The Hour Glass draws profit boost from these 2 drivers

Even amid lacklustre sales ahead.

According to CIMB, our recent meeting with The Hour Glass’s management revealed that while the company is facing some turbulence in the near term, it is well placed to ride on Asia’s burgeoning demand for luxury watches.

Here's more from CIMB:

We believe that the company is worth around 9-10x P/E as it is more profitable than other watch retailers that are currently trading at 6x P/E.

Further, the company is in net cash. We however do not cover the stock due to the low free float and trading volumes. We estimate that about 80% of the shares are locked up with insiders.

We recently met up with management following our Non-rated note earlier this year. The key takeaway from the meeting was that although there is weaker sentiment for luxury spending this year, broader positive structural trends are in place from which The Hour Glass is poised to benefit.

Singapore and Hong Kong, among the fastest growing watch markets in the world, are cities where the company has significant retail presence. While The Hour Glass has no stores in China, it is still a beneficiary of Chinese luxury spending as a sizable proportion of this is done outside China.

Despite the slowdown, The Hour Glass is still the best performing retailer with one of the fastest inventory turns. In the near term, management will be focussing on driving up the yields of the five new stores opened in the last two years.

The Hour Glass’s competitive moat comes from: 1) the limited supply of prime retail space in Singapore which it has secured; and 2) its existing relationship with brand manufacturers.

This moat is somewhat breached by the entrance of a foreign luxury watch retailer at RWS, but we think this is a unique set of circumstances that won’t be repeated often.

The aforementioned two advantages should be strong enough to allow the company to maintain its share of the growing pie.