ORIENTAL WATCH: "Why I consider it a small-cap gem"

Lotustpsll, who contributed this article to NextInsight, worked 32 years with a global banking group before he retired.

Key reasons why I have invested in Oriental Watch:

(All financial data below are based on the Annual Report for the year ended March 2018)

"Whether the investing thesis is “deep value, net-net, high yield or for Margin Of Safety”, Oriental Watch satisfies all.  In my view, it is a unique small-cap play for the long haul." -- Lotustpsll (photo)

Deep Net Net

Net current asset value (NCAV) was HKD 3.50. Current price/NCAV is 54%.

I would categorise Oriental Watch as a deep Net-Net stock.

Over the years, the company has taken in various luxury brands but I believe Rolex is the dominant brand driving its business. 

The bulk of the inventory, a big component of current assets, should comprise of Rolex timepieces. Hence, the inventory value should hold its value.

Photo: Company

Exceptionally Strong Balance Sheet

For the past 3 FYs, in addition to paying down its debts significantly, the Management decided to build up its cash balance aggressively.

Strong Recurrent free cash flow (FCF)

In the last FY, Oriental Watch recorded huge FCF of HKD 482m, HKD 84 cents ps and registered an exceptional FCF yield of 44% (based on current price). Operational CF yield was at 18%.

There are 2 huge FCF drivers – strong operating CF and material reduction in inventory level.

Management is proactive in managing its inventory level and has done exceptionally well for the past 3 FYs. I believe inventory level is close to reaching optimal level and unlikely to drop much further. In future, FCF will be dependent more on operating CF.

High Dividend Yield

Driven by strong profits (EPS at 24.3 cents), Oriental Watch paid total dividends of HKD 25 cents, of which 15 cents were special dividends. Based on share price of HKD 1.90, this gives a yield of 13.2%.

Record profits for last FY were driven by improved GPM and lower rental costs. Management has implemented a 2-pronged strategy to close marginal profitable outlets and to cut rental costs (biggest component of operating expenses) - that have led to a strong turnaround of its business profitability.

                             
Net Cash = Market Capitalisation

Net cash at last FY was HKD 1035 million. Market cap is currently at HKD 1085m. So you literally get other assets for free if you invest in Oriental Watch at the current level -- at the time of writing -- of  HK$1.90 per share.

I think Oriental Watch owns 4 to 5 retail properties, acquired years back, in Hong Kong that are accounted for at book values. Not much information can be gleaned from the accounting notes. So there are significant hidden values in these properties.