Oriental Watch still has a huge pile of excess cash

Oriental Watch completed its conditional share buy back offer and reported H1 results.

This is not investment advice. Please read the disclaimer.

Oriental Watch bought back 83m shares. After completion on Nov. 20th, the number of issued shares was reduced to 487m from 570m (-14.5%). Yeung Concert Group assured not to tender any of its 175.9m shares resulting in increasing interest to 36.10% from 30.85%.

Other investors held about 391m shares prior to the offer. Most of them seem to have tendered all their shares, as I have. Public investors have tendered 283m shares or 340% of the buy back offer of 83m (source), resulting in 29.27% of these being bought back by the company.

  • I tendered all my shares and expect that about 30% will be accepted. Accordingly, I hold shares of Oriental watch, currently.

As written in my September post, I believe the share buy back is value accretive for shareholders so I am fine holding shares longer-term, and could even increase my position going forward. My last fair value estimate was for HK$ 3.36 per share and the buy back should result in a small uplift.

Financial results for six months, ending Sept 2020, were released on Nov 26th, resulting in the company’s shares (398 HK) rising +15% to HKD 2.88. The operational development was rather strong, but after tax profits were subdued by higher taxes payable in the PRC with sales shifting to the mainland: While the retail market in the People’s Republic of China (the “PRC”) has rebounded rapidly, especially in the luxury industry, since the second quarter of 2020. The increase in demand from the PRC market, has created greater business opportunities for the Group, resulting in higher revenue in the current interim period.

extraction from H1 2020 results

Total equity was HKD 2,093m, as of Sept 30. Bank balances and cash were HKD 1,101m, resulting in an ‘adjusted cash balance’ of 852m after deducting the 249m total consideration payable for buying back stocks. Inventories were further reduced to 704m and trade and other receivables increased to 219m as did trades payable. I derive an adjusted book value of HKD 1,844m which compares against a current market value of HKD 1,403m, for a ~ 0.76x P/B ratio. This is for a profitable and dividend paying business, despite the current pandemic.

The company declared dividends payable to ‘shareholders whose names appear on the company’s register of members on 11 December’ (ex date dec 8th) consisting of an interim dividend of HKD 0.028 (unchanged) and a special dividend of HKD 0.092 (0.087).

In conclusion ‘the PRC market has been showing a substantial recovery as well as the gradual improvement in Hong Kong, without a readily available vaccine for the virus, the risk of COVID-19 pandemic is still high’. HK sales suffer from a ‘continuing 19-month downward trajectory’ of HK retails sales due to the pandemic, moving restirctions and dropping tourists numbers and other factors, but ‘a growth of 6% yoy in September 2020’ could be the light at the end of the tunnel.

  • The company wants to expand its presence in the PRC.

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