Annual Report

Annual reports and statements




Chairman’s Statement


DEAR FELLOW SHAREHOLDERS,

I am pleased to report that for the financial year ended 31 March 2015, The Hour Glass maintained its forward momentum, surpassing the performance benchmarks we established in the last financial year. Revenues over the period grew by $52.1 million, or 8%, to $734.9 million whilst net profit after-tax increased 6% to $59.7 million. Notably, these results were attained at a time when the majority in the Asian specialty luxury watch retail industry faced sharp declines in both sales and profitability.

During the year, we deployed $87.2 million of capital adding to both our property portfolio and expanding our working capital base. Investments made include enhancing our retail store network and along with that, widened our inventory pool. We concluded a bolt-on acquisition of Watches of Switzerland – a 50 year-old strategic peer based in Singapore for $13.3 million and purchased two Australian properties – 192 Pitt Street, an 11,000 square feet heritage listed retail and commercial property in Sydney sitting on one of the world’s most important retail intersections for $37.2 million and 201 Elizabeth street, an 8,000 square feet retail property in Brisbane’s prime luxury retail precinct for $6.3 million.

Principally, we pursed this aggressive but calculated capital investment strategy because despite the uncertainty that shrouds the global economy, we continue to keep a keen eye on the future. We believe that with these business and asset acquisitions, we have laid the building blocks for growth for the next decade and beyond. And even though the Group increased its borrowings to $61.2 million, we have maintained a conservative debt profile with a debt to equity ratio of 15% whilst preserving our net cash position with cash on hand on a consolidated basis at $98.3 million.

For some time now, the Board has been identifying means by which to enhance the liquidity of our company’s shares in the market. One such measure that was proposed, and subsequently approved by shareholders during the financial year was the sub-division of each ordinary share in the issued share capital of the company into three shares; raising the number of outstanding shares in the company from 235 million shares to 705 million shares. I take pleasure in reporting that this action has demonstrably produced a positive outcome for all shareholders. On a consolidated net asset basis, our corporate net worth increased by $42.9 million to $408.7 million or $0.58 per share on a post sub-division basis. In view of our robust operating performance and modestly enhanced earnings, the Board of Directors is pleased to recommend a first and final dividend of 2.2 cents per share amounting to $15.5 million.

GENERAL COMMENTARY

We are presently experiencing a world in rapid transition. A world in which shifting geopolitical realities and new operative norms have to be considered. Where volatility and the velocity of change are establishing themselves as the baseline for market activity. And where widely held assumptions about people and place have to be reevaluated and strategies for our business’ sustainability and growth refined. In mature Asian countries such as Hong Kong and Singapore, hot button issues such as rapid asset inflation, widening income disparity and rising domestic friction between their citizens and foreigners had dominated the public sphere; prompting these governments to introduce policies aimed at addressing those concerns. Many of these measures have had a dampening effect on business confidence, consumer sentiment and spending.

In Singapore for instance, the move towards a reduction in the perceivable presence and participation of foreigners in our society and a push to strengthen the Singaporean core led to a tightening in the growth of foreign worker quotas. This is an important policy pivot for Singapore and the positive results will only be realised in the medium to long term. For now though, it has crimped capacity, increased the cost of doing business and subsequently decelerated the growth of the economy. It is also most disappointing when in the case of Hong Kong, fuelled by multiple public protests, Mainland Chinese shoppers have been made to feel unwelcome. And the consequence of that? This group of visitors simply take their business elsewhere evidenced by the near doubling of Mainlanders to destinations such as Japan and Korea.

On a lighter note, the state of affairs for broader Asia is not quite as dire. Even with its multitude of domestic challenges, in 2015, China displaced the United States as the world’s largest economy. Additionally, the combined wealth of Asian highnet-worth individuals will for the first time in modernity, exceed those HNWIs in America. By 2022, China’s middle class will have grown to 630 million, half its population, and by 2030, Asia will account for two thirds of the world’s middle class. Five years from now, the number of Mainland Chinese travellers will double to reach 200 million per annum, increasing the absolute quantum of the travel retail spend. Such tectonic shifts in the centre of the world’s economic power and gravity of wealth pose an incredible opportunity for luxury businesses such as ours. But that does not mean that our journey will not be fraught with multiple speed bumps.

The Hour Glass too is at an inflection point. Our management teams have matured and most have over two decades of experience under their belts. All our subsidiary businesses are profitable and things are beginning to feel uncomfortably comfortable. We have reached that critical juncture where for us to take The Hour Glass to the next level, we will have to tackle incumbent mentality, outsmart our biases, broaden our thinking and resurrect that pioneering, entrepreneurial spirit. We will have to choose not to cling to the old adage and will need to once more finesse our methods to the new rules of the game.

What will The Hour Glass’ brand symmetry be a decade from now? How will the new architecture for watch retail distribution in Asia transform itself? Will bricks and mortar retail still be a viable business model in ten, twenty years? What of omni-channel retailing? Which are the key partners we should be aligning ourselves with? Where are the most valuable customers going to come from in the next 20 years? Who are they? What do they desire? How do we engage in a conversation with them? We do not have definitive answers to all these questions but we are currently processing and I’m certain in due time, we will have greater clarity.

Pricing Dislocations

The past year had been particularly turbulent with two significant factors negatively impacting the state of the Swiss watch industry. The first being the Swiss Central Bank’s decision to abandon the Swiss Franc peg to the Euro in January 2015; a policy that had been in place for a little over three years and secondly, Mainland Chinese consumers who have retreated from overt displays of wealth and their conspicuous consumption of luxury goods. Disconnected events but associated in that they both have heavily influenced the demand equation, triggering acute remedial action by brand owners. One such measure – global pricing resets.

Post de-pegging of the Swiss Franc, a wave of price realignments were set in motion with an objective to equilibrate the global parity of retail prices. This retail price dislocation between Europe and Asia was initially distorted with the strengthening of Asian currencies against the Euro over the last five years. It created imbalances in prices between markets and especially so in South-East Asia and Hong Kong. In April 2015, eleven of Hong Kong and Macau’s leading watch retailers jointly signed a letter petitioning for all watch brands to reduce retail prices in these two Greater Chinese territories. The reasoning they put forward was that sales had dropped by at least 40% in Hong Kong in the first quarter of 2015 as PRC shoppers bought less due to price imbalances against other desired shopping destinations such as Europe and Dubai. For the most part, their requests were accommodated.

Every brand will have their own set of circumstances that dictate a particular course of marketing action. We do not believe that there was a multilateral consensus amongst the key actors in the luxury watch world reducing retail prices in Asia only because growth has tapered. With that said, a softening of the market had been a key consideration for many and our overarching view is that the contraction in the absolute number of PRC buyers purchasing luxury goods have hurt both brand owners and their partners.

The PRCs today are also no longer prepared to pay what we term as ‘The Chinese Premium’. This premium existed in all forms of goods consumed by the Chinese Mainlanders, but the luxury market amplified this notion. Premiums levied could be as much as 15% to 35% in many cases and could continue so long as buoyant Chinese demand outstripped the ability to supply; and the PRCs were buying from all over the world. But today, they have transformed into sophisticated world travellers and shoppers and are no longer prepared to pay those premiums. What is more, the rest of the world’s luxury consumers have definitely been irked by it as they are also similarly taxed. This is not the first time we have witnessed this premium. To a lesser degree, in the early 2000s, there too was a Russian premium on high valued luxury watches but that dissipated when the Russian economy fell on hard times in the mid-2000s.

The action of the Swiss Central Bank and the rightsizing of demand to the world’s new consumption reality was an opportunity for many brands to ‘reset’ their global retail prices, bringing markets closer in line with one another. My opinion is that this action signals a recognition that the world has become one gigantic shopping centre. That the consumer’s access to technology and hence global pricing information is readily available and most important is that regardless of nationality, they demand honesty and equity in how they are treated as global shoppers.

Leadership and Management Succession

Leadership succession and management transition in a family enterprise continue to be a priority for our executive management teams. We are bound by aligning our different interests around our values, culture and vision for the company. We focus on building sustainability for the next decade, for the next generation. We think long term because we think hard about the legacy we will leave behind. Therefore, every one of our senior executives and line managers have been selected on the basis of a strong cultural fit with The Hour Glass.

Over the past five years, I have been reinforcing the need to build successive layers of management bench strength and never before has that direction been clearer than when we experienced the sudden passing of our General Manager for Malaysia Mr Yon Shee Guan. Yon, as he was affectionately known to his colleagues, epitomised The Hour Glass lifer. He joined The Hour Glass Sdn Bhd twenty three years ago first as an Admin and Finance Manager before rising through the ranks to become country head for Malaysia. His jovial, can do attitude was infectious and he will be dearly missed by us all. We were fortunate that we were able to swiftly on-board an experienced individual with over a decade of specialty luxury watch retail experience into his seat. But we may never always be so fortunate and so, will be intensifying our organisational development efforts in this area.

One Hundred and Seventy Five Years

On behalf of The Hour Glass, I wish to congratulate the Stern family – Philippe, Gerdi, Thierry and Sandrine for guiding the House of Patek Philippe to its 175th anniversary. Many industry pundits claim that Philippe’s greatest achievement is to have brought Patek Philippe into the modern era of watchmaking and in a span of some forty years, cement its position as the platinum standard in high horology. I agree. But I also believe he has accomplished something even more significant. Philippe has successfully orchestrated the seamless transition of the leadership of Patek Philippe to the hands of its fourth generation owner – his son Thierry. In researching succession in family businesses, the Harvard Business Review concluded that only 3% of companies ever make it to this degree of transition. So what Philippe has done is definitively remarkable.

The genesis of our relationship with Patek Philippe began 60 years ago between my father and Philippe’s father and hence, this partnership we struck with the Sterns has now transcended business. It is the bonding of 2 families over 3 generations. A bond which began as a business relationship, and that over decades, has transformed into one of friendship. A friendship built on the bedrock of trust and shared values. Our companies and management teams are also built around a values based system. The first and most important principal is that of integrity. Where our word, when given, is our bond. Secondly, we construct long term goals, thinking and planning in decade long trajectories. Both pursuing our aim of providing quality to our clients. To be nothing less than the best in-class. This trust and mutual respect for each other can only be developed through the test of time, through actions and deeds. We have been through multiple global economic challenges together. Each time, emerging from them closer and in a stronger position. Lastly, we believe in commitment. And at The Hour Glass, we have vowed that we will do whatever is necessary to always positively project the brand of Patek Philippe and protect the interest of the house. With these time-tested principles in mind, we look forward to a continued and meaningful partnership for the generations to come.

ROUNDING OFF

High performance organisations share a common trait. They build cultures of introspection and trust, never losing sight of their organisation’s purpose. At The Hour Glass, I believe we have a team that is self-aware and with the resolve, stamina, vitality and industry to continue baking a layer cake of success. We realise that it is not our size that defines who we are but our people. From our client facing goodwill ambassadors to those who support quietly in the background. By extension, this also applies to my fellow independent Board members who continue to demonstrate incredible patience in the management of board affairs, offering incisive strategic guidance and lifting the standards of governance in the company. Thank you all for contributing to our Group’s development as we proceed forward, upward, onward.

HENRY TAY YUN CHWAN
Executive Chairman
2 June 2015


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