Asia is Key to Grow Prospects for Swiss Watch Makers

Posted 04/04/2012 by in

From http://online.wsj.com

When it comes to making a statement, a $5 million watch encrusted with almost 1,300 diamonds is hard to beat.

The one-of-a-kind watch, called “The 5 Million” and produced by LVMH Moët Hennessy Louis Vuitton‘s MC.FR -2.38% brand Hublot, illustrates the bullishness of an industry that has enjoyed a remarkable boom over the last two years. But after an increase in Swiss watch exports of almost 46% since 2009, how much more can the good times continue?

Industry figures leave no doubt that demand from Asia and China can fuel continued growth.

“2010 was a record, and 2011 was another record year, and 2012 will be another record year,” said Hublot chairman Jean-Claude Biver.

While he was only speaking for his brand, his optimism was typical of the exhibitors at the recent Baselworld watch and jewelry exhibition in Switzerland.

The Swiss Watch Industry Federation expects exports to rise in the single digit range this year from the record 19.3 billion Swiss francs ($21.2 billion) in 2011. Swatch Group AG UHR.VX -2.51% CEO Nick Hayek thinks it will increase in the range of 5% to 10%. This would benefit Swatch and LVMH, as well as Compagnie Financiere Richemont CFR.VX -2.48% .

The share prices in the three luxury watchmaking companies have risen as the macroeconomic situation improves and investors realize that the growth is sustainable, said Patrick Haesenboehler at Bank Sarasin in Zurich. In last 12 months shares in Richemont have risen nearly 11%, Swatch Group 8% and LVMH 12%. This year, they have all gained more than 20%.

Watches and jewelry make up only 8% of LVMH’s sales, while watches account for more than half of Richemont’s sales. Swiss watchmakers Rolex, Audemars Piguet and Patek Philippe make up almost 20% of the global timepiece market but are privately owned.

Chief among concerns is talk of a Chinese slowdown, with March’s HSBC preliminary purchase manager’s index falling to a four-month low. But in February, Swiss watch exports to the country still rose 39%.

Fears of declining European sales following a sharp economic slowdown over the winter has also been cushioned by rising numbers of Chinese tourists buying watches on visits to Paris, London and Geneva.

Longer term, as the world gets wealthier and other markets like India and Brazil open up, there could be even more potential.

Analyst Rene Weber at Bank Vontobel in Zurich said he expects Swatch sales to rise by around 10% in 2012, outperforming total Swiss watch exports, which he forecasts to increase by around 8% during the year. He expects net profit to rise 13%. He expects Richemont, which owns the world’s largest branded jewelry company Cartier, to increase sales by 9% and profit 21%. For LVMH, consensus is for a 12% sales increase and 15% rise in net profit.

“It all depends very much on China, and also Chinese tourists, and there is no sign of a collapse there,” he says.

Analysts have also drawn attention to the recovering U.S. market, the world’s second-largest market for Swiss watches, as a driver of growth, while Japan is also starting to grow again.

Analysts at both Sarasin and Vontobel favor Swatch Group over Richemont and LVMH, citing the company’s greater exposure to China, as well as the higher share of midprice watches, which are less vulnerable during a downturn.

In terms of valuation, Sarasin expects the stock to outperform the Swiss Performance Index by at least 5% in the next 12 months. It rates Richemont and LVMH at “neutral.”

“These companies have had pretty good sales and profit growth in the last two years, and when you look at the barriers to entry and their exposure to China, these stocks are not too expensive,” says Jon Cox at Kepler Capital Markets.

As for Hublot’s $5 million watch, it has been sold to a Singapore jeweler pending a final buyer being found.