An Update on Oriental Watch (398 HK)
An Update on Oriental Watch (398 HK)
Insights from management and some important clarifications
A Review on Final Results
Oriental Watch recently announced its earnings for the fiscal year, and the results were quite impressive. On June 20, 2023, the company reported a revenue of HKD3.7 billion and a net profit of HKD295 million. These figures surpassed our initial estimates of HKD3.4 billion and HKD270 million, respectively.
While we typically assess companies with a long-term perspective of three years, it's worth noting that we underestimated the performance of Oriental Watch's Chinese segment in the second half of the fiscal year. The strong performance in China greatly contributed to the overall results, with the segment achieving record-high revenues of HKD1.4 billion and profits of HKD286 million.
However, it is important to highlight that the net profit margin decreased from its peak in FY 21/22, dropping from 10% to 8%, which was within our expectations. The gross profit margin also experienced a slight decline from 32.4% to 32.1%. This trend aligns with our belief that the prices of Rolex watches peaked in early 2022 and will gradually impact Oriental Watch's financials.
Additionally, the cash bonus awarded to directors remained relatively high at 3.3% of the total revenue for FY 22/23. Although it decreased from the previous fiscal year's figure of 3.6%, we still consider it to be a significant amount. Excluding this cash bonus, the net profit margin for the fiscal year would have exceeded 10% and hence higher dividend. We wish the directors and their families own more shares of Oriental Watch and receive their ‘bonus’ in the form of dividend for better alignment of interest with shareholders.
Insights from Management
We had the opportunity to speak with the management following the release of the earnings report. Here are some interesting points about the business and industry we gathered:
Demand: The management continues to observe strong performance in the luxury watch market in China, while the mid-low end watch segment shows some weaknesses. Rolex watches remain highly popular despite their lower prices.
Supply: The company anticipates that the supply of Rolex watches will remain constrained. Even with the opening of the new factories in two years, the management believes that Rolex will effectively manage the demand-supply dynamics.
RMB Weakness: Since the beginning of the year, the Renminbi has depreciated over 4% against the US dollar. Watch brands have not yet raised prices in China to offset this depreciation, but the management expects them to do so in the near future should RMB continues to depreciate.
Hong Kong: The weakened RMB discourages luxury spending by tourists in Hong Kong. As a result, Rolex is more inclined to consolidate its store footprint in Hong Kong, while also planning to open more stores in China.
Clarifications
We have received inquiries regarding our article where we first discussed Oriental Watch and provided a single-digit IRR estimate. We want to clarify that it was not intended as a stock pitch.
We would like to reiterate that our objective is to encourage interactive discussions on companies that we find interesting. While it is true that we may own some of the stocks we write about, none of our articles should be considered a stock pitch.
We always welcome comments and questions, especially regarding the companies we cover. Please feel free to leave them below our articles. We are also exploring the use of the "chat" function on Substack as an additional tool for discussions.
Disclosure
The author of this article does not own shares in Oriental Watch (398 HK).
This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities mentioned herein. Readers should conduct their own research and due diligence before making any investment decisions. Investing in stocks involves risks, and past performance is no guarantee of future results. The author assumes no responsibility for any losses incurred as a result of using this information.
The views and opinions expressed in this article are purely those of the author and do not reflect the official position of any organization they may be affiliated with. The author has not been compensated in any way by any of the companies mentioned in this article. Please note that the author may buy or sell shares of any of the companies mentioned in this article at any time without further disclosure.