Saturday, May 26, 2007

Horology Culture

Sincere Watch (Hong Kong) Ltd (HKG:0444) reported its full year results for the period ending 31 March 2007 in the middle of this week. First, some pertinent numbers:

  • Revenue increased 26% from HK$373 mil to HK$470 mil.
  • Gross profit increased 40.2% from HK$108 mil to HK$151 mil.
  • Hence, the gross profit margin inched up from 29% to 32%.
  • The net profit, however, dropped from HK$49 mil to HK$43 mil. This was because last year's figures were boosted by an exchange rate gains. Net margin however, remain a respectable 9%.
  • Hence, if the exchange differences were excluded, the operating profit before tax would have increased from HK$37 mil to HK$71 mil.
  • The operating margin has also swelled to about 15% while ROA and ROE were 8% and 20% respectively.

The final EPS figure, as MOS had expected, was lesser than that of 2006's HK13.2 cents. However, it exceeded our full year forecast of HK10 cents by 0.7 cents. MOS singled out Sincere HK on 7 Nov 06 when it was trading at HK$0.56. We had wondered aloud whether it was "Time to Buy?". Then, we were of the view that the PER (even before adjusting for its cash horde) was trading at an attractive 5.6x forward earnings. Its management did not disappoint and also managed to swell NAV to HK$0.52 per share by FYE. Hence, we were able to initiate a position at utterly un-demanding valuations. Please thank Mr. Graham for introducing the term "margin of safety" to investing.

Sincere has also expanded its distributor-ships in the region by adding 7 retail outlets and 4 independent watch dealers. As at end Mar 07, the Group has 41 retail outlets and 23 independent watch dealers in North Asia. Sincere had also open a total of 3 Franck Muller outlets in the last FY - one on HK island, one on Kowloon's Ocean Terminal Mall and one in Macau's Landmark Hotel.

Next year's earnings are likely to be boosted by the Group’s first Franck Muller store in Beijing. It also plans to re-open the boutique in Shanghai's Plaza 66 Nanjing Xi Lu, the classy luxury mall in the booming city. Another outlet is likely to sprout out in the Venetian Macao in Aug 2007. These new shops make Sincere well positioned to capitalize on the growing affluence in Greater China. Furthermore, the up coming Beijing Olympics should translate to a tourism boom and possibly higher sales for the Group.

To reward shareholders for sticking out with management in a year when the stock price sank, a final dividend of HK$0.06 per share has been proposed. This is a cent less than last year's payout but it still represents a 10.7% yield on the price at our time of initial call.

The counter soared to around HK$0.92 cents after the results announcement. It, however, lost some ground to HK$0.87 amidst poor market sentiment. At the latter closing price, the return over the approximately half year holding period is about 55%.

For readers who may want more brain food, swing by to MOS' partner site to get your weekend dose of value investing news. The site features several new articles, including one describing how Bill Miller is lagging the S&P 500 returns in this calender year so far.



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