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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
14 March 2017 Europe/Switzerland
Equity Research Luxury Goods
Swiss Watchmakers The Ideas Engine series showcases Credit Suisse’s unique
insights and investment ideas.
Research Analysts
Guillaume Gauvillé, CFA
44 207 888 0321
Catherine Tillson
44 20 7888 6052
SECTOR REVIEW
What could go wrong in the 'rebound'
■ We reiterate our cautious view on the Swiss watch industry. While the
market seems to be expecting a bounce in watch manufacturing in 2017,
we believe the industry continues to face cyclical and structural challenges.
Exports are off to a slow start (down 6% in January), the KOF Swiss
Economic Institute survey suggests overcapacity persists and we think
manufacturers have to tackle not only inventory issues but also a negative
ASP development in the medium term.
■ New analysis provides new perspectives on the Swiss watch industry.
Our proprietary work features (a) a detailed analysis of product launches
for five brands covering half the Swiss watch industry which indicates that
the average selling price at the retail level is likely to be negative, (b) a
benchmark analysis with sell-in data which suggests the negative mix for
the industry is yet to come at the wholesale level, (c) an excess inventory
model which concludes that the stock overbuild in Asia remains but is
marginally improving whilst the stock situation in the US has worsened, and
(d) an innovative way to assess the inventory glut by brand using the
average discount on watches when purchased on the grey market.
■ We rate both Swatch Group and Richemont Underperform. With >70%
of watch sales being wholesale and >55% of sales coming from Asia, we
are most negative on Swatch Group, chiefly on fundamentals. Most of its
brands show more problematic inventory issues than peers. Our Swatch
target price increases to SFr260 from SFr220 due to the time value factor
and the rerating of luxury peers. We remain cautious on Richemont largely
on valuation grounds. Our target price is unchanged at SFr65.
Figure 1: Value chain for the Swiss watch industry
Source: Credit Suisse research
Retailers
Grey market
ConsumersManufacturers
Inventory buybacks
analysis
Proprietary excess inventory
model for Asia and US
Proprietary analysis of average
discount in the grey market
SELL IN SELL THROUGH
Detailed channel
checks in Asia and US
Proprietary analysis of
product launches
14 March 2017
Swiss Watchmakers 2
Key charts
Figure 2: ASP at the retail level is coming down
according to our proprietary product launch analysis
Figure 3: This suggests that mix should ultimately
start to become negative at the wholesale level
Entry price points and ASP by brand and by launch date ASP development of Swiss watch exports
Source: Company data, Credit Suisse research Source: FHS, Credit Suisse research
Figure 4: Our excess stock model shows that stock
overbuild remains in Asia but is not worsening
Figure 5: Our analysis of the grey market shows that
the inventory glut is the highest for Swatch Group
Estimated excess stocks in Asia Average discount on grey market online retailer Jomashop
Source: FHS, Credit Suisse research Source: Company data, Credit Suisse research
Figure 6: Swatch Group is already pricing in a
rebound in exports
Figure 7: Swatch Group and Richemont do not
screen well under our EV/IC framework
Swatch Group's share price vs. KOF Business Climate index 2018e EV/IC vs. RNOA/WACC
Source: KOF Swiss Economic Institute, FHS, Credit Suisse research Source: Credit Suisse estimates
0
5,000
10,000
15,000
20,000
25,000
Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP
Average Omega IWC Cartier Rolex Jaeger LeCoultre
New launches Existing
-10%
-5%
0%
5%
10%
15%
20%
25%
0
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1993
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2016
ASP (in SFr, lhs) Y/Y % chg. (rhs)
0
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800
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2012 2013 2014 2015 2016
Excess stocks (in SFrm, lhs) Excess stocks (in days, rhs)
0%
5%
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20%
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Average
-100
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2002 2002 2003 2004 2005 2006 2007 2007 2008 2009 2010 2011 2012 2012 2013 2014 2015 2016 2017
Swatch Group share price (SFr, lhs) KOF Business climate (3-m moving average, rhs)
LVMHRichemont
Swatch
Kering BurberryHugo Boss
Ferragamo
Hermes
Tod's
Cucinelli
R² = 96%
-
2.0
4.0
6.0
8.0
10.0
12.0
0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
EV
/ IC
(ad
just
ed)
-20
18e
ROIC / WACC (adjusted) - 2018e
14 March 2017
Swiss Watchmakers 3
Table of contents
Key charts 2
What could go wrong in the 'rebound' 4
Setting the scene ...................................................................................................... 4
New analysis provides new perspectives ................................................................. 6
Negative mix yet to be seen 7
The way we think brands are adapting their offer .................................................... 7
Looking for empirical evidence ................................................................................. 7
IWC Schaffhausen ................................................................................................... 9
Jaeger-LeCoultre .................................................................................................... 10
Cartier ..................................................................................................................... 11
Rolex ...................................................................................................................... 12
Omega .................................................................................................................... 13
The price/mix conundrum in sell-in numbers ......................................................... 14
Stock levels in the channel 17
A recap on sell-through .......................................................................................... 17
Marginal improvement in stock levels .................................................................... 21
Industry responds with inventory swaps ................................................................ 24
A closer look at discounts within the grey market .................................................. 25
The way we approach valuation 27
Swatch Group (UHR.S) 29
Charting the story ................................................................................................... 31
Financials ............................................................................................................... 32
Valuation ................................................................................................................. 33
Compagnie Financiere Richemont SA 35
Charting the story ................................................................................................... 37
Divisional assumptions ........................................................................................... 38
Valuation ................................................................................................................. 39
The authors of this report wish to acknowledge the contribution made by Maya
Mahadevan, an employee of CRISIL Global Research and Analytics, a business division
of CRISIL Limited, a third-party provider of research services to Credit Suisse.
14 March 2017
Swiss Watchmakers 4
What could go wrong in the 'rebound'
Setting the scene
The general assumption appears to be that the downturn for the Swiss watch
industry is over. The share prices for both Swatch Group and Richemont have rallied
c.30% in the last six months and outperformed their peers by 5%. The sell side has turned
slightly less bearish on these two names with now 9/30 analysts having a sell rating on
Swatch Group and only 3/34 for Richemont. A growing number of clients we have met in
the last few months have also turned less pessimistic on the Swiss watch industry. We
believe five factors have contributed towards this regained optimism leading to the share
price rally:
1. Improving sales for Richemont in the three months to December. Richemont
reported 3Q17 group organic sales up +5% improving from -12% in 1H17. While
jewellery was the main driver of the improvement, watch retail sales seemed to be
rising and wholesale had become less negative.
2. A recovery in Chinese demand for luxury goods. There are now tangible signs that
Chinese demand is picking up after 3-4 years of relative austerity marked by the anti-
corruption campaign initiated in 2013 and the stock market correction in 2015. If we
take Louis Vuitton as a proxy for Chinese luxury goods demand, LVMH reported that
sales in the Chinese market grew strong double digits in 2H16 after being flat in 1H
and rising mid-single digits in 2013, 2014 and 2015.
3. Bullish 2017 guidance from Swatch Group. During the 2016 results conference call,
CEO Nick Hayek stated that he expects organic sales to grow +7% to +10% in 2017,
therefore improving from the 11% decline recorded in 2016. He also indicated that the
group reported positive organic sales growth in retail/wholesale in January.
4. Money flow into European cyclicals. Our strategists note that the European non-
financial cyclicals outperformed defensives by 10% in the last six months (see Four
areas of complacency published on 2 February). This has largely benefited high-beta
stocks in cyclical sectors, namely Swatch Group and Richemont in luxury.
5. Retailers turning less pessimistic on demand trends. Feedback from retailers and
the SIHH in Geneva suggest that sell-through is improving in some of the most
problematic markets including Hong Kong and the US.
However, we think the picture may not be as rosy as it appears. The market
sometimes appears to be too complacent about challenging the above factors. We
highlight our thoughts below:
1. Stock swaps may have inflated the underlying wholesale trends at Richemont.
We welcome the initiatives of some watch brands to help retailers clear inventories by
swapping slow moving items for newer and more affordable watches. However, we
believe the wholesale performance of Richemont would have been much worse than
the 3% decline reported in wholesale in 3Q17 in the absence of these swaps. We
estimate the underlying wholesale business could have been down at least high single
digits in 3Q (see Mind the dynamics around inventory swaps published on 10
November 2016). This would be consistent with the overall export figures of the Swiss
watch industry of -9% in the quarter.
2. Official sell-through may be boosted by the crackdown on the grey market. We
do not deny that Chinese demand is improving. But the degree of the improvement
seen in China is rather surprising. We believe the initiatives taken by the Chinese
government last year to tackle the grey market for luxury goods had an influence on
the rate of growth in the Chinese market. For instance, the government has
implemented stricter controls at Chinese customs, making it much harder for the
14 March 2017
Swiss Watchmakers 5
daigou to conduct their business. Our channel checks suggest that this redirected
sales to traditional retail channels and therefore boosted the reported sell-through
numbers in China.
3. We are cautious on guidance from Swatch Group. From experience, Swatch
Group tends to be overly bullish at the beginning of the year. Judging by the last four
years, the company has consistently failed to deliver on its initial guidance. Moreover,
Mr Hayek's comment on January performance being up in retail/wholesale seems to
contradict the industry data that showed a 6% drop in exports despite easy comps,
one additional working day and the earlier timing of the Chinese New Year compared
to the same month in the prior year (see Figure 8).
4. The cyclicals rally may be running out of steam, according to our strategists.
The last few months of strong outperformance has left cyclicals in Europe pricing in
extremely strong growth outturns. Our strategists note that the cyclical/defensive ratio
is consistent with PMI new manufacturing orders rising to c.60. This would be
consistent with GDP growth of c.4% in Europe, double the pace forecast by our
economists (see Four areas of complacency published on 2 February, Figure 9).
Figure 8: Exports saw little sign of improvement in
January despite Swatch's bullishness
Figure 9: The outperformance of cyclicals seems to
imply a sharp rebound in PMI and European growth
Swiss watch exports Cyclicals/defensives performance against Euro area PMI
Source: FHS, Credit Suisse research Source: Credit Suisse Global Strategy Team
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
Dec
-10
Mar
-11
Jun-
11
Sep
-11
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-11
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12
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Mar
-15
Jun-
15
Sep
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Jun-
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Sep
-16
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-16
Y-o-Y % change 3-month moving average
25
30
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40
45
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55
60
65
70
30%
35%
40%
45%
50%
55%
2000 2002 2004 2007 2009 2012 2014 2017
Cont Europe cyclicals rel defensive (lhs) Euro area PMI manufacturing new orders (rhs)
14 March 2017
Swiss Watchmakers 6
New analysis provides new perspectives
We believe some structural and cyclicals issues still need to be tackled. In fact, this
regained optimism seems to overshadow some lingering challenges for the Swiss watch
industry. In order to shed light on these, our proprietary work features:
1. An analysis of new product ASP against previous lines for five Swiss brands.
Our channel checks suggest that sell-through is improving globally but demand has
changed radically since the last peak of the cycle. When asking retailers about what
product is performing better, they generally respond: 'the more affordable price points
of the more iconic brands'. Given the lack of data available to gauge ASP at the retail
level, we have screened 2,000 SKUs of watches across five different brands covering
nearly half of the Swiss watch industry. We then compare ASP as well as entry price
points of the recent launches against the existing lines. As brands are adapting their
offer to a changing demand, this should give a fair picture of the likely ASP
development at the retail level. In terms of sell-through, we conclude that ASP could
be trending in negative double digits over the medium term.
2. Benchmarking against sell-in data. Detailed data from the Fédération de
l'Horlogerie Suisse suggest that ASP has been broadly flat in each price segment and
within its largest markets. For instance, the industry was down 10% in both value and
volumes in 2016 and mix was only low single-digit negative in the last few months. As
a result, the negative mix we are starting to see in sell-through should eventually feed
through sell-in numbers.
3. A detailed excess inventory model. We extended our proprietary model to include
markets like Japan, Singapore and the US in addition to Hong Kong/China. Following
a bottom-up analysis of trends at key retailers in Asia and the US, we compare sell-
through against sell-in over the last four years in order to estimate (a) the necessary
level of exports to meet replenishment needs of retailers and (b) the stock overbuild.
We conclude that the situation in Asia is becoming marginally better. While exports
have been adjusted down to replenishment levels, we estimate there are still 90 days
of excess stocks in the retail channel. The situation in the US seems more problematic
with exports still well above replenishment levels, leading to a bigger inventory glut.
4. An analysis of the grey market to assess inventory issue by brand. We have
screened 1,000 SKUs of watches across 20 different brands sold on grey market
platforms in the US. In practice, the higher the discount at these unauthorised dealers,
the more problematic the inventory issue. We aim to give a regular update to investors
on how the average discount by brand evolves. We conclude that Patek Philippe and
Rolex remain the most desirable brands among consumers and the inventory problem
appears to be manageable. On the contrary, Swatch Group does not screen well with
its largest brands being discounted on the grey market by more than the 30% industry
average discount.
14 March 2017
Swiss Watchmakers 7
Negative mix yet to be seen
The way we think brands are adapting their offer
Swiss watch brands are focusing increasingly on three main areas. From our
research of retailers, industry players and watchers, we have identified three pillars to
drive volume growth in the industry:
1. (Re)developing ladies' watches. We believe there are reasons why the industry has
been neglecting this segment for so long and only a few brands have a sizeable ladies'
watch business. First, it is less lucrative than selling men's watches. In fact, ladies'
watches directly compete against other accessories including jewellery and handbags.
Second, the know-how of most Swiss watchmakers traditionally has focused more on
the mechanisms and complications than on the aesthetic qualities. Our research has
shown that more complex watches, e.g. that indicate moon phases and sunset times,
are more likely to appeal to men. Third, male customers appear to have a higher
degree of loyalty to Swiss brands, whereas women switch brands more frequently for
reasons such as novelty and fashion and are likely to be less passionate about
collecting watches. That said, there clearly is a market for ladies' watches. It may not
be as lucrative as the men's segment but we believe this remains an untapped
opportunity for Swiss watch brands.
2. (Re)focusing on entry-price points. Feedback from retailers suggests that there is
demand for entry-price timepieces. However, this does not mean that the entire
demand is shifting towards low-end watches, priced <$1,000. Instead, we believe
brands should look at rebalancing the pricing architecture so that the SKU distribution
is skewed towards their existing entry-price points rather than the tail. We believe
brands are unlikely to slash prices on existing products or they will run the risk of
damaging their brand equity. Therefore, this will be a lengthy process of rebalancing
the offering through product launches and perhaps discontinuing existing lines.
3. (Re)adapting the price/value proposition. This is probably a trend that relates to the
entire luxury goods industry. We believe many millennials put the price/value
proposition at the forefront of their purchase decision. Therefore, branding still matters,
of course, but the high price of a luxury item also has to reflect a superior quality. Full
transparency on product characteristics and prices through the increasing number of
brands launching their own website or specialists' blogs has contributed towards that.
Although understanding watchmaking is not effortless, we believe the rise of millennials
in the overall luxury market makes it necessary for Swiss watch brands to rethink their
current price/value proposition.
Looking for empirical evidence
There is an apparent lack of data. As of now, there are not many data points available to
the financial community that can shed light on the ASP development for luxury watches at
the retail level. Therefore, investors tend to rely solely on qualitative comments made by
watch retailers. In fact, we find that only Oriental Watch and Emperor Watch & Jewellery,
two of the three HK-listed watch retailers, disclose ASP on a half-yearly basis (Figure 10).
But Oriental Watch and Emperor Watch & Jewellery do not provide any concrete
conclusions. Two out of the three time series provided by the two HK retailers suggest
that ASP is rising; however, we think this is questionable. There has been a positive brand
mix effect as high-end brands like Patek Philippe are still outperforming. We understand
that HK may have been biased towards the purchase of high-end products recently due to
decreasing price differentials with other regions and more easily negotiable discounts.
14 March 2017
Swiss Watchmakers 8
Figure 10: ASP for Oriental Watch and Emperor Watch & Jewellery
In HKD unless stated otherwise FY11 FY12 FY13 FY14 FY15 1H16
Emperor Watch & Jewellery 64,970 70,963 69,592 69,710 73,305 78,489
Y/Y % change 9% (2%) 0% 5% 7%
In HKD unless stated otherwise FY14 FY15 FY16 1H17
Oriental Watch* core brands 43,169 53,200 55,143 56,548
Y/Y % change 23% 4% 3%
Oriental Watch* non-core brands 18,074 19,654 19,741 16,048
Y/Y % change 9% 0% (11%)
Source: Company data, Credit Suisse research. Note: *year end March
We aim to tackle this lack of data through an analysis of product launches. If brands
are rebalancing their offer towards entry price points, this should be seen in the most
recent product launches already available for purchases or presented at the Geneva and
Basel watch fairs. Therefore, we look at the watches introduced in the last 6-12 months
and see how these compare against the existing offer in terms of price points.
We analyse five different watch brands covering 2,000 SKUs. These include Cartier,
IWC, Jaeger LeCoultre, Omega and Rolex. Together, we estimate these cover nearly half
of the Swiss watch industry in value (see Figure 11). For each brand, we are able to
identify the products that have been launched recently and derive an ASP of the new
additions at retail value. We carry out the analysis for the US market and we either use the
brands' own websites when online shopping is available or third-party websites such as
Tourneau. Lastly, we use an harmonic mean instead of an arithmetic mean to derive ASP.
The main advantage of the harmonic mean is that it is largely insensitive to large outliers.
In other words, it better reflects the sales volumes curve whereby high-end brands offer
timepieces >$100,000 but volumes at these levels are very low.
Figure 11: We cover almost half of the Swiss watch
industry in our ASP analysis
Figure 12: We use the harmonic mean mainly
because it is largely insensitive to large outliers
Value breakdown of the Swiss watch industry by brand (2016) Harmonic mean formula
Source: Company data, FHS, Credit Suisse estimates Source: Credit Suisse research
We highlight some caveats in our pricing analysis. Because our analysis is based on
US prices, we are mindful that comparing historical data may be biased by currency
fluctuations. The US dollar has indeed strengthened against the euro and the renminbi in
the last two years. As a result, the constant need to rebalance pricing across markets in
theory should have led to downward price adjustments when introducing new lines in the
US. However, with the vast majority of costs being in Switzerland, we believe the
appreciation of the Swiss franc and the need to protect margins have largely mitigated this
downward price adjustment in the US. In fact, the USD/CHF has remained close to parity
in the last two years.
Rolex15%
Omega12%
Cartier11%
Jaeger LeCoultre3%
IWC3%
Others56%
14 March 2017
Swiss Watchmakers 9
IWC Schaffhausen
The early update of the Pilot line shows the need to highlight entry price points.
There are six main watch lines at IWC, of which we believe Portugieser, Portofino and
Pilot are the most iconic. IWC typically updates one of its lines each year. While we
expected an update of the Portofino line to be presented at the 2016 SIHH given the
historic innovation cycle (see Figure 13), IWC decided to do an early revamp of its Pilot
line. We think this is particularly interesting for two reasons:
1. The Pilot watches constitute the most affordable line. Our analysis indicates that
the ASP of the Pilot line is $6,513 against $8,274 for the Portofino line and $9,076 for
the entire IWC offer (see Figure 14).
2. ASP on the new Pilot line has come down slightly. IWC introduced the Pilot's
Watch Mark XVIII in 2016 replacing the Pilot's Watch Mark XVII launched in 2012. This
entry price Pilot watch, which is also the entry price IWC watch, sells for $3,950.
Interestingly, this compares with $4,100 for the similar 2012 Pilot's Watch Mark XVII
with the only main difference being a case 1mm smaller for the new version. More
broadly, we find that the ASP of the new Pilot line is 8% less expensive than the
previous line in 2012.
Figure 13: IWC lines updated at the last SIHH
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Ingenieur Aquatimer Portugieser Portofino Pilot Ingenieur Aquatimer Portugieser Pilot Da Vinci
Source: Company data, Credit Suisse research
The new Da Vinci line has lowered its entry price point and is focusing on ladies'
watches. While an update of the Portofino line could have been on the agenda for the
2017 SIHH, IWC presented a complete revamp of its Da Vinci line instead. Two aspects of
the new line particularly caught our attention:
1. ASP on the new Da Vinci line has fallen. The new entry price Da Vinci Automatic
watch selling for $5,400 replaces the previous version selling for $6,500. Similarly, the
Da Vinci Chronograph now costs $12,700 against $14,500 for the previous version.
More broadly, our research suggests that the ASP of the new Da Vinci collection for
men has dropped to $12,290 from $14,971.
2. IWC is expanding its ladies' offer with the Da Vinci line. While this line was chiefly
for men, the revamped Da Vinci line now offers more ladies' watches than men's
watches. With the Da Vinci line, we find that IWC doubled the number of ladies'
watches it offers (see Figure 15).
Figure 14: IWC is focusing on entry price points… Figure 15: …and is expanding its ladies' offer
Entry price points and ASP by product line for IWC (in $) Number of ladies' watches by product line for IWC
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
IWC Ingenieur Aquatimer Portofino Portugieser Pilot Da Vinci
Entry price ASP
Recent updates
0
2
4
6
8
10
12
14
16
18
IWC Ingenieur Aquatimer Portugieser Portofino Pilot Da Vinci
Recent updates
14 March 2017
Swiss Watchmakers 10
Jaeger-LeCoultre
The focus of the 2017 SIHH was on a new entry price points for the Master lines.
Among the six main lines for men's watches at Jaeger-LeCoultre, we believe Reverso,
Master and Geophysic account for the majority of revenue. At the 2017 SIHH, the brand
focused on three new Master watches all with lower entry price points than the previous
comparable Master lines. In fact, the entry price point fell to $5,700 from $6,350 for the
Master Control Data line, to $8,000 from $9,000 for the Master Chronograph line and to
$9,400 from $10,800 for the Master Geographic line. More broadly, we find that the ASP of
the recent launches for the new Master lines is $11,945 against $19,924 for the existing
watches (see Figure 16).
Affordable manual/quartz Reverso watches were the highlight of the 2017 SIHH. This
year, we noticed that the brand presented very few, if any, highly complex watches.
Instead, the emphasis was on entry price products. In fact, all watches presented had
manual winding or quartz movements, instead of automatic movements. Their look is very
close to the automatic Reverso lines but retail prices are lower because of the lower cost
of producing or sourcing components. For instance, Jaeger-LeCoultre focused on its
updated men's Reverso Classic watch with manual movements selling for $5,900, the
entry price point for the Reverso lines. This compares against the most affordable launch
of the SIHH 2016 which was an automatic Reverso Classic for $8,000. Another example is
the launch of a manual Reverso Classic Large Duoface watch for $8,400 in 2017 when the
directly comparable automatic watch still sells for $11,400. More broadly, we find that the
ASP of the 2017 launches for men's Reverso watches was $8,512 against $17,274 for the
existing lines (see Figure 16).
Jaeger-LeCoultre launched more ladies' watches than men's in 2017. The product
offer is already by nature more oriented towards ladies' watches than most other
Richemont's brands, with the exception of Cartier or Piaget. We calculated that 40% of
watches sold on the website are for women. Interestingly, we find that Jaeger-LeCoultre
launched 19 ladies' watches against 18 for men's watches in 2017. The main launches
were both for the Reverso and the Rendez-Vous lines. Similar to what we found for men's
watches, the ASP of the new launches for ladies were lower than the existing watch
collection (see Figure 17).
Figure 16:ASP and entry price points have generally
fallen for men's watches at Jaeger-LeCoultre
Figure 17: As well as launching more ladies'
watches than men's in 2017, ASP has fallen
Entry price points and ASP for men's watches at Jaeger-LeCoultre (in $)
Entry price points and ASP for ladies' watches at Jaeger-LeCoultre (in $)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
0
5,000
10,000
15,000
20,000
25,000
30,000
Entry price ASP Entry price ASP Entry price ASP
Reverso Master Geophysic
2017 SIHH Existing lines
0
5,000
10,000
15,000
20,000
25,000
Entry price ASP Entry price ASP
Reverso Rendez Vous
2017 SIHH Existing lines
14 March 2017
Swiss Watchmakers 11
Cartier
The repositioning which began in 2015 is clearly visible. Cartier is possibly the only
brand, along with Tag Heuer, that has been vocal about the need to realign its product
offering with the current demand environment. As recently as 2015, Cartier launched two
new lines aimed at the more affordable area of the brand's pricing architecture:
1. Cartier launched the more affordable Clé line in 2015. At the beginning, Cartier
focused on the Clé in pink gold selling for nearly $20,000 but subsequently released
the gold and steel men's version selling for $9,650. However, Cartier did not say at the
launch whether a steel only version would be available. This was eventually launched
in 2016 for a retail price of $5,500. The new Clé Steel is the entry price automatic
watch of all Cartier lines and improves the price/value perception, in our opinion. In
fact, It carries the same price as the existing entry price Ballon Bleu Steel that features
a quartz movement and a smaller case. The overall ASP of the Clé at $10,650 for
men's is the lowest of all Cartier lines (see Figure 18).
2. The Drive line appears to be more affordable than Calibre or Tank. The new Drive
family of watches was introduced at the 2016 SIHH. This is a men-only watch line
whose price positioning sits between the Clé/Ballon Bleu lines and the Calibre/Tank
lines. The entry price Drive Steel and Leather sells for $6,250 against $6,350 for the
historic entry price mechanical Tank and entry price Calibre selling for $6,450.
Interestingly, having already launched the entry price points last year, the focus of the
2017 SIHH for the Drive line was on thin watches or precious metals.
The highlight of the 2017 SIHH was the relaunch of a ladies' line. Cartier is, by nature,
a jeweller and therefore its product offering is more geared towards ladies' watches than
most of its competitors. We calculated that 50% of watches sold on the websites are
ladies' watches. Interestingly, the main introduction for Cartier at the last SIHH was the
Panthère line that had been discontinued for more for than a decade. Cartier will be
releasing 17 new Panthère watches in June 2017. These are largely jewellery accessories
as they are all simple timepieces featuring a quartz movement. The entry price small
Panthère Steel will sell for $4,000, i.e. below their equivalents in the Clé, Ballon Bleu and
Tank lines. Only the quartz Tank Solo Steel is more affordable.
Figure 18: Cartier's new lines are priced below the
existing ones
Figure 19: Cartier relaunched a women's line at this
2017 SIHH
Entry price points and ASP by product line for Cartier in men's watches (in $)
Entry price points and ASP by product line for Cartier in ladies' watches (in $)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
Cartier Calibre Tank Ballon Bleu Clé Drive
Entry price ASP
Recent launches
0
5,000
10,000
15,000
20,000
25,000
Cartier Tank Ballon Bleu Clé Panthère
Entry price ASP
Recent launches
14 March 2017
Swiss Watchmakers 12
Rolex
ASP of the most recently launched watches is lower than the existing lines. Being
the biggest Swiss watch brand, Rolex is also the most complex to analyse. We have
limited our pricing analysis to new watches across six lines for men and one unisex watch
line. For men's watches, the overall ASP of the novelties was c.13% lower than the ASP of
the existing models across those lines. While more affordable price points seem to be the
case for the men's segment, the latest launches in the women's segment are priced higher
than the combined ASP of the existing collections.
The relaunched Cosmograph Daytona was the highlight of 2016 Baselworld. Rolex
introduced the unisex Oyster Perpetual Cosmograph Daytona in steel replacing the
existing Rolex Daytona dating back to 2000. With this new watch, we note that Rolex
wishes to reinforce its entry price offer. Although its price of $12,400 is higher than the
previous entry price Daytona watch selling for $10,600, the ASP of the existing Daytona
lines, including both men's and women's watches, is more than twice as high at $27,335.
More affordable Explorer and Yacht-Master 40 watches were launched last year. At
Baselworld 2016, Rolex introduced entry models of the Explorer and the Yacht-Master 40
lines. The recently launched Explorer features the same movement and metals as its
sister Explorer II line. The only major difference lies in the case size which is smaller for
the recent launches. The new Explorer is selling for $6,550 against $8,100 for the Explorer
II. A new Yacht-Master 40 in gold was launched at $14,050 in 2016. Admittedly, this was
above the current entry price point of the Yacht Master 40 in steel and slightly above the
line's ASP at $13,611. However, it is still priced 52% below the ASP of the Yacht-Master II
line.
Datejust continues to dominate the product lines. The Datejust 41 remains one of the
most sought-after Rolex watches and this is evident from the fact that over half of the new
launches came in this particular line. The women's variant Lady-DateJust dominates the
women's offerings in both existing lines as well as new launches. It is interesting to note
that the new launches in the Lady-Datejust models have smaller cases (28mm) than the
existing 31mm case watches, which constitutes over half of the units in the brand's
women's watches.
Figure 20: Rolex shows mixed results in terms of ASP/entry price point by line
Entry price points and ASP by product line for Rolex watches (in $)
Source: Company data, Credit Suisse research
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP
Rolex Air King Explorer CosmographDaytona
Datejust 41 Yacht Master Cellini Day-Date 40
2016 Baselworld Existing lines
14 March 2017
Swiss Watchmakers 13
Omega
A refocus on more affordable watches is not apparent. Omega seems to break the
trends we have seen for the other watch brands. In other words, the most recent launches
were watches priced significantly higher than the ASP of existing models. The only
exception was the Globemaster for men launched in steel with an annual calendar selling
for just over $8,000. This is close to the entry price point of the line at $7,700 and below its
ASP at $10,317.
Recent launches focused on the Seamaster line. While the Globemaster, Speedmaster
and the Constellation all saw one new model each launched in the respective lines, the
Seamaster line outdid them all with six new launches for the Planet Ocean line and two for
the Aqua Terra line. The Seamaster and Speedmaster both saw new launches in the
region of $10,000 while the ASP of existing lines for these models is in the region of
$7,000. The Constellation watch for women was launched at over $11,000, almost double
the current ASP of $5,974 for the existing line.
Upcoming launches show no intention to adapt to a changing demand scenario. In
early January this year, Omega offered a preview of its upcoming launches at Baselworld
2017 due 23-30 March: the new Speedmaster 38mm and the Speedmaster Moonwatch
Automatic. The prices of both are currently withheld and will be disclosed only at the
event. From the teaser of the launch, we find it fairly evident that the new Speedmaster
38mm is targeting the higher-end of the price spectrum, given its diamond-encrusted bezel
in addition to a Sedna gold casing and complications.
Figure 21: The Globemaster was an exception in
2016 with ASP of new launch lower than existing
Figure 22: The latest Constellation watch for women
was launched at a significantly higher price point
Entry price points and ASP by product line for Omega men's watches (in $)
Entry price points and ASP by product line for Omega ladies watches (in $)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
0
2,000
4,000
6,000
8,000
10,000
12,000
Entry price ASP Entry price ASP Entry price ASP Entry price ASP Entry price ASP
Seamaster Constellation Speedmaster Globemaster Omega
2016 Baselworld Existing lines
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Entry price ASP Entry price ASP Entry price ASP Entry price ASP
Seamaster Constellation Speedmaster Omega
2016 Baselworld Existing lines
14 March 2017
Swiss Watchmakers 14
The price/mix conundrum in sell-in numbers
ASP at the retail level is clearly coming down. Besides the qualitative comments from
retailers and industry participants, we have found empirical evidence that the product offer
in the Swiss watch industry is shifting towards low-profile, more affordable watches. In
fact, the five brands we analyse, with the exception of Omega, have all focused on their
more affordable lines and entry price watches at the most recent watch fairs in Geneva or
Basel. We find it difficult to put a hard number on the likely development of the ASP at the
retail level in the next few years. However, by simply using the overall ASP development
of the recent launches we calculated for nearly half of the Swiss watch industry, we find
that the overall ASP of the most recent watch launches are priced c.20% below the
existing lines (see Figure 23).
Figure 23: ASP for most recent men's watches is generally down against the
existing lines Entry price points and ASP by brand and product line (in $)
Source: Company data, Credit Suisse research
This should break a decade-long period of positive mix. ASP for the Swiss watch
industry has risen by +7% on average since 1993. This has been driven largely by rising
demand for precious metals watches from the late 2000s pushing the value share of the
>SFr3,000 segment from <40% before the mid-2000s to >60% in the most recent years
(see Figure 24). Therefore, if our previous analysis of product launches truly reflects a
demand shift towards more affordable timepieces, then the mix of the overall Swiss watch
industry is likely to be rebalanced to the 2010 pre-bubble levels.
Figure 24: The value share of high-end watches has
increased considerably from mid-2000s
Figure 25: ASP has remained mostly in line with the
2014 peak at the wholesale level
Swiss watch exports breakdown by price segment in value terms ASP development for Swiss watches at wholesale value
Source: FHS, Credit Suisse research Source: FHS, Credit Suisse research
0
5,000
10,000
15,000
20,000
25,000
Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP Entryprice
ASP
Average Omega IWC Cartier Rolex Jaeger LeCoultre
New launches Existing
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
<SFr200 SFr200-500 QFr500-3,000 >SFr3,000
-10%
-5%
0%
5%
10%
15%
20%
25%
0
100
200
300
400
500
600
700
800
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
ASP (in SFr, lhs) Y/Y % chg. (rhs)
14 March 2017
Swiss Watchmakers 15
Mix at the wholesale level has remained fairly neutral in recent years. To our surprise,
the industry did not record any decline in ASP in 2016. Swiss watch exports were down
10% in both volumes and value. This followed a 2% negative mix in 2015. As a result, the
ASP of Swiss watches at wholesale value has barely changed since the 2014 peak and
remains 25% above the 2010 pre-bubble level (see Figure 25).
We introduce new value/volumes data series by region. We question whether this data
series could be distorted by mix shifts across regions and price brackets. In other words,
ASP could be down in each price segment but the outperformance of high-end brands
relative to the low- to mid-end may have left the overall ASP number unchanged. Using
FHS data, we demonstrate that this is not the case based on two observations:
1. ASP in each price segment has barely moved in the last four years. Figure 26
demonstrates that a change in category/segment mix has not played a role in the ASP
development, as it has remained broadly flat in the last four years. The mid-end
segment of SFr200-3,000 watches at export value posted flat ASP in the last four
years. The high-end segment of >SFr3,000 watches only recorded a 3% decline in
ASP from their 2015 peak.
2. ASP in each key market has barely moved in the last four years. Figure 27
demonstrates that ASP in the two largest watch markets, the US and Hong Kong, has
not changed in recent years. Interestingly, ASP in China came down in 2012-2013 and
was slightly up in 2016.
Figure 26: ASP has been stable in the last four
years in each price segment
Figure 27: ASP has been fairly stable in HK and the
US
ASP for Swiss watches by price segment (at export value, 1993=100 for each price segment)
ASP for Swiss watches by market (at export value, 1997=100 for each market)
Source: FHS, Credit Suisse research Source: FHS, Credit Suisse research
We conclude that a negative mix is yet to happen at the wholesale level. Because
there does not seem to be any geographical or segment mix distorting the overall ASP
development, we are convinced that the negative ASP seen at the retail level will
eventually feed through to sell-in numbers. It is hard for us to predict how long it could take
for ASP to set to a more normal level but we think we could just be at the beginning of this
process. We note that mix started to turn negative only a few months ago with ASP down
4% on average in the last three months (see Figure 28).
More affordable price points could be unfavourable for margins. Companies disclose
very little on the topic. Our research suggests that brands generally generate the highest
margins at the midpoint of their pricing architecture (see Figure 29). For example, we
understand that an entry price Clé de Cartier watch in steel generates lower margin than
the more expensive model featuring the same movement but with a mixture of gold and
steel. At the other end of the spectrum, a watch with several complications requiring many
more man-hours and produced in small numbers will not generate the highest margin for
the brand.
80
100
120
140
160
180
200
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
<SFr200 SFr200-500 QFr500-3,000 >SFr3,000
100
200
300
400
500
600
700
800
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
HK China US
14 March 2017
Swiss Watchmakers 16
Ladies' watches tend to be higher gross margin but the product cycle is shorter.
Ladies' watches are much less complicated than men's watches and are therefore less
labour intensive. We believe precious metals account for the majority of costs. As a result,
we understand gross margins are generally higher. For instance, the entry price Cartier
Panthère watch in steel which sells for $4,000 and features an inexpensive quartz
movement should be margin accretive for the ladies' segment. However, we believe
product cycles are shorter for ladies' watches and marketing investment may be higher
than for men's.
Figure 28: ASP development has just started to turn
negative
Figure 29: Entry price watches tend to be lower
margins than mid-price products
Y/Y % change for ASP of Swiss watch exports Margin profile by price points
Source: FHS, Credit Suisse research Source: Credit Suisse research
-10%
-5%
0%
5%
10%
15%
20%
25%
May-10 Dec-10 Jul-11 Feb-12 Sep-12 Apr-13 Nov-13 Jun-14 Jan-15 Aug-15 Mar-16 Oct-16
Mar
gin
Price points
14 March 2017
Swiss Watchmakers 17
Stock levels in the channel
A recap on sell-through
There remains a lack of transparency on sell-through trends. Unlike Swiss watch
exports data which gives a good picture of sell-in, there is no data series directly available
to the financial community to analyse sell-through. As a result, we carry regular channel
checks among watch retailers/dealers and other industry participants to gauge demand for
luxury watches. However, this approach is admittedly made difficult for two reasons:
1. There are very few listed watch retailers. The large global listed companies in the
watch industry are mainly manufacturers and therefore wholesalers. Major watch
retailers such as Tourneau in the US, Bucherer in Switzerland or Watches of
Switzerland in the UK are all privately-owned companies. Other global multi-brand
retailers like Hour Passion or Tourbillon are part of Swatch Group and therefore
disclosure is limited. Only Hengdeli, Emperor Watch & Jewellery, Oriental Watch or
Hour Glass are listed entities in Asia with a reasonable level of financial disclosure.
2. The grey market increasingly contributes to watch sales globally. This is
particularly true in the US largely as a result of the development of e-commerce and
high inventory levels in the traditional retail channels. By nature, it is difficult to assess
the size of the grey market and even more the sell-through.
Sell-through in HK appears to be bottoming. Our most recent channel checks with the
two largest watch retailers in HK suggest that the rate of decline for LFL retail sales
moderated to single digits in 2H and further improved in 4Q:
1. Oriental Watch mainly distributes Rolex/Tudor but also Richemont's brands in HK.
After LFL sales fell 17% in the six months to Sept-16, it appears the rate of decline
moderated to -5% in the three months to Dec-16. Coupled with positive developments
in China, the group retail LFL sales moved into positive territory in the last quarter
(see Figure 30). The company seems cautiously optimistic and predicts a stabilisation
of sell-through trends in HK instead of a sharp growth acceleration with retail LFL
sales growth closer to flat than positive in the coming year.
2. Emperor Watch & Jewellery mainly distributes Richemont's brands alongside Rolex
and Patek Philippe in HK. The company indicated that retail LFL sales growth turned
mid-single digit positive in 4Q after being down mid-single digit in 3Q. According to
Emperor Watch & Jewellery, this improvement seems to be largely driven by three
years of easy comps and lower price differentials with Japan and Europe.
Figure 30: LFL at Oriental Watch is turning back
positive thanks to lower rates of declines in HK
Figure 31: LFL at Emperor Watch turned positive in
4Q and was overall flattish in 2H
Group retail LFL sales for Oriental Watch (HK + Macau + China) Group retail LFL sales for Emperor Watch (HK + Macau + China)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
1H11 2H11 1H12 2H12 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16
14 March 2017
Swiss Watchmakers 18
This brings sell-through closer to pre-bubble levels in HK. Although exchange rate
swings largely contributed towards making HK a more attractive place to shop, we find two
data series that suggest sell-through may be closer to the bottom than the peak:
1. HK Watch & Jewellery sales are a well-known proxy for sell-through of Swiss
watches. However, we need to be mindful that fluctuations in the gold price typically
influence the sales of affordable golden jewellery and create some noise in the data
series (see Figure 32). That said, we note that 2016 retail sales were between the
2010-2011 level and nearly 50% off the 2013 peak. Another downward adjustment
towards the 2009-2010 levels does not seem like an impossible scenario, in our
opinion, but this would be a less sharp contraction than seen in recent years.
2. Aggregate watch retail sales were compiled using the HK businesses of the three
HK-listed watch retailers. We used consensus estimates for 2016 revenue numbers.
This exercise indicates that retail sales have fallen by 45% since the 2012 peak and
are currently at a level that is comparable with 2009.
Figure 32: Total watch and jewellery sales in HK are
possibly closer to the bottom than the peak
Figure 33: Aggregate retail sales for the three
largest HK watch retailers are close to 2009 levels
HK Watch & Jewellery sales (in HKDm) Aggregate retail sales of the three HK-listed retailers (in HKDm)
Source: Hong Kong Census & Statistics department, Credit Suisse research Source: Company data, Thomson Reuters, Credit Suisse research
China sell-through has been improving since 2Q16. Our research suggests that sell-
through in China for watches swung back to positive territory in 2H16 and exited 2016 at a
double-digit rate. We draw this conclusion chiefly on feedback from two retailers:
1. Hengdeli is the largest Swiss watch retailer in China with a 35% market share, on our
estimates. >70% of 2015 revenue came from mid-end watches (<¥30,000 at retail
value) with the rest from high-end watches. After reporting LFL retail sales down 9% in
1H16 (see Figure 34), it appears LFL turned flattish in 3Q and positive in 4Q. Hengdeli
will report 2016 results later in March at which point we should expect more detail on
LFL trends also by price segment.
2. Oriental Watch has a business in China mainly selling Rolex/Tudor in mono-brand
boutiques and accounting for 1/3 of retail sales, on our estimates. The Chinese retail
business turned sharply positive from 1H17 and sustained strong double-digit growth
momentum through 3Q17 (see Figure 35).
0
200
400
600
800
1000
1200
1400
1600
1800
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
HK watch and jewellery retail sales (HKDm, lhs) Gold Bln (USD/Troy ounce, rhs)
0
2,000
4,000
6,000
8,000
10,000
12,000
2008 2009 2010 2011 2012 2013 2014 2015 2016e
14 March 2017
Swiss Watchmakers 19
Figure 34: Hengdeli reported a gradual improvement
in China trends
Figure 35: Trends turned sharply positive in China
in the middle of last year for Oriental Watch
China LFL retail sales for Hengdeli (Y/Y % chg.) China LFL retail sales at Oriental Watch (Y/Y % chg., YE March)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
We do not deny there has been a pick-up in underlying Chinese demand. After
consumer sentiment turned negative following the anti-corruption campaign which began
in 2013 and the stock market correction in 2015, the Chinese consumer seems to be
moving on from four years of relative austerity. Luxury goods proxy Louis Vuitton recorded
a sharp acceleration in Chinese spending globally to double-digit rates in 2H16 from flat in
the prior four quarters (see Figure 36). We note that this recovery in Chinese demand
overall has not only been felt in handbags but also across categories that appeared to be
out of favour in recent years, such as cognac and watches.
Figure 36: Louis Vuitton sales growth among the Chinese clientele
1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16
Source: Company data, Credit Suisse research. Note: growth >10%, mid- to high-single digit % growth, mid-single digit % growth, flat % growth
However, we think the improvement in China/HK is also partly due to regional shifts.
Asia accounted for 39% of Swiss watch exports in 2016, of which c.33% is HK and 17% is
China. If we simply consider a similar split for retail sales in Asia, this implies that c.50% of
watch retail sales are generated outside China/HK. The two largest Asian markets outside
China/HK are Japan and Singapore, accounting for 17% and 13% of watch exports to Asia
in 2016. Trends in these two markets have been weak in recent quarters, which illustrates
the transfer of watch sales back to China/HK away from other Asian markets. We highlight
two data series:
1. Watch & jewellery sales at Japanese department stores have been declining since
2Q16 (see Figure 37). We believe this is a good proxy for watch sell-through in Japan
given that our research suggests that department stores account for a far bigger share
of the watch retail market than in the US or Europe. This includes all of the largest
department stores such as Takashimaya, Isetan, Mitsukoshi, Matsuya and Daimaru.
The caveat of this indicator is that it also includes jewellery. Watch & jewellery retail
sales were down 8% in both 2Q16 and 3Q16 and down 6% in 4Q16.
2. The Hour Glass is one of the largest watch retailers in South East Asia, mainly in
Singapore. It sells primarily mid- to high-end brands including Richemont's and
Swatch Group's brands as well as Patek Philippe and Rolex/Tudor. Management has
been fairly bearish on the outlook for 2017 suggesting that sustaining retail sales at
the 2016 level would already be a great achievement.
-25%
-20%
-15%
-10%
-5%
0%
5%
1H13 2H13 1H14 2H14 1H15 2H15 1H16
Total China High-end China Mid-end China
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1H14 2H14 1H15 2H15 1H16 2H16 1H17 3Q17
14 March 2017
Swiss Watchmakers 20
Figure 37: Watch sales in Japanese department
stores have been declining since 2Q16
Figure 38: Hour Glass' management remains
cautious on 2017 retail sales development
Japanese department store sales of art, jewellery and watches Group sales for the Hour Glass (Y/Y % chg., Y/E March)
Source: Japan department stores association, Credit Suisse research Source: Company data, Credit Suisse research
The US remains mixed. We tend to look at multi-brand watch retailer Tourneau as a
proxy for the sell-through of luxury watches in the US. The company communicates rarely
on trading and financial performance but our research suggests that Tourneau enjoyed
positive LFL retail sales in 2H16 improving from flattish in 1H16 and a 10-20% decline
sales in 2015. On the other hand, Fossil, admittedly not the best proxy for sell-through in
the US given its lower price point but the only US-listed watch company with relatively
detailed LFL disclosure, recorded a further deterioration of trends in the US. This led to
group LFL retail sales declining >5% in 4Q16 (see Figure 40).
Figure 39: Sales of watches in Singapore were down
overall in 2016, albeit improving in 4Q
Figure 40: Fossil global retail sales have been
trending downwards
Singapore retail sales of watches and jewellery Fossil global retail LFL sales (Y/Y % change)
Source: Statistics Singapore, Credit Suisse research Source: Company data, Credit Suisse research
-20%
-10%
0%
10%
20%
30%
40%
50%
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
Mar
-16
Jun-
16
Sep
-16
Dec
-16
Y/Y % change 3-month moving avg.
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
-30%
-20%
-10%
0%
10%
20%
30%
40%
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Jul-1
5
Jan-
16
Jul-1
6
Watch & jewellery retail sales 3-month moving avg.
-10%
-5%
0%
5%
10%
15%
20%
25%
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
14 March 2017
Swiss Watchmakers 21
Marginal improvement in stock levels
We focus on stock levels at the retail level. We find that investors' concerns around
excess inventories in the distribution channels have mostly vanished following a recovery
in sell-through in HK/China. Unless retail trends pick up significantly to the extent that
watch retailers/dealers are willing to reorder again despite low stock turns (see Figure 41),
we continue to believe overstocking remains an issue for the Swiss watch industry which
should weigh on sell-in numbers in the near term.
We expand our proprietary excess inventory model to regions outside HK/China. In
our previous Ideas Engine report on the Swiss watchmakers (see Swiss Watchmakers:
Ideas Engine published on 2 August 2016), we introduced an excess inventory model for
HK/China. In this section, we take it a step further to include Singapore, Japan and the
US. These five markets together account for >40% of exports last year. Unfortunately, we
fail to gather sufficient data from European retailers given the lack of public companies.
That said, we believe the inventory situation in Europe is less problematic than elsewhere
given strong sell-through in 2015/2016 in the Eurozone/UK and cautious replenishment.
Figure 41: Inventory turns remain low for Asian
retailers
Figure 42: Our excess inventory analysis covers
>40% of the Swiss watch market
Days of inventories for four major Asian retailers Swiss watch exports breakdown by market (in 2016)
Source: Company data, Credit Suisse research Source: FHS, Credit Suisse research
Our approach lies in comparing sell-in against sell-through. The main assumption is
that retailers typically adjust their replenishment according to recent and anticipated sell-
through trends. As a result, sell-in and sell-through should ultimately adjust to the same
levels through a full cycle. However, what is generally a 6- to 12-month cycle in traditional
retailing has stretched to a multi-year cycle in Swiss watch retailing. Manufacturers have
taken advantage of their bargaining power to push inventories into the distribution
channels in order to keep watch factories running at nearly full utilisation rates. In our
analysis, we aim to break out Swiss watch exports into two brackets: (a) the normal
replenishment needs according to sell-through development and (b) the excess stocks that
are either sitting at the retailers or feeding the grey market.
We take 2011-12 as a starting point and use our sell-through time series as base. It
is debatable whether 2011 or 2012 was the peak of the watch cycle. Exports of Swiss
watches to both HK and China peaked in 2012, while sell-through for the Chinese peaked
in 2011. To analyse sell-in vs. sell-through dynamics, we take 2011 as a starting point. In
other words, the assumption is that inventories were in a healthy position in 2011. The
average stock turns for the listed retailers only started to deteriorate from 2012 (see Figure
41) suggesting sell-in was inadequate relative to sell-through. In addition, our analysis
chiefly uses the regional time series we presented in the previous section as a proxy for
sell-through. The caveat of this method is that it only captures the sell-through trends in
the traditional retail channels but not in the grey market.
0
50
100
150
200
250
300
350
400
450
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1H15 1H16
Oriental Watch Emperor Watch & Jewellery Hengdeli Hour Glass
Hong Kong12%
USA12%
China7%
Japan7%
Singapore5%
Others57%
14 March 2017
Swiss Watchmakers 22
We take a deep look at the inventory cycle in Asia. We highlight four regions that
together account for nearly 80% of 2016 export value:
1. Stock levels did not deteriorate further in HK in 2016, but overstocking remains.
The good news about HK is that, unlike 2015, Swiss watch exports were broadly
aligned with replenishment needs in 2016 (see Figure 43). We estimate that retail
sales of Swiss watches have declined by 46% since 2011 while the industry reported
a 42% drop in exports to HK over the same period. While this may seem reassuring,
this does not eliminate the four years of overstocking (2011-16). We estimate that
there was a SFr1.7bn inventory build-up over the 2011-2016 period. Part of it is still
sitting on the books of watch retailers/dealers and part of it is in the grey market.
Figure 43: Estimated excess watch inventories in HK in value terms
In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2011-2016
Emperor watch & jewellery 0% (1%) (14%) (28%) (15%)
Oriental watch NA (10%) (15%) (22%) (9%)
Hengdeli Elegant (1%) 1% (18%) (27%) (11%)
Average sell-through (1%) (3%) (15%) (26%) (11%) (46%)
Swiss watch exports (a) 4,371 4,125 4,122 3,176 2,383 18,177
Y/Y % change 7% (6%) (0%) (23%) (25%) (42%)
Exports for normal stock replenishment (b) 4,202 4,062 3,435 2,555 2,263 16,517
Y/Y % change 3% (3%) (15%) (26%) (11%) (45%)
Excess stocks 169 63 687 621 120 1,659
Source: Company data, FHS, Credit Suisse research and estimates
2. Stock levels in China appear to be less problematic. We estimate that sell-through
declined by 14% over the 2011-2016 period. This uses Hengdeli as proxy for China
mid-end watch retail sales and Oriental Watch for China high-end watch retail sales.
Our analysis suggests that there has not been any major inventory build-up in the
distribution channels. We note that exports to China have fallen by 21% since 2011,
therefore a bigger drop than sell-through (see Figure 44).
Figure 44: Estimated excess watch inventories in China in value terms
In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2011-2016
Hengdeli (1%) (7%) (1%) (10%) (1%)
Oriental NA (11%) (3%) (8%) 11%
Average sell-through (1%) (9%) (2%) (9%) 5% (14%)
Swiss watch exports 1,653 1,446 1,401 1,336 1,293 7,130
Y/Y % change 1% (12%) (3%) (5%) (3%) (21%)
Exports for normal stock replenishment 1,631 1,483 1,455 1,328 1,396 7,294
Y/Y % change (0%) (10%) 1% (5%) 4% (15%)
Excess stocks 22 (37) (54) 8 (103) (164)
Source: Company data, FHS, Credit Suisse research and estimates
3. Japanese retailers have swiftly adjusted their replenishment plans. Following
three years of strong sell-through, driven by rapid growth in Chinese tourism due to
the weak yen, retail sales trends turned negative in 2016. We note that exports to
Japan rapidly adjusted to the negative sell-through in 2H16. Exports were down 3% in
2016 broadly in line with retail trends. Since the 2011-12 average, we note that
exports to Japan have jumped by 38% while sell-through has increased by 25%. This
led to a manageable overstocking position of SFr0.1bn, on our estimates (Figure 45).
14 March 2017
Swiss Watchmakers 23
Figure 45: Estimated excess watch inventories in Japan in value terms
In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2011-2016
Watch & Jewellery sales 3% 15% 4% 8% (6%) 25%
Swiss watch exports 1,092 1,155 1,331 1,305 1,262 6,145
Y/Y % change 20% 6% 15% (2%) (3%) 38%
Exports for normal stock replenishment 1,034 1,187 1,239 1,334 1,255 6,048
Y/Y % change 13% 9% 7% 0% (4%) 25%
Excess stocks 59 (32) 92 (29) 7 97
Source: Japan department stores association, FHS, Credit Suisse research and estimates
4. Inventory levels in Singapore seem to be healthy. We use the retail sales index for
watches and jewellery as a proxy for sell-through in Singapore. Our research suggests
that jewellery is a much smaller component than watches in the index. On that basis,
we note that exports have dropped more than sell-through since 2012. During the
more difficult year of 2016, watch retailers/dealers adapted their replenishment and
there was no overstocking during the 2012-2016 period, according to our analysis.
This is confirmed by inventory turns at Cortina or Hour Glass that did not deteriorate
over the period, albeit with some volatility ranging from 170 to 210 days and 240 to
280 days respectively.
Figure 46: Estimated excess watch inventories in Singapore in value terms
In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2012-2016
Watch & Jewellery sales 0% 1% (2%) 1% (6%) (6%)
Swiss watch exports 1,125 1,136 1,120 1,131 1,013 5,524
Y/Y % change (2%) 1% (1%) 1% (10%) (12%)
Exports for normal stock replenishment 1,139 1,150 1,124 1,138 1,071 5,622
Y/Y % change (1%) 1% (2%) 1% (6%) (6%)
Excess stocks (14) (14) (4) (7) (58) (99)
Source: Statistics Singapore, FHS, Credit Suisse research and estimates
The stock overbuild in Asia continues but is not worsening. Our aggregate analysis
for the four largest markets in Asia concludes that 2016 shipments to Asia were finally
aligned with sell-through trends and replenishment needs of watch retailers/dealers. This
breaks a four-year trend where manufacturers have shipped watches to retailers/dealers
well above their replenishment needs. This is good news because it appears that the
overbuild is finally stabilising. However, similar to what happened in HK, this does not wipe
out the SFr1.5bn excess inventories that have accumulated since 2011. We estimate the
excess stocks account for 91 days of buying in 2016 up from 88 days in 2015 and 47 days
in 2014 (see Figure 47). Leaving aside the effect of inventory buybacks which we
discussed later in the next section, this simply means that manufactures should halt their
shipments to Asia for about 90 days in order for retailers/dealers to possibly clear the
excess inventory.
Figure 47: Estimated excess watch inventories in four Asian countries in value
terms
In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2012-2016
Swiss watch exports 8,241 7,862 7,974 6,949 5,951 36,975
Y/Y % change 6% (5%) 1% (13%) (14%) (24%)
Exports for normal stock replenishment 8,006 7,882 7,253 6,355 5,985 35,481
Y/Y % change 3% (2%) (8%) (12%) (6%) (25%)
Excess stocks 235 (20) 721 593 (34) 1,494
Stock overbuild 235 214 935 1,528 1,494
Days of excess stocks 11 10 47 88 91
Source: Company data, Credit Suisse estimates
14 March 2017
Swiss Watchmakers 24
The inventory situation in the US seems more problematic. We use our channel
checks on Tourneau as well as reported group LFL for Fossil to derive an approximation of
sell-through in the US. We estimate that retail sales have been broadly flat over the 2011-
2016 period while Swiss watch exports have risen sharply by 22%. As a result, we believe
Swiss watch retailing in the US moved from a period of healthy stock levels in 2012-13 to
a gradual stock build up from 2014. We estimate that there has been a build-up of
SFr0.6bn excess inventories in the US market since 2011 representing 106 days of buying
(see Figure 48).
Figure 48: Estimated excess watch inventories in the US in value terms
In SFrm unless stated otherwise 2012 2013 2014 2015 2016 2011-2016
Tourneau 7% 5% - (12%) 2%
Fossil 3% - 2% 1% (5%)
Average sell-through 5% 3% 1% (6%) (2%) 1%
Swiss watch exports 2,187 2,240 2,377 2,359 2,416 11,578
Y/Y % change 10% 2% 6% (1%) 2% 22%
Exports for normal stock replenishment 2,192 2,246 2,269 2,144 2,112 10,963
Y/Y % change 10% 3% 1% (6%) (2%) 1%
Excess stocks (5) (7) 108 214 304 615
Stock overbuild (5) (11) 97 312 615
Days of excess stocks NA NA 16 53 106
Source: Company data, FHS, Credit Suisse research and estimates
Industry responds with inventory swaps
We agree that buying back stocks is the right path to take for the long term… After
years of pushing inventories into the retail channel, the reverse action is clearly welcome.
Undoubtedly, these kinds of initiatives have proven to be helpful for other watch brands
over the long term, namely Tag Heuer. Coupled with successful launches of lower-price
products, buybacks enable watch dealers/retailers to free up their inventories and make
space for more popular products.
…but this may not solve the problem entirely. Companies in general and Richemont in
particular were very vocal about buying back inventories from retailers last year, mostly in
Asia. Richemont indicated that it had repurchased €198m worth of watches, mainly at
Cartier, in the six months to September 2016. We find investors often overestimate the
benefits of these actions on the stock overbuild. We make the following three
observations:
1. SFr1.5bn of Swiss watches came back to Switzerland in 2016e. The Swiss
Federal Customs Administration started providing some useful data last year on
reimported goods, and in particular for watches (see Figure 49). The 2016 report has
not been published yet but the Administration issued a press release in December
indicating that reimported Swiss watches amounted to SFr1.3bn for the first 10
months of 2016. If we were to extrapolate the trend for the whole of 2016, we
calculate that reimported watches could amount to SFr1.5bn.
2. But 2016 was not the only year that the industry has undertaken inventory
buybacks. Whilst the industry has been fairly vocal about buybacks lately, the data
suggest that bringing stocks back into Switzerland is common practice. During what
could be considered as good years, namely 2005-2008 and 2011-2013, 2-4% of
watch exports in value terms came back to Switzerland. Our research concludes that
manufacturers regularly bring back timepieces from their subsidiaries to be
reallocated. These are generally high-end watches. That said, this process
accelerated from 2014 and buybacks amounted to almost 8% of exports in 2016. In
other words, we can attribute the incremental 4% from 2014 levels to the efforts made
14 March 2017
Swiss Watchmakers 25
by manufacturers to help retailers/dealers with their excess stocks. As a result, we
estimate that the industry brought back SFr700-800m worth of watches at wholesale
value in addition to the recurring reimports.
3. These additional buybacks are not a cash-for-stock exchange; they are
inventory swaps. In other words, the slow-moving stocks are taken back and watch
dealers/retailers receive credit notes to order the more popular products at some point
in time. On the one hand, our channel checks with retailers in Asia suggest these
credit notes can be exercised from two weeks to six months following the inventory
buyback. On the other hand, Richemont indicated that its partners are given infinite
time to trigger the reordering process. Interestingly, we believe these swaps distort the
Swiss watch exports data. Reimports are indeed not netted off the official Swiss watch
exports data. As a result, if we assume retailers exercise their credit over 12 months,
we calculate this could boost monthly exports by up to 4%.
Figure 49: Buying back inventories is not abnormal but this process has
accelerated in recent years
Reimported Swiss watches
Source: Federal Customs Administration, FHS, Credit Suisse estimates
A closer look at discounts within the grey market
Traditional methods of clearing excess stocks may not be enough. Authorised watch
retailers/dealers have generally little flexibility when it comes to discounting. To put it
simply, they cannot openly put products on sale and have regular visits by "mystery
shoppers" sent from the manufacturers like Richemont or Swatch Group. As a result,
discounts will only be limited to a core clientele with whom the retailer has built up a
relationship. Because of this, inventory swaps and selective discounts are generally not
enough to improve stock turns.
Watch retailers/dealers are pushing stocks into the grey market. Our research
suggests that it is common practice for authorised retailers/dealers to use unauthorised
third-parties to clear excess stocks. This can be done through online platforms that market
the watches as pre-owned although they could be new watches. A major difference with
authorised dealers lies in the warranty. Unauthorised retailers cannot grant the
manufacturer's warranty but instead offer their own warranty which carries more risk given
their limited access to spare parts. We note that this process is legal.
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016e
Reimported watches (SFrm, lhs) As a % of watch/movement exports value (rhs)
14 March 2017
Swiss Watchmakers 26
We introduce an innovative way to think about the inventory issue by brand. In
practice, the lower the demand and the bigger the inventory glut for one particular brand,
the more likely watch retailers will try to clear these excess stocks through the grey market
at bigger discounts. As a result, we use one of the largest pre-owned watch retailers
Jomashop in the US to assess the average level of discount by brand. The advantage of
Jomashop is that most of the pre-owned watches come directly from authorised retailers
and, therefore, can be considered as new.
We have screened discounts on 1,000 SKUs across 20 different brands. For the
samples to be statistically relevant, we randomly selected 50 watches of each brand. None
of the watches we considered are part of a discontinued line and each watch is sold as
new with the Jomashop warranty. From our analysis, we draw four conclusions:
1. Patek Philippe and the Rolex Group stand out. We calculated an average discount
of 11% and 16% for Patek Philippe and Rolex respectively (see Figure 50). This
confirms our belief that these two brands benefit from stronger desirability and more
manageable inventory issues than their peers. We note that mid-price brand Tudor,
part of the Rolex Group, has an average discount of 23%.
2. The results for Richemont are mixed. We calculated the lowest average discount
for Cartier at 25%. This is possibly the result of the inventory buybacks last year and
the launch of more affordable products. However, we calculated an average discount
rate for IWC, Vacheron Constantin and Jaeger LeCoultre of at least 30%.
3. Swatch Group does not score well. Besides Blancpain and Breguet, all of the main
brands of the Swatch Group are fairly heavily discounted in the grey market. We
calculate an average discount of 38% for its largest brand, Omega. This indicates that
stock levels, in this case, in the US, relative to the end demand are higher than the
competition.
4. LVMH could have scored better. To our surprise, we found that the average
discount for Tag Heuer watches is higher than its peer group. The company initiated
an inventory buyback process more than two years ago, revenue grew in 2016 and
our research suggests that sell-through for Tag Heuer is performing well.
Figure 50: Proprietary analysis of discounts in the grey market suggests that
the inventory glut for Swatch Group is bigger than its peers
Average discount on Jomashop (red=Richemont, blue=Swatch Group, orange=LVMH, grey=independent)
Source: Company data, Credit Suisse research
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Average
14 March 2017
Swiss Watchmakers 27
The way we approach valuation Swatch Group appears fairly valued according to the KOF business climate index.
We view the KOF Swiss Economic Institute survey (see Introducing the KOF business
climate survey published on 3 October 2016) as a cyclical indictor for Swiss watch
manufacturing. We find an interesting correlation between Swatch Group's share price and
the overall business climate index. On that particular metric, the stock looks fairly valued
and the recent absolute share price performance seems to be consistent with the small
improvement in the overall business climate index (see Figure 51). However, in order to
justify a share price >SFr400, we would need to see the majority of the 40 survey
respondents reporting an increase in production and incoming orders against the same
period last year, according to the KOF barometer.
Figure 51: Swatch Group appears to be fairly valued against the KOF indicator
Swatch Group's share price vs. KOF Business Climate index
Source: KOF Swiss Economic Institute, FHS, Credit Suisse research
Richemont and Swatch Group are already trading at peak multiples. On consensus
earnings forecasts, Swatch Group and Richemont are now trading at 22x and 25x 12-
month forward P/E respectively against a long-term historical average of 16x. These two
stocks have moved away from their historical discount to luxury goods peers in less than a
year. Therefore, the market seems to already assume Swatch Group and Richemont will
deliver earnings growth well ahead of peers in the next few years
Figure 52: Richemont is trading at a historical high
premium to its luxury goods peers
Figure 53: Swatch Group has moved from >20%
discount to none in less than a year
12-m fwd. consensus P/E relative to luxury peers for Richemont 12-m fwd. consensus P/E relative to luxury peers for Swatch Group
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research
-100
-80
-60
-40
-20
0
20
40
60
80
100
200
300
400
500
600
700
2002 2002 2003 2004 2005 2005 2006 2007 2008 2008 2009 2010 2011 2011 2012 2013 2014 2014 2015 2016 2017
Swatch Group share price (SFr, lhs) KOF Business climate (3-m moving average, rhs)
12%
-5%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Prem. (disc.) vs. sector Avg. premium (discount) vs. sector
0%
-8%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Prem. (disc.) vs. sector Avg. premium (discount) vs. sector
14 March 2017
Swiss Watchmakers 28
Richemont is already pricing in a return to peak earnings. Adjusted EPS for the
company peaked at €3.68/share in FY13. After applying the average P/E of 16x of the last
five years, we derive an equity value of €60/share or SFr65/share. This compares to a
share price of SFr76 on 9 March suggesting a return to peak earnings is currently priced
in. We believe a return to peak earnings will unlikely be achieved through cost cutting only.
Further job cuts should remain limited and underlying cost inflation on rent is unavoidable.
As a result, we calculate that jewellery has to sustain double-digit sales growth from FY18
and watch sales to excess peak levels of FY15 at some point in the next 3-5 years.
Both stocks look expensive on EV/Sales multiples. We tend to rely on EV/Sales or
EV/GP when earnings have come down and consensus expectations have been cut
significantly. While Swatch Group tends to screen relatively well on EV/Sales at 2.2x on
12-month forward consensus numbers against a 10-year average of 2.5x, Richemont
trades at 3.0 EV/Sales against an average of 2.4x and a slight premium to luxury peers.
Figure 54: Richemont looks expensive on EV/Sales
above average levels
Figure 55: Swatch Group is back to below average
levels
12-m fwd. consensus EV/Sales for Richemont 12-m fwd. consensus EV/Sales for Swatch Group
Source: Thomson Reuters Source: Thomson Reuters
Figure 56: Luxury goods valuation table
P/E EV/Sales EV/EBITDA EV/EBIT Div. Yield
CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E CY17E CY18E
x x x x x x x x % %
Richemont 28.7x 25.7x 2.8x 2.7x 13.3x 12.4x 18.2x 16.7x 2.4% 2.5%
Swatch 26.5x 22.6x 2.3x 2.2x 12.9x 11.6x 19.4x 16.8x 2.1% 2.3%
LVMH 20.8x 19.2x 2.7x 2.5x 11.2x 10.4x 14.3x 13.1x 2.4% 2.6%
Kering 19.8x 17.7x 2.5x 2.4x 12.9x 11.8x 15.9x 14.4x 2.1% 2.3%
Hermes 37.6x 34.6x 7.6x 7.1x 21.3x 19.6x 23.6x 21.8x 1.0% 1.0%
Burberry 22.3x 20.9x 2.5x 2.3x 11.4x 10.7x 15.7x 14.7x 2.1% 2.2%
Hugo Boss 20.1x 18.9x 1.8x 1.8x 10.4x 9.9x 15.8x 14.9x 4.0% 4.2%
Tod's 23.0x 21.2x 2.2x 2.1x 12.1x 11.2x 16.5x 15.3x 3.0% 3.1%
Ferragamo 24.3x 22.6x 3.3x 3.1x 14.4x 13.5x 17.9x 16.8x 2.1% 2.3%
Prada 28.3x 25.7x 2.9x 2.8x 12.6x 11.8x 19.4x 17.6x 0.3% 0.3%
Brunello Cucinelli 32.6x 29.6x 2.8x 2.6x 16.6x 15.3x 22.5x 20.7x 1.1% 1.2%
European average 21.4x 19.5x 2.5x 2.4x 11.4x 10.6x 15.0x 13.8x 2.3% 2.4%
Source: Company data, Credit Suisse estimates. Note: shares prices as of 09-Mar-2017
3.0x
2.4x
3.0x
1.8x
-
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Richemont EV/sales Average Stdev+/-1
2.2x
2.5x
3.1x
1.9x
-
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Swatch EV/sales Average Stdev+/-1
14 March 2017
Swiss Watchmakers 29
Europe/Switzerland Luxury Goods
Swatch Group (UHR.S) Rating UNDERPERFORM Price (09 Mar 17, SFr) 341.20 Target price (SFr) (from 220.00) 260.00 Market Cap (SFr m) 18,473.8 Enterprise value (SFr m) 17,701.4 Target price is for 12 months.
Research Analysts
Guillaume Gauvillé, CFA
44 207 888 0321
Catherine Tillson
44 20 7888 6052
A few areas of complacency
■ We reiterate our Underperform rating on Swatch Group. The stock has
rallied 30% and has outperformed our coverage universe by 5% in the last six
months. This was achieved against no earning upgrades unlike most of its
luxury goods peers. While the market seems to be expecting a bounce in
watch manufacturing in 2017, we think the industry continues to face multiple
challenges which we believe the Swatch Group is not addressing.
■ Swatch Group's mid-end business may face more competition. We
estimate that 50% of sales are watches priced <$5,000. While this may seem
a favourable exposure at first given consumer preference shifting towards
more affordable watches, we think it is an issue. Our channel checks suggest
that demand is not shifting across brands but across product lines and price
points within each brand. Our product analysis shows that the more high-end
and iconic brands outside Swatch Group are adapting to these demand shifts
by launching new entry price products, hence creating more competition for
Swatch Group's mid-end business. Moreover, our analysis shows that its
largest brand Omega is not adapting its product offer to capture the more
aspirational part of the luxury watch clientele.
■ Inventory gluts may be the most problematic for Swatch Group. First,
the company is the most exposed to difficult markets. 66% of 2017e sales are
to Asia or America. Our excess inventory model suggests that the stock
overbuilds remain, albeit with marginal improvement in Asia. Second, Swatch
Group has the highest level of discounts on the grey market which indicates
more challenging inventory gluts than watch peers.
■ We raise our target price to SFr260 from SFr220. This is largely driven by
the time value factor and rerating of luxury peers. We are leaving our 2017/18
EPS forecasts broadly unchanged as currency impacts offset more prudent
underlying assumptions. We remain >10% below consensus EPS for both
years. The stock now trades at 16x 12-month forward EV/EBIT on consensus
numbers and at a premium to peers. We think this is unjustified given
continuous earnings risk and decreasing ROIC.
■ Risks to our Underperform rating include a faster than expected rebound
in the Swiss watch industry, inventory buybacks and management changes.
Share price performance
The price relative chart measures performance against the
SMI PRICE which closed at 8639.7 on 09/03/17
On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.-
Eu.95/US$1
Performance 1M 3M 12M Absolute (%) 1.7 7.4 -5.8 Relative (%) -1.6 0.6 -15.5
Financial and valuation metrics
Year 12/16A 12/17E 12/18E 12/19E Revenue (SFr m) 7,553.0 7,818.7 8,160.3 8,510.4 EBITDA (SFr m) 1,242.0 1,371.0 1,532.2 1,668.9 Adjusted net income (SFr m) 570.95 680.48 783.12 870.67 CS EPS (adj.) (SFr) 10.68 12.90 15.13 16.97 Prev. EPS (SFr) 12.52 13.28 15.14 15.41 ROIC (%) 6.1 6.8 7.7 8.5 P/E (adj.) (x) 31.9 26.5 22.6 20.1 P/E rel. (%) 177.3 157.6 148.7 142.2 EV/EBITDA (x) 14.1 12.9 11.6 10.4
Dividend (12/17E, SFr) 7.26 Net debt/equity (12/17E,%) -7.0 Dividend yield (12/17E,%) 2.1 Net debt (12/17E, SFr m) -772.4 BV/share (12/17E, SFr) 229.9 IC (12/17E, SFr m) 10,289.4 Free float (%) 79.0 EV/IC (12/17E, (x) 1.7 Source: Company data, Thomson Reuters, Credit Suisse estimates
14 March 2017
Swiss Watchmakers 30
Swatch Group (UHR.S)
Price (09 Mar 2017): SFr341.2; Rating: UNDERPERFORM; Target Price: (from SFr220.00) SFr260.00; Analyst: Guillaume Gauville
Income statement (SFr m) 12/16A 12/17E 12/18E 12/19E
Revenue 7,553 7,819 8,160 8,510 EBITDA 1,242 1,371 1,532 1,669 Depr. & amort. (437) (460) (480) (501) EBIT 805 911 1,052 1,168 Net interest exp. 6 6 6 6 Associates (4) 0 0 0 PBT 773 917 1,057 1,174 Income taxes (184) (216) (250) (277) Profit after tax 589 701 808 897 Minorities (19) (21) (25) (27) Preferred dividends - - - - Associates & other 1 0 0 0 Net profit 571 680 783 871 Other NPAT adjustments 3 0 (0) 0 Reported net income 574 680 783 871
Cash flow (SFr m) 12/16A 12/17E 12/18E 12/19E
EBIT 805 911 1,052 1,168 Net interest 6 6 6 6 Cash taxes paid (277) (216) (250) (277) Change in working capital 41 (151) (96) (113) Other cash and non-cash items 435 460 480 501 Cash flow from operations 1,010 1,010 1,192 1,286 CAPEX (533) (506) (516) (527) Free cashflow to the firm 960 963 1,144 1,236 Acquisitions 0 0 0 0 Divestments 3 0 0 0 Other investment/(outflows) 46 0 0 0 Cash flow from investments (484) (506) (516) (527) Net share issue/(repurchase) (331) (350) (309) 0 Dividends paid (439) (363) (383) (406) Issuance (retirement) of debt 103 (0) 2 7 Cashflow from financing (666) (712) (689) (399) Changes in net cash/debt (252) (209) (15) 353 Net debt at start (1,233) (981) (772) (757) Change in net debt 252 209 15 (353)
Net debt at end (981) (772) (757) (1,110)
Balance sheet (SFr m) 12/16A 12/17E 12/18E 12/19E
Assets Total current assets 9,045 9,016 9,107 9,590 Total assets 13,106 13,123 13,250 13,758 Liabilities Total current liabilities 1,207 1,235 1,245 1,261 Total liabilities 2,033 2,061 2,072 2,088 Total equity and liabilities 13,106 13,123 13,250 13,758
Per share 12/16A 12/17E 12/18E 12/19E
No. of shares (wtd avg.) (mn) 54 53 52 51 CS EPS (adj.) (SFr) 10.68 12.90 15.13 16.97 Dividend (SFr) 6.75 7.26 7.76 8.31 Free cash flow per share (SFr) 17.86 18.24 22.09 24.10
Key ratios and valuation 12/16A 12/17E 12/18E 12/19E
Growth/Margin (%) Sales growth (%) (10.6) 3.5 4.4 4.3 EBIT growth (%) (44.5) 13.1 15.5 11.0 Net income growth (%) (47.6) 19.2 15.1 11.2 EPS growth (%) (46.7) 20.8 17.3 12.2 EBITDA margin (%) 16.4 17.5 18.8 19.6 EBIT margin (%) 10.7 11.6 12.9 13.7 Pretax profit margin (%) 10.2 11.7 13.0 13.8 Net income margin (%) 7.6 8.7 9.6 10.2
Valuation 12/16A 12/17E 12/18E 12/19E
EV/Sales (x) 2.3 2.3 2.2 2.0 EV/EBITDA (x) 14.1 12.9 11.6 10.4 EV/EBIT (x) 21.7 19.4 16.8 14.9 Dividend yield (%) 1.98 2.13 2.28 2.43 P/E (x) 31.9 26.5 22.6 20.1
Credit ratios (%) 12/16A 12/17E 12/18E 12/19E
Net debt/equity (%) (8.9) (7.0) (6.8) (9.5) Net debt to EBITDA (x) (0.8) (0.6) (0.5) (0.7) Interest coverage ratio (x) (127.0) (148.3) (189.6) (184.6)
Company Background
The Swatch Group Ltd. is engaged in the manufacture of watches, jewelry and accessories as its core business. The Company also manufactures mechanical and quartz movements, and is active in the design, production and marketing of electronic components.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (SFr) (from 315.00) 390.00
Our blue sky scenario is based on an earlier rebound for watches leading to margin recovery. This leads to an operating profit being 15% higher than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation above the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr390.
Our Grey Sky Scenario (SFr) (from 165.00) 210.00
Our grey sky scenario is based on prolonged weakness for watches leading to further margin pressure. This leads to an operating profit being 15% lower than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation below the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr210.
Share price performance
The price relative chart measures performance against the SMI PRICE which
closed at 8639.7 on 09/03/17
On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.- Eu.95/US$1
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
14 March 2017
Swiss Watchmakers 31
Charting the story
Figure 57: Competition for more affordable watches
is likely to rise
Figure 58: Swatch Group's brands show some of
the highest discount rates on the grey market
Estimate revenue breakdown by ASP at retail value (in FY16) Average discount on Jomashop (Swatch Group = blue)
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
Figure 59: We and the market are already assuming
margins have troughed for Swatch Group
Figure 60: A weaker Swiss franc fully offsets
negative underlying revisions
Long-term operating margin Old vs. new FY17e operating profit forecast bridge
Source: Company data, Credit Suisse estimates Source: Credit Suisse estimates
Figure 61: We remain >10% below consensus on
operating profit over FY17-19e
Figure 62: The stock is now trading at record high
multiples
CS vs. consensus forecasts (in SFrm) 12-month forward consensus EV/EBIT
Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse research
$50010%
$500-$1,00017%
$1,000-$5,00024%
>$5,00049%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Average
5%
10%
15%
20%
25%
30%
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
e
2018
e
2019
e
911918
+5% -3%
-2%
600
650
700
750
800
850
900
950
1000
Old FY17e op. profit Currency effect Organic sales Underlying margin New FY17e op. profit
0
200
400
600
800
1,000
1,200
1,400
1,600
FY17e FY18e FY19e
Consensus CS
16.3x
11.2x
8.7x
13.6x
4x
6x
8x
10x
12x
14x
16x
18x
20x
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Swatch 12-month EV/EBIT Average +/- 1 stdev
1
14 March 2017
Swiss Watchmakers 32
Financials
Figure 63: Cost of goods sold model
In SFrm unless stated otherwise FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
Material purchases (1,274) (1,422) (1,634) (1,870) (1,843) (1,746) (1,565) (1,587) (1,634) (1,680)
% change 16% 12% 15% 14% (1%) (5%) (10%) 1% 3% 3%
Material purchases (1,471) (2,221) (2,356) (2,456) (2,240) (2,001) (1,642) (1,665) (1,714) (1,763)
% change 33% 51% 6% 4% (9%) (11%) (18%) 1% 3% 3%
Changes in inventories 197 799 722 586 397 255 77 77 80 82
% change 2,089% 306% (10%) (19%) (32%) (36%) (70%) 1% 3% 3%
Personnel expense (1,020) (1,126) (1,241) (1,282) (1,385) (1,462) (1,496) (1,529) (1,563) (1,602)
% change 1% 10% 10% 3% 8% 6% 2% 2% 2% 3%
Subcontracting and other costs of sales (281) (287) (295) (313) (304) (291) (260) (266) (277) (289)
% change 12% 2% 3% 6% (3%) (4%) (11%) 2% 4% 4%
Depreciation on tangible assets (170) (177) (201) (237) (274) (309) (334) (352) (368) (383)
% change (1%) 4% 14% 18% 16% 13% 8% 5% 4% 4%
Total (2,745) (3,012) (3,371) (3,702) (3,806) (3,808) (3,655) (3,735) (3,842) (3,955)
% change 9% 10% 12% 10% 3% 0% (4%) 2% 3% 3%
Gross profit 3,363 3,752 4,425 4,754 4,903 4,643 3,898 4,084 4,319 4,555
Gross margin 55.1% 55.5% 56.8% 56.2% 56.3% 54.9% 51.6% 52.2% 52.9% 53.5%
Source: Company data, Credit Suisse estimates
Figure 64: Operating expenses model
In SFrm unless stated otherwise FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
Personnel expense (614) (692) (747) (862) (958) (922) (846) (861) (881) (896)
% change 5% 13% 8% 15% 11% (4%) (8%) 2% 2% 2%
Other operating expenses (1,400) (1,482) (1,878) (2,029) (2,340) (2,278) (2,394) (2,328) (2,521) (2,498)
% change 18% 6% 27% 8% 15% (3%) 5% (3%) 8% (1%)
Marketing, sales and administration (863) (948) (1,097) (1,261) (1,347) (1,279) (1,201) (1,188) (1,216) (1,268)
% change 11% 10% 16% 15% 7% (5%) (6%) (1%) 2% 4%
as a % of sales 14.1% 14.0% 14.1% 14.9% 15.5% 15.1% 15.9% 15.2% 14.9% 14.9%
Maintenance, rents and energy (426) (487) (604) (703) (843) (938) (1,022) (1,063) (1,106) (1,150)
% change 14% 14% 24% 16% 20% 11% 9% 4% 4% 4%
Other operating expenses (111) (47) (177) (65) (150) (61) (170) (77) (199) (80)
% change 226% (58%) 277% (63%) 131% (59%) 179% (55%) 160% (60%)
Depreciation and amortization (52) (52) (60) (67) (84) (95) (103) (108) (113) (118)
% change 8% - 15% 12% 25% 13% 8% 5% 4% 4%
Other operating income 139 88 238 518 231 103 206 124 247 124
% change 34% (37%) 170% 118% (55%) (55%) 100% (40%) 100% (50%)
Total (1,927) (2,138) (2,447) (2,440) (3,151) (3,192) (3,136) (3,173) (3,267) (3,387)
% change 13% 11% 14% (0%) 29% 1% (2%) 1% 3% 4%
% change (excl. other op. income) 10% 11% 15% 15% 12% 0% (2%) 2% 3% 4%
as a % of sales 31.6% 31.6% 31.4% 28.9% 36.2% 37.8% 41.5% 40.6% 40.0% 39.8%
as a % of sales (excl. other op. income) 33.8% 32.9% 34.4% 35.0% 38.8% 39.0% 44.3% 42.2% 43.1% 41.3%
Source: Company data, Credit Suisse estimates
14 March 2017
Swiss Watchmakers 33
Valuation
We increase our target price to SFr260 from SFr220. This largely reflects the time value
factor and a higher EV/IC peer multiple valuation given the sharp rerating of most luxury
goods stocks in the last six months. Our new target price is a simple average of our EV/IC
valuation methodology (SFr235) and Credit Suisse HOLT® (SFr284).
Our EV/IC valuation approach uses a 2017e invested capital base adjusted for operating
leases vs. our RNOA/WACC in order to derive a fair Enterprise Value for Swatch Group.
After deducting our projections for net cash, operating lease obligation, pension, and
minorities, we estimate an equity fair valuation for the stock of SFr235 per share with a 12-
month horizon.
Figure 65: EV/IC valuation framework
In SFrm unless stated otherwise
FY17e invested capital base (lease adjusted) 14,607
FY17e RNOA/WACC spread 0.7
EV fair value 15,123
Net debt (FY17e) (799)
Lease adjustment (FY17e) 4,447
Minorities (FY17e) 86
Pension (FY17e) 39
Equity fair value today 11,350
Share count (m) 52.2
Equity fair value per share today (SFr/share) 218
Equity fair value in 12-months (SFr/share) 235
Source: Credit Suisse estimates
The Credit Suisse HOLT-based valuation approach incorporates our five-year explicit
forecast period and a five-year transition period. This assumes +3% revenue growth and
margin declines reflecting increased competition. Beyond a 10-year competitive advantage
window, the HOLT model assumes CFROI® to fade gradually to 6% and asset growth to
fade to 2.5%. This reflects the economic reality of competition, eliminating excess returns
and growth regressing to the corporate average. The HOLT-12-month warranted value
stands at SFr284.
14 March 2017
Swiss Watchmakers 34
Figure 66: Credit Suisse HOLT valuation framework
Source: Credit Suisse HOLT, company data, Credit Suisse estimates
Current Price: CHF 341.20 Warranted Price: CHF 284.83 Valuation date: 09-Mar-17
Sales Growth (parallel % point change to forecasts) Dec 15A Dec 16A Dec 17E Dec 18E Dec 19E
CHF -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % -3.0 -9.4 2.6 4.3 4.3
EBITDA Mgn, % 21.9 17.1 17.9 19.1 19.9
Asset Turns, x 0.34 0.3 0.3 0.3 0.3
CFROI®, % 7.8 5.2 4.8 5.0 5.2
Disc Rate, % 3.8 4.1 4.6 4.6 4.6
Asset Grth, % 11.8 3.2 3.9 3.5 3.6
Value/Cost, x 1.2 1.1 1.2 1.1 1.1
Economic PE, x 15.7 21.5 24.6 22.4 20.7
Leverage, % 19.3 25.4 26.5 27.0 28.0
HO
LT
-
C
red
it S
uis
se A
naly
st
Scen
ari
o D
ata
THE SWATCH GROUP SA (UHR)
EB
ITD
A M
arg
in (
para
llel
% p
oin
t ch
an
ge
to f
ore
casts
)
-2.0% -40% -36% -30% -24%
-1%
-17%
-1.0% -35% -29% -23% -17% -9%
0.0% -29% -23% -17% -9%
16%
1.0% -23% -17% -10% -2% 8%
2.0% -17% -10% -3% 6%
More than
10%
downside
Within 10%More than
10% upside
Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
-15
-10
-5
0
5
10
15
20
2012 2014 2016 2018 2020 2022 2024 2026
Sales Growth (%)
0
5
10
15
20
25
30
35
2012 2014 2016 2018 2020 2022 2024 2026
EBITDA Margin
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
0.5
2012 2014 2016 2018 2020 2022 2024 2026
Asset Turns (x)
0
2
4
6
8
10
12
14
2012 2014 2016 2018 2020 2022 2024 2026Historical CFROI Historical Transaction CFROIForecast CFROI Forecast CFROICFROI Discount Rate
CFROI & Discount Rate (in %)
0
2
4
6
8
10
12
14
16
18
2012 2014 2016 2018 2020 2022 2024 2026
Historical Asset Growth Rate Forecast GrowthForecast Growth RAGRNormalised Growth Rate
Asset Growth (in %)
14 March 2017
Swiss Watchmakers 35
Europe/Switzerland Luxury Goods
Compagnie Financiere Richemont SA
(CFR.S) Rating UNDERPERFORM Price (09 Mar 17, SFr) 75.70 Target price (SFr) 65.00 Market Cap (SFr m) 39,515.4 Enterprise value (SFr m) 33,859.6 Target price is for 12 months.
Research Analysts
Guillaume Gauvillé, CFA
44 207 888 0321
Catherine Tillson
44 20 7888 6052
Pricing in a rapid return to peak earnings
■ We reiterate our Underperform rating on Richemont. The stock has
rallied 30% and has outperformed our coverage universe by 5% in the last
six months. Admittedly, this was achieved thanks to better 1H and 3Q results
leading to c.10% earnings upgrades over the period. However, we believe
consensus earnings growth of 20% in FY18e is challenging. After raising our
FY17-19e EPS forecasts by 3% on average, we remain >10% below
consensus estimates. Our target price of SFr65 is unchanged.
■ Richemont's watch business should see pressure on ASP. 40% of group
sales still come from wholesale in FY18e. Our analysis of Cartier, IWC and
Jaeger-LeCoultre shows that the ASP is likely to come down at the retail
level. While this is positive long term as it drives a volume recovery, more
affordable price products should weigh on gross margin and profit in the near
term.
■ Inventory issues may not be completely sorted. The buybacks for Cartier
last year have helped. Our analysis shows that Cartier watches are the least
discounted among Richemont's brands on the US grey market. However, an
average discount of 25% remains high vs. best-in-class peers like Rolex or
Patek Philippe. Moreover, its other brands like IWC, Vacheron Constantin or
Jaeger-LeCoultre are still heavily discounted on the grey market.
■ The stock is pricing in a return to peak earnings. Using FY14 peak EPS
and the 16x average P/E of the last five years gives a valuation of
SFr65/share. In contrast, we think the market is assuming that Richemont will
grow earnings well ahead of peers and return to peak levels in the medium
term. We believe this cannot be achieved solely through cost cutting but that
double-digit growth rates in jewellery and watch sales returning to previous
peaks are necessary to justify the current valuation.
■ Risks to our Underperform rating include a faster than expected rebound
in the Swiss watch industry and sustained double-digit growth in jewellery.
Share price performance
The price relative chart measures performance against the SMI
PRICE which closed at 8639.7 on 09/03/17
On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.-
Eu.95/US$1
Performance 1M 3M 12M Absolute (%) 1.1 12.2 14.7 Relative (%) -1.5 6.0 6.2
Financial and valuation metrics
Year 3/16A 3/17E 3/18E 3/19E Revenue (€ m) 11,076.0 10,643.2 11,291.3 11,684.8 EBITDA (€ m) 2,708.0 2,157.5 2,437.5 2,591.2 Adjusted net income (€ m) 2,324.00 1,138.22 1,478.54 1,578.89 CS EPS (adj.) (€) 4.11 2.01 2.62 2.79 Prev. EPS (€) - 2.03 2.45 2.67 ROIC (%) 18.4 12.4 14.2 14.9 P/E (adj.) (x) 17.2 35.1 27.1 25.3 P/E rel. (%) 95.6 209.4 178.4 179.2 EV/EBITDA (x) 11.8 14.7 12.8 11.9
Dividend (03/17E, €) 1.64 Net debt/equity (03/17E,%) -34.1 Dividend yield (03/17E,%) 2.3 Net debt (03/17E, € m) -5,282.5 BV/share (03/17E, €) 27.4 IC (03/17E, € m) 10,192.9 Free float (%) 90.0 EV/IC (03/17E, (x) 3.1 Source: Company data, Thomson Reuters, Credit Suisse estimates
14 March 2017
Swiss Watchmakers 36
Compagnie Financiere Richemont SA (CFR.S)
Price (09 Mar 2017): SFr75.7; Rating: UNDERPERFORM; Target Price: SFr65.00; Analyst: Guillaume Gauville
Income statement (€ m) 3/16A 3/17E 3/18E 3/19E
Revenue 11,076 10,643 11,291 11,685 EBITDA 2,708 2,157 2,437 2,591 Depr. & amort. (550) (594) (641) (675) EBIT 2,158 1,563 1,797 1,916 Net interest exp. 17 20 20 25 Associates (5) (10) (12) (14) PBT 2,155 1,403 1,805 1,927 Income taxes (370) (265) (326) (348) Profit after tax 1,785 1,138 1,479 1,579 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other 539 0 0 0 Net profit 2,324 1,138 1,479 1,579 Other NPAT adjustments (97) 99 0 0 Reported net income 2,227 1,237 1,479 1,579
Cash flow (€ m) 3/16A 3/17E 3/18E 3/19E
EBIT 2,158 1,563 1,797 1,916 Net interest (10) 20 20 25 Cash taxes paid (446) (265) (326) (348) Change in working capital (12) (400) (148) (155) Other cash and non-cash items 274 685 641 675 Cash flow from operations 1,964 1,604 1,983 2,113 CAPEX (613) (587) (609) (621) Free cashflow to the firm 1,351 1,017 1,374 1,491 Acquisitions (280) (114) (79) (82) Divestments 6,034 2,596 0 0 Other investment/(outflows) (6,428) (2,742) 0 0 Cash flow from investments (1,287) (847) (688) (703) Net share issue/(repurchase) (94) (67) 0 0 Dividends paid (854) (878) (922) (969) Issuance (retirement) of debt (100) (1,433) 57 62 Cashflow from financing (1,201) (2,380) (866) (906) Changes in net cash/debt (80) (57) 372 441 Net debt at start (5,419) (5,339) (5,282) (5,655) Change in net debt 80 57 (372) (441) Net debt at end (5,339) (5,282) (5,655) (6,096)
Balance sheet (€ m) 3/16A 3/17E 3/18E 3/19E
Assets Total current assets 14,358 13,940 14,569 15,277 Total assets 20,125 19,850 20,526 21,264 Liabilities Total current liabilities 4,196 3,603 3,702 3,805 Total liabilities 5,078 4,374 4,483 4,595 Total equity and liabilities 20,125 19,850 20,526 21,264
Per share 3/16A 3/17E 3/18E 3/19E
No. of shares (wtd avg.) (mn) 566 565 565 565 CS EPS (adj.) (€) 4.11 2.01 2.62 2.79 Dividend (€) 1.56 1.64 1.72 1.80 Free cash flow per share (€) 2.39 1.80 2.43 2.64
Key ratios and valuation 3/16A 3/17E 3/18E 3/19E
Growth/Margin (%) Sales growth (%) 6.4 (3.9) 6.1 3.5 EBIT growth (%) (11.4) (27.6) 14.9 6.7 Net income growth (%) 111.3 (51.0) 29.9 6.8 EPS growth (%) 111.4 (51.0) 29.9 6.8 EBITDA margin (%) 24.4 20.3 21.6 22.2 EBIT margin (%) 19.5 14.7 15.9 16.4 Pretax profit margin (%) 19.5 13.2 16.0 16.5 Net income margin (%) 21.0 10.7 13.1 13.5
Valuation 3/16A 3/17E 3/18E 3/19E
EV/Sales (x) 2.9 3.0 2.8 2.6 EV/EBITDA (x) 11.8 14.7 12.8 11.9 EV/EBIT (x) 14.8 20.2 17.4 16.1 Dividend yield (%) 2.20 2.31 2.43 2.55 P/E (x) 17.2 35.1 27.1 25.3
Credit ratios (%) 3/16A 3/17E 3/18E 3/19E
Net debt/equity (%) (35.5) (34.1) (35.2) (36.6) Net debt to EBITDA (x) (2.0) (2.4) (2.3) (2.4) Interest coverage ratio (x) (126.9) (76.6) (89.3) (77.2)
Company Background
Richemont is the second largest luxury goods company globally, with particular strengths in jewellery, luxury watches and writing instruments.
Blue/Grey Sky Scenario
Our Blue Sky Scenario (SFr) 82.00
Our blue sky scenario is based on an earlier rebound for the watch and jewellery businesses leading to margin recovery. This leads to an operating profit being 15% higher than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation above the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr82.
Our Grey Sky Scenario (SFr) 34.00
Our grey sky scenario is based on prolonged weakness for both watches and jewellery leading to further margin pressure. This leads to an operating profit being 15% lower than our current forecasts. We then apply an EV/EBIT multiple of at least one standard deviation below the historical average. After adjusting for net debt, pensions and minorities we derive a fair value per share of SFr34.
Share price performance
The price relative chart measures performance against the SMI PRICE which
closed at 8639.7 on 09/03/17
On 09/03/17 the spot exchange rate was SFr1.07/Eu 1.- Eu.95/US$1
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates
14 March 2017
Swiss Watchmakers 37
Charting the story
Figure 67: Richemont is the most exposed to the
high end segment with negative ASP development
Figure 68: We forecast FY18 growth to be more 1H
weighted as Richemont annualises the buybacks
Estimate revenue breakdown by ASP (in FY16) Organic sales growth by product line (Y/Y % chg.)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 69: Our forecasts already assume margin
recovery in the next three years
Figure 70: Our forecasts move up due to a stronger
US dollar and inventory buybacks rolling off
Long-term operating margin Old vs. new FY18e operating forecast bridge
Source: Company data, Credit Suisse estimates Source: credit Suisse estimates
Figure 71: We remain >10% below consensus on
operating profit over FY18-19e
Figure 72: The stock looks particularly expensive
even on EV/sales multiples
CS vs. consensus forecasts (in €m) 12-month forward consensus EV/Sales
Source: Thomson Reuters, Credit Suisse estimates Source: Thomson Reuters, Credit Suisse research
$1,000-$5,0006%
>$5,00094%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
1H08
2H08
1H09
2H09
1H10
2H10
1H11
2H11
1H12
2H12
1H13
2H13
1H14
2H14
1H15
2H15
1H16
2H16
1H17
2H17
e
1H18
e
2H18
e
1H19
e
2H19
e
Watches Jewellery Group
0%
5%
10%
15%
20%
25%
30%
FY
95
FY
96
FY
97
FY
98
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
FY
05
FY
06
FY
07
FY
08
FY
09
FY
10
FY
11
FY
12
FY
13
FY
14
FY
15
FY
16
FY
17e
FY
18e
FY
19e
1797
1683+4%
+3% -1%
1,000
1,100
1,200
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
Old FY18e op. profit Currency effect Inventory buybacksrolling off
Underlying margin New FY18e op. profit
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
2,500
FY17e FY18e FY19e
Consensus CS
3.0x
2.4x
3.0x
1.8x
-
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Richemont EV/sales Average Stdev+/-1
14 March 2017
Swiss Watchmakers 38
Divisional assumptions
Figure 73: Sales and operating profit breakdown
In €m unless stated otherwise
Sales by region FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e FY20e
Europe 2,099 2,588 3,098 3,611 3,919 3,908 4,363 3,964 4,115 4,239 4,450
Reported growth (11%) 23% 20% 17% 9% (0%) 12% (9%) 4% 3% 5%
Underlying growth (11%) 20% 20% 14% 11% 7% 10% (8%) 2% 3% 5%
Asia Pacific 1,740 2,569 3,684 4,162 4,235 4,100 3,937 3,908 4,349 4,510 4,751
Reported growth 18% 48% 43% 13% 2% (3%) (4%) (1%) 11% 4% 5%
Underlying growth 17% 36% 46% 5% 6% (6%) (13%) (0%) 9% 4% 5%
Japan 625 737 833 904 892 814 1,031 1,017 996 1,036 1,088
Reported growth (10%) 18% 13% 9% (1%) (9%) 27% (1%) (2%) 4% 5%
Underlying growth (17%) 1% 9% 6% 23% (6%) 20% (12%) - 4% 5%
Americas 712 998 1,253 1,473 1,603 1,588 1,745 1,754 1,831 1,900 1,991
Reported growth (20%) 40% 26% 18% 9% (1%) 10% 1% 4% 4% 5%
Underlying growth (20%) 30% 30% 11% 14% 8% (1%) 1% 1% 4% 5%
Total 5,176 6,892 8,868 10,150 10,649 10,410 11,076 10,643 11,291 11,685 12,281
Reported growth (4%) 33% 29% 14% 5% (2%) 6% (4%) 6% 3% 5%
Underlying growth (5%) 24% 30% 9% 10% 1% (1%) (4%) 4% 3% 5%
Sales by Maisons
Jewellery Maisons 2,688 3,479 4,590 5,206 5,438 5,657 6,048 5,771 6,173 6,420 6,805
Reported growth (3%) 29% 32% 13% 4% 4% 7% (5%) 7% 4% 6%
Underlying growth (2%) 20% 32% 8% 10% 1% (1%) (5%) 5% 4% 6%
Specialist Watchmakers 1,353 1,774 2,323 2,752 2,986 3,123 3,225 2,916 2,882 2,911 2,998
Reported growth (6%) 31% 31% 18% 9% 5% 3% (10%) (1%) 1% 3%
Underlying growth (5%) 23% 31% 13% 13% 2% (3%) (10%) (3%) 1% 3%
Other Businesses 584 967 1,232 1,426 1,495 1,630 1,803 1,957 2,237 2,354 2,478
Reported growth 73% 66% 27% 16% 5% 9% 11% 9% 14% 5% 5%
Underlying growth - 56% 28% 11% 10% (0%) 4% 8% 12% 5% 5%
Total 5,176 6,892 8,868 10,150 10,649 10,410 11,076 10,643 11,291 11,685 12,281
Reported growth (4%) 33% 29% 14% 5% (2%) 6% (4%) 6% 3% 5%
Underlying growth (5%) 24% 30% 9% 10% 1% (1%) (4%) 4% 3% 5%
Operating profit by Maisons
Jewellery Maisons 742 1,062 1,510 1,818 1,890 1,975 1,892 1,481 1,623 1,720 1,857
Operating margin 27.6% 30.5% 32.9% 34.9% 34.8% 34.9% 31.3% 25.7% 26.3% 26.8% 27.3%
Specialist Watchmakers 231 392 539 733 778 730 520 305 374 392 419
Operating margin 17.1% 22.1% 23.2% 26.6% 26.1% 23.4% 16.1% 10.4% 13.0% 13.5% 14.0%
Writing Instrument Maisons 79 109 119 120 43
Operating margin 14.3% 16.2% 16.5% 15.7% 5.9%
Other Businesses (36) (34) (27) (38) (80) 170 (94) (9) 0 24 50
Operating margin (6.2%) (3.5%) (2.2%) (2.7%) (5.4%) 10.4% (5.2%) (0.5%) 0.0% 1.0% 2.0%
Total 830 1,364 2,057 2,435 2,430 2,436 2,158 1,563 1,797 1,916 2,139
Operating margin 16.0% 19.8% 23.2% 24.0% 22.8% 23.4% 19.5% 14.7% 15.9% 16.4% 17.4%
Source: Company data, Credit Suisse estimates
14 March 2017
Swiss Watchmakers 39
Valuation
We are leaving our target price unchanged at SFr65. Our target price was set as a
simple average of our EV/IC framework (SFr66) and Credit Suisse HOLT (SFr64).
Our EV/IC multiple approach uses the FY18e invested capital base adjusted for
operating leases vs. our RNOA/WACC in order to derive a fair Enterprise Value for
Richemont. After deducting our projections for net cash, operating lease obligation,
pension, and minorities, we estimate an equity fair valuation for the stock of SFr66 per
share with a 12-month horizon.
Figure 74: EV/IC valuation framework
In €m unless stated otherwise
FY18e invested capital base (lease adjusted) 14,473
FY18e ROIC/WACC spread 1.2
EV fair value today 32,782
Net debt (FY18e) (5,595)
Lease adjustment (FY18e) 5,530
Minorities (FY18e) -
Pension (FY18e) 315
Equity fair value 32,533
Share count (m) 565
Equity fair value per share today (€/share) 58
Equity fair value in 12-months (€/share) 62
Equity fair value in 12-months (SFr/share) 66
Source: Company data, Credit Suisse estimates
The Credit Suisse HOLT-based valuation approach incorporates our five-year explicit
forecast period and a five-year transition period. This assumes +4% revenue growth and
margin declines reflecting increased competition. Beyond a 10-year competitive advantage
window, the HOLT model assumes CFROI® to fade gradually to 6% and asset growth to
fade to 2.5%. This reflects the economic reality of competition, eliminating excess returns
and growth regressing to the corporate average.
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Swiss Watchmakers 40
Figure 75: Credit Suisse HOLT framework
Source: Credit Suisse HOLT, Credit Suisse estimates
Current Price: EUR 70.69 Warranted Price: EUR 59.99 Valuation date: 09-Mar-17
Sales Growth (parallel % point change to forecasts) Mar 15A Mar 16A Mar 17E Mar 18E Mar 19E
EUR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % -2.2 6.4 -3.9 6.1 3.5
EBITDA Mgn, % 28.0 24.0 20.3 21.6 22.2
Asset Turns, x 0.42 0.4 0.5 0.5 0.5
CFROI®, % 9.0 10.2 8.1 8.9 8.8
Disc Rate, % 3.9 3.3 4.2 4.2 4.2
Asset Grth, % 23.7 0.4 -7.6 4.8 4.0
Value/Cost, x 2.3 2.0 2.2 2.1 2.0
Economic PE, x 25.4 19.7 26.4 23.1 22.5
Leverage, % 13.4 12.6 12.0 12.5 12.9
More than
10%
downside
Within 10%More than
10% upside
Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
15%
1.0% -12% -7% -3% 3% 9%
2.0% -7% -3% 2% 8%
-8% -3%
0.0% -16% -12% -8% -3%
HO
LT
-
C
red
it S
uis
se A
naly
st
Scen
ari
o D
ata
RICHEMONT (COMPAGNIE
FINANCIERE) (CFR)
EB
ITD
A M
arg
in (
para
llel
% p
oin
t ch
an
ge
to f
ore
casts
)
-2.0% -24% -21% -18% -13%
3%
-9%
-1.0% -20% -16% -13%
-10
-5
0
5
10
15
20
25
30
35
2011 2013 2015 2017 2019 2021 2023 2025
Sales Growth (%)
0
5
10
15
20
25
30
2011 2013 2015 2017 2019 2021 2023 2025
EBITDA Margin
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2011 2013 2015 2017 2019 2021 2023 2025
Asset Turns (x)
0
2
4
6
8
10
12
14
16
2011 2013 2015 2017 2019 2021 2023 2025Historical CFROI Historical Transaction CFROIForecast CFROI Forecast CFROICFROI Discount Rate
CFROI & Discount Rate (in %)
-10
-5
0
5
10
15
20
25
30
2011 2013 2015 2017 2019 2021 2023 2025
Historical Asset Growth Rate Forecast GrowthForecast Growth RAGRNormalised Growth Rate
Asset Growth (in %)
14 March 2017
Swiss Watchmakers 41
Companies Mentioned (Price as of 09-Mar-2017) Brunello Cucinelli SpA (BCU.MI, €20.72) Burberry Group (BRBY.L, 1788.0p) Compagnie Financiere Richemont SA (CFR.S, SFr75.7, UNDERPERFORM, TP SFr65.0) Cortina Holdings (CORT.SI, S$0.69) Emp Wat & Jew (0887.HK, HK$0.295) Fossil Group (FOSL.OQ, $16.82) Hengdeli (3389.HK, HK$1.21) Hermes International (HRMS.PA, €423.05) Hour Glass (HRGS.SI, S$0.69) Hugo Boss (BOSSn.DE, €67.68) Kering (PRTP.PA, €236.85) LVMH (LVMH.PA, €195.65) Movado Group (MOV.N, $22.45) Oriental Watch (0398.HK, HK$1.66) PRADA S.p.A. (1913.HK, HK$31.0) Salvatore Ferragamo Spa (SFER.MI, €28.35) Swatch Group (UHR.S, SFr341.2, UNDERPERFORM, TP SFr260.0) Tod’s Group Spa (TOD.MI, €67.85)
Disclosure Appendix
Analyst Certification Guillaume Gauvillé, CFA, and Catherine Tillson each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Compagnie Financiere Richemont SA (CFR.S)
CFR.S Closing Price Target Price
Date (SFr) (SFr) Rating
07-Apr-14 85.00 100.00 O
25-Apr-14 88.40 105.00
28-Aug-14 87.90 103.00
29-Jan-15 76.40 85.00
16-Mar-15 85.30 100.00
09-Nov-15 80.15 91.00
21-Jan-16 62.40 80.00
24-Mar-16 61.30 70.00 N
23-May-16 56.90 58.00
02-Aug-16 56.40 50.00 U
10-Nov-16 66.60 53.00
16-Jan-17 76.80 65.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
U N D ERPERFO RM
3-Year Price and Rating History for Swatch Group (UHR.S)
UHR.S Closing Price Target Price
Date (SFr) (SFr) Rating
28-Mar-14 550.00 650.00 O
25-Jul-14 493.90 620.00
29-Jan-15 369.50 400.00 N
16-Mar-15 439.30 470.00
18-May-15 397.30 440.00 O
04-Sep-15 370.40 480.00
20-Nov-15 369.50 450.00
12-Feb-16 324.00 420.00
16-Jun-16 282.20 340.00
02-Aug-16 248.10 230.00 U
03-Oct-16 272.00 220.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
U N D ERPERFO RM
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
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Swiss Watchmakers 42
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiv eness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expec ted total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation: Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 44% (64% banking clients) Neutral/Hold* 39% (60% banking clients) Underperform/Sell* 14% (52% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
Important Global Disclosures Credit Suisse’s research reports are made available to clients through our proprietary research portal on CS PLUS. Credit Suisse research products may also be made available through third-party vendors or alternate electronic means as a convenience. Certain research products are only made available through CS PLUS. The services provided by Credit Suisse’s analysts to clients may depend on a specific client’s preferences regarding the frequency and manner of receiving communications, the client’s risk profile and investment, the size and scope of the overall client relationship with the Firm, as well as legal and regulatory constraints. To access all of Credit Suisse’s research that you are entitled to receive in the most timely manner, please contact your sales representative or go to https://plus.credit-suisse.com . Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: https://www.credit-suisse.com/sites/disclaimers-ib/en/managing-conflicts.html . Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Target Price and Rating Valuation Methodology and Risks: (12 months) for Compagnie Financiere Richemont SA (CFR.S)
Method: Our Underperform rating and target price of SFr65 is set based on a simple average of HOLT® (using a 10-year competitive advantage period window) and our EV/IC vs. RNOA/WACC framework. We rate the stock Underperform as we find valuation particularly stretched while a rebound in watches is highly uncertain.
Risk: Key risks to our target price of SFr65 and Underperform rating include: a significant rebound in consumer demand for high end watches, the 'feel good' factor returns and drives a recovery in big ticket jewellery sales, currency movements, launch of a signficant cost control programme which looks to protect margins.
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Swiss Watchmakers 43
Target Price and Rating Valuation Methodology and Risks: (12 months) for Swatch Group (UHR.S)
Method: Our target price of SFr260 is set based on a simple average of HOLT® (using a 10-year competitive advantage period window) and our EV/IC vs. RNOA/WACC framework. We rate the stock Underperform as we see continued weakness in Swiss watch exports and only a timid recovery in end demand, while the valuation remains stretched.
Risk: Key risks to Swatch Group's Underperform rating and target price include; (i) a strong rebound in consumer demand for watches, (ii) a change in top management results in a new strategy and overhaul of the cost base, (iii) the current CEO attempts to buy back the business, taking it off the market, and (iv) Belenos, the company's battery venture, makes a break through for car batteries.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names The subject company (BRBY.L, HRMS.PA, LVMH.PA, PRTP.PA, BOSSn.DE) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (BOSSn.DE) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (BOSSn.DE) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CFR.S, BRBY.L, LVMH.PA, PRTP.PA, TOD.MI, BOSSn.DE) within the next 3 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (BRBY.L). As of the end of the preceding month, Credit Suisse beneficially own between 1-3% of a class of common equity securities of (CFR.S). Credit Suisse has a material conflict of interest with the subject company (UHR.S) . Credit Suisse AG is acting as an agent in relation to the company's announced share buy-back program.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683. For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=288763&v=3elzo6n0hgbwcllmdaonitu97 .
Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html. The following disclosed European company/ies have estimates that comply with IFRS: (PRTP.PA, BOSSn.DE). As of the end of the preceding month, Credit Suisse beneficially owned the following percentages of the voting rights of the subject companies: 1.0% or more of UHR.S, 1.0% or more of CFR.S Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. This research report is authored by: Credit Suisse International ................................................................................................................... Guillaume Gauvillé, CFA ; Catherine Tillson To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the FINRA 2241 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Credit Suisse International ................................................................................................................... Guillaume Gauvillé, CFA ; Catherine Tillson
Important Credit Suisse HOLT Disclosures With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report. The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.
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Swiss Watchmakers 44
Additional information about the Credit Suisse HOLT methodology is available on request. The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur. CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
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Swiss Watchmakers 45
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