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3 Things I Like About The Hour Glass
Corporate Digest | 08 July 2014
By: Louis Kent Lee
Articles (199) Profile

I remembered the time when I first saw a Patek Philippe watch. It was inside one of the boutiques of The Hour Glass (THG).

Someone once told me, the harder it is to pronounce a watch’s name, the heftier the price tag. Parmigiani Fleurier is a good example.

An exquisite master piece carried by THG

But don’t get me wrong, this article is not about fine watches. It’s about a long standing business that speaks for itself with its performance.

THG is established in 1979 and is one of Asia’s premier retail groups of luxury watches with 27 boutiques in nine key cities throughout Asia Pacific.

Now, let me stop wasting more time (pun not intended), and get into the 3 things I like about THG.

Consistent Performance In Profitability Scorecards
I particularly dig consistency. Especially when it relates to good performance.

Of course, the first thing that struck me was the performances seen in its revenue, operating profit (EBIT), and net profit to shareholders (PATMI).

All three flew off my excel sheet with compounded annual growth rates for FY09-FY14 registering double digit growth rates, between 11 percent to 20 percent.

CAGR of profitability metrics that flew off the page

Not bad for a distributorship if you ask me.

Also, profitability ratios such as Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity (ROE) have all shown consistency close to, or above the 15 percent mark.

Consistent performance range of ROIC, ROA, ROE

In textbook theory, profitability ratios for ROIC, ROA, and ROE above 12-15 percent are already considered desirable.

This means that THG is not only maximising its invested assets, it is also flipping the capital invested by shareholders very nicely as well.

More often than not in reality, it’s also hard to find a company that checks all three profitability ratios with the “desirable percentage range” over five years consistently.

Conservative Capital Structure
If you ran a liquidity test on THG, you’d have realised how conservative their capital structure is.

Zero long term debt over the past five years, consistent increase in its cash chest, and negative net debt for all five years.

Cash and cash equivalents in contrast with net debt

The management has long been a known advocate of keeping its capital structure conservative, resulting in negative gearing, superb current ratios (average of 4-5.5 times) and a cash hoard that could be used for expansion if it chooses to.

This effort is paying off as THG was able to reinvest into the construction of new stores, renovate existing ones, and acquire a warehouse facility, with the ultimate goal of increasing brand presence and strengthening its point of sales. (seen in FY13)

Management And South East Asia Strategy
I like it when the management does something right. I like it even more when they keep their word and achieve that in a whole.

It is not new news that THG has a behemoth count decked to its inventory days.

Albeit being a norm in the luxury retail goods industry, it is still a problem to a certain extent to shareholders.

Obvious decrease in inventory days

In 2013’s annual report, Henry Tan, executive chairman of THG stressed that “a key area which we will continue scrutinising are our inventory assets”, and this was well seen in the reduction of inventory days in FY14 (although still high, but you get my point).

Because of how THG avoided placing emphasis on markets in the vicinity closest to China, it was largely shielded by the changed consumption behaviour of Chinese consumers as a result of a credit squeeze by authorities to clamp down on shadow banking, and corruption in China.

Instead, its strategy to focus within South East Asia benefitted from this “changed consumption behaviour” as it scored on the crowd of travelling Chinese consumers aiming to purchase luxury products when abroad, especially in regions where THG operates within.

    Investment Merits

  • Superb profitability metrics that are consistent
  • Good management that is not only well versed and has good foresight in the luxury retail industry, but walks the talk
  • Conservative capital structure allows leverage, if they need it
  • Strong cash chest to allow THG to acquire, strengthen its point of sales, or tide through a crisis (if any)
  • Consistent dividend payout over the years

    Investment Risks

  • Recession in the global economy
  • Change of luxury watch retail landscape
  • Online competing merchants carrying the same inventory
  • High inventory days might cause unwanted inventory write-downs

Conclusion
I’ll end this with a quote from THG’s chairman in its FY13’s chairman letter, “Companies are not judged by what they say, but by what they do and how they go about doing it.”

So if you remember what was said earlier on above about the intention to reduce inventory days, I would say, yes, walking the talk.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.


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