Tuesday, November 07, 2006

Time to Buy?

Dear Reader,

Sincere Watch (Hong Kong) Ltd (HKG:0444) ("Sincere HK") is principally engaged in brand management and wholesale distribution of watches in Hong Kong, Macau and the PRC. The brands in Sincere HK's stable include Franck MULLER, de Grisogono, European Company Watch and Pierre Kunz.

As a result of largely unrealised FX losses affecting 1Q07 earnings, Sincere HK’s price has plummeted by nearly 50% in the past year from its IPO price of HK$1.08. The FX losses are due to the sharp appreciation of the CHF vs USD during the reporting period. However, we consider short term FX changes to be random and should cancel out in the longer run.

In terms of financial ratios, Sincere HK generally is able to command respectable net margins of 9% and an ROE in excess of 20%. Additionally, it must be emphasized that the ROE was achieved with no gearing.

With the FX movement squaring out over the longer term, full year earnings are expected to come in at around HKD 0.10 for FY2007. At the current market price of HKD 0.57, this imputes an inexpensive PER of 5.7.

Whilst there are risks such as its dependence on Groupe Franck Muller for the exclusive distributorship which aren’t expounded here, the current market price may merit more investigation than merely putting Sincere HK on your watch-list.

Yours Sincerely,
Mr Market



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