The Hour Glass

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My 2 cents.

THG is a very decent business but not a great business because there are very few home grown companies that are great. THG is a middleman between the brand owners and the consumers. For newer brands, they will need THG to grow awareness. For established brands, it is the other way round as the watches sell itself.

Case is exemplified by the previous epi centre. Apple gave wafer thin margins and even then, decided to pull out and set up their own shop. Apple holds too much sway and epi centre is reduced to ashes when apple pulled the plug.

Scenario is played out in other products/services as well. Too little sales and the brand owners might not want to renew dealership. Too much sales and the brand owners might get greedy want to go do it themselves instead. At the end of the day, the middle man business can work but like all businesses that exists today, it needs to find its own moat and value.
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(16-06-2021, 12:30 AM)Big Toe Wrote: My 2 cents.

THG is a very decent business but not a great business because there are very few home grown companies that are great. THG is a middleman between the brand owners and the consumers. For newer brands, they will need THG to grow awareness. For established brands, it is the other way round as the watches sell itself.

Case is exemplified by the previous epi centre. Apple gave wafer thin margins and even then, decided to pull out and set up their own shop. Apple holds too much sway and epi centre is reduced to ashes when apple pulled the plug.

Scenario is played out in other products/services as well. Too little sales and the brand owners might not want to renew dealership. Too much sales and the brand owners might get greedy want to go do it themselves instead. At the end of the day, the middle man business can work but like all businesses that exists today, it needs to find its own moat and value.

In today's age which are the few home grown business worthy of being described as 'great'?
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(16-06-2021, 12:30 AM)Big Toe Wrote: My 2 cents.

THG is a very decent business but not a great business because there are very few home grown companies that are great. THG is a middleman between the brand owners and the consumers. For newer brands, they will need THG to grow awareness. For established brands, it is the other way round as the watches sell itself.

Case is exemplified by the previous epi centre. Apple gave wafer thin margins and even then, decided to pull out and set up their own shop. Apple holds too much sway and epi centre is reduced to ashes when apple pulled the plug.

Scenario is played out in other products/services as well. Too little sales and the brand owners might not want to renew dealership. Too much sales and the brand owners might get greedy want to go do it themselves instead. At the end of the day, the middle man business can work but like all businesses that exists today, it needs to find its own moat and value.

I would agree that THG is a very decent business but not a great business.

But from a value investing perspective, if this very decent business is trading at valuations of a weak business, then it can still be a good opportunity for a value investor.

The risk about brands integrating forward, I believe this is the greatest risk to THG's business model. And this risk has only increased with the advent and popularity of e-commerce.  

And so investing in THG, perhaps the most important evaluation one has to make is the degree to which brands would integrate forward. 

I recall this risk was loudest 5 to 10 years ago when the listed brands embarked on building mono-brand boutiques. But it seems they have since receded when there was an industry inventory glut around 2015-2016.

So while Epicentre/Apple is a good reminder of this risk, we should also be careful about using it as a broad stroke for all industries. 

For example, could it be that the economics of mono-brand boutiques would not be as attractive as that of multi-brand boutiques. If Rolex are being produced in limited quantities, a mono-brand Rolex boutique may not have enough Rolex to sell. But  multi-brand boutique can still make some money by signaling to customers that they need to buy some of other brands, to get onto the waiting list for Rolex. Somewhat similar to how in the past,  it it more profitable overall for Starhub/Singel to bundle so many less attractive PayTV channels with their one/two attractive channels.
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(15-06-2021, 05:24 PM)d.o.g. Wrote: The luxury watch business runs on inventory. A new owner cannot expect to magically earn more on the same assets: principals don't give you a discount, customers don't pay you a premium. Pay your staff less, they leave and take the customers with them. Move to cheaper locations, you offend the principals. Basically, your hands are tied. So as a buyer of such a business, if you pay more, you will earn less. The end.

As always, YMMV.

Very well written.. Agree with all your above points except for this little part on inventory because i do buy a few of these watches thus have some insights.

In the luxury watch market, principals sell the dealers with a fix discount or margin. As mention in my previous post, about 10 years back during the GFC inventory means nothing because you must factor in a discount on the carrying value because most dealers are selling with huge discount store front. Only popular models are sold at a premium. Yes back then dealers can sell popular ROLEX / PP models at a premium (above RRP). The brand owners close 1 eye.

Fast forward to 2016 (launch of the ROLEX ceramic daytona), the watches are no longer selling at any discount store front - even those watches that immediately lose half its value when you walk out of the door. Premiums are prohibited by popular brand owners. However there are some watches which are on Price on Asking (POA) these watches could be quoted at a much higher price. Buyers also now have to build relationship. These relationship translates to better sales (both in terms of margin & volume; maybe in 2020 you need 3 watches to get a popular model. Fast forward 2021 you need 5 watches).

So this watch trade is quite lucrative if you understand the inner dealings
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how about the mystical bond of branded mechanical watches to people? is it just discretionary spending, a form of human nature, or a kind of valued angle of investment asset class? ie, the grey resale market prices are higher!

personally i don't even wear a watch anymore, :O
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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So much discussions on THG's watch distribution business in just one day, including from a few knowledgeable VBs!

We should also bear in mind the basics of this trade, some of which remain quite constant over time. Those players who can manage these basics well should do better for themselves and against the competition.

1. Demand for branded mechanical watches - including from collectors and the wealthy - continues to increase over the years. This phenomenon is a global one. With internet providing easy access to brand/product information, this demand trend has become quite solid, and the demand is extending into the rich even in poor or faraway countries.

2. Even the top watch brands cannot sell by themselves without middlemen or retailers. The world market is simply too big, and international trade and many country markets with their peculiarities are simply too complex for the brand-owners to handle on their own. The proven wholesaler/distributor/retailer value- and supply-chains have worked well for the international watch trade, and will continue to evolve with technology advancement.

3. New watch brands or products need the support/acceptance of experienced middlemen/retailers in order to sell or penetrate into different country markets. There is simply no alternative here. The ability of those experienced middlemen/retailers in picking new brands with great potential - before the brands/watches become clear to watch collectors or the competition - to provide marketing support to, is an exceptional management quality.

4. The ownership and top management of many leading watch-brands remain in the hands of the founding family members, and managing the long-term relationships with them at a personal level and on an even keel based on mutual respect and business benefits is very important, and can be a great strength for the middlemen/retailers.

5. Mainly due to the fact that precision mechanical watches are mostly assembled by skilled hands, the ex-factory prices of the leading watch-brands continue on a long-term inflation-adjusted upward trend. This characteristic provides a certain degree of price protection on watch inventory held by middlemen/retailers.

6. Market reputation and brand-name of the local middlemen/retailers for different country or regional markets are very important too, as leading watch brand-owners choose their middlemen/retailers very well, and discerning buyers of expensive watches still prefer to go to well-established shops. Local market knowledge and access to collectors are very important too.

7. Like in most successful businesses, a proven, competent, experienced and driven management team headed by someone of good character and reputation, is very important, and very valuable.
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The company bought back some 400,000 shares yesterday at $1.32.

If my memory is correct, the one and only time the company bough back shares was in 1H2020, during the deepest of COVID19 at 50-70cts.
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(17-06-2021, 01:52 PM)Choon Wrote: The company bought back some 400,000 shares yesterday at $1.32.

If my memory is correct, the one and only time the company bough back shares was in 1H2020, during the deepest of COVID19 at 50-70cts.

Actually, THG executed open-market share buy-back in the last 3 market-days at higher prices in line with a steadily increasing price trend..
https://links.sgx.com/1.0.0/corporate-an...6c85bf0968 [16Jun]
https://links.sgx.com/1.0.0/corporate-an...5883829a76 [17Jun]
https://links.sgx.com/1.0.0/corporate-an...b8a3ec1461 [18Jun]

And an indirect result..
https://links.sgx.com/FileOpen/_FORM1_18...eID=671601
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Tabulating share buybacks made by the Company to date (in attachment).

While care has been taken to present accurate data, refer to at your own risk.

Total amount spent to date ~S$2M not significant relative to net cash of S$143M as at 31Mar2021 and dividend payout of ~S$40M for FY2021 ($0.06/share).


Attached Files Thumbnail(s)
   
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Last year's share buy back at low, low prices have helped in raising EPS and NAV/share.
This year's share buy back so far at record high prices will help raise future EPS, but may have a small short-term dampening impact on NAV/share.

In general, share buy back will also reduce free-float shares and the number of minority shareholders, especially when carried out at record high prices.
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