Although I wrote a lot about Watch companies over the past few years (Swatch part 1, Swatch part 2, Hengdeli, Fossil part 1, Fossil part 2, Movado, Richemont), no investment came out of it. However I had a lot of fun researching these companies so it was time well spent.
When I initiated the series in 3 years ago, Smart Watches were a big thing and especially the Apple Watch was perceived to be the “Swiss Watch” killer, which, as we know now didn’t happen as they seem to coexist quite well.
Besides Smart Watches, Fitness Trackers were the “hot shit” and especially VC backed FitBit that IPOed in 2015 was taking oer the world.
This chart shows Fitbit against Fossil (blue) and Richemont (green) and we can clearly see who had staying power and who not:
Within my “Watch series” last year (Swatch part 1, Swatch part 2, Hengdeli, Fossil part 1, Fossil part 2, Movado) I left out one company which also is one of the major players in the Watch space: Richemont.
Some might ask: Why didn’t you already buy Swatch ? I argued that 300 CHF would be a good entry point and the stock is now at 292. Well, at the time of writing the Swatch post, I implicitly assumed that 2015 would be the low point. As we can see now, this is most likely not the case. Sentiment at Swatch is clearly more negative than for Richemont but still not rock bottom.
Additionally, I think one should not overestimate the moat of expensive Watch brands. One example is a (German) article 2 weeks ago in Handelsblatt about luxury watch brand Richard Mille. Founded in the early 2000’s they went from zero to almost 600 mn EUR in sales of super luxury watches with a new brand. So the market entry seems to be possible, at least at the very top.
Originally founded in South Africa by Anton Rupert, Richemont has a quite colorful history.The Group among other activities was into Tobacco, Pay TV and jewelery. Then, in the early 2000s, they focused on luxury and increased their exposure to watches.
No analysis of Swatch (part 1 and part 2) would be complete without a look at Hong Kong listed company Hengdeli.
Hengdeli claims to be the largest luxury watch retailer in the world and sells mostly in Hong Kong and Mainland China. According to several sources, Hengdeli has a 35% market share in selling Swiss Watches in China, so they are of course important for Swatch. How important they are, shows another fact. According to the 2014 annual report, Hengedeli’s largest supplier is responsible for 71% (!!!) of all watches sold. The two largest suppliers account for 88% of all watches sold.
It is time to finish the Swatch case. Let’s start with summarizing the first post on Swatch and the post on smart watches:
– I do believe that luxury watches have “staying power” and will not replaced or significantly impacted by smart watches as the main buyers are Emerging Market consumers and collectors
– If we accept that Swatch is in fact a luxury product company, there would be a clear valuation upside compared to other luxury companies
– However the lower range of their products (Swatch, Tissot, Rado, Hamilton etc.) clearly has problems which could become worse over time as the moat here is small to non-existent
So let’s look at some more aspects of how Swatch is run:
The company is run like a “family company”, very conservative and “Swiss” and a big contrast to Fossil. As mentioned in my post about the Hayek book, Hayek senior hated banks and Swatch therefore always kept a big cash buffer.
In the short term, I don’t think that the Apple Watch is a big danger for Premium Swiss Watch brands. Why ?
– putting some gold on a mass-produced electronic gadget didn’t work for smart phones either
– the smart watch doesn’t have a killer app yet and we don’t see an overall smart watch boom
– the observed decline in Swiss watch exports seems to be mostly caused by overall weakness in Hong kong and Macau
– however lower or medium priced brands could be affected especially in the coming Christmas season
The short-term danger to Premium Watches is much more a further cooling of Chinese and Emerging Market demand. Mid to long-term there could be issues as the market seems to be in the early stages of significant technical changes
Before I jump into more details I have to make a confession: I am myself not an expert on watches. As a matter of fact, I haven’t worn a wrist watch for the last 25 years.
This is the 4th post in what developed into a kind of “Watch series”, see Fossil part 1 and part 2 plus Movado.
Swatch is the largest wrist watch producer in the world. The company is the brainchild of legendary founder Nicholas Hayek who turned around the whole Swiss Watch industry and created Swatch out of insolvent Swiss watch makers.
All Danish Share – the Grand Final:
After looking at all 175 Danish companies, it’s time to consolidate. From the 175 companies, overall 34 made it onto the preliminary watch list which looks as follows:
Another 10 randomly selected Swiss shares. This time, two share made it into the watch list.
41. WISeKey AG
WISekey is a 102 mn CHF market cap Cybersecurity firm that went public in 2016. The company made some headlines pre IPO as Kevin Spacey was one of the investors. The first quoted price has been 12 CHF/share, in the meantime, the stock lost -90%. The company investor presentation manages to have 27 pages without a single hard number.
The company claims to be in the midst of Blockchain, IOT and AI. However Sales have been shrinking and losses are at a level of 2x sales. “Pass”.
42. Banque Cantonal de Jura SA
Another week, another 10 Swiss stocks, this time with one stock to “watch”.
31. Plazza AG
Plazza is a 581 mn CHF market cap real estate company that invests in and around Zurich. The company seems to trade close to NAV and as a rule I normally don’t consider listed real estate as part of my investment universe, therefore I’ll “pass”.
32. Komax AG
Komax is a 831 mn CHF market cap company that supplies cable automation machines to mainly car manufacturers but also the Aerospace industry as well as other industries. As a automobile supplier, business suffered already in 2019 before getting hit again in 2020.
The stock chart shows a significant cyclicality which is not a surprise:
And the next batch of randomly chosen Swiss stocks, however this time I only identified one potential “watch list” candidate.
I do have to say that I enjoy this kind of research a lot. After looking now at 20 stocks so far I have to say that reporting quality is generally a lot better than for German companies, independent from the size of the company.
11. Varia US Proporties
Varia is a listed property company that only invests in US real estate with a market cap of ~380 mn CHF. They seem to own a diversified portfolio of resdidential units. The company seems to be a “yield vehicle”, with relatively large distributions but little increase in NAV. As I am not a fan of listed real estate in any case, I’ll “pass”.
12. Lonza Group
Lonza is a 42,3 bn CHF “large cap” chemical and pharmaceuticals Group. What makes the company interesting is the fact that over the last 10 years, the share price has risen by around 10x: