Lovely gemstone beaded watch.

BILLIONAIRE Warren Buffett recently told reporters in Lausanne, Switzerland that food companies, watchmakers and energy traders are among companies he would consider buying in Switzerland as he scours Europe for opportunities to expand his Berkshire Hathaway Inc.

The choice of watch companies was definitely surprising, maybe due to the fact that I have little interest in buying a watch for more than $100.

I suppose there are consumers out there who think nothing of splashing $25,000 on a watch.
With that in mind, I examined several watch and watch-related companies in the region.

Sincere Watch (SIN SP)
Sincere markets an extensive range of watches from the middle market brands to the premier exclusive brands.
The Company is also widely recognised as a leading retailer of limited edition watches, collector pieces, intricate and complicated watches and exquisite jewellery timepieces in Singapore. It has 17 retail outlets in Singapore, Malaysia, Thailand and Hong Kong.
Hour Glass (HG SP)
Hour Glass describes itself as a leading contemporary specialist watch retailer in the Asia Pacific region with 29 years of experience.
It is the largest luxury watch player in Southeast Asia by sales, with 22 retail outlets in Singapore, Malaysia, Australia, Thailand, Hong Kong and Japan.
Time Watch (TWIN SP)
Time Watch is a retailer of house-brand watches in PRC, namely Tian Wang and Balco.
The Company is vertically integrated, with control over the supply of watch movements, designing, manufacturing, retailing and branding
Cortina (CTN SP)
Cortina Holdings retails and distributes luxury watches in the Asia Pacific region. The Company also trades, imports, and exports pens, lighters and clocks
FJ Benjamin (FJB SP)
FJ Benjamin imports, exports, licenses, distributes and retails consumer fashion wear and accessories, household furnishings, timepieces and eyewear.
Peace Mark (304 HK)
Peace Mark, through its subsidiaries, designs, manufactures and trades timepiece and its components.
Xinyu Hengdeli (3389 HK)
Xinyu Hengdeli, through its subsidiaries, retails and wholesales international brand watches in China
Shenzhen Fiyta Holdings (200026 CH)
Shenzhen Fiyta designs, manufactures and markets watches and clocks. Its products include quartz watches, artistic clocks, scratch proof precious stone watches and timing regulators.
The Company also has operation in property rental business.

Last December, HKSE-listed Peace Mark proposed to take over Sincere Watch in a S$530 million offer. This proposed acquisition valued Sincere Watch at 20x FY2008 PER and 3.2x PBV. This is lower than Peace Mark’s FY2008 PER for 31x and FY2008 PBV of 8.2x at that time.

A quick scan through the latest financial results show that the local-listed watch companies are enjoying better sales and profitability compared to a year ago. This is in line with higher consumer spending and higher economic growth in this part of the world. 

Hour Glass (HG SP)
For the 12 months ended 31 March 2008, the Group announced a 20% growth in revenue to S$487.6 million while operating profit grew 67% to S$39.5 million.
Profit attributable to shareholders stands at S$30.5 million. EPS is 13.46 Sing cents
Time Watch (TWIN SP)
For the 9 months ended 31 March 2008, Time Watch announced marginal growth in revenue to HK$651.5 million. PBT jumped 33.2% to HK$65.8 million. Profit attributable to shareholders stands at HK$47.5 million. EPS is 12.6 HK cents (fully diluted) 
Cortina (CTN SP)
For the 12 months ended 31 March 2008, Cortina recorded a 20% increase in revenue to S$238.6 million. PBT improved 155% to S$11.8 million. Profit attributable to shareholders is S$9.7 million. EPS is 5.9 cents (fully diluted)
FJ Benjamin (FJB SP)
For the 9 months ended 31 March 2008, FJ Benjamin revenue stands at S$263.8 million while PBT is at S$20.7 million. Net profit attributable to shareholders is at S$16.7 million. EPS is at 2.95 cents. The timepieces business contributed S$25.6 million in sales for third quarter.

The companies differ in either being distributors (Hour Glass, Cortina and FJ Benjamin), manufacturers or brand owners (Time Watch). The target markets also vary significantly (Hour Glass, Cortina and FJ Benjamin being in the high end segment, while Time Watch is in the mid-mass market in PRC).

This resulted in different gross and operating margins. To allow for easy comparison, I did a check on their ROE, ROA, PBV and PE.

CompanyMarket CapHistoric PEPBVROEROAFin. Leverage
Hour GlassS$222m7.33x1.31x16.08%11.85%1.36x
Time WatchS$90m6.57x2.54x54.18%18.32%2.96x
FJ Benjamin*S$236m10.71x1.09x14.58%8.67%1.68x
Peace MarkHK 9,264m28.07x4.67x17.83%7.76%2.30x
Xinyu HengdeliHK 9,267m19.8x4.62x25.63%13.07%1.96x
Shenzhen Fiyta HK 2,802m24.2x2.30x10.03%6.69%1.50x

* FJ Benjamin as a timepieces division

Tian Wang, a proprietary brand of Time Watch.

HKSE-listed watch companies are trading at a significant premium to local watch companies. This is due partially to superior ROEs and larger market capitalization.

Most of the local-listed watch companies (Hour Glass, Cortina and FJ Benjamin) are distributors of global watch brands and likely to trade at a discount compared to the brand owners.

Time Watch, on the other hand, has proprietary brands Tian Wang and Balco which cater to the mass market in PRC. Tian Wang is ranked among the best selling local brands by the number of pieces.

Time Watch is trading at a steep discount to PRC-listed Fiyta (24.2x FY07 EPS).
All in all, the watch companies do look interesting but only time can tell whether the recent surge in profitability is sustainable. 

Recent NextInsight story: TIME WATCH widens profit margins 7ppt with retail strategy

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