Swatch Jumps as Outlook Boosts Optimism for China Demand

Swatch Group AG, the maker of Omega watches, rose the most in almost a year after the company reported record revenue for 2013 and forecast a positive year ahead, boosting optimism that demand in China is rebounding.

The bearer shares rose as much as 4.8 percent to 576 Swiss francs in Zurich, the steepest gain since Feb. 4 last year.

After a “strong start” to January for all brands, Swatch expects “dynamic growth” for all of 2014, the company said today. Sales could rise by a “double-digit” percentage figure, Chief Executive Officer Nick Hayek said. The CEO also revealed that the watchmaker’s mainland China sales rose by a “high-single-digit” figure in 2013.

The predictions spurred optimism that sales growth may rebound after a Chinese crackdown on extravagant gifts contributed to Swatch’s slowest revenue growth in four years. The Swiss watch industry’s growth rate has sputtered as China, which buys more than a quarter of Swiss watches, gets tougher over the use of luxury goods as bribes and illegitimate gifts.

“Given the uncertainty surrounding China, we don’t doubt that it is going to be a bumpy ride,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich. “However, overall we believe the company is a classy, inexpensive asset and recent weakness may provide an attractive entry point.”

Swatch traded 4.7 percent higher at 575.50 francs at 1:46 p.m. in Zurich, recovering from yesterday’s 3 percent decline. The shares gained 28 percent in 2013, while Cie. Financiere Richemont SA, the maker of IWC watches and Swatch’s biggest traded competitor, advanced 24 percent.

‘Real Headache’

Gross revenue advanced 8.3 percent to 8.82 billion Swiss francs ($9.7 billion) in 2013, the Biel, Switzerland-based company said. That compares with the 8.86 billion-franc median of 12 estimates compiled by Bloomberg. Exchange-rate swings cut more than 100 million francs from second-half sales.

Operating profit and net income in 2013 were “good,” the company said. Swatch will report full results later this year.

“The only real headache I have is exchange rates,” Hayek said in a phone interview. “I see much more opportunity than risks” in mainland China and the U.S., while the European market is coming back, he said. Group sales in China should improve in 2014, fueled by mid- and low-price brands, and a possible improvement in the luxury segment, Hayek also said.

Sales at Swatch’s watch and jewelry business rose more than 10 percent, while sales at its production division, which sells parts to other watchmakers, increased 8.6 percent. That compares with gains of 16 and 10 percent, respectively, in 2012.

Growth Potential

“You cannot continue to grow a major brand’s sales at 30 to 40 percent over a four-year period,” said John Guy, an analyst at Berenberg Bank in London. “Normalization of growth was always to be expected.”

Swatch’s management today said it’s “comfortable” with analysts’ consensus for 2014 gross sales of 9.6 billion francs to 9.7 billion francs, according to Guy. That would represent a gain of as much as 10 percent. A spokeswoman for the company declined to comment. Hayek told Finanz & Wirtschaft in November that he expects double-digit growth in 2014, barring an economic crisis and worse exchange rates.

Switzerland’s watch exports to China and Hong Kong dropped

8.5 percent in the first 11 months of 2013, on track for the second annual decline since 2008, the year those markets became the biggest source of revenue for the industry. Data for December hasn’t yet been published.