DEAR FELLOW SHAREHOLDERS,

For the financial year ended 31 March 2024, the Group’s revenues rose marginally to $1.13 billion whilst profit‑after‑tax declined by 9.5% to $157.6 million. This performance is broadly within management’s expectations and can be attributed to several factors. A softening of watch buying sentiment in Asia from early 2023, a rising operating cost base and, the financial impact of a change in a legislative ruling in New Zealand removing tax depreciation deductions on buildings in March 2024. This policy shift necessitated the accounting adjustment of deferred tax liabilities, resulting in a $4.7 million increase in deferred tax expenses for the financial year relating to the Group’s properties in Auckland.

Along with an increased allocation towards capital expenditures in line with our network re‑development programme, we have also seen our overall inventory rise from a historic decade low in 2022 to close at $314.1 million. Assessing it over this time frame is important as it highlights two key points. Firstly, we were operating at a highly productive, yet unsustainably low level of inventory when the market was peaking in 2022 and secondly, that consumer purchases have slowed and, because brands and their suppliers had added to their production capacity during the pandemic years, inventory levels in all direct owned stores and specialist retail channels have once again reflated to pre‑Covid times.

Over the course of the financial year, the Group continued its shareholder return programme by buying back $14.7 million of our own shares from the market. Cash and bank balances were $237.6 million whilst debt, which is attributed solely towards our investments in our real estate portfolio, stood at $83.9 million.

On a consolidated net asset basis, The Hour Glass increased its corporate net worth to $848.4 million or $1.31 per share. During the financial year, an interim dividend of 2.0 cents per ordinary share, amounting to $13.1 million was paid. The Board of Directors are pleased to recommend a final dividend of 6.0 cents per ordinary share. Together with the interim dividend, the total dividend for FY 2024 is $52.1 million.

GENERAL COMMENTARY

Uncertainty, be it economic or geopolitical, has become a certainty in the commentary and predictions of analysts and pundits in the media. Despite major stock indices enjoying all‑time highs, the world is beset by many problems, any one of which could tip over into a wider disaster. There are presently two wars taking place––an asymmetric armed conflict in Gaza and a large‑scale conventional war in Ukraine––both of which have already impacted the world in a variety of ways. The recent Israel‑Hamas war has had more of a political effect across the world, widening divisions and exacerbating the polarisation of politics, particularly in the West. Despite seemingly far removed from luxury watches, political developments, whether in the Middle East or the United States, should not be underestimated. The ongoing Russia‑Ukraine war on the other hand has continued to throw energy and food commodity markets into flux, leading to persistent inflation worldwide.

Fuelled by a decade of arguably unsustainable near‑zero interest rates in the Western world, inflation has led to higher‑for‑longer rates in most developed countries and markets we operate in. The effect of these higher rates and corresponding tighter money supply has reversed the once‑inexorable rise in asset prices, including those of collectible watches. Warren Buffet characterises it best when he said: “Interest rates are to asset prices like gravity is to apple. They power everything in the economic universe”.

All these problems have induced something of a malaise amongst consumers, standing in stark contrast to the positive sentiment they experienced some 12 to 36 months ago. This was apparent in the watch market as well as the wider luxury goods universe, where demand for handbags, cars, and even private jets, far exceeded supply. The shift in consumer psychology is particularly evident considering the massive rallies in the stock markets and cryptocurrencies–– Bitcoin is once again closing in on its all‑time high––which in more ordinary times would have swiftly translated into an increased appetite for the good things in life. This has simply not happened this time around. One factor is because people can travel freely again, allowing aspirational luxury clients to consume experiences rather than goods. But it is arguably the shift in mindset that is the stronger and more enduring reason. It is not just the loss of the feel‑good factor amongst consumers. Many buyers of luxury wares are now adopting a wait‑and‑see approach since the obvious slowdown implies that one, prices are not likely to rise as frequently and as swiftly as they have the past 3 years, and two, the availability of watches one desires is likely to improve. This is especially so with seasoned watch collectors, who have seen the vagaries of the watch market over the years.

The downturn in demand was first evident in the secondary market, where values began to decline from mid‑2022. Some hyped‑up watches have seen their secondary market values decline by more than half. This in turn has led to pre‑owned watch merchants writing down inventory whilst dealing with a slowdown in sales, and invariably leading to a liquidity crunch in the secondary market. As a result, the consolidation and growth of secondary‑market resellers, especially the biggest players that were backed by professional investors, have come to a halt with several attempting to pivot away from reselling as their core business. Although the Rolex Certified Pre‑Owned programme has been gradually rolled out in the brand’s biggest markets, it is still too early to quantify its full impact on the global secondary market. Which now as it stands, and has always been, a largely fragmented sector dependent on a high‑volume, low‑margin trade.

The slowing market then began showing up in the primary, new watch market nine months later. By the first quarter of 2024, most major markets were either shrinking or eking out anaemic growth. Presently, the biggest market for Swiss watches is the United States, which accounted for a sixth of Swiss watch exports in the first three months of 2024. Though it remains resilient, the United States enjoyed a mere 0.2% increase in Swiss watch imports for the first quarter of 2024 relative to 2023, a major slowdown over the 15.9% gain compared to 2022. As the world’s strongest consumer market, the United States remains one of the last hopes for the watch industry having doubled in size over the past five years to reach CHF4.0 billion in annual Swiss watch shipments. Besides directing more inventory to America, it is also the world’s most widely distributed watch market with brands continuing to open more points of sale and host influential global events. LVMH Watch Week, a combined platform for the luxury group’s watch and jewellery brands to launch new products and an indicator of their geographic focus for the year, took place in Miami in January 2024, after Singapore in 2023 and Dubai in 2020. The strength of the American market will hinge in a large part on how its elections play out and its long‑term rates, which at the time of writing, may appear to stay elevated for some time to come. Although the country’s job market has been robust, it is beginning to show signs of weakness. Other indicators, like credit card delinquencies are also flashing red. Its commercial real estate market, teetering on distress. These early warning signals do not bode well for the market and consequently, the wider watch industry.

China and Hong Kong, once the largest destinations for Swiss watch exports, are in 2024, a serious cause of concern for many watchmakers who had projected a softer landing. Swiss watch exports to these two countries for the first three months of 2024 were down 25.0% over the same period last year, but worse yet, in the month of March 2024, registered year‑on‑year declines of 41.5% and 44.2% respectively. A busted property market, high youth unemployment and widespread pessimism amongst business owners and consumers are behind the lacklustre economy.

Japan has been a rare bright spot for the luxury industry, largely thanks to the weak yen. Overall retail sales in Japan have grown over 60.0% since 2019, with much of the increased spending at department stores and luxury boutiques driven by tourists. At some brands, as much as half of sales are now to foreigners, yet strong sales in Japan are not enough to save an industry. History has shown that currency‑driven changes in spending markets tend to be temporary rather than permanent as brands eventually adjust prices upwards to shield themselves from margin erosion, which diminishes the purchasing power of the local Japanese buyers.

NEWTON’S LAW OF UNIVERSAL GRAVITATION

One of the founders of the Abstract Expressionist movement Willem de Kooning ascribed his secret to the vertiginous prices his works fetched at auction and eventual art world infamy was his ability to “free himself from gravity”. A decade and a half of cheap money coupled with a brief but consequential post‑pandemic boom, instilled a false sense of invincibility amongst executives in the luxury sector; many of whom believed that they had finally achieved escape velocity and were hurtling through the doorway of emancipation from the boom‑and‑bust behaviour of markets. In the past 12 months, these luxonauts have re‑entered earth’s atmosphere with several already ejecting safety chutes.

The slowdown is apparent in the results of even the largest luxury goods groups. In the first quarter of 2024, LVMH’s fashion and leather goods division wrung out organic growth of 2.0%, while watch and jewellery sales fell 2.0%, and wines and spirits continued its quarterly sequential drop of 12.0%, reflecting a similar trend amongst its peers. The same trajectory can be seen in the FY 2024 results for Richemont, which is more focused on watches and jewellery. Its jewellery maisons saw sales rise 6.0%, while its specialist watchmakers endured a 3.0% drop in sales. Notably, Richemont overhauled its management as it announced its results, with chairman Johann Rupert indicating the leadership changes they are making are intended to prepare the group for a slowdown.

The Hour Glass also felt the onset of this downturn in something as simple as interest‑registration for our most important brands where year‑on‑year comparisons over a 12‑month period saw a decline of 8.0%. Contributing to this are interests registered from prospects (individuals who have never patronised The Hour Glass) which fell more than the rise in interests registered from our existing clientele. We saw this pattern materialise across gender and demographic profiles from ages 30 through to their 60s. The only exception was amongst those born after 1995, where we witnessed net positive interest gains. This implies that one, we are attracting a younger base of clients. Two, that the watch enthusiasts who already shop with us continue to be intrigued by watches and, more importantly, sense that this is an opportunity to acquire what they desire. But it is all too clear that the aspirational clientele once powered by the most abundant fuels in the universe–the ‘fear‑of‑missing‑out’ and ‘you‑only‑live‑once’–are under pressure, with many dropping out entirely. It is no surprise that this comes on the back of floundering secondary market values.

THE GREATER THE OBSTACLE, THE MORE GLORY IN OVERCOMING IT

Slowing growth across the board has led to rising inventory levels at retailers as well as brands, many of which now operate their own store network. Anecdotal evidence also points to sharply higher inventory levels on the grey market, a figure that is largely concealed but will have a significant influence on the primary market. The watchmaking industry has started to acknowledge this, with brands and their suppliers cutting both forecasts and plans. This is happening at a varying rate, depending on the brand’s perception of reality, but the first movers have an instant advantage that will strengthen their position in the long run.

Even though the industry has recognised the slowdown, supply will still exceed demand for the most part, as it always has. While this will be negligible for the most desired brands, it will likely be pronounced for second and third‑tier marques. Historically, this supply‑demand imbalance led to increased grey market sales, more discounting, and narrower margins for authorised retailers. This is likely the scenario for the industry, but it will play out differently depending on the brand and retailer. Once again, the most sought‑after brand and the retailers that represent them will fare better. As this slowdown persists and eventually begin to bite hard, I remain confident that there remains a strong horizon of hope for the watch sector to regain its forward momentum.

This brings us back to a point I have made in my chairman’s statements for the past several years. The Hour Glass will prosper in the long term only by working with brands we admire and trust, true partners that share our philosophy of patiently building the business with a coherent long‑term strategy. Whilst we cherish every moment of our friendships built over decades, we are also not one to dwell on sentiment. Nostalgia is among the most futile of emotions in the management of business relationships. Our management teams are trained to anticipate and adapt, blinkered to the scaling of an organisation that thrives on elevating quality at every touchpoint of our business and over time, emerge to be exceptional in the field of speciality watch retailing. Because today, our most important and farsighted collaborators are more concerned with how we sell and who we sell to, rather than how many and how much we are selling.

ROUNDING OFF

Most people fail not because they make mistakes, but because they never fully commit themselves. We could not have made it through the year if not for the discipline and dedication of all our team members in the Group. From our board members and heads of affiliates down to the most junior specialist on the boutique floor, I express my heartfelt gratitude. To our friends and long‑standing business partners, I will be counting on your energy and wise counsel in the year to come.

In his tome––The Wealth and Poverty of Nations––historian and horological enthusiast David Landes observed that “If we learn anything from the history of economic development, it is that culture makes all the difference”. Culture lies at the epicentre of The Hour Glass’ raison d’être. This takes the form of an ever‑evolving organisational culture of excellence that has been moulded over the past 45 years, to the distillation of this axiom into an overarching corporate mission which seeks to “Enrich lives with passion by advancing watch culture”. Together with my colleagues in the Group, we believe that we can make people happier by sharing with them this hobby of watch collecting and building a community around this pursuit.

One of our principal social engagement initiatives this coming year is the launch of ‘IAMWATCH’, an informal gathering of leading industry personalities, artisanal watchmakers and enthusiasts that is open to the public from 18th October to 20th October 2024 in Singapore. We hope this milestone edition will ignite the flames of desire amongst those attending and as share owners, I encourage all of you to sign up. I look forward to welcoming you there.

HENRY TAY
Executive Chairman
31 May 2024