Swatch First-Half Profit Rises 24%; Increases Hengdeli Stake
Swatch Group AG (UHR), the world’s biggest watchmaker, said that earnings in the first half rose 24 percent and boosted its stake in its Chinese retail partner.
Net income rose to 575 million Swiss francs ($717 million), the Biel, Switzerland-based company said today in an e-mailed statement. Operating profit rose 21 percent to 756 million francs, beating the median estimate of three analysts compiled by Bloomberg.
The maker of Omega and Breguet timepieces is getting more revenue from Asia where rising incomes are fueling demand for luxury goods, helping offset the impact of a surging Swiss franc. The currency has advanced 31 percent against the U.S. dollar in the past year and Swatch warned that “uncurbed speculation” in the franc would cut into 2011 sales and profit.
“This strong set of figures demonstrates that Swatch can achieve strong earnings growth in spite of the Swiss franc,” Antoine Belge, an analyst at HSBC, wrote in a research note. “It’s a strong beat.”
Swatch shares advanced 2.4 francs, or 0.6 percent, to 426.7 francs at 2:22 p.m. in Zurich. The stock has advanced 31 percent in the past year, giving the company a market capitalization of 22.4 billion francs.
The watchmaker may miss out on 1 billion francs of potential revenue if current exchange rates continue, Chief Executive Officer Nick Hayek told Tages-Anzeiger today in an interview.
Swatch bought 500 million shares in Hengdeli Holdings Ltd. (3389) on July 21 for an undisclosed price, bringing its investment to 20.4 percent, according to a filing with the Hong Kong stock exchange. Today’s share price values the additional stake at about $257 million. Swatch previously held a stake of about 9 percent, said Beatrice Howald, a company spokeswoman.
Swatch acquired the shares from Best Growth International Ltd., Ruby Chan, a spokeswoman for the Chinese retailer, said by phone today. Best Growth, controlled by Chairman Zhang Yuping, is the biggest investor in Hengdeli, according to data compiled by Bloomberg.
LVMH Moet Hennessy Louis Vuitton SA, which owns the rival TAG Heuer and Hublot watch brands, owns about 6 percent of the Chinese company, according to Bloomberg data.
While it’s unlikely that Swatch would want to take full control of Hengdeli, the increased stake may allow the Swiss company to influence strategy and how its brands are presented in China, Jon Cox, an analyst at Kepler Capital Markets in Zurich, said by phone.
Protection Versus Takeover
“About half of Hengdeli’s products are Swatch brands, so Swatch are protecting their interest in case someone else wants to take them over,” Cox said. He rates the stock “buy.”
Hengdeli fell 3.6 percent, the most in three weeks, to HK$4.04 at the 4 p.m. close of trading in Hong Kong.
Asia imported more than half of Switzerland’s watches during the first half, according to the Federation of the Swiss Watch Industry. The demand helped offset the impact of a stronger franc, which reduces the value of revenue generated in other currencies.
Net sales of watches and jewelry increased 13 percent to 2.75 billion francs during the first half, while revenue from the unit that makes components and watch mechanisms rose about 30 percent to 964 million francs. The company said it’s seeking to increase capacity to tackle “substantial” delivery backlogs for movements, hands and dials.
“We are very confident regarding the future and consider that the production force should facilitate the group in winning market share,” Cheuvreux analysts wrote in a note to investors.
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