DEAR FELLOW SHAREHOLDERS,

For the financial year ended 31 March 2023, the Group continued its post-pandemic growth momentum, achieving an increase in sales of 9% to $1.12 billion with profit-after-tax rising by 11% to a high-water mark of $174.2 million. Cash and bank balances stood at a healthy $244.6 million whilst loans solely attributed to the purposes of the Group’s long term property acquisitions totalled $93.8 million.

Over the course of the financial year, the Group deployed a further $83.2 million in capital towards the acquisition of a prime commercial property in Brisbane, Australia, whose key long-term tenants include Hermes and The Hour Glass. The Group also continued its shareholder return programme by buying back $55.3 million of our own shares from the market.

On a consolidated net asset basis, The Hour Glass increased its corporate net worth to $774.0 million or $1.18 per share. During the financial year, an interim dividend of 2 cents per ordinary share, amounting to $13.2 million was paid. With an improved set of operating results, the Board of Directors is pleased to recommend a final dividend of 6 cents per ordinary share. Together with the interim dividend, the total dividend for FY 2023 is $52.7 million.

GENERAL COMMENTARY

The last 12 months have been tumultuous. An ongoing military conflict in Europe, an intensifying and era-defining US-China rivalry gathering force and, rapid monetary tightening whose unintended consequence led to a banking crisis in the West are just some of the events that have been punctuating the headlines; adding fuel to the global woodpile of anxiety. Contrariwise, the same 12 months have been nothing short of spectacular for the luxury watch industry – an unrivalled period of prosperity that has set a high bar for some time to come.

Swiss watch exports for 2022 grew 11.6% to an all-time high of CHF23.7 billion with all our principal brand partners reporting record sales. This is despite a steady decline in the number of watches Switzerland exports. Last year’s number was 15.8 million units, nearly half the total number of units exported in the year 2000. In other words, industry growth has been driven by higher value watches at the expense of more entry level Swiss watches. The compounded annual growth rate of watches with an export value above CHF3,000 (which translates into a public retail price that is roughly twice the value) over the last five years was 8% per annum, compared to just 4% for the broader industry. The implication of these statistics is clear: the premiumisation in the industry has led to a heightened sales performance for the luxury watch category.

This trend is also reflected in our results but, the tea leaves are also revealing a stark shift in the landscape. The spring of 2022 was the peak of the secondary market for luxury watches. This was followed by a swift and steep market correction that precipitated a decline in consumer desire and demand for watch purchases. It was this very growth in secondary market values that in part, lured newcomers into the hobby. Many of them motivated by breathless Bloomberg headlines proclaiming watches to be a better investment than any other asset class.

With the most desirable sports models featuring integrated bracelet designs selling for four to five times their retail price at the peak, deploying cash into watches was a no-brainer. Now that the premiums-to-retail on the secondary market have corrected – but not entirely disappeared yet – buyer sentiment is returning to pre-pandemic normal. The over-hyped secondary market for watches was, like everything else, frothy over the last three years and was a period which was also spurred on by over a decade of ultra-low interest rates. Cheap financing and new money printed on top of that created a wave of cash that had to be spent. That has now ended decisively, and its effects are only starting to be felt across all asset classes, including watches.

BUSINESS OUTLOOK

The near to mid-term prognoses are not shaping up to be much better than the recent financial year past. Rising rates, or simply current rates staying where they are, might imply more problems at major financial institutions, curtailing lending and spreading defaults across sectors – with the tech sector already bearing the brunt of it. Rising rates may also lead to more disruptions in commodity markets causing inflation to remain persistent. Already the current high levels of inflation have caused social and political troubles across the world, particularly in developed Western nations. The storming of the LVMH headquarters on Avenue Montaigne by Parisian protesters in April 2023 was symbolic of the growing popular  anger  against  the  wealthy.  Increased geo-political tensions including the continuing war in Ukraine deeply worry our Swiss watchmaking partners. Adding to those troubles is the situation in the Taiwan Straits which is leading them to conclude that the rise of the Asian luxury markets will be fraught with greater challenges and discontinuities, affecting their judgement to lean heavier into our region than otherwise would have been the case.

Apart from promoting horological culture, we are also in the business of advancing hopes and dreams. And in this dream, a potential bright spot for the watch world was the reopening of the Chinese economy after three hard years of lockdowns. This led to hopes of revenge spending of the sort that was seen in the Western world, particularly the United States, as it emerged from the pandemic. Nothing of the sort happened, with the recovery in domestic consumption and international travel being modest at best. Some of the factors weighing against a strong recovery in China include the continued malaise of the property market, with both developers and local governments carrying too much debt, as well as the rising youth unemployment rate, which hit 20.4% in the first quarter of the year.

For the watch industry specifically, the good years that started in 2020 also imply a dampened outlook. That’s simply  because  watchmaking,  like  other capital-intensive manufacturing industries, takes a long time to tool up to raise production capacity. So much of the planned increases to cater to the demand of the past 24 months will come online from the latter half of 2023 onwards, running right into an overall market slowdown. This is where the lines for demand and supply will cross – with demand trending down whilst supply quickly increasing – leading to a widening gap between the two. In conversations with several watch brand CEOs, it appears that most of them appreciate that after three years of breakneck growth, this market correction is a healthy consolidation for the industry.

The consequences of manufacturing capacity gains may result in excess inventory in the markets, as has historically been the case during a slowdown. Add to that the inventory of pre-owned watches on the secondary market that was once driven by the robust buying by pre-owned watch dealers during the go-go pandemic years, and there will be an abundance of watches available for trade. This may lead to pressure on prices and hence overall margins as both brands themselves and retailers, new and pre-owned, attempt to right size their inventory.

WHEN THE TIDE GOES OUT

The secondary market for watches began its decline from May 2022 hitting something of a plateau in the early part of this year. However, the most recent data point, namely the 2023 spring auctions in Geneva, Hong Kong, and New York, point to a more challenging trading environment for the future. Bidding and results were generally weak, with “hype” watches down 25% to 60% from their 2022 highs. Even blue-chip artisanal watchmakers saw their secondary market dip, although some watches from independent brands such as F.P. Journe’s most desired examples continue to perform well, perhaps reflecting the extreme niche nature of such makers. At auction, other categories of collectibles such as art, jewellery, and automobiles all ended below expectations, even for flagship sales. The collection of paintings once owned by Conde Nast chairman S.I. Newhouse, for instance, achieved almost US$180 million at Christie’s in May, but the sale was described by the media as “muted” and that, “If it wasn’t a trophy, it probably struggled to command a high price.” The same rings true for watches.

Declining volume and values in the secondary watch market along with rising rates and evaporating private funding have meant that secondary market watch dealers have had to go cold-turkey to the absence of fresh equity. Generous and prolific fund raising meant many secondary market players achieved exceptional growth during the pandemic, a trend that has clearly gone into reverse. The biggest names in the European pre-owned watch sector have been hit particularly hard since mid-2022. Chrono24, the leading marketplace for the listing of pre-owned watches, having raised US$200 million has reportedly just cut over 25% of its workforce. After postponing its 2021 public offering, Chronext – which had announced revenues of EUR101 million in 2020 – appears to have shelved its IPO plans for good and replaced its chief executive this April.

Despite the prevailing negative sentiment, many of the most popular watch models from the most desired brands continue to be valued at a premium to retail prices, albeit at more modest levels. The conclusion is that these few brands remain strong and will emerge even stronger.

TREES THAT ARE SLOW TO GROW BEAR THE BEST FRUIT

I have always maintained that the strongest brands in watchmaking (of which there are less than a handful) will continue to get stronger because they are doing the right things and playing the long game. We are fortunate that these brands are our key partners and by securing their confidence, we believe they will remain so for the long term. Among them is Rolex, the world’s biggest watch brand and arguably, one of the world’s most important luxury brands by revenue as well as by brand value. Despite being the largest by far, Rolex continues to outpace its competitors of a similar positioning.

The brand’s success stems from several factors, including a long-tenured leadership team that can plan and execute over the distant horizon, excellent products that are continually and incrementally improved, and a slow-but-steady pruning of its retail network to focus on their most qualitative retail partners. This is borne out by the fact that despite weakness in the secondary market, demand for Rolex watches at retail continues to exceed supply by a factor of multiple times.

Illustrating the brand’s careful and long-term approach is its rollout of its certified pre-owned programme across the world that was inaugurated in Switzerland and is gradually expanding to the United States, Europe, the Middle East, and eventually, Asia. On its face, the Rolex certified pre-owned programme appears to lack short-term financial incentives for authorised retailers, but the long-term strategy can be discerned. It appears to be a way for Rolex to weed out the less credible secondary market actors and though likely to be a project that will take many years to bear fruit, this is the Rolex way.

THE INFINITE GAME

Although an entirely different animal to its Genevois peer, Patek Philippe is similar in many ways. Family owned and a specialist in haute horlogerie, Patek Philippe also operates with the long term in mind. The CHF650 million investment in the construction of a new extension of its Plan-les-Ouates manufacture is testament to that. Now in its fourth generation of Stern family stewardship – with the fifth soon to embark on the same journey – Patek Philippe has been growing production and quality prudently while steadily improving its offerings. They are also trimming their distribution network by 30% with a target of completing the consolidation by 2025. All of this sets it up to continue as the preeminent name in high-end watchmaking, which will invariably benefit its key retail partners in the long term. It is a strategy we embrace without hesitation.

Notably, the same thing is unfolding at the opposite end of the watchmaking spectrum. The most important artisanal watchmakers are doing the same. F.P. Journe, the most successful living watchmaker going by the value his watches at auction achieve, is likewise shrinking his wholesale distribution network. Even though its scale is intimate compared to Rolex or even that of Patek Philippe, we consider F.P. Journe as one of our important partners and will continue to extend this key partnership. This will see us inaugurate the group’s first-ever F.P. Journe boutique in Southeast Asia, opening in Bangkok in late 2023.

The small scale of watchmakers like F.P. Journe mean they are not significant financially, but such brands go a long way in advancing both the culture of watchmaking and the cultivation of watch collecting needed to eventually fuel the broader market. It is for this reason that The Hour Glass is a principal supporter of the F.P. Journe Young Talent Competition, a prize that recognises and rewards up-and-coming watchmakers with a grant. Recently, our group managing director Michael, was appointed as a jury member of the Louis Vuitton Watch Prize, a similar but more recent endeavour established by the luxury giant.

RESILIENCE IS THE ART OF NAVIGATING TORRENTS

I wish to offer my gratitude to our business partners and clients for their confidence in our teams and our Board of Directors for their counsel. I also take this opportunity to extend my warm welcome to Christine Pillsbury who recently joined our Board of Directors. Christine is a principal at global private equity firm Hillhouse Investment Management and prior to that, had clocked over 25 years of operational and financial experience in both the finance and healthcare sectors in the Asia Pacific region. I look forward to her contributions in the coming years.

The Group’s business growth reflected developments in the watch market during an extraordinary period. In a shifting rate environment with economic activity and consumer behaviour reverting to pre-pandemic norms, a sense of balance and moderation appears to be returning to the high-end watch industry. So, despite our solid operating performance, we remain vigilant as we head into this next macro-dynamic phase of uncertainty and decelerating growth for the world.

As it is for watch brands, the path to becoming a successful retailer is clear. What matters is a long-term focus and our ability to execute on our mission: we must do it better, not necessarily faster, than the competition. We will continue to invest with the next decade in mind and operate in a manner that, whilst may not maximise short-term financial gains, will extract future advantages. We shall continue to focus on being the best possible collaborator for the brands we represent with a deliberate emphasis on offering high-quality watches with a high-quality personalised service to our clients. Notwithstanding this progressive reduction of the retail network by our most important brands, we believe we have the wherewithal to be their preferred partner because we share a similar vision for watchmaking and for organisational and operational excellence.

The short-term outlook has dimmed, but I am confident that the future will remain dynamic and prosperous.

HENRY TAY YUN CHWAN
Executive Chairman
31 May 2023