Swatch (UHR.VX, Buy) held an investor/analyst conference call on 22 July to discuss its 1H14 results. Swatch management informed investors that Mr. Cheung, chairman of Hengdeli, has repaid a USD100m loan to the company. Separately, management also discussed 2H14 guidance, commenting that current trading looks positive (up d-d in July), driven by mid-priced brands, and with high-end remaining more difficult. Geographically, a strong Japan and US are offset by soft spots such as HK (Macau and Taiwan are exceptions), significant underperformance of high-end watches in China, and the weak performance of the French market, According to Francesca Di Pasquantonio, our head of Global Luxury, the HW jewellery business is performing well, and China was particularly flagged. For more information, please refer to her note titled Swatch Group Alert - Conference call takeaways dated 22 July.
We view the repayment of the loan to Swatch as a positive move in easing some of the corporate governance issues, and it will take time to fully regain investors’ confidence. Meanwhile, Swatch’s comment on HK/China is in line with what Hengdeli has experienced over the past six months, in our view. We maintain our Hold recommendation.