Would Sincere Watch be a good buy for Cortina?

RUMOURS are swirling that Cortina Holdings is considering buying privately-held Sincere Watches, and the price movements of Singapore Exchange-listed Cortina may be reflecting the murmurs on the grapevine.

Shares of Cortina rose from S$1.32 on July 30 to S$1.56 on Aug 3, an 18 per cent gain over the two trading sessions. The counter ended up S$0.05 to S$1.60 on Wednesday.

The mainboard-listed luxury watch retailer had on July 30 declared special and final dividends of 2.5 Singapore cents in total - on top of the four-Singapore cents interim dividend announced earlier that month - but the magnitude of the share price gain seems disproportionate to the dividends declared.

An acquisition of Sincere Watch would certainly make sense.

Cortina would be able to tap Sincere Watch's retail network in the massive mainland China market.

China was the second-largest export destination for Swiss watches in the first half of this year, after the United States, statistics from the Federation of the Swiss Watch Industry showed. Exports values to most of the top 30 export markets declined in H1, but China saw the smallest drop at 14.6 per cent year-on-year to 790.9 million swiss francs (S$1.2 billion). Exports to China also staged a rebound of 47.7 per cent in June.

The Singapore market, down 31.7 per cent to 409.6 million swiss francs, was the fifth largest export destination.

One of the oldest luxury watch retailers in Singapore with a history of 66 years now, Sincere Watch runs four boutiques in mainland China, four in Hong Kong and three in neighbouring Macau. Cortina has just one shop in Hong Kong.

In total, Sincere Watch has 37 boutiques and points-of-sales. Cortina has 23.

Adding Sincere Watch could help Cortina close the gap with, or even leapfrog, its listed rival The Hour Glass. The latter clocked S$720.9 million in revenue for the financial year ended March 2019. Cortina's revenue was S$460.8 million and Sincere Watch's S$182.6 million. (No financial data was available for Sincere Watch for FY2020.)

Sincere Watch also owns Franck Muller Private Limited, which was one of the five largest suppliers of Sincere Watch (Hong Kong) in the past financial year. Sincere Watch (Hong Kong) is the sole distributor of Franck Muller watches and accessories in Hong Kong, Macau, Taiwan and mainland China.

Sincere Watch owns 5.39 per cent of Sincere Watch (Hong Kong), which is listed on the Stock Exchange of Hong Kong. Sincere Watch (Hong Kong) is currently loss making, but could perhaps benefit from a pair of fresh eyes.

In fact, there is generally room for improvement in Sincere Watch's numbers. This could present some upside for Cortina. In FY2019, Sincere Watch's net earnings from continuing operations came in at a mere S$278,000 - giving it a very slim net margin of 0.15 per cent.

The Hour Glass Group and Cortina registered net profit margin of 9.8 per cent and 6.7 per cent, respectively.

Both Cortina and The Hour Glass were able to improve their earnings in FY2019, by 31 per cent and 41 per cent, respectively. But Sincere Watch's net earnings dipped 22.4 per cent despite a rise in revenue.

Given those numbers, the price tag for Sincere Watch should be affordable for Cortina.

Also, Cortina has the headroom to borrow for an acquisition. It only had short-term debts of S$4.96 million as at March. Its cash balances and inventories together amounted to S$257.7 million, against total liabilities of S$98 million.

According to someone with direct knowledge of the potential acquisition, "preliminary talks" of a deal were held last week. Market speculation is that the purchase could be tagged between S$100 million and S$180 million. It was also said that Cortina had sent a team to visit some of the Sincere Watch outlets in Singapore.

Cortina has denied the rumour, while Sincere Watch was silent when queried by The Business Times.

A sale of Sincere Watch, if it materialises, will mark the fourth change of ownership since it was founded in 1954. It was first sold by Tay Liam Wee, the founder's son, in 2007 to now-defunct Hong Kong fashion and luxury watch retailer Peace Mark Holdings at S$530 million in 2007. Mr Tay was part of a consortium that bought back the watch retailer two years later at S$112.7 million.

The retailer was resold in 2012 to Pollyanna Chu for S$232 million, with Sincere Watch (Hong Kong) later being carved out and listed.

According to Forbes, Mrs Chu had a net worth of US$1.75 billion and was the 45th richest person in Hong Kong in this year's ranking. She was once the richest woman in Hong Kong, but lost that title after more than half of her wealth (then US$12 billion) was wiped out after shares of Kingston Financial Group, a major source of her wealth, crashed in early 2018.

Additional reporting by Chuang Peck Ming