watchmaking. For the anniversary, he introduced the world to the Calibre 89. A watch which took nine years to develop and produce and which occupies a place in the history books as the world’s most complicated watch. Arguably, this bold statement at a time when many doubted their estate made the Swiss watch industry sit back, reflect on their position and eventually kick-started a renaissance in fine watchmaking that continues till today. The outcomes have been staggering with the Swiss watch industry growing from CHF 2.8 billion in export terms in 1980 to a record CHF 21.8 billion in 2013. And Smart watch or not, the industry continues to extend itself.

THE LAND OF THE DRAGON

The effervescence and euphoria of the past six years have given way to a strong dose of sobriety in China as luxury industry growth rates continue to decelerate and trend to the negative. A policy overhaul aimed at steering its economy away from an investment dependent, export oriented growth model, a credit squeeze as authorities clamp down on the shadow banking system coupled with concerns stemming from an anti-corruption drive and the domestic stigmatisation of opulence are driving mainland Chinese consumers to alter their purchasing behaviours. Not only are mainland Chinese retailers feeling the brunt of this rebalancing but so too are those in tourist destinations such as Hong Kong, Macau and Taipei. Evidence of this is the closure of mono-brand boutiques opened during the market fuelled hubris and the drop in the average net retail spend.

The mainland Chinese customer continues to contribute to 20% of the Group’s direct sales as we avoided placing emphasis on markets in the vicinity closest to China. Hence, we have been sheltered from this decline. With up to two thirds of the 97 million travelling mainland Chinese aiming to purchase luxury products when abroad, we are well positioned to leverage off our stores in their new playgrounds of Australia, Thailand and Japan.

THE LAND OF THE RISING SUN

2013 also marked Japan directly benefiting from Prime Minister Abe’s highly lauded three pronged economic programme which was further bolstered by a recovery in demand in Europe and the United States. One key strategy was to reverse past year’s excessive Yen appreciation by more than 20%. The positive effect of this meant that our sales to non-Japanese clients consisting primarily of mainland Chinese and Thais doubled from one year to the next and when compared to FY 2012, increased by a factor of six. More liberal visa approvals coupled with on-site, duty-free purchases has made Japan an easier destination to access and shop. Abenomics also led to improved business and domestic consumer sentiment and with the knowledge of an impending consumption tax hike from 5% to 8% in April 2014, a first in 17 years, our clients adopted an attitude of “Buy first, cry later”. In sum macro-economic forces over the past year contributed positively to The Hour Glass Japan achieving its best set of results since inception.

THE LAND OF OZ

The Hour Glass first entered Australia over 25 years ago opening our first boutique in the Gold Coast, Queensland. We had initially travelled there on vacation and were taken aback by the influx of Japanese visitors, all drawn to its white sand beaches and smile fixating climate. Within five years, we had punched into the core cities of Sydney and Melbourne and as of last year, Brisbane.

In the eighties and early nineties, luxury retail in Australia was Japanese-centric. Waxing and waning with the state of the Japanese economy. In the new millennium, luxury consumption bore an East Asian flavour as immigration into the country accelerated. New Asian migrants, especially the mainland Chinese has resulted in Mandarin becoming Australia’s second most widely spoken language. The story of Australia since is one of rapidly rising affluence amongst its resident population, the result of a resource boom and real asset inflation driven by a low interest rate regime, real estate developers and yield-hunting Asians. Australians who once were disinterested in the ownership of luxury objects have begun to develop an affinity for the pleasures that may be attained.

The development of the travel retail market is also intensifying. A weaker Australian dollar relative to Asian currencies have made the country a more attractive holiday destination. What particularly augurs well for our business is that 43% of all inbound visitors in 2013 were of Asian origin. Not surprising, the largest group were the mainland Chinese. Property developers and gaming operators are seizing this opportunity by committing investments over A$10.0 billion over the next five years in New South Wales and Queensland alone with Sydney set to have the world’s first seven-star high roller casino.

We view Australia to be a prime destination for this group of travellers because as the Chinese elite and middle-class travel, apart from shopping and leisure gaming opportunities, one of the things they embrace is the natural environment. Something which Australia has an abundance of. Based on our assessment of the future prospects of this market, we aim to deploy up to $30.0 million in capital expenditure and working capital over the next five years. These funds will be channelled into the refurbishment of our existing retail stores in both Sydney and Melbourne, enlarging their overall retail floor plates as well as accelerating the pace of our retail network development throughout the country. We are convinced that despite the recent drop in consumer confidence and the tightest federal budget in twenty years, Australia will remain in the medium to long term an attractive market for the Group to deepen its presence in.

THE LAND OF SMILES

It has been anything but a docile year for Thailand with the Kingdom once more experiencing great political upheaval, stifling the business investment climate and disrupting our day-to-day operations. Notwithstanding, we had continued with our network development programme completely refurbishing our three boutiques in Bangkok and recently, adding another two mono-brand boutiques by Rolex and Hublot in the newly opened Central Embassy. Our plan by financial year end 2015 is the opening of another two stand-alone boutiques at Emquartier in Bangkok and two Laduree points of sales at Siam Paragon. The closing tally is that we will be responsible for ten retail stores in both Bangkok and Phuket. In the five years of partnership with Prima Times, the total revenue for our Thai associate quintupled. Needless to add, this joint venture is a match made in horological heaven!

TO ROUND OFF

The Hour Glass celebrates its 35th anniversary in 2014 – exactly half my lifetime. When I cast my mind back to when Jannie and I founded the company, I readily admit that never in our dreams did we imagine we would build such an enduring enterprise.

Companies are like mini civilisations and can only evolve and grow because they have been able to successfully respond to challenges in the market environment. This recurring pattern of challenge and response continues because each successfully met challenge generates another challenge and yet another set of creative responses. This has been fundamental to the rhythm of The Hour Glass’ organisational and business development. The manner in which we have been able to embrace all of these cycles and continue to progress is because we are staffed by a group of committed and creative individuals who are knowledgeable, experienced and have a willingness to learn, re-learn and build an institution that will endure. One brick at a time.

I am grateful to have had such a team behind us throughout the years. One such member is Peter Chong, a senior sales consultant. At 77 years young, he has upgraded his skills, remaining relevant by becoming computer literate, learning how to email and process transactions online. Peter continues to be active, is still in the front line selling, training younger members of our team and loving every moment of it. He tells me that being of service to his clients is what motivates him to get out of bed every day. Peter is a colleague I admire and someone whose attitude is the embodiment of The Hour Glass spirit; that one is never too old to learn new things 😉

And in that same spirit, I wish to thank my fellow board members who remain paragons of wisdom, our brand and business partners John Glajz and the Thamavaranukup family from whom I constantly acquire nuggets of knowledge and our clients whose passion and commitment are the very reason for our success.

Henry Tay Yun Chwan
Executive Chairman
30 May 2014


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