Overstone Global Equity Fund on The Swatch Group AG
Thesis
Swatch's luxury-watch profits are depressed as demand in China has not yet recovered. Despite a 1.7% first-half operating margin, sales rose 8.5% at constant exchange rates and US sales jumped 27%. Management retained staff and manufacturing capacity to capture operating leverage when demand strengthens. Its CHF1.5 billion net cash and CHF4 billion property portfolio leave the operating business valued at about CHF4 billion, only 3.3 times its historical average operating profit.
“We continue to believe that the recovery in sales will ultimately drop through to profits.”
Key risks
- Chinese demand recovery has been deferred.
- Sales in mainland China fell about 5%.
- Retained production capacity keeps operating costs elevated in a slow recovery.