DEAR FELLOW SHAREHOLDERS,

For the financial year ended 31st March 2021, the Group recorded a 1% decline in sales to $742.9 million whilst profit-after-tax rose 9% to a new high watermark of $84.5 million. Given the challenges the world faced this past year, we consider our financial performance a hard-fought, rewarding outcome.

Two factors contributed significantly. Firstly, the uncompromising support afforded by our principal business partners in ensuring a constant supply of watches despite an early breakdown in global logistics. And secondly, our management team’s celerity in pivoting to crisis management mode, then devising and effectively executing our post-lockdown business recovery plan. The objective was squarely focused on reigniting sales momentum, ensuring that once commerce was legally allowed to restart, our watch specialists would be “retail fit” and the Group would be first off the blocks.

Throughout it all, we continued to deploy capital into opportunities we believe will benefit our business in the long term. To this end, amid a 110-day lockdown in Melbourne, we successfully acquired 139 Collins Street for A$68.0 million. 139 Collins is a heritage-listed retail and office building presently tenanted by Louis Vuitton. Regarded by locals as the crown jewel of Collins Street real estate, it was a once-in-a-generation opportunity that will become one of our bedrock assets across generations. As is the case with investment properties, there will be periodic adjustments to account for changes in the valuations of our investment properties and this year, our balance sheet took a negative, non-cash adjustment of $10.0 million, or 1.5% of our net assets. In spite of this, we continue to remain confident that the long-term value of our assets will be realised in time.

On a consolidated net asset basis, the Group increased its corporate net worth by $72.2 million to $680.0 million, or $0.97 per ordinary share. During the financial year, an interim dividend of 2 cents per ordinary share, amounting to $14.1 million, was paid. As the second half of the financial year rolled on and our business recovery plans yielded   early   wins,   our   prognosis of improving sentiment swung to the positive. Consequently, the Board of Directors recommends a final dividend of 4 cents per ordinary share, amounting to $28.2 million. Together with the interim dividend, the dividend for FY2021 totals $42.2 million.

GENERAL COMMENTARY

Starting this chairman’s statement with the pandemic is cliché but inevitable. Its scale and resulting disruptions to economies and societies are certainly beyond any crisis management exercise we had undertaken. While drastically unforeseen in most of the world, a pandemic of this magnitude was inevitable and merely a question of time.

Already in 2006, the World Bank produced a chilling report detailing the consequences of a severe pandemic – restrictions on travel, mass quarantines, limitations on social interactions, and closure of non-essential retail to combat the spread of infections. The paper also calculated the social costs and economic outcomes, forewarning of the pandemic inflation that would follow and modelling its impact on the global economy.

It is now evident in how the COVID-19 crisis unfolded that World Bank was right. Some nations took such warnings more seriously than others, namely Singapore, Hong Kong, Australia, and New Zealand. As a result, there is a vast gulf between countries in how they have handled the current crisis, impacting our ability to continue with our business differently across geographies.

OF PANDEMICS AND PRUDENCE

While I am not an epidemiologist, I am a medical doctor, which has helped shape my perspective on how the pandemic will unfold. The progress of vaccinations around the world has been patchy, with the effectiveness of such programmes hindered by diminished but continuing international air travel between most countries. The situation is made even more difficult by the multiplying strains of COVID-19, some of which have evolved to be more contagious and deadly.

Vaccine passports aside, before a vast majority of a population is vaccinated, the entire population remains vulnerable to imported sources of infection. The fact of the matter is plainly understood: COVID-19 is now endemic and will continue to affect our business unpredictably for the next 12 to 36 months.

In May 2021, almost a year after our inaugural 10-week circuit breaker in Singapore, it was one of these mutant strains that led to the reimposition of enhanced restrictions on social life and businesses. At time of writing, this new wave is sweeping through the Asia-Pacific. Kuala Lumpur is once more under a strict movement control order, Bangkok remains in a “Deep Red Zone”, and a state of emergency has been declared in Tokyo – all cities we are present in. So while we have experienced a robust rebound in sales, we are mindful that a transition to a post COVID-19 normal will be an arduous and fragmented journey.

OF TURBULENCE AND TRAVEL

The global personal luxury goods sector declined by 25% last year to €217 billion, but some marques, like Louis Vuitton and Ferrari, outperformed their peers.

The watch industry mirrored much of this in disparity of outcomes. Overall, the watch business suffered: Swiss watch exports fell by 21% in terms of value and 33% by volume, according to trade body Federation of the Swiss Watch Industry. This decline was uniform across almost every country except China, which enjoyed a V-shaped recovery starting in the second half of the year, culminating in a full-year rise of 20% in Swiss watch imports.

The negative export figures for 2020 obscured the obvious recovery in some countries, highlighting the clear shift eastwards in luxury goods demand as reshoring of Asian spending accelerated in the second half of 2020, putting most countries in the region, with the exception of Japan, back on a forward footing.

For the first quarter of 2021, it is noteworthy that the velocity of watch retail sales intensified as Swiss watch exports to China nearly doubled year-on-year. Even Hong Kong, one of the most battered of watch markets the past two years, staged a recovery to return to par for the first quarter.

Europe, in contrast, did not enjoy such a turnaround, with sales continuing to contract well into 2021. According to a recent survey of leisure travellers conducted by Global Blue, the Swiss tax refund company famous amongst shoppers, only 10% of Chinese travellers were prepared to return to key European cities such as Paris and Milan in the next 12 months. In fact, the survey predicted it would be 2024 before Chinese visitor numbers to those cities return to their pre-pandemic levels. The region’s undoing was its unhealthy reliance on tourist spending – by Asians in particular – meant the lack of high-spending visitors from outside Europe has hit hard. This will likely play out over the next few years, leaving it probable that the expansive network of stand-alone specialty watch and jewellery stores in Europe will shrink.

OF CONVERGENCE AND CLIENTS

Within the industry itself, it was similarly a story of winners and those that lost ground. Watch manufacturing shut down for about a quarter of 2020, corresponding to the decline in Swiss watch exports. For the strongest performing brands and those with far-sighted plans, the pandemic will be a blip. According to Morgan Stanley’s annual watch industry report, the production declines faced by Cartier, Patek Philippe and Rolex were in the low double digits whilst their sales continued to advance. The winners in short, gained market share in a year where the market as a whole shrank, which means the gains came at the expense of their rivals. The best performing brands continue to enjoy intensified demand well into 2021, which is reflected in record-low inventory levels and the multiple increase of interests being registered for their most sought-after watches.

Even within the most esoteric niche of the industry – high-end artisanal watchmaking – the polarisation is pronounced. Though not significant enough to move the needle in Swiss watch export figures, F.P. Journe posted a record performance that emptied showcases in all channels.

This can be explained by the simple fact that tastes are converging globally. There are individuals in every country wealthy enough to buy high-end watches and what they all desire are largely informed by the same images on social media.

We expect this disparate performance to continue, purely on the sheer strength of strategy amongst the winners. Despite being the best performers, brands like Patek Philippe and Rolex have remained steadfast and are committed to their long-term goals while rolling out products that are consistent, reliable, and marketable. In the same vein, we continue with our objective to deepen our commitment to these partners. Instead of being an emporium of choice, we prefer to be a purveyor of the best and the uncommon.

In both emerging and maturing Asia, a demographic shift is under way, accompanied by a generational transfer of wealth. According to the Global Wealth Management arm of UBS, there is a high proportion of 2nd and 3rd generation heirs in Singapore who are broadening their range of collecting – from the traditional, like contemporary art and watches, to the thoroughly millennial, like trading cards and sneakers.

We have also noticed this shift with a younger demographic walking into our boutiques post-pandemic, bringing the average age of our clients down by 30%.

In a survey of wealth managers to ultra-high net worth individuals conducted by Knight Frank, it was found that watches were the single most popular collecting category for 79% of wealthy Singaporean families, followed by other “passion” investments, with art and wine tied at 57%. Our own data bears this out: this predilection for watches as a collectible applies not only to ultra HNWIs in Singapore. Since June 2020, the year-on-year share of purchases by individuals residing in public housing against those in private homes increased their overall share of watch purchases by 10% on an enlarged base. This was surprising and we derive several insights from this set of statistics. Firstly, watches have transcended the luxury goods market and are increasingly viewed as a serious collectible and even a store of value. Secondly, our clients often cite the fact that a watch is a substitute for what would have been spent on travel. And lastly, crisis or not, the broader segment of middle-class Singaporeans remain financially sound.

OF TECHNOLOGICAL ADVANCEMENT AND DIGITAL LEADERSHIP

Since 2017, we have on numerous occasions discussed the digital transformation journey The Hour Glass has embarked on. Our ability to operate effectively during the pandemic is validation for the resources we deployed into making this a centrepiece of our business and organisational development strategy.

We are nowhere finished with our transformation and have reached the conclusion that once an organisation begins on this path, there will never be an end point. There will always be improvements to be made. As such, we have set ourselves a new goal. One that is still transformative, but much more definitive – working towards technological and digital leadership within the specialty watch retail sector. This informs our plans in the most widely discussed aspect of the watch retail in the past year – e-commerce.

COVID-19 catalysed online sales as companies raced to transition their sales to this channel as lockdowns set e-commerce is now everywhere, literally – from groceries to luxury automobiles. Bain forecasts a third of sales in luxury goods will be online by 2025, bringing forward its own, earlier prediction by a decade. To that end, Richemont invested heavily in e-commerce, acquiring both Yoox Net-a-Porter and Watchfinder, albeit without achieving a profit so far.

Again, there are nuances within the big picture. In our experience, we believe that e-commerce for luxury watches is not click-and-buy as one would do on Amazon or Taobao. Instead, it’s more click-and-reserve online, with the client then visiting a store to purchase and pick up the item. We concede that this might differ in big countries where distances are vast enough that visiting an authorised retailer is difficult. But in most of our markets, our boutiques are not far from the consumer.

We are investing behind technological applications to improve the organisation, communicate better with our clients, and to reach new clients. In that sense, technology enhances the physical business of retailing watches. And that approach echoes the focus of our key partners. Both Rolex and Patek Philippe are firmly committed to the bricks-and-mortar experience, with technology functioning as an aid.

That said, we believe e-commerce for new watches might have potential at the more accessible end of the market. With that in mind, one of our key partners, Tudor, selected The Hour Glass to roll out a pilot e-commerce project in Singapore that will then be debuted in all our markets. Sales transacted solely via e-commerce have been encouraging. Notably, despite the offer of a “white glove” delivery service, many clients unsurprisingly opted to conclude the purchase in store. We are studying consumer behaviour in this channel closely and are certain it will continue to generate greater interest and leads for the brand and the Group.

Technology can surmount many challenges for a client and in the daily operations of our boutiques. But technology can only solve so many of these frustrations, while also bringing along its own problems. So, technology and digital leadership must be about crafting a humanistic approach to the digital tools that we use to close the loop between the customer and our teams. This human element should never be ignored, especially in the specialty watch business.

ROUNDING OFF

On behalf of the Board of Directors and management of The Hour Glass, I wish to extend our sincere gratitude to all healthcare professionals and essential workers around the world who are working tirelessly to keep all of us safe and in the process, undertaking extraordinary risks to themselves and their families.

I also wish to  offer  our  deepest  appreciation  to our clients who have been so supportive of our business, and our long time business partners – Rolex, Patek Philippe and Hublot – whose teams on the ground have continued to ensure our boutiques are well stocked.

I would like to welcome a new board member – Mr Lock Wai Han. Wai Han is the chief executive of OKH Global who, in a prior role, managed the China business  of  CapitaMalls  Asia,  and  before that held various leadership positions over a 20-year career in the Singapore Government’s Public and Administrative Service. We value  the  breadth  of Wai Han’s public and commercial experience and look forward to his many years of active participation on our Board.

From the very moment the mechanical timekeeper was invented, its purpose was not merely to keep track of the passage of time, but also to synchronise the rhythm of work and life. Our team members go about their daily training and activities with discipline and rigour, which means that as an organisation, we have built up tremendous mental resilience. And when crisis hits, we know that we can resist it better, adapt and pivot quicker, but also accelerate and thrive coming out of it.

Twenty-twenty was a year where everything changed yet nothing changed. Our approach and methods of serving our clients have adjusted to the new reality, but we are pursuing exactly the same line of business, working with the very best brands to retail the watches they create and produce. We go about our profession increasingly with the aid of technology and digital tools, but still primarily via our bricks-and-mortar network to a largely local clientele. With this continued emphasis on the boutique experience, we believe that the essence of heartfelt hospitality in retail remains in the development of genuine human connections. People will always remember how they are treated and how you make them feel. Some things are better done the warm, old-fashioned way.

The world will eventually get the pandemic under control, some countries before others, but in the meantime, disruptions will continue. As an organisation, all we can do is maintain vigilance, with health and safety protocols in place to protect our clients and team members, while keeping agile in our response to sudden policy shifts. Most importantly, we maintain a cast of mind that is confident in the bright future that lies ahead for our industry and region.

 

HENRY TAY YUN CHWAN
Executive Chairman
28 May 2021