Ticking Off the Problems in China's Luxury-Watch Market

　　Hong Kong is the single biggest export destination for Swisswatches, with about 21% of shipments, thanks largely toChinese shoppers. But a darkening outlook for luxury goods inChina has seen shares in Hong Kong-listed watch sellerstumble─some are down about 50% from recent peaks.

　　Investors in Hengdeli─one of the largest companies in the sector with a 9 billion Hong Kong dollar (US$1.2 billion) market value─should be especially concerned.

　　The retailer operates more than 400 stores with names such as Elegant and Prime Time in HongKong, China and Taiwan. It boasts Swatch and LVMH as major shareholders.

　　Like its peers, Hengdeli has been hit by China's slowdown. Year-on-year sales growth of 6.3% inthe first half of 2012 was well below the 38.5% jump for the whole of 2011. Profit fell 5% afterstripping out one-time items. Worse, a 20% jump in inventory between December and June couldmean price cuts ahead.

　　Beyond that, there are governance issues that are especially worrying given continuing fears aboutthe state of Chinese accounting practices.

　　For starters, major investor and supplier Swatch made a US$100 million loan to Hengdeli'schairman, Zhang Yuping, last year. As security, Mr. Zhang put up 500 million of his Hengdeli shares. Few other details have been made public─Hengdeli, Swatch and Mr. Zhang declined to comment.

　　The unusual personal loan and lack of information around it is a potential red flag. The stock isdown 45% since Mr. Zhang used his shares as collateral for the loan. Both Mr. Zhang and Hengdelihave bought big blocks of the company's shares in recent months as the price has fallen.

　　The company's balance sheet also raises serious questions. At times, it is resembled a 'pseudo-bank,' CLSA said recently. Hengdeli lent about $115 million to third parties at high interest rates lastyear. The company says the loans have been repaid in full. Investors, though, should questionwhy management put 16% of total equity at risk in an activity that seems outside its core businessof selling watches.

　　Hengdeli's stock still trades at a premium to its peers-about 9.5 times next year's estimatedearnings, according to FactSet, compared with 6.4 times at Oriental Watch and 8.1 times atEmperor Watch and Jewellery. That is partly because Hengdeli has a larger Chinese store networkthan most rivals and a wider customer base that extends to the mass market as well as luxuryconsumers.

　　But the company's shares are already 42% below their recent highs. With business slowing, investors may become more demanding on governance issues. If that happens, Hengdeli'spremium valuation could be on borrowed time.

　　香港是瑞士手表最大的出口目的地，約占21%的發貨量，這在很大程度上要歸功于中國內地購物者。然而由于中國奢侈品行業前景黯淡，在香港上市的手表銷售商股價受挫，其中一些的股價較近期峰值下跌了50%左右。

　　手表零售業規模最大的公司之一、市值達90億港元（約合12億美元）的亨得利集團(Hengdeli)，尤其值得投資者擔憂。

　　這家零售商在香港、中國內地和臺灣地區經營著400多家門店，包括三寶(Elegant)和盛時表行(Prime Time)等。斯沃琪(Swatch)和路威酩軒集團(LVMH)都是亨得利的大股東。

　　與同行一樣，亨得利也因中國內地經濟增速放緩而遭到打擊。2012年上半年銷售額同比增長6.3%，遠低于2011年全年38.5%的增幅。剔除一次性項目后利潤下降5%。更糟糕的是，該公司去年12月至今年6月存貨量猛增20%，這可能意味著未來將會降價。

　　除此而外，由于外界一直擔心中國會計慣例的現狀，亨得利的一些公司治理問題尤其令人擔憂。

　　首先，該公司主要投資者兼供應商斯沃琪為亨得利董事長張瑜平提供了1億美元的貸款。張瑜平則以5億股亨得利股票作為抵押。除此之外幾乎沒有公布其他細節──亨得利、斯沃琪和張瑜平都拒絕置評。

　　這次不同尋常的私人貸款和相關信息的缺乏可能是個警示信號。自張瑜平用手中的股票作為上述貸款的抵押以來，亨得利股價下跌了45%。但最近幾個月股價下跌后，張瑜平和亨得利買入了大量公司股票。

　　該公司的資產負債表也引發重大質疑。里昂證券(CLSA)不久前說，有時這家公司就像一間“假銀行”。去年，亨得利以高昂利率向第三方發放了大約1.15億美元借款。該公司說，這些貸款都已全額償還。然而投資者應當質疑，管理層為何將16%的總資產置于風險之中，而且是從事似乎與其銷售手表這一核心業務無關的活動。

　　亨得利的股票估值水平仍高于同行，FactSet的數據顯示，該股未來一年的預期市盈率為9.5倍，相比之下，東方表行(Oriental Watch)為6.4倍，英皇鐘表珠寶(Emperor Watch and Jewellery)為8.1倍。這在一定程度上是因為亨得利在中國內地的門店網絡規模超過大多數競爭對手，其客戶群體也更為廣泛，該公司既面向大眾市場，也針對奢侈品消費者。

　　但該公司股價已經較近期高點下跌了42%。在業務減緩之際，投資者可能會在公司治理方面提出更高要求。如果出現這種情況，亨得利的高估值可能就時日無多了。