LUXURY WATCH retailer Hengdeli Holdings Ltd (HK: 3389) is well on its way to consolidating its leading position in the Greater China watch market, the company’s vice president told an Aries Consulting-sponsored analyst meeting in Hong Kong on Wednesday.
Since going public five years ago, Hengdeli has since grown into an over 14 bln hkd market cap firm with a 40% market share in Greater China with nearly 800 stores.
A Matter of Time
Hengdeli’s campaign to solidify its position in Greater China as the top retailer and distributor of fine watches in the region is moving forward with the times, and the company continues to grow via strategic acquisitions.
“We have the largest network of fine watch stores in Greater China and cover all major cities in the PRC, Hong Kong and Taiwan, retailing over 50 world class brands. In fact, we are the biggest such buyer around the world,” Hengdeli Vice President James Cheng told several analysts yesterday.
He said the company’s success enjoyed two “pillars of support” for sustained growth.
“When people come into our shops for sales or service, they like to see watchmakers behind the counter, on site, busy at work. This gives consumers a sense of comfort and confidence to do business with us.”
The company also had a thriving wholesale business, and acts as the exclusive agent for numerous world class brands.
“This gives us a unique insight into the total market – both wholesale and retail – which affords us excellent perspectives on possible M&A targets,” Mr. Cheng said.
The Hong Kong-based firm was naturally not putting all its eggs in the Mainland China basket, but was also living up to its leading role as the top retailer in the region.
“Global Swiss watch exports rebounded in 2010, and the Greater China market is now around three times that of the US, growing 31% last year and making up 17% of the global total,” he added.
“The Elegant Brand of shops in Hong Kong has proven to be a key pickup for us,” he said of the retail outlets that sell Hengdeli’s top line, most luxurious and expensive watches including Breguet, A. Lange & Sohne, Vacheron Constantin, Cartier, Bulgari and of course Rolex and Omega.
“Our 12 Elegant shops in the PRC, four in Hong Kong and one in Taiwan offer only top-grade internationally renowned watch brands with average selling prices (ASPs) of around 50,000 yuan,” he said.
Next on the totem pole in terms of prestige is Hengdeli’s chain of Prime Time shops, with 174 in the PRC and 27 in Taiwan, which offer mid-to-high end global watch brands such as Tag, Rado, Longines and Hermes, with ASPs of around 12,000 yuan.
Finally, its 68 Temptation and Boutique retail shops across the PRC provide watches in the under-10,000 yuan range including Gucci, Tissot, Christian Dior, CK and Swatch.
“We have over the past few years seen travel to Taiwan becoming much easier for PRC shoppers, and this has to be a key focus for us. We can’t ignore the fact that disposable incomes in Mainland China are growing at an exponential pace, and it is even a well-known phenomenon in our industry for the highest-end retail watch shops in Hong Kong, New York, Paris and Tokyo to these days be oftentimes filled with cash-rich PRC ‘shopping tourists’,” Mr. Cheng said.
But the focus for Hengdeli’s future growth would be to bring watches to the PRC shoppers on their home turf.
“Our acquisition of Beijing Hengdeli was a major first step for us in penetrating the PRC market and from then on began to rapidly expand our retail business, soonafter becoming the exclusive distributor of Omega watches in the PRC. In fact, Omega watch turnover in the PRC is bigger than LV’s total PRC turnover,” he said.
He said business was always improving and the nature of the industry was that demand chronically outstripped supply, thus insuring steady ASP increases.
“Every year, hand-made Swiss watch prices increase, along with materials, and we are easily able to pass this onto the consumer of luxury watches,” Mr. Cheng added.
Mainland on its Mind
“For many Mainland Chinese, to own an authentic hand-made Swiss watch is quite a big deal, even a ‘dream’. And with the upper class gradually expanding and more and more people moving into the middle class, our customer base in the PRC is growing steadily,” Mr. Cheng said.
And Hengdeli was well-positioned to tap into this growth.
“We like to get consumers onboard when they are young, around the time of their first watch purchase. Perhaps they might begin by buying one of our Swatches. Then they might eventually move onto a Calvin Klein, and then gradually up the luxury chain, so in this way hopefully they will stay with us for a lifetime,” he said.
He said the fundamentals of China’s sustained growth were in place, and that was where Hengdeli saw its best results going forward.
“China’s macro indicators remain robust, the population of wealthy consumers is rapidly increasing, and therefore China growth and the growth of wealthy watch shoppers will underpin the demand for luxury products there for many years to come.”
And the fact that China was undergoing structural shifts from an investment and export-driven economy to a consumption driven growth model meant that Hengdeli would likely benefit tremendously in the PRC.
“In 2005, less than 1% of PRC households had disposable income over 100,000 yuan. However this is steadily increasing and by 2025 we expect this to reach over 11%. With domestic demand generating just 30% of GDP growth in China compared to around 70% in the US, we see tremendous growth potential in the PRC,” Mr. Cheng said.
Hengdeli therefore anticipated robust growth momentum and huge market potential for Swiss-made watches in the PRC market.
“A Swiss watch is after all a highly aspiration item in Mainland China, representing social status, success and a higher quality of life. And despite the higher spending power in the major metropolitan areas, it will be Tier II and III PRC cities that will be the main source of our future growth,” he said.
And with the rapidly rising middle class and the emergence of a visible luxury-hungry class in the PRC, was Hengdeli committed to remaining a dedicated high-end watch retailer?
“Our Chairman has said recently that Hengdeli will remain a watch seller for now, but we are also looking to move into more jewelry sales going forward. We are a very credible watch seller, so why can’t we sell jewelry as well? After all, jewelry’s margins are much higher of course!”
