(Oct 16): The improvement in the luxury watch industry this year appears set to continue. From January to August, the total export value of Swiss watches rose 1.2% y-o-y to CHF12.6 billion ($17.6 billion), according to the Federation of the Swiss Watch Industry FH. This was driven by higher sales in the majority of markets around the world.

Hong Kong, the world’s top destination for Swiss watch exports, recorded a 2.9% growth y-o-y. Singapore, which is among the top 10 markets, saw smaller growth of 0.1%. China registered the fastest growth of 19.4%. Exports to the UK increased 11.8%. FH says the overall growth was attributable entirely to watches with export prices of over CHF3,000.

This positive set of data has started to fuel optimism in the industry. A Deloitte survey of 60 watch executives, conducted from May to July, found that 52% are optimistic about the outlook for the industry for the next 12 months, compared with only 2% last year. They expect volume to grow across all price segments.

Thus, we think luxury watch retailer The Hour Glass is set to do better. Founded in 1979, the company is the official retailer of fine watch brands such as Audemars Piguet, Cartier, Hublot, IWC, Patek Philippe and Rolex. It operates about 40 boutiques in nine cities in the region.

As highlighted in our cover story last week (Issue 800), the company has delivered an annualised return of 20.1% since March 2002 on a dividends reinvested basis.

These strong returns can be attributed to the company’s astute management over the years. The Hour Glass survived the Asian financial crisis and the SARS epidemic that pummelled sales of luxury watches. It also withstood the sudden appreciation of the Swiss franc in early 2015 and the clampdown on corruption in China that hurt sales of luxury watches.

During the global financial crisis of 2008, the company expanded its store network even as its rivals were consolidating, owing to tight cash flow. Notably, it acquired Watches of Switzerland, a watch retail chain with five boutiques, for $13.3 million.

As economic growth picks up across major economies, consumers could begin spending more. And The Hour Glass is well positioned to benefit.

We are adding 15,500 shares of The Hour Glass to our Singapore Market Portfolio. At 64.5 cents a share on Oct 10, the stock is trading at an inexpensive 9.6 times earnings. It is cheaper than the only other locally listed peer Cortina Holdings, which trades at 11.7 times earnings. The stock also compares favourably with Hong Kong-listed watch and jewellery retailers such as Chow Tai Fook Jewellery Group and Luk Fook Holdings International, which trade at 29.7 and 18.5 times earnings, respectively.

UOL extends gains after buying Nanak Mansions UOL Group was among our gainers in the past one week to Oct 10. Shares in the property developer rose 6.4% to $8.64 after it announced the successful en-bloc purchase of a freehold residential property known as Nanak Mansions. Since it was added to our portfolio on March 28, UOL has gained 23.8%.

On Sept 28, UOL announced that a tender submitted by its 50%-owned associated company Secure Venture Development (No 1) has won approval from all the subsidiary proprietors at Nanak Mansions. Secure Venture will pay $201.1 million for the property, which it will use to replenish its residential landbank.

Located at 92-128 Meyer Road Singapore, the property occupies an area of 2.5 acres. This could be enlarged further by 0.2 acres through the exercise of a put option. The redevelopment of Nanak Mansions will be jointly undertaken with Kheng Leong Co (Pte), an entity controlled by the Wee family.

Maybank Kim Eng Research says UOL continues to be its “top pick”. The research house says the company has been ahead of the curve in acquiring development land. And it expects UOL to raise average selling prices for its property units, owing to escalating land costs for its projects. In addition, a successful share swap with Haw Par Corp has enabled UOL to own 48.9% of United Industrial Corp. This is beneficial to UOL as UIC is a less risky and cheaper avenue for value creation, says Maybank KE.

Factoring in the new shares issued from the share swap and UOL’s dividend reinvestment programme, Maybank KE has trimmed its revalued net asset value for the company to $10.93, from $11.03 previously. However, it raised its price target for the stock to $9.80 from $9.43 — implying an upside potential of 13.4%.

GEAR falls amid coal price concerns Among our decliners this past week, Indonesia-based and Singapore-listed coal miner Golden Energy & Resources (GEAR) fell 1.1% to 45 cents. The stock has dropped 12.6% since it was added to the portfolio on Feb 14.

There has been some speculation that coal prices will fall, following announcements by two major coal-consuming countries. In China, the National Development and Reform Commission drafted rules to establish the minimum and maximum requirement of coal inventories. During winter and summer, coal inventories shall be five to 10 days above normal levels. But when coal supplies are short and prices are increasing, the coal stock level shall not be more than double the amount of the minimal storage.

In Indonesia, the Ministry of Energy and Mineral Resources (MEMR) announced its intention to draft new rules to determine coal prices for domestic supplies. This came as high coal prices have put pressure on state electricity utility Perusahaan Listrik Negara, which largely uses coal power plants to generate electricity.

Phillip Securities Research says the measures initiated by China will “gradually” move prices downwards to reflect supply and demand. It will also leave buffer time for the market to react to an expected price correction, it adds. However, the Indonesia Domestic Market Obligation price control could cause a “hard landing” for domestic coal price, because MEMR directly sets the benchmark price for the market.

Still, the research house is optimistic about GEAR’s fortunes. “Though more than 50% of GEAR’s coal is supplied to the domestic market, GEAR is dealing with more than 15 trading partners that enable the group to shift supply to export partially. In other words, the group has the discretion to lift the percentage of export sales to buffer the domestic price that is possibly below the market rate,” Phillip analyst Chen Guangzhi writes in a note dated Sept 29.

As at mid-September, MEMR’s thermal coal reference price, or Harga Batubara Acuan, was US$92 a tonne, up 44% y-o-y. The Qinghuangdao 5,500 GAR FOB traded at RMB686 a tonne, up 24.2% y-o-y.

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This article appeared in Issue 801 (Oct 16) of The Edge Singapore.

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