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，约占21%的发货量，这在很大程度上要归功于中国内地购物者。然而由于中国奢侈品行业前景黯淡，在香港上市的手表销售商股价受挫，其中一些的股价较近期峰值下跌了50%左右。

　　手表零售业规模最大的公司之一、市值达90亿港元（约合12亿美元）的亨得利集团(Hengdeli)，尤其值得投资者担忧。

　　这家零售商在香港、中国内地和台湾地区经营着400多家门店，包括三宝(Elegant)和盛时表行(Prime Time)等。斯沃琪(Swatch)和路威酩轩集团(LVMH)都是亨得利的大股东。

　　与同行一样，亨得利也因中国内地经济增速放缓而遭到打击。2012年上半年销售额同比增长6.3%，远低于2011年全年38.5%的增幅。剔除一次性项目后利润下降5%。更糟糕的是，该公司去年12月至今年6月存货量猛增20%，这可能意味着未来将会降价。

　　除此而外，由于外界一直担心中国会计惯例的现状，亨得利的一些公司治理问题尤其令人担忧。

　　首先，该公司主要投资者兼供应商斯沃琪为亨得利董事长张瑜平提供了1亿美元的贷款。张瑜平则以5亿股亨得利股票作为抵押。除此之外几乎没有公布其他细节──亨得利、斯沃琪和张瑜平都拒绝置评。

　　这次不同寻常的私人贷款和相关信息的缺乏可能是个警示信号。自张瑜平用手中的股票作为上述贷款的抵押以来，亨得利股价下跌了45%。但最近几个月股价下跌后，张瑜平和亨得利买入了大量公司股票。

　　该公司的资产负债表也引发重大质疑。里昂证券(CLSA)不久前说，有时这家公司就像一间“假银行”。去年，亨得利以高昂利率向第三方发放了大约1.15亿美元借款。该公司说，这些贷款都已全额偿还。然而投资者应当质疑，管理层为何将16%的总资产置于风险之中，而且是从事似乎与其销售手表这一核心业务无关的活动。

　　亨得利的股票估值水平仍高于同行，FactSet的数据显示，该股未来一年的预期市盈率为9.5倍，相比之下，东方表行(Oriental Watch)为6.4倍，英皇钟表珠宝(Emperor Watch and Jewellery)为8.1倍。这在一定程度上是因为亨得利在中国内地的门店网络规模超过大多数竞争对手，其客户群体也更为广泛，该公司既面向大众市场，也针对奢侈品消费者。

　　但该公司股价已经较近期高点下跌了42%。在业务减缓之际，投资者可能会在公司治理方面提出更高要求。如果出现这种情况，亨得利的高估值可能就时日无多了。