On Oriental Watch (pre FY’22, ending March’22)

I bought Oriental Watch when it was very cheap on an asset base …

This is not investment advice. Please read the disclaimer. I might own discussed stock(s) currently or at a later time.

In Sept 2020 I bought Oriental Watch when it was very cheap on an asset base. Some hypothetical DDM/DCF calcualtions supported estimated value ranges and there was a tender offer.  

Then, sth good happend to the business, namely people were crazy for expensive watches in Asia. Demand increased, making it easier to sell inventory items which are less sought-after, by ‘bundling’ them with most desired items. Something like: ‘If you want to buy X, you should buy Y today to go up within our waiting list‘. But anyway, demand increased, and resulted in very strong profits. Profits increased during the pandemic and shifted from HK to mainland China (with higher tax). Meanwhile, Oriental Watch continued to shrink its store count. A hint that structural long-term growth will be difficult. Also being difficult because Rolex have to give a get go for new stores.  

Demand might turn out to be cyclical. It is almost certain to be cyclical. One can buy or hold cyclicals if they are cheap vs average throug the cycle earnings, or try ride them during cyclical up-trends. Since I never had a firm view of long-term (average) earnings of the business, I prefered looking at assets.  

Currently, it trades at HKD 4.08 per share for a market cap of 2 bn, as of May 20th. This is around book value of 1,820m if I deduct paid dividends of 168m from 1,987m as of Sept’21. So assuming H2 earnings around H1 level, current estimated P/B should be 1x on point. A large portion of book value consists of cash: HKD 1,167m or 2.39 per share. One could argue that considerable assets (customer contact lists) are not recognized. FY 2022 results, for 12m ending March 2022 are due on June 23.

Above average, which is not great. Importantly, this is not the very bad run HK stock hoarding outrageously excessive cash hoards, proven by the tender offer and high dividend payments. Though, structural growth (more shops) seems unrealistic and the opposite (fewer shops) seems likely, which could increase profitability and lower inventory for more cash.  

Second hand rolex prices show some weakness recently (link). This could the beginning of a cyclical downturn potentially resulting in much lower profits going forward. The primary market should be much more resilient than the secons hand market, where watches change hands with heavy premiums. Should demand remain solid, limited supply of Rolex watches poses another risk which could limit future profit opportunities.  

Profits are at the top. Recently reported net income of HKD 175m (H2’21) and 167m (H1’22) are at the very top. I will not sell yet and wait for results (i guess, today). This could be a mistake, as could be selling today.

2 thoughts on “On Oriental Watch (pre FY’22, ending March’22)

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