DEAR FELLOW SHAREHOLDERS,

For the financial year ended 31st March 2020, the Group continued its positive year-on-year impulse, reporting an increase in revenue of 4% to $749.5 million. Profit-after-tax rose to $77.5 million which translates to a net profit margin of 10.3%. This net margin is an achievement that required considerable management and operational discipline.

With a bolstered balance sheet, the Group engaged in a series of long-term capital allocation decisions which resulted in the re-purposing and refurbishment of one of our investment properties in Sydney – 192 Pitt Street into Australia’s most prominent Rolex stand-alone boutique, the acquisition of a retail property in Brisbane, Australia and two retail and office buildings prominently located on Queens Street, the luxury retail precinct of Auckland, New Zealand. Finally, the Group acquired a 100% ownership of Mansors Jewellers, New Zealand’s oldest authorised Rolex retailer and the country’s sole authorised Rolex service centre. This series of investments deepened our commitment to the Australasian markets. The Group’s balance sheet remained robust with cash and cash equivalents standing at $183.1 million and borrowings of $64.5 million.

On a consolidated net asset basis, the Group increased its corporate net worth by $47.6 million to $607.9 million or $0.86 per share. Whilst The Hour Glass has reported its finest set of financial results, early indications signal that the COVID-19 coronavirus pandemic has led to a most devastating global health and economic crisis that humanity has experienced in a century. It is under this swelling fog of uncertainty that the Board of Directors is recommending a first and final dividend of 2 cents per share amounting to $14.1 million.

GENERAL COMMENTARY

In what seems like a lifetime ago, the 58th Venice Art Biennale that took place in the summer of 2019 was aptly titled ‘May you live in interesting times’. A phrase often invoked by Westerners; it has long been misattributed as an ancient Chinese curse. A fictional malediction it is not – but it certainly served as a prescient warning of the grave uncertainty, turmoil and crisis that would come in 2020.

A RUBY YEAR

October 1st, 2019 marked The Hour Glass’ 40th anniversary. What began as a single store family enterprise has, over the course of four decades, evolved into one of the leading specialty watch retailers in the world, with a combined network of 45 boutiques spanning 12 cities in eight countries across the Asia Pacific. My father’s watch retail business he founded in Singapore in the 1940s was the start of deep-rooted relationships with our brand partners that have endured some 60 to 70 years; notably with Patek Philippe and Rolex.

Over those decades, we have been diligent in pursuing a set of organisational values such that The Hour Glass brand is positively regarded in the industry amongst business partners and peers. In a similar vein, The Hour Glass is recognised and respected by both the watch cognoscenti and horological institutions around the world. I believe that much of this stems from our distinct brand of mindful hospitality and conscience, our team’s specialist knowledge, our highly selective merchandising strategy, and our primary mission to advance watch culture around the world.

Three years ago, we initiated a whole-of-organisation digital transformation exercise that included the augmentation of our company culture. To date, our management team have successfully met every project milestone including completing the full integration of our upgraded back-end Enterprise Resource Planning system and our proprietary front-end Client Experience Management platform. Twenty-nineteen was also an extra special year given that Singapore was selected to be the host country for the highly successful, and unforgettable, Patek Philippe Watch Art Grand Exhibition. Conceived solely to raise horological awareness and spread watch appreciation, the event attracted 80,000 visitors over the three week long exhibition. The Hour Glass and our regional affiliates were privileged to be counted as one of the brand’s key partners during the event. Shortly after, it was our turn to play host when we staged a more intimate exhibition of time inspired artworks and objects and premiered a series of short films, which were all commissioned to commemorate our 40th anniversary. On top of it all, to complement the varied activities and anniversary celebrations, the team worked incredibly hard and delivered a record set of financial and operating results. Yet, despite all these accomplishments, from where I sit now, it certainly feels like neither an appropriate time for jubilation nor celebration.

A peaceful and connected world has been the sine qua non for the steady rise in global prosperity that started in the postwar era. This idea appears to have been derailed by escalating political friction putting the brakes on perhaps the most crucial driver behind wealth creation, the very thing that has propelled the luxury-watch business in the same period. The seeds of the geopolitical and economic decoupling were sown in the financial crisis of 2008 and have now sprouted to polarise the world, with the main face-off between the United States and China. And when two giants battle, everyone else will inadvertently be pulled into the fight one way or another. Though we only appear to be in the early stages of the confrontation, consequences have been wide ranging – the tearing up of trade pacts and the imposition of trade sanctions, the breakdown in institutions of global governance, the proliferation of fake news, and perhaps even the instability in Hong Kong. But despite all of that, the watch industry managed to eke out a tiny rise in 2019 with Swiss watch exports growing 2.4% to CHF21.7 billion. Except for Hong Kong, which suffered an annual decline of -11.4% due to the disruptions caused by persistent city-wide protests, Swiss watch exports rose for most countries. Singapore recorded a respectable uptick of +14.6%, one of the highest in recent history. This gave all industry players hope that 2020 would, at the very least, be a year of moderation or minor consolidation. More specifically, watch brands and specialty retailers such as The Hour Glass that cater to the luxury segment of watches – that is just 6.6% of the export volume but 69% of the value, quite reasonably expected to be more protected than the rest.

And then the COVID-19 global pandemic struck.

THE INVISIBLE ENEMY

The Great Lockdown, the Coronavirus Recession, Pandession. These are some of the names used to describe the present situation the world is facing. In Switzerland, watch production was not spared from lockdown and social distancing measures. Factories suspended production in March and April 2020. And even as the country has reopened, many manufacturers are still operating at 50% of production capacity, crimping the supply of watches and affecting deliveries to all markets. As a result, Swiss watch exports plunged 81% in April compared to the year before, for a year-to- date decline of 26%.

The effect of the lockdowns on The Hour Glass was pronounced. By April, 95% of our offices and stores were closed, with only our two boutiques in Hong Kong managing to stay open throughout. On the demand side of the equation, leisure travel has been halted for the foreseeable future, putting a stop to watch purchases by travellers, a key driver for high-end watches. Markets and retail businesses traditionally reliant on high-spending Chinese visitors have effectively seen their sales drop to zero. When economies reopen, so long as travel restrictions remain in force, there will be severe repercussions on the watch industry as Chinese travellers account for approximately CHF5.0 billion in retail watch purchases outside of mainland China, which is perhaps 10-15% of global watch sales. Even here in Singapore, the prolonged lockdown, enhanced social distancing and uncertainty in the world have paralysed local shoppers from committing to hard luxury spending. Never have I experienced, nor imagined anything like this would occur in my lifetime, and you all know I have been around for a long time.

With brick-and-mortar in a state of suspended animation, digital has become the sole cure. I have related in the past how the watch sector has been slow to embrace digitalisation and as such, the industry has not been able to fully exploit the shift to online shopping. In The Hour Glass’ philosophy, shopping online for luxury collectibles should not be an Amazon-like marketplace of cataloguing products and transacting online. Instead, it should be a channel that allows for equally high-level discovery and engagement between prospective clients and merchants on digital platforms. And whilst we already have a well-developed, content laden website, we embarked on a vigorous social media campaign during the pandemic. We received very positive responses for our online activities which included ‘Zoom’ cocktail get-togethers with clients and brand principals to present the latest 2020 models. Annual fairs such as Watches & Wonders, which was due to take place in Geneva but had to cancel at the last minute, also staged an online-only presentation to much global fanfare.

The past years of digital transformation meant that the Group experienced a seamless transition into lockdown operations. Our entire team still turned up for work – virtually – every day. That includes our watch specialists from our boutiques who maintained a retail regime, five days a week for 11 weeks straight. They tuned into their regular training sessions, partook in cross-border learning hosted by their colleagues from New Zealand to Malaysia, participated in quizzes, sat in for talks by captains of the watch industry, and twice a week practiced meditation and yoga. The goal was to take full advantage of the situation, boost the capabilities and horological competencies of all our watch specialists, thereby putting them in a strong position to spring into action once the world starts turning again. Undeniably, these past several months have been our Group’s single-most important investment in team building, bonding and training.

That leads us to the looming question – what happens now?

REMAINING RELEVANT

I shall not attempt to offer a first draft of history as eleven weeks into Singapore’s “circuit breaker”, events are still unfolding. I do not believe that this is a moment where one has all the necessary facts to prognosticate the echoing effect the pandemic will have, but I shall attempt to frame how we may be affected.

To start with, I offer two key observations about the pandemic: first, ‘no one is safe until everyone is safe’. Second, ‘uncertainty is the only certainty’.

The first observation assumes that COVID-19 is going to remain a threat to public health for a while more, meaning that some level of disruption will continue until a vaccine or effective treatment is found and dispensed to the global populace. This disruption will be physical and in certain countries such as Singapore, social distancing will be strictly enforced so we may expect footfall in shopping malls to decline over this period. Disruption will also manifest itself in areas such as irregular inventory supply in the immediate term, limited or lengthy after-sales service lead times, inability to organise traditional physical events and so on. The economics of travel and the ability to travel freely will be curtailed and to different degrees, will have consequences for the countries we operate in. The impact will be felt directly through the loss of sales, and indirectly in the all-important but now absent contribution tourism brings to economies. At the furthest extent of our assumptions, we have projected that leisure travel may not return till 2021.

Throughout this lockdown, I have continued to impress upon the senior team that no one can accurately predict the length of time required for the world to return to normal. It could be a year, or it could be five years and beyond. To continue to develop and excel, we must be comfortable operating in this envelope of uncertainty. We must exercise operational agility, ensure that inventory levels remain healthy and protect our net cash position. We have already demonstrated that we can pivot our business on a dime, shifting our entire organisation to working from home efficiently, introducing a multitude of digital and social media initiatives to keep our clients and teams engaged and entertained while also rolling out new procedures for “last mile” home delivery to our clients. And if physical sales remain out of reach, we have developed a system for virtual consultations, where our specialists can speak with customers in real time, much like in a video conference but in a streamlined conducive set up.

Despite all of that, there are core values that we stick to, like preserving our workforce for instance. Many of our team members are long-tenured, loyal employees who have developed deep specialist knowledge of our products, clients and business, and we believe in these long relationships and loyalty accrued over time. This compact we have with our team members form an important foundation for our organisational resilience during difficult times.

One of the salutary lessons of the watch industry from the past year revolves around complacency, and it concerns not a watch brand, but the organisers of Baselworld. Once the largest and most important watch and jewellery fair globally, Baselworld entered a period of gentle decline starting about a decade ago, with exhibiting brands departing for various reasons, but most often, the exorbitant costs to exhibit as well as for accommodation in the city. But accelerated by the pandemic, the decline transformed into a fiery crash in a matter of weeks. Baselworld lost all its biggest exhibitors in the month of April, who decamped to Geneva for a new fair in 2021 the brands themselves will organise, essentially putting an end to the century-old event. And the reason the wheels fell off was simply a broken relationship. Baselworld exhibitors and trade visitors had been complaining for years about the cost of participating in the fair – which was excessive even by the lofty standards of Switzerland’s high cost of living – and no one listened. “Arrogant” was a label often used to describe its leadership. Yet exhibitors stayed on, for old time’s sake and because they could afford to. The pandemic changed the equation and the delicate equilibrium was lost, putting an end to a fair that survived the second world war but not COVID-19.

The lessons we can take away from this single event are as follows. Firstly, relevance is a quality created by human endeavour and once it has been created, relevance can only be preserved by continually adding value and catering to the needs of our customers and partners – at less expense than it would cost them to do themselves. Secondly, given that uncertainty is the only certainty, we must remain organisationally and operationally agile, constantly adapting to the zeitgeist. Failing to do either would mean that our survival comes into question. Failing at both would be fatal.

ROUNDING OFF

On behalf of the Board of Directors, I would like to thank the management and team at The Hour Glass, our brand partners and our loyal clients for their incredible support this past year. I will also extend my heartiest congratulations and gratitude to Deepa Chatrath and her incredible team at Geneva Master Time for organising the landmark Patek Philippe Watch Art Grand Exhibition in Singapore. She has raised the bar so high, the next time anyone considers doing anything similar, they will need to first secure a gold at the Olympic pole vault.

After 18 years at The Hour Glass, Dr Kenny Chan retired from his position as Co-Group Managing Director. Kenny has been an incredible asset for The Hour Glass. He entered at a pivotal period for the company and was able to dramatically improve our operational efficiency. Under his charge, our retail network expanded by three times and our corporate net worth multiplied by four. As such, it is our fortune that he remains as a Non-Executive Non-Independent member of our Board.

Pascal Demierre, a long serving Board member will also be retiring from his position. Pascal has been a director since 2011 and his pragmatism was instrumental in shepherding the Board through some of its most difficult moments. His quiet contributions have been most appreciated and will certainly be missed.

Having served 21 years at The Hour Glass, Michael Tay has assumed the role of sole Group Managing Director having operated on a joint basis with Kenny the past five years. We wish him well.

The need to acquire a fine watch or any luxury good in the prevailing global environment will be subdued. Despite the short to mid-term decline in our business, it is my firm belief that the active promotion and sale of specialty watches will remain a viable and prosperous business in the long term. This is because it is driven by the human desire to own finely crafted objects that are imbued with a cultural heritage that can be traced to man’s earliest of civilisations.

Whilst shifting activities online is the order of the day, these digital tools will not be retired even when a medical solution to the pandemic is discovered. At the same time, humans will also always revert to their primordial instincts – that to thrive, we require physical, social intercourse with one another. It is therefore our view that the intermeshing of the digital and physical realm will accelerate. In this new world, the winners will be those that have figured out how to negotiate their clients experience in both. I believe that The Hour Glass is working on delivering just that.

So, my fellow shareholders, as dismal as is the prevailing global outlook, fret not, fear not. This too shall pass and there is much hope for us yet!

HENRY TAY YUN CHWAN
Executive Chairman
29 June 2020