Lotustpsll, who contributed this article to NextInsight, worked 32 years with a global banking group before he retired. This is a follow-up to his article 

ORIENTAL WATCH – Sterling 1HFY19 Results

Interim results were released on Nov 20 and it was a solid half-year performance, leading the board to declare an interim dividend of 2.8 HK cents per share (2017: 2 HK cents) and a special dividend of 8.7 HK cents (2017: Nil).

The share price closed at HK$2.08 yesterday, up from HK$1.74 at the start of this month (Nov).

(HK$m)

1HFY19

1HFY18

Sales

1181

1508

Gross Profit

288

254

Gross profit margin

24.4%

16.8%

Net profit 
after tax

64

46

EPS

11.2

8.07

Inventory

875

1001

Dividend

HK$0.115

HK$0.02

Dividend Yield

5.6%

Key management imperatives to improve the gross profit margin (gross profit margin), stabilise/reduce expenses and to reduce inventory level were achieved.

The drive to focus on margins expansion is working admirably – note the divergence of sales (down) and gross profit margin (up). 

OrientalWatch rolexOriental Watch is a distributor of Rolex watches, amongst others.
Photo: Company

pstan3.17"Oriental Watch is obviously selling time-pieces with higher gross profit margins and the sharp growth in group gross profit margin is telling. The 39% growth in EPS exceeded my expectation of a rise of 25%."
- Lotustpsll (photo)

Rental expenses have reduced further (7% drop as compared to last 1H). Operating expenses are being managed effectively.

The further decline in inventory level is a good indicator that management is working hard to further optimise its inventory management. 


This will impact positively on its free cash flow (FCF). (Note – Cashflow Statement will be available only later when the Interim Report is released)

Stock price

HK$2.08

52-week
range

HK$1.57 – HK$2.72

PE (ttm)

7.6

Market cap

HK$1.2  b

Shares outstanding

570 m

Dividend 
yield 
(ttm)

5.2%

1-year return

32%

Source: Bloomberg

The larger dividend pay-outs may have taken the market by surprise. As for me, I was expecting it as the Group had paid out dividends that were close to its EPS in the last FY. 


This is interesting as I expect Oriental Watch to keep on paying high pay-outs to shareholders.

Barring any unforeseen circumstance, can Oriental Watch sustain its EPS growth and to maintain high dividend pay-outs?  IMO, I believe Oriental Watch can deliver :-  
 

♦ Group’s business strategies are delivering well (contain costs and improve margins)

♦ 
Secular demand for luxury time-pieces (China’s growing Middle Class)

Financial position (net cash over H$1.0 billion) is rock solid

♦ 
Capex requirements continue to be modest (below H$10m)


Oriental Watch had expanded aggressively in the past. In 2013, the Group had 103 outlets and now only 62.

Lessons were painful – incurred losses, slumping cash-flows and high external debts.

         

Four years on ….

 

FY14

FY18

No. of outlets

97

  62

Gross profit margin

  17.6%

20.9%

EPS

  3.6c

24.3c

Free cashflow

  $305m

$482m

Net cash

($66m)

  $1035m

Bank Loans

  $491m

$75m

Inventory

 $1788m

  $1001m

Note: $ figures are in HKD $

Now, the Group is completely transformed – growing profitability, rising gross profit margin, strong recurrent FCF and strong financial position. 


Oriental Watch is hitting the sweet spot with its revamped business strategies and this will propel the Group forward.

The Ugly Duckling is now a Swan.


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