This Share has Returned 308%. Can it Continue? – Part 1

Shares of Hour Glass Ltd (SGX: AGS), has outperformed over the last five plus years. The luxury watch retailer’s shares are up 308% from 1 April 2009 to its closing price on last Friday (12 December 2014). By comparison, the capital gain returns of the SPDR STI ETF (SGX: ES3) was 96% for the same duration. The SPDR STI ETF is a proxy for the market barometer, Straits Times Index (SGX: ^STI).

While the shares of Hour Glass has been clocking in the returns — as Foolish investors, we can still look behind the covers to understand its drivers of growth.

A closer look

The business of Hour Glass is fairly straight forward to understand. The majority of its business is centred around its network of 33 stores in Singapore, Malaysia, Thailand, Japan, Hong Kong, and Australia. It’s closest listed competitor would be Cortina Holdings Limited (SGX: C41). You can read more about Hour Glass here and here.

Hour Glass - 1

Source: Company Earnings Report

From the financial year ended 31 March 2010 (FY2010), Hour Glass has managed to grow its topline by an annual compounded rate of 7.1% up till FY2014. The contribution in terms of percentage growth is fairly similar between its two major regions of South East Asia & Australia and North East Asia. For FY2014, South East Asia & Australia made up 84% of its total sales. For the South East Asia Region, the luxury watch retailer has 18 stores in Singapore, four stores in Malaysia, five stores in Thailand, and three stores in Australia. The North East Asia region has two stores in Hong Kong, and one in Japan.

A Quick Peek Ahead

In FY2013’s annual report, Hour Glass referred to Bain & Company’s luxury market study which pointed towards tourists contributing 40% of global luxury spending. Of this amount, customers from China contributed half of the luxury purchases in Asia and a third of luxury purchases in Europe. To this point, CEO Dr. Henry Tay noted that two-thirds of the 97 million mainland China tourists would purchase a luxury watch and that Hour Glass generates about 20% of its direct sales from mainland Chinese customers. The company believes that it is well positioned to capitalize on these trends with its locations in Australia, Japan, and Thailand.

Furthermore, in FY2014’s annual report, CEO Dr. Tay labeled the 2013 as the year of the “Smartwatch panic”. He pointed out that the Swiss watch industry has transcended trends in the past such as quartz watches in early 1980s. In fact, the industry grew from CHF 2.8 billion in 1980 export terms to CHF 21.8 billion in 2013.

Foolish summary

The exercise above is to look at the sales alone. As a next step, we should observe if the topline growth trickles down to the bottom-line for it to sustain its growth in share price But, that’s for the next article.

In the past five years, Hour Glass has to be able to navigate through different country environments, and deliver the topline growth that investors are looking for. There is more that we have to do to figure out the growth drivers for the company in our next article.

As of the closing price on last Friday (12 December 2014) of $0.64, Hour Glass traded at a trailing earnings ratio of about 8, and has a dividend yield of around 3.1%.

Read the second part of the article here.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.