13 Feb 11:38AM : Sincere Watch ($0.84) - Record Profits at 3Q06
  • Exceptionals boosted the bottom-line in 3Q06
    Record profits of S$15.7m in 3Q06 (+525% yoy) was boosted by a S$10.6m exceptional gain from the listing of Sincere Watch Hong Kong (SWHK) on HKSE. Excluding this, net profit from recurring activities doubled to S$5.1m due to strong demand for luxury watches in the group's key markets and forex gains of S$1.3m. 9M06 net profit grew 31% y/y to S$25m, beating our FY06 forecast by 9% on account of the exceptional gains.

  • Lower overheads and gross margin expansion
    3Q06 revenue declined 7% as two shops were closed for refurbishment in October. Sincere also closed one of its Changi airport outlets to reduce overheads. Consequently, Opex/Sales declined from 20.6% to 18.1% due to lower rentals incurred and the deferring of marketing expenditures to 4Q06. Gross margins increased 80bp on the back of ASP increases for selective brands.

  • Expanding retail reach in Asia
    Sincere's growth strategy remains focused on retail expansion across key markets in Asia, complemented by an expanding dealer distribution network. In China, the group is sourcing for prime locations in Shanghai and Beijing to expand its retail presence and distribution reach, while Emotus outlets are targeted at the Singapore market. Flushed with proceeds from SWHK's IPO and a strong cash position, we believe the group can fund these expansion plans from internal resources.

  • A beneficiary of increased luxury goods consumption
    Against a buoyant economic background in key Asian markets, record tourist arrivals in Singapore and the opening of Disneyland in Hong Kong, we believe 4Q06 will shape up to be a strong quarter for Sincere. Swiss watch Industry statistics indicate that demand trends for Swiss watches remain strong in Sincere's key markets, with growth rates of 9%, 8% and 25% in Singapore, Hong Kong and China in 2005, respectively. In December alone, Singapore and China grew by more than 50%, boosted by sales from the luxury segment.

  • Forecast raised, maintain buy
    We have raised our FY06 estimates to factor in the exceptional gains from HK listing and also raised margin assumptions due to positive impact of forex on cost of goods. The stock continues to offer good value against our target price of S$1.26, based on blended ROE/COE and DCF-derived valuations. Maintain Buy.

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