Positive take from Swatch FY13 results
Swatch held a results release conference call yesterday and announced its NP in FY13 increased by 20% yoy (for more details, please refer to Conf call take-aways, by Francesca Di Pasquantonio), sweeping away the cloud in the watch industry and the concerns about China’s anti-extravagance measures. To recap, Swiss watch exports to China (which imports over 25% of Swiss made watches) fell 8.5% in the first 11 months of 2013, according to the Federation of the Swiss Watch Industry. Mr. Nick Hayek, CEO of Swatch Group, commented during the interview with CNBC that despite the economic slowdown in China, Swatch has made the most of their lower-end products in China. He said that the lower market segment has increased and the upper market segment has suffered.
During the interview, Mr. Hayek commented that Chinese Consumers with a penchant for watches and je welry are “buying like hell”. He stated that there was strong growth in China with the increase of the population in private business, who have strong purchasing power and would be willing to buy watches and jewelry. He cited that Swatch Group has always been on a growth path of double-digit growth in mainland China and therefore, the consumption is healthy.
On the results release conference call, Mr. Hayek further cited that there were solid performances since December into CNY, with China seeing a pick-up driven by private consumption, which is now strong enough to resist the anti-corruption policy by the government. The solid demand has extended from mid-end brands to high-end brands. Omega, as a major brand under Swatch, is seeing noticeable improvements in Ch ina and CNY sell-out was higher than last year.
Deutsche Bank view
We maintain our Buy rating as we believe Hengdeli has the deepest network among watch retailers, which should benefit from the rise in the middle-income class, especially in lower tier cities. For 2H13, we believe the company is still in the process of shifting of pr oduct mix and is catering to more mass market products, as it used to have 50% of its China sales from high-end watches. Management is yet to provide guidance for 2014, but we believe that the impact from anti-corruption measures will be more subdue than in 2013. The ASP increase for a few watch brands in mid-2013 might help the margins.
The author of this report wishes to acknowledge the contribu tion made by Rena Ma, an employee of Amba, a third-party provider to Deutsche Bank of offshore research support services.