Are the good times over for Singapore’s listed watch retailers?

SHARES of Singapore’s listed luxury watch retailers have corrected over the past year, following a spectacular run-up in the immediate period post-pandemic.

Both The Hour Glass (THG) and Cortina Holdings have fallen around 12 to 13 per cent since June 2022, compared with gains of 2.5 per cent in the benchmark Straits Times Index (STI), as growth in revenue slowed.

This reversed the extraordinary boom between March 2020 and March 2022, during which the share prices of both players rose over 300 per cent, as demand for luxury timepieces soared during the pandemic.

But are the good times truly over for these players?

Post-pandemic boom

For the financial year ended March 2023, both Cortina and THG reported higher profits and revenue. Net profit for Cortina rose 11 per cent on year to S$76.5 million, while THG’s net profit was also up 11 per cent to S$172.4 million. The earnings from both companies were more than double their FY2019 levels.

The outperformance came amid robust global demand, as consumers poured money they might have spent on travel into high-end timepieces instead. Stock markets and cryptocurrencies were also trading at their all-time highs post-pandemic, likely supporting high-end spending.

Popular brands such as Rolex, Patek Philippe and Audemars Piguet faced long waiting lists for purchases, spurring a boom in the secondary market. Sought-after pieces were fetching steep premiums to their list prices.

According to data from the Federation of the Swiss Watch Industry, the total value of Swiss watch exports worldwide grew some 46.1 per cent between 2020 and 2022 – to 24.8 billion Swiss francs (S$37.4 billion).

The growth in exports to Singapore was also particularly strong over the two years. Despite the lack of tourism, export value to the Republic rose 72.5 per cent between 2020 and 2022 to over 1.6 billion Swiss francs.

Slowing sentiment

There are signs demand is slowing. Bloomberg reported in February that online pre-owned watch selling platform Watchfinder dropped prices by about 15 per cent.

Both THG and Cortina also reported lower revenue growth for their second half ended March, and year-on-year declines in net profit. They also flagged in their outlook that the uncertain global economic outlook is likely to negatively affect consumer sentiment.

Michael Tay, group managing director of THG, noted that economic activity and consumer behaviour are returning to pre-pandemic norms, and a “sense of balance and moderation appears to be returning to the high-end watch industry”.

Indeed, the global economic environment is weakening. Market watchers have flagged concerns about a potential technical recession in Singapore.

China’s post-pandemic reopening has also not provided the boost to economic growth that many have been hoping for.

Swiss watch exports to Singapore declined on a year-on-year basis in the most recent months of April and May, even though total exports to the country are still up 8.6 per cent on a year-to-date basis.

Potential relief?

Nevertheless, stock markets worldwide have been holding up remarkably well this year.

The S&P 500, for instance, has risen over 20 per cent from its October 2022 lows, entering what has been widely called a new bull market. The wealth effect arising from an increase in stock valuations may drive consumer confidence and spending on luxury items.

In Singapore, prices of big-ticket items such as cars and houses have also been holding up – despite challenging conditions such as higher interest rates. While this pricing phenomenon is at least partly due to supply issues, it shows that demand from wealthy individuals in the market remains present.

Meanwhile, tourist arrivals to the Republic are recovering. The percentage of visitors from China is still a fraction of what it was pre-Covid. Swiss watch exports to China have rebounded rapidly as the country reopens, with the total value of exports more than doubling year on year in April and May.

An increase in the number of Chinese tourists visiting Singapore in the coming months may boost watch sales.

If Cortina and THG are able to maintain their revenue and profits at recent levels, their present valuations do not appear too expensive. Cortina’s share price of S$3.66 gives it a price-to-earnings (PE) ratio of 7.9, which is below its 10-year average of 9.6 – according to Bloomberg data. Similarly, THG’s PE ratio of 7.9 based on its S$2.00 share price is below its 10-year average of 9.2.

The question is whether the potential positives are sufficient to counter the broader slowdown worldwide.