Equity, Bottom-up Analyst, Investics Research

Sameer Taneja

Equity, Bottom-up Analyst

Investics Research

It is important to note that the information provided by Investics Research is based on publicly available data and own knowledge, which has been gathered and analyzed from a variety of sources. While every effort has been made to ensure the accuracy and completeness of the information provided, it is not guaranteed to be free from errors or omissions. All forecasts and estimates are based on information that has been obtained from public sources that are considered to be reliable. The sources include but are not limited to, company announcements, exchange filings, presentations, etc. Investics does not guarantee the accuracy and completeness of the forecasts, estimates, and/or other information.

Equity Bottom-up Research

Equity Bottom-Up

In his insight, <a href="https://www.smartkarma.com/profiles/nicolas-van-broekhoven-24a66c2d-bca4-4f5b-adda-c4e2bcc509f4" target="_blank" data-smartkarma-citation="accounts:1208" rel="noopener">Nicolas Van Broekhoven</a> has made a very compelling case to stay on in <a href="https://www.smartkarma.com/entities/oriental-watch-holdings" target="_blank" data-smartkarma-citation="entities:19950:1" rel="noopener">Oriental Watch (398 HK)</a>.  I will attempt to make a case for why dividends could be larger in H1 FY22 than H1 FY21, which we believe could further catalyze the stock. Our rationale for the same is:
<ul>
<li>Recovery of Hong Kong. </li>
<li>Continuous strength in China.</li>
<li>The massive decline in costs HoH as we expect employee and staff bonuses to come down.</li>
</ul>
Risks and Concerns
<ul class="">
<li>The outbreak in Nanjing could temporarily disrupt sales in China.</li>
<li>The potential upcycle owing to the inability of people in China to travel will reverse at some stage resulting in the normalization of earnings.</li>
</ul>
With the stock trading at 7x PE FY22, around 50% of the market capitalization in cash, and an estimated dividend of greater than 40 cents HKD around the corner in H1 FY22 ( after the declaration of a final dividend of 39 cents HKD in H2 FY21 ) we believe there is good upside in <a href="https://www.smartkarma.com/entities/oriental-watch-holdings" target="_blank" data-smartkarma-citation="entities:19950:1" rel="noopener">Oriental Watch (398 HK)</a>.

In his insight, Nicolas Van Broekhoven has made a very compelling case to stay on in Oriental Watch (398 HK).  I will attempt to make a case for why dividends could be larger in H1 FY22 than H1 FY21, which we believe could further catalyze the stock. Our rationale for the same is:

Recovery of Hong Kong. 
Continuous strength in China.
The massive decline in costs HoH as we expect employee and staff bonuses to come down.

Risks and Concerns

The outbreak in Nanjing could temporarily disrupt sales in China.
The potential upcycle owing to the inability of people in China to travel will reverse at some stage resulting in the normalization of earnings.

With the stock trading at 7x PE FY22, around 50% of the market capitalization in cash, and an estimated dividend of greater than 40 cents HKD around the corner in H1 FY22 ( after the declaration of a final dividend of 39 cents HKD in H2 FY21 ) we believe there is good upside in Oriental Watch (398 HK).

Oriental Watch: Sit Tight and Stay On For Larger Dividends

Insight Provider, CrossASEAN Research

Nicolas Van Broekhoven

Insight Provider

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Earlier this month we had written about Oriental Watch having pivoted from a HK tourism play into a China domestic luxury spending play. Three years ago approximately 70% of its sales were generated in HK. In FY21 (financial year-end March 2021) approximately 70% is now generated in mainland China. We expect more of the same in FY22 as China borders will remain closed for another year according to various news reports.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/028/original/image_81657348551624511345072.png?1624511342" class="editor-image img-responsive" data-smartkarma-image-id="215028"></figure>Oriental Watch is a prime beneficiary of this trend as we estimate it is the largest importer and reseller of Rolex in mainland China. We expect FY21 trends to continue well into FY22 which means more large dividends to shareholders. Management rewarded shareholders with a final 0.39 HKD dividend (ex-date 24 September). This is on top of the interim dividend of 0.12 HKD paid earlier. On an annualized basis this 0.51 HKD dividend is the highest ever and an 11% dividend yield on the current stock price. Despite buying back 249 million HKD worth of its own stock in 1H21 (partial tender at 3 HKD/share) the cash position actually grew YoY. The inventory position also declined further. Despite all this the company is trading at very cheap levels as 48% of the market cap remains cash and ex-cash the P/E is just 5.5x. For investors who bought in December 2017, when we first wrote about the company, the total return in Oriental Watch is now close to 240%. Not a bad return for a boring watch retailer in a sunset industry.In a 0% interest world investors looking for consistent yield would be wise to consider having Oriental Watch in their portfolio. We raise our Fair Value to 6 HKD (see details below).The biggest risk to Oriental Watch is that Rolex or Patek Philippe upset the Chinese government/consumers (think H&amp;M recently) which would lead to boycott of either brand.

Earlier this month we had written about Oriental Watch having pivoted from a HK tourism play into a China domestic luxury spending play. Three years ago approximately 70% of its sales were generated in HK. In FY21 (financial year-end March 2021) approximately 70% is now generated in mainland China. We expect more of the same in FY22 as China borders will remain closed for another year according to various news reports.Oriental Watch is a prime beneficiary of this trend as we estimate it is the largest importer and reseller of Rolex in mainland China. We expect FY21 trends to continue well into FY22 which means more large dividends to shareholders. Management rewarded shareholders with a final 0.39 HKD dividend (ex-date 24 September). This is on top of the interim dividend of 0.12 HKD paid earlier. On an annualized basis this 0.51 HKD dividend is the highest ever and an 11% dividend yield on the current stock price. Despite buying back 249 million HKD worth of its own stock in 1H21 (partial tender at 3 HKD/share) the cash position actually grew YoY. The inventory position also declined further. Despite all this the company is trading at very cheap levels as 48% of the market cap remains cash and ex-cash the P/E is just 5.5x. For investors who bought in December 2017, when we first wrote about the company, the total return in Oriental Watch is now close to 240%. Not a bad return for a boring watch retailer in a sunset industry.In a 0% interest world investors looking for consistent yield would be wise to consider having Oriental Watch in their portfolio. We raise our Fair Value to 6 HKD (see details below).The biggest risk to Oriental Watch is that Rolex or Patek Philippe upset the Chinese government/consumers (think H&amp;M recently) which would lead to boycott of either brand.

Oriental Watch: Great 0.39 HKD Final Dividend; With China Closed off from World Expect More of Same

<a href="https://www.smartkarma.com/entities/oriental-watch-holdings" target="_blank" data-smartkarma-citation="entities:19950:1" rel="noopener">Oriental Watch (398 HK)</a> has been a long term favorite of mine as the company was a perennial cheap HK travel play. Chinese residents would come to HK and Macau to buy luxury watches which were cheaper vs the mainland.Since 2020 and the onset of Covid the story has changed with mainland citizens unable to travel to HK, Macau, Europe or the US. Chinese travelers were notorious for spending lavishly in cities across Europe and the US in luxury boutiques. Today's Bloomberg article <a href="https://www.straitstimes.com/asia/east-asia/cautious-china-keeps-borders-shut-despite-mass-covid-19-vaccination-drive" target="_blank" rel="noopener">"Cautious China Keeps Borders Shut Despite Mass Vaccination Drive"</a> again highlights that the opening up of China is going to take much longer than investors expect. This is bullish for domestic luxury players.With no foreign holidays mainland Chinese buyers have gone on a spending spree buying luxury watches in mainland China. While no official data is available we estimate Oriental Watch is the largest importer and reseller of Rolex watches in China. During 1H21, 27% of its sales were generated in HK, 70% came from China, 2.8% from Macau, and 0.2% from Taiwan. Contrast this with pre-Covid times when HK/Macau generated a combined +/-75% of annual revenues.Oriental Watch will report FY21 results later this month. We expect record results and a good dividend (minimum 0.25 HKD/share). The question is how much is already discounted with the stock up 60% YTD. As highlighted by fellow insight provider <a href="https://www.smartkarma.com/profiles/sameer-taneja-a0539e0c-84dd-4e66-9c40-6e598edfb4c5" target="_blank" data-smartkarma-citation="accounts:352" rel="noopener">Sameer Taneja</a> in March the stock is still not expensive on a SOTP basis.

Oriental Watch (398 HK) has been a long term favorite of mine as the company was a perennial cheap HK travel play. Chinese residents would come to HK and Macau to buy luxury watches which were cheaper vs the mainland.Since 2020 and the onset of Covid the story has changed with mainland citizens unable to travel to HK, Macau, Europe or the US. Chinese travelers were notorious for spending lavishly in cities across Europe and the US in luxury boutiques. Today's Bloomberg article "Cautious China Keeps Borders Shut Despite Mass Vaccination Drive" again highlights that the opening up of China is going to take much longer than investors expect. This is bullish for domestic luxury players.With no foreign holidays mainland Chinese buyers have gone on a spending spree buying luxury watches in mainland China. While no official data is available we estimate Oriental Watch is the largest importer and reseller of Rolex watches in China. During 1H21, 27% of its sales were generated in HK, 70% came from China, 2.8% from Macau, and 0.2% from Taiwan. Contrast this with pre-Covid times when HK/Macau generated a combined +/-75% of annual revenues.Oriental Watch will report FY21 results later this month. We expect record results and a good dividend (minimum 0.25 HKD/share). The question is how much is already discounted with the stock up 60% YTD. As highlighted by fellow insight provider Sameer Taneja in March the stock is still not expensive on a SOTP basis. 

Oriental Watch: Buying a Rolex in Milan or New York? No, Thanks We Will Get It in Shanghai & Beijing

<a href="https://www.smartkarma.com/entities/oriental-watch-holdings" target="_blank" data-smartkarma-citation="entities:19950:1" rel="noopener">Oriental Watch (398 HK)</a> still presents a great opportunity come the H2 results in May 2021. We believe that the company has the potential to show good growth for profits in H2 as the SSSG was strong over the last few months due to &gt;120% YoY SSSG in the Chinese stores, which has more than compensated for weakness in the HK market.There is deep value in this name with over 850 mn HKD of the market capitalization in cash ( representing 1.75 HKD/share or 67% of the market capitalization).  The stock currently trades at a PE of 9x FY21 (3x ex-cash).

Oriental Watch (398 HK) still presents a great opportunity come the H2 results in May 2021. We believe that the company has the potential to show good growth for profits in H2 as the SSSG was strong over the last few months due to &gt;120% YoY SSSG in the Chinese stores, which has more than compensated for weakness in the HK market.There is deep value in this name with over 850 mn HKD of the market capitalization in cash ( representing 1.75 HKD/share or 67% of the market capitalization).  The stock currently trades at a PE of 9x FY21 (3x ex-cash).  

Oriental Watch: Deep Value and a Good H1 2021

<a href="https://www.smartkarma.com/entities/oriental-watch-holdings" target="_blank" data-smartkarma-citation="entities:19950:1" rel="noopener">Oriental Watch (398 HK)</a> reported 1H21 results (March year-end) which demonstrated sales increasing 108% in mainland China but imploding in HK, Taiwan, and Macau. Profits from mainland China were up almost 300% as margins for particularly Rolex were extraordinary. Sales from China were 70% of total sales which is a massive reversal from a few years ago when HK made up 80% of revenues.Overall company revenues were +16.4% and pre-tax profits were +32.7%. The bottom line was impacted by the higher PRC Enterprise Tax rate.The company just completed a 14.55% buyback of its outstanding shares and subsequently canceled them. Shares outstanding have therefore fallen from 570.36 to 478.36 million shares. After this buyback is accounted for net cash on the balance sheet is 853M HKD (estimate). This equates to cash still being 70% of the market cap! Our expectation is that cash re-builds quickly to around 1 billion HKD and large dividends will continue.Management also raised the interim dividend slightly to 0.12 HKD. The stock goes ex-dividend on 8 December and payment is planned right before Christmas. Just the interim dividend alone yields close to 4.5%.Did you know that if one bought Oriental Watch after our first insight in December 2017,  reinvested all dividends, and participated in the partial tender offer your return would be 179%? Not bad for a "boring" HK watch retailer. Our Fair Value remains at 3.5 HKD or 40% upside from here.<section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/210/original/oriental%20watch%20total%20return%202017%20to%2025%20nov%202020.png?1606353118" class="editor-image img-responsive" data-smartkarma-image-id="174210"></figure></section>

Oriental Watch (398 HK) reported 1H21 results (March year-end) which demonstrated sales increasing 108% in mainland China but imploding in HK, Taiwan, and Macau. Profits from mainland China were up almost 300% as margins for particularly Rolex were extraordinary. Sales from China were 70% of total sales which is a massive reversal from a few years ago when HK made up 80% of revenues.Overall company revenues were +16.4% and pre-tax profits were +32.7%. The bottom line was impacted by the higher PRC Enterprise Tax rate.The company just completed a 14.55% buyback of its outstanding shares and subsequently canceled them. Shares outstanding have therefore fallen from 570.36 to 478.36 million shares. After this buyback is accounted for net cash on the balance sheet is 853M HKD (estimate). This equates to cash still being 70% of the market cap! Our expectation is that cash re-builds quickly to around 1 billion HKD and large dividends will continue.Management also raised the interim dividend slightly to 0.12 HKD. The stock goes ex-dividend on 8 December and payment is planned right before Christmas. Just the interim dividend alone yields close to 4.5%.Did you know that if one bought Oriental Watch after our first insight in December 2017,  reinvested all dividends, and participated in the partial tender offer your return would be 179%? Not bad for a "boring" HK watch retailer. Our Fair Value remains at 3.5 HKD or 40% upside from here.

1H21 Shows 108% Sales Growth in China; Bottom Line Hit by Higher Tax; Cash 70% of Market Cap

Hong Kong

Oriental Watch is an investment holding company primarily engaged in the trading of watches and clocks through an extensive retail network in Greater China. It sells watches from numerous prestigious brands, including Rolex, Tudor, Bulgari, Breitling, and Longines. The company also engages in property holding and securities investment activities. Headquartered in Central, Hong Kong, the company was founded in 1961.

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Oriental Watch (398 HK)

Oriental Watch: Sit Tight and Stay On For Larger Dividends

Oriental Watch represents a good medium-term opportunity with a 7x FY22 PE multiple with more than 50% of the market capitalization in cash and a...

Sameer Taneja

Oriental Watch: Great 0.39 HKD Final Dividend; With China Closed off from World Expect More of Same

Oriental Watch delivered another set of solid results and a large dividend for FY21. With China closed for travel for another year we expect more...

Nicolas Van Broekhoven

Oriental Watch: Buying a Rolex in Milan or New York? No, Thanks We Will Get It in Shanghai & Beijing

Oriental Watch has morphed from a cheap HK travel play to a domestic China luxury spending story. The stock has run up 60% YTD in anticipation of...

Nicolas Van Broekhoven

Oriental Watch: Deep Value and a Good H1 2021

Oriental Watch presents an excellent opportunity to buy with a 67% of the market capitalization in cash, 3x ex-cash PE as well as potential...

Sameer Taneja

1H21 Shows 108% Sales Growth in China; Bottom Line Hit by Higher Tax; Cash 70% of Market Cap

Oriental Watch continues to deliver great outcomes for its shareholders. Management just bought back 14.55% of its own shares and subsequently...

Nicolas Van Broekhoven

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