Annual Report

Annual reports and statements




Chairman’s Statement


DEAR FELLOW SHAREHOLDERS,

For the financial year ended 31 March 2018, the Group registered a 1% decline in sales to $691.6 million and grew our profit-after-tax by a modest 2% to $50.7 million. The Group has been able to not only weather the cyclical downturn that beset the global watch industry since 2012, but more significantly, it has maintained consistent profitability throughout this period: yielding $270.0 million in cumulative net profit- after-tax in the past 5 financial years. A rare performance in the context of the Asian specialty luxury watch retail sector.

The Group produced even stronger cash flow than the prior year, growing its annual free cash flow by 30.0% to $74.2 million with cash and cash equivalents closing at a historic $180.5 million. This is the result of an intensification of our operational oversight over our operating margins and the continued reduction in base inventory levels which saw total inventories decline by $24.9 million. As we begin a new phase of network enhancements and measured retail expansion, coupled with our overall inventory having been rightsized to our desired level of stock turnover, it is highly probable that this pace of cash generation will begin to moderate in the coming year.

On a consolidated net asset basis, the corporate net worth of the company rose by $28.7 million to $507.1 million or $0.72 per share. In view of the Group’s respectable financial performance, the Board of Directors is pleased to recommend a first and final dividend of 2 cents per share amounting to $14.1 million.

 

GENERAL OUTLOOK

The luxury watch market has enjoyed a pronounced turnaround in the last 12 months – driven by a strong global economy and revived demand from Chinese shoppers – proving that my outlook in last year’s Chairman’s statement was overly cautious. 2017 had started slow for Swiss watchmakers, with the value of watch exports inching up just 0.3% for the first six months of the year. However, by the second semester, exports powered to a 4.9% rise ensuring the year ended up when compared to 2016. This positive uptrend continued in 2018, with like-for-like exports rising 10.1% in the first quarter.

In fact, the swiftness of this market recovery appears to have caught many watchmakers, and retailers, by surprise. And it has inevitably lead to marked shortages for the most desired models, evidenced by the secondary market premiums over suggested retail prices which are at the highest levels in a decade. We expect the upturn to continue for the next 12 to 18 months.

 

Market Convergence

Despite the good news, the watch industry is still in the process of undergoing substantial change, with developments taking place that promise to shape the industry for decades to come. The premiums commanded by certain watches is reflective of a growing polarisation in the business between strong, successful brands, and everyone else. A handful of watch brands, including the likes of Patek Philippe, Rolex and Audemars Piguet which managed their brands carefully the past five years, staying disciplined in their approach towards consolidating their global distribution networks and ensuring that they neither build mountains of stock nor force feed the market with excess inventory during the slowdown, are emerging stronger than ever before. That means these brands have created sufficient tension between product distribution and client demand, and perhaps for the first time in their operating histories, are experiencing a similar degree of success across all markets globally.

Many of them have expressed a reluctance to increase production to meet demand and those who plan on doing so are only making marginal adjustments. Most are shrewdly tightening pricing structures while disrupting their own commercial channels by trimming traditional wholesale networks; and in particular, within the regions of Europe and the United States where as many as a third of retailers will be reduced. As both the world’s luxury giants – Louis Vuitton and Hermes – have demonstrated, fanatical control over distribution is the only way to build bulletproof brand equity while maintaining growth. And for third party retailers like The Hour Glass, the only way to ensure long term success is for us to forge indelible partnerships with the right brands.

 

The New New Thing

Seemingly more ephemeral yet of growing relevance to our business is the emergence of e-commerce – in all flavours and forms. In the 2017 Global Online Consumer Report published by KPMG that surveyed over 18,000 participants in 50 countries, the conclusion was that millennials no longer “go shopping”. Not because they have lost interest in buying but are in fact literally shopping all the time online.

Several notable developments in online retailing for luxury watches have taken place in 2017, and this is only the beginning. To start with, watch brands themselves have gotten into the game, none more decisively than Richemont. Over the course of the year several of its brands began selling online – only on their own websites – in a meaningful manner, offering a relatively wide variety of products in major markets like the United States and China. In fact, in May 2018 Richemont announced the introduction of Baume, a new brand catered to millennials that is available only online.

Last year, I had commented that Richemont had previously divested itself of its own online multi-brand platform and merging it with its direct rival Yoox forming Yoox Net-a-Porter (YNAP). In a dramatic about-turn in pursuit of its digital ambitions, Richemont acquired the whole of YNAP earlier this year, instantly making itself a key player in luxury e-commerce. And such is the nature of the tech universe where the operating bias of the sector encourages companies to perform strategic ‘pivots’ in order to maintain a nimble footing with other start-ups in the field. In Richemont’s case, it was a €2.7 billion pivot to acquire the remaining 50% of the business it did not already own. Whether YNAP becomes an online mall solely for Richemont brands, or something broader and potentially more influential, remains to be seen.

E-commerce is sufficiently lucrative, and inevitable, that even media platforms like American watch blog Hodinkee have embraced it. Beginning with pre-owned watches, in 2017, it was appointed as an authorised online retailer for a selection of watch brands including Nomos, Vacheron Constantin and Zenith. Its early success have prompted other watch media owners to follow suit as they perceive that this is a pathway to enhancing their revenues and hence, business valuations. This convergence of content and commerce is beginning to gain traction though the extent of converting the audiences of such sites into active purchasing clients is still in its infancy.

 

The New Old Thing

Inextricably linked to e-commerce is the pre-owned market and the secondary market, or otherwise more commonly referred to as the grey market. Ironically, that segment is further along than watch brands and traditional watch retailers themselves in exploiting the potential of online selling. This is because players in this arena do not have restrictions placed on their operating behaviours.

While auction houses and online marketplaces like Chrono24 have been in operation for several years, the major development in the space is the formation of organised, online specialists in pre-owned watches, and one that has otherwise has been a highly fragmented sector dominated by traditional brick and mortar mom and pop retailers.

The success of online pre-owned retail trading platforms vis-à-vis authorised “e-tailers” selling primary market, new watches is the simple fact that there is a universal value for a pre-owned watch. So whether the item is located in Singapore, Shanghai or San Francisco, there is a high incidence of pricing parity. Hence facilitating a healthy, global commoditised trade for them. According to our research, 80% of buyers in this segment are males over the age of 25 and who are prepared to spend anywhere between $10,000 to $15,000 per transaction.

To be successful here requires multiple streams of supply, in-house servicing capabilities and building synergies from such economies of scale. A pioneer in this field is U.K. based Watchfinder, with a reported annualised revenue of £86.0 million in the year to March 2018. A business recently acquired by Richemont. Enterprises such as Watchfinder have also long been a platform for less scrupulous brands to dispose of excess inventory by selling slow-moving new watches as pre-owned in an attempt to achieve a higher trading value for them. Private individuals may also use such sites to sell recently acquired, sought after watches at premium prices for profit.

Traditional watch retailers in Europe and the United States do often already have a pre-owned business operating alongside with their new watch business, similar to that of automobile dealers. This allows them to accept trade-ins of a client’s pre-owned watch to facilitate the sale of a new watch to them. Perhaps the most telling is the fact that some brands are dipping their toes into the pre-owned market. The most prominent being Audemars Piguet, which started experimenting selling used Audemars Piguet watches in Geneva. The initial results of such an operation have yet to be conclusive.

 

CE + CX

Whilst the industry’s focus is on creating a digital response to the disruption that technology and e-commerce are having on the future of the watch world, our response has been to spend the past nine months rebooting our attitudes and approach towards client facing interactions. How, and how often we engage our clients, and the service experience we provide them to gain more understanding of their needs and form even greater intimacy with those customers. We do this because we acknowledge what Four Seasons founder Isadore Sharp has often repeated, “The simple idea that if you treat people well, the way you would like to be treated, they will do the same.” It is therefore our organisational desire to build a high and consistent standard in every one of our boutiques within our entire retail network, with aspirations to be the Four Seasons of the specialist luxury watch retail industry.

 

ROUNDING OFF

Leadership rejuvenation at both the management and Board level have been a key agenda item for us as it is a process that requires a multi-year plan to execute. Most important is to identify the appropriate candidates bearing a similar shared vision, with the right cultural fit and then onboarding them into the organisation. I am therefore pleased to welcome Jeffry Lee as an independent director of The Hour Glass. With three decades of hospitality experience as Senior Vice-President at Hotel Properties Limited, building and managing some of the finest hotels in the world, Jeffry brings with him a holistic appreciation of fine watch connoisseurship and a deep understanding of experiential retail marketing, a key thrust for The Hour Glass.

I will also like to take the opportunity to thank three senior directors who have, and who shall be retiring from the Board. Firstly, Robert Tan, who had served with The Hour Glass for 18 years stepped off the Board this past financial year. Robert had performed his directorial duties with incredible distinction, offering wise and important guidance through several difficult market cycles and contributing to our present-day success. Philip Eng chaired the Audit Committee for 8 years and was conscientious about ensuring the implementation of an appropriate balance of corporate governance without stifling commercial and operational efficiency. His ability to execute these duties with diligence and even handedness shored up our standards of governance and raised the bar for both our audit and operations teams. Finally, Saw Phaik Hwa, who was instrumental in advancing our travel retail business in Phuket and whose incisive views on retail businesses promoted a better appreciation of the forces shaping our sector. All three directors will be missed for their experience and counsel.

Discipline is the bridge between goals and accomplishment. And as we set our sights on the objective of qualitative organisational development, I encourage my fellow colleagues to always strive to take the correct path. To exercise a discipline in the manner in which they improve their individual skill sets and to continue to fulfil an attainment for a better self. If we each begin to change the manner we think, behave and perform, over time, these changes aggregated will certainly morph The Hour Glass into an organisation we aspire to become.

 

HENRY TAY YUN CHWAN
Executive Chairman
31 May 2018


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